Introduction to NFRS
What Is NFRS and Why It Matters
Nepal Financial Reporting Standards (NFRS) are a set of accounting standards developed to support Nepal's financial reporting with global best practices, particularly the International Financial Reporting Standards (IFRS). NFRS is introduced by the Institute of Chartered Accountants of Nepal (ICAN) which aims to bring consistency, transparency, and comparability to financial statements across all sectors. There is a need of the rapidly globalizing economy for standardizing financial disclosures ensuring the integrity of reports along with building confidence among investors, stakeholders, and international partners. ICAN is all set to implement NFRS for SMEs in Nepal to bring consistency, transparency, and comparability to financial statements of the small businesses of Nepal.
How NFRS Differs from Previous Standards
Nepal followed Nepal Accounting Standards (NAS), which were relatively less strong and lacked international alignment before implementing Nepal Financial Reporting Standards (NFRS). NFRS, in contrast, emphasizes a principles-based approach, focusing on the substance over form. It also incorporates fair value measurement, extensive disclosures, and the recognition of more complex financial instruments. This shift in NFRS represents a move toward global integration, requiring a significant change in how financial data is prepared, analyzed, and audited.
The Journey of NFRS in Nepal
Timeline of Adoption
Nepal started the NFRS journey in 2009 when ICAN announced its intention to converge with IFRS. The actual implementation began in 2014 with the phased adoption of standards across sectors. Listed companies and banks were among the first to adopt NFRS, followed by insurance companies, manufacturing firms, and other public interest entities. The roadmap is still evolving, particularly for small and medium-sized enterprises (SMEs) and government entities.
Key Regulatory Bodies Involved
Several institutions have played crucial roles in NFRS implementation in Nepal:
Institute of Chartered Accountants of Nepal (ICAN): It is the primary body responsible for issuing standards and training professionals.
Nepal Rastra Bank (NRB): Regulates financial institutions and monitors compliance among banks.
Securities Board of Nepal (SEBON): Oversees listed companies and ensures transparency in capital markets.
Insurance Board of Nepal (IB): Enforces standards among insurance companies.
Sectors Required to Adopt NFRS
Initially, NFRS was mandatory for:
Listed companies
Commercial banks and financial institutions
Insurance companies
Government-owned enterprises
Gradually, the scope of NFRS is expanded to include manufacturing firms, NGOs, and certain SMEs. Full adoption across all sectors is still underway, with specific timelines and guidelines issued sector-wise.
Key Features of NFRS
Focus on Transparency and Comparability
One of the primary goals of NFRS is to make financial statements more transparent and comparable. Nepalese entities can present their financials in a format that is easily understood and trusted internationally by adopting global standards. This boosts stakeholder confidence and facilitates easier cross-border transactions and investment.
Principles vs. Rules-Based Framework
Unlike NAS, which had a more prescriptive, rules-based approach, NFRS follows a principles-based framework. This allows for greater flexibility in judgment and interpretation but requires a higher level of professional competence and ethical standards among preparers and auditors. Companies must focus more on the intent and economic substance of transactions.
Commonly Used NFRS Standards in Nepal
Some widely applied standards in the Nepalese context include:
Conceptual Framework for Financial Reporting
Defines the core principles (e.g., accrual accounting, qualitative characteristics like relevance and faithful representation) underlying NFRS. It guides standard-setting and helps resolve accounting issues not covered by specific standards.
NFRS 1 First-time Adoption of NFRS
Provides rules for companies transitioning to NFRS which includes opening balance sheet adjustments, exemptions, and disclosures to ensure comparability.
NFRS Practice Statements
Non-binding guidance on applying NFRS which includes materiality judgments and risk disclosures.
Presentation & Reporting
NAS 1 Presentation of Financial Statements
Mandates structure (statement of financial position, comprehensive income, statement of cashflows) and requires "fair presentation" with notes.
NAS 7 Statement of Cash Flows
Requires cash flows categorized as operating, investing, or financing activities (direct/indirect method).
NAS 8 Accounting Policies, Changes in Estimates & Errors
Rules for selecting policies (e.g., consistency), handling changes (retrospective), and correcting errors.
NAS 34 Interim Financial Reporting
Minimum content for interim reports (condensed statements, selected notes).
Income & Expenses
NFRS 15 Revenue from Contracts with Customers
5-step model to recognize revenue (identify contract, performance obligations, transaction price, allocate price, recognize revenue as obligations are satisfied)
NFRS 8 Operating Segments
Requires disclosure of segment info (revenue, profit, assets) based on how management monitors performance.
NAS 33 Earnings per Share (EPS)
Calculates basic EPS (net income ÷ weighted shares) and diluted EPS (potential shares).
