Reliable Accounting Ensures Transparency

Use of reliable accounting and reporting systems is of great importance in the business community. Such systems are being upgraded and updated over time. At present, international financial standards are adopted in the business sector. Accordingly, Nepal has also adopted Nepal Financial Reporting Standards (NFRS). The NFRS system represents universal accounting and reporting standards that are in the implementation stage in various organisations such as commercial banks, insurance companies, state-owned enterprises, multinational manufacturing companies, small and medium scale enterprises (as defined and classified by the Accounting Standards Board) and other entities. 

The NFRS system has been designed as a common global language for the business sector. The NFRS system aims at bringing about uniformity in account-keeping in a comparable and reliable manner. As per the NFRS system, the rules are to be followed by all accountants while preparing and reporting financial statements so that such information is understandable to both internal and external users and stakeholders. The NFRS system is principle-based rather than rule-based because they interpret principles involved in financial reporting. The financial reports prepared on the basis of the NFRS system differ from normal reports. Balance sheet figures differ. So do reserve funds and other items. 

Accounting standards

In Nepal, accounting standards are developed by the Accounting Standards Board (ASB), which was established in July 2002 in accordance with the provisions of the Nepal Chartered Accounts Act, 1997. The ASB is responsible for formulating accounting standards regarding preparation and presentation of financial statements. The ASB is also responsible for setting accounting standards for business organsations in line with the International Financial Reporting Standards (IFRS) and for issuing interpretations of the NFRS. The ASB earlier issued Nepal Accounting Standards (NAS) in line with International Accounting Standards (IAS), which was gradually replaced by the updated International Financial Reporting Standards (IFRS). The ASB issued the NFRS on the basis of the IFRS system.

The NFRS system represents a single set of principles adopted for reflecting transactions and events in financial statements. Such principles are beneficial for the global economy as universal principles help prevent conflict and disharmony in the treatment of financial transactions and bring about uniformity in the presentation of financial reports. The NFRS system is helpful to stakeholders in analysing financial positions of organisations. Comparative analysis of two or more similar organisations is also possible by using NFRS tools. The NFRS system is an effective tool for business executives to make pragmatic and informed decisions. Uniformity in accounting assumptions is another hallmark of the NFRS. 

The NFRS system includes the principles in line with the IFRS system, NAS system and IFRIC interpretations issued by the International Accounting Standards Board (IASB). IFRIC stands for International Financial Reporting Interpretations Committee. The Committee is now known as the IFRS Interpretations Committee. Financial statements are a mirror of an organisation’s financial performance. Financial statements provide information on financial positions, performance, cash inflows and outflows and other indicators that are useful to users and stakeholders in making financial decisions. Financial positions can be gauged by assets, liabilities, equity, incomes and expenses, including gains and losses. 

Financial statements also reflect contributions by and distributions to owners and cash flows. Such information is useful to users and stakeholders for forecasting future cash flows. Prudent investors invest in an organisation on the basis of its financial position. The NFRS presents information and indicators of an organisation in unvarnished fashion. This helps investors make decisions and boosts their confidence in that organisation. The NFRS system also helps in assessing the international financial market. Uniformity in accounting reports is one of the greatest hallmarks of the NFRS system. An organisation can formulate accounting assumptions standards in line with the NFRS system. 

In the NFRS system are encapsulated several reporting features such as fair presentation and compliance with this system, the going concern concept, accrual basis of accounting, materiality and aggregation, offsetting, frequency of reporting, comparative information and consistency and presentation. Under the NFRS system, an organisation is considered a going concern. Balance sheet items are carried forward from one year to the next. Similar items are presented in aggregate, whereas dissimilar items are presented separately. Offsetting is not generally allowed. Offsetting is when one financial entry is offset by an equal but opposite entry. Under the NFRS system, a complete set of reports has to be presented at least annually. 

Consistency

While presenting reports, comparative information in the form of the current year and the preceding year is to be shown for easy comparison. Consistency in the presentation and classification of items in financial statements is to be retained from one period to the next. The NFRS system is a bit complicated. Organisations like banks and insurance companies need to make improvements on several fronts such as management information systems and information and technology. The staff of the organisations covered by the NFRS system need to upscale their skills in management information systems and to enhance their information and technology capabilities. In fact, these are some of the challenges recognised under the NFRS system. 

Even cooperatives have been instructed to maintain accounts on the basis of the NFRS system. Cooperatives having deposits or loans above Rs. 500 million are considered cooperatives with public accountability and bound to adopt the full NFRS system. Cooperatives having over 300 employees are also to adopt the full NFRS system. Other cooperatives are to adopt the NFRS system for SME or the NAS system for ME as per criteria such as borrowing from BFIs, annual turnover, balance sheet totals and assets held in fiduciary capacity. It is imperative to impart required training to the employees concerned of organisations like banks and insurance companies so as to scale up their skills in preparing financial statements and financial reporting in line with the NFRS system. 

(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)