Kathmandu: After large discrepancies were found between pre-audit and post-audit profits of banks and financial institutions, Nepal Rastra Bank (NRB) has introduced new rules to prevent such practices.
In recent years, this anomaly had become increasingly prevalent.
NRB has amended the procedures related to the publication of financial statements, approval for annual general meetings, and dividend distribution of banks. The revision comes after banks began rapidly publishing audited financial statements for annual general meetings and submitting them to the central bank for approval.
According to the revised procedure, if the loan loss provisioning accounted under Nepal Financial Reporting Standards (NFRS) is less than what is required under NRB directives, the shortfall amount must be transferred to the regulatory reserve fund.
Similarly, interest capitalized during the grace period and booked as accrued interest on loans must also be set aside in the regulatory reserve fund. NRB will also check whether institutions disclose in their financial statement notes the accounting policies, methods, estimates, and information used under “NFRS-9 Expected Credit Loss Guidelines” and the “Guidance Note on Interest Recognition 2025.”
Banks and financial institutions issuing debentures and other debt instruments must clearly state whether they have proportionately deposited payments into the Capital Redemption Reserve Fund. The procedure also specifies that dividends on non-redeemable cumulative preference shares must only be distributed from the current year’s profit through the profit and loss account and not from retained earnings or other reserves.
NRB will verify whether events after the reporting period, adjusted in the financial statements as per NFRS, are disclosed in the notes. Likewise, when actuarial valuations are carried out for employee liabilities, the central bank will ensure that realistic assumptions based on past data have been applied in line with NFRS provisions.
Banks must also transfer 20 percent of distributable income recorded under the Statement of Comprehensive Income to the general reserve fund. Furthermore, changes in regulatory reserves, including deposits and withdrawals, must be separately disclosed in the financial statement notes.
Finally, NRB will ensure that amounts allocated to merger and acquisition reserves, income tax on total non-banking assets as per prevailing law, employee bonuses, and statutory fund allocations have been deducted before depositing the remaining balance into the regulatory reserve fund.
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