Assets & Liabilities
NAS 2 Inventories
Measured at lower of cost (FIFO/weighted average) or net realizable value (NRV). Prohibits LIFO.
NAS 16 Property, Plant & Equipment (PPE)
Recognized at cost, then either cost or revaluation model. Depreciated over useful life.
NAS 23 Borrowing Costs
Capitalizes borrowing costs directly attributable to qualifying assets (e.g., construction).
NAS 38 Intangible Assets
Recognized if identifiable and future benefits probable. Amortized (finite life) or tested for impairment (indefinite life).
NAS 40 Investment Property
Property held for rentals/capital appreciation. Measured at cost or fair value (changes hit P&L).
NFRS 5 Non-current Assets Held for Sale
Classifies assets "held for sale" at lower of carrying amount or fair value less costs to sell.
NFRS 6 Exploration for Mineral Resources
Temporary standard for extractive industries (capitalize exploration costs, test for impairment).
NFRS 9 Financial Instruments
Classifies instruments into amortized cost, FVTPL, or FVOCI. Expected credit loss (ECL) model for impairment.
NFRS 16 Leases
Lessees recognize right-of-use assets and lease liabilities (exceptions for short-term/ low-value leases).
NFRS 17 Insurance Contracts
Measures contracts using current assumptions (risk adjustment, contractual service margin).
Liabilities & Equity
NAS 12 Income Taxes
Recognizes deferred tax liabilities/assets for temporary differences (tax base vs. carrying amount).
NAS 19 Employee Benefits
Pension accounting: defined benefit plans (actuarial gains/losses in OCI) and defined contribution.
NAS 20 Government Grants
Recognized as income when conditions met (either deferred or offset against asset costs).
NAS 37 Provisions
Recognizes provisions if probable outflow from past events (e.g., warranties, restructuring).
NFRS 2 Share-based Payment
Expenses equity-settled payments (e.g., stock options) based on fair value at grant date.
Consolidation & Business Combinations
NFRS 3 Business Combinations
Purchase method: identifiable assets/liabilities at fair value, goodwill = purchase price – net FV.
NFRS 10 Consolidated Financial Statements
Consolidates entities controlled by the parent (power + returns + ability to direct).
NFRS 11 Joint Arrangements
Classifies as joint ventures (equity method) or joint operations (proportionate consolidation).
NFRS 12 Disclosure of Interests in Other Entities
Disclosures about subsidiaries, joint arrangements, associates, and unconsolidated entities.
NAS 27 Separate Financial Statements
Accounting for subsidiaries/joint ventures/associates when not consolidated (cost or equity method).
NAS 28 Investments in Associates/Joint Ventures
Equity method: investor’s share of profit/loss adjusts carrying amount.
Fair Value & Special Transactions
NFRS 13 Fair Value Measurement
Defines fair value (exit price), valuation techniques (market/income/cost approach), hierarchy (Levels 1–3).
NAS 21 Foreign Exchange Rates
Foreign currency transactions: spot rate at transaction date; translate financial statements using closing rate.
NAS 32 Financial Instruments – Presentation
Classifies instruments as liability/equity (e.g., redeemable preference shares = liability).
NAS 36 Impairment of Assets
Tests assets for impairment if indicators exist; recoverable amount = higher of FV less costs or value in use.
NAS 41 Agriculture
Biological assets (e.g., crops, livestock) measured at fair value less costs to sell (changes in P&L).
These standards require detailed disclosures, valuation adjustments, and more rigorous recognition principles, enhancing the quality of financial information.
NFRS for SMEs, NAS for MEs and NAS for NPOs in Nepal
For financial reporting purpose, the entities can be classified as:
a) Those having public accountability: NFRS shall be applicable
b) Those NOT having public accountability: NFRS for SME shall be applicable
c) Those NOT having public accountability other than SMES:
Micro Entities- NAS for MEs
NPOs- NAS for NPOs
Entities having Public Accountability
a) Whose debt or equity instruments are traded in public market or is in process of issuing such instruments (except listed Micro Finance not having economic significance)
b) It holds assets in a fiduciary capacity for broad group of outsiders as one of its primary businesses:
i. Banks, credit unions, insurance companies, security dealers and mutual funds, investment banks (except Micro Finance and Cooperatives not having economic significance)
ii. Pension and retirement funds
c) Government Business Enterprises (GBEs), Public entities established under special acts not preparing financial statements under NPSAS
d. Entities having economic significance
i. Borrowings from banks or financial institutions or public funds or from entities holding assets in fiduciary capacity of NRs 500 million or more;
ii. Statement of Financial Position (Balance Sheet) total (without off-setting current liabilities with current assets) of NRS 1000 million or more;
iii. Employing more than 300 employees including workers in an average or
iv. Annual Turnover (Revenue of Entity) of NRS 1000 million or more;
v. Holding assets in fiduciary capacity in excess of NRs 500 million (includes security brokers handling Demat account, micro finance and cooperatives),
An entity which attains at least 1 of these limits in 2 consecutive years shall be deemed to be an entity having economic significance to qualify as an entity with Public Accountability and once qualified, must fall below all of these limits for 2 consecutive years to cease to qualify.
Small and Medium Sized Entities
Small and Medium Sized Entities are those entities that:
a) Do not have public accountability; and
b) Publish general purpose financial statements for external users
Micro Entities
Micro entities are those entities with the following thresholds (all):
a) Annual Turnover (Revenue of Entity) of NRs 100 million or less;
b) Borrowings from banks or financial institutions or public funds or from entities holding assets in fiduciary capacity of NRS 50 million or less;
c) Statement of Financial Position (Balance Sheet) total of NRs 100 million (without off-setting current liabilities in current assets) or less; and
d) Holding assets in fiduciary capacity of NRS 50 million or less (includes security brokers handling Demat account, micro finance and cooperatives.
An entity must meet all of these limits in 2 consecutive years to qualify as a micro- entity and once qualified, must exceed at least 1 of these limits for 2 consecutive years to cease to qualify.
Challenges in Implementation of NFRS for SMEs in Nepal
Technical and Knowledge Gaps
Many organizations, especially SMEs and public enterprises, face significant technical challenges. The complexity of standards such as NFRS 9 and NFRS 16 makes it difficult for non-experts to apply them correctly. The lack of simplified guidance tailored to the local context adds to the confusion.
Lack of Trained Professionals
There is a shortage of accountants, auditors, and finance professionals trained specifically in NFRS. Although ICAN and other bodies have initiated training programs, the pace has not kept up with demand. This gap hampers proper implementation and increases the risk of non-compliance.
System and Process Adjustments
Implementing NFRS often requires an overhaul of internal systems, including ERP software, financial reporting tools, and data collection processes. Companies must invest in technology upgrades and realign their internal controls to accommodate new measurement and disclosure requirements.
Impact on Businesses and Stakeholders
Changes in Financial Reporting
NFRS has significantly changed how companies recognize revenue, measure assets and liabilities, and present their financial position. For instance, lease agreements that were previously off-balance-sheet now need to be disclosed, altering debt ratios and impacting financial metrics used by lenders and investors.
Compliance Costs and Burden
The transition to NFRS is not without cost. Companies incur expenses in training, software updates, consultation, and compliance audits. For smaller entities, these costs can be disproportionately high, making the adoption financially burdensome.
Improved Investor Confidence
Despite the challenges, NFRS has led to greater investor confidence by enhancing the credibility and comparability of financial statements. Transparent reporting encourages more informed decision-making and can attract both domestic and foreign investment.
Support and Training Initiatives
Government and ICAN Programs
ICAN has taken the lead in organizing training, publishing implementation guides, and offering technical support. The government, through entities like the Ministry of Finance, has also endorsed NFRS adoption and provided policy-level backing.
Corporate Training and Workshops
Many private organizations and business associations conduct specialized workshops to train in-house finance teams. These cover everything from theoretical principles to real-world case applications. Online courses and certification programs are also gaining popularity.
Role of Audit Firms and Consultants
Audit firms especially international ones operating in Nepal have played a significant role in facilitating the transition. They provide technical consultations, assist in reworking financial statements, and guide companies through compliance audits.
Expanding NFRS to SMEs
Currently, full NFRS adoption is not mandatory for all SMEs. However, a simplified version or "NFRS for SMEs" is under consideration. Expanding the framework to include these businesses while keeping compliance manageable could significantly raise the overall quality of financial reporting in Nepal.
Enhancing Public Sector Adoption
While public enterprises are expected to comply, the public sector as a whole still lags behind. Adoption in this space will require policy reforms, capacity-building, and perhaps a phased approach tailored to the needs of government entities.
Conclusion
A Step Toward Global Alignment
NFRS represents a monumental shift in Nepal’s financial reporting landscape. It brings the country closer to global accounting practices, enhances corporate governance, and strengthens financial transparency. For businesses looking to expand internationally or attract foreign investment, NFRS compliance is increasingly a prerequisite.
What Needs to Improve Moving Forward
While the benefits are clear, full realization of NFRS’s potential requires more robust training programs, stronger enforcement, and better technological infrastructure. Policymakers, regulatory bodies, and businesses must collaborate closely to streamline adoption and make NFRS implementation sustainable and impactful in the long run.
Should We hire a consultant for preparing NFRS based Financial Statements?
If you're unfamiliar with new accounting standards of Nepal, it's highly recommended to appointment a NFRS Consultant to avoid errors and ensure compliance.
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