Every Pvt. Ltd. in Nepal has to produce financial statements, get them audited, and file them: with the Office of the Company Registrar under Companies Act 2063 s.80, and with the Inland Revenue Department along with the income tax return. For a very small company, the framework those statements are prepared under is NAS for MEs: the Nepal Accounting Standard for Micro Entities, issued by the Accounting Standards Board and published through ICAN.
The accounting part is the easy half. The half that decides what you pay is the bridge between the profit in your Income Statement and the taxable income in your tax computation. Those two numbers are almost never the same, and the places they diverge are set by statute, not by judgement.
The short version
Your books show one profit. The Income Tax Act 2058 recomputes it (its own depreciation under Schedule 2, its own cap on repairs under s.16, its own limit on donations under s.12) and taxes the result. A set of financial statements that does not show that reconciliation is incomplete, however neatly it adds up.
Which Framework Applies to You
ICAN operates a tiered system. Listed and large entities apply full NFRS. Mid-sized entities apply NFRS for SMEs. The smallest apply NAS for MEs, which is deliberately short: historical cost, no deferred tax, no complex financial-instrument measurement, minimal disclosure.
ICAN publishes model financial statements under NAS for MEs in both Nepali and English on its own website, and those models are the reference point your auditor will have in mind. ICAN describes them as recommendatory, to be adapted to the nature of the business, so they are a starting format, not a form to be filled blindly.
Get the model from the source
Copies of the ICAN model circulate privately between firms, and the ones we see have usually been edited many times over. Download the current model from ICAN rather than inheriting somebody’s copy. See the twelve errors below for what accumulates in a workbook that has been passed around.
What the Statement Set Contains
| Component | What it shows |
|---|---|
| Balance Sheet | Assets, liabilities and equity at the year end (31 or 32 Ashadh, depending on the year) |
| Income Statement | Income and expenses for the year, down to profit after tax |
| Statement of Changes in Equity | Opening equity, profit, dividends and any share issue, to closing equity |
| Cash Flow Statement | Operating, investing and financing cash movements, reconciled to the bank |
| Notes | Accounting policies, plus a note behind each line in the statements |
| Tax computation | Not part of the statements, but filed with them: the bridge described below |
Comparative figures for the previous year are shown alongside every line. For a company’s first year there is no comparative, and that column stays blank rather than being filled with zeros.
The Bridge: From Book Profit to Taxable Income
This is where most of the money is. Start at profit before tax, then apply each of the following.
Depreciation is computed twice
Your accounts depreciate assets on whatever basis the policy says, usually straight line over useful life. The Act ignores that entirely. Under s.19 and Schedule 2, tax depreciation is computed on pools, on a written-down-value basis:
| Pool | Rate | Typically |
|---|---|---|
| A | 5% | Buildings, structures |
| B | 25% | Computers, data-handling equipment, office furnishings |
| C | 20% | Vehicles, plant and machinery |
| D | 15% | Assets not falling in A, B, C or E |
| E | Over useful life | Intangibles: software, leasehold rights. Cost divided by the period of use, adjusted to the nearest half year |
The detail that catches people is when in the year you bought the asset. An addition does not enter the pool at full cost unless it was acquired early in the year:
| Acquired between | Absorbed into the pool |
|---|---|
| Shrawan 1 and the last day of Poush | 100% of cost |
| Magh 1 and the last day of Chaitra | Two-thirds of cost |
| Baisakh 1 and the last day of the year | One-third of cost |
The unabsorbed remainder is not lost; it is added to the pool in the following income year. A workbook that drops a Chaitra purchase into the pool at full cost overstates this year’s deduction and understates next year’s, and the error compounds down the depreciation schedule.
Repairs are capped at 7%
Under s.16, repair and improvement expenditure on a pool is deductible only up to 7% of the depreciation basis of that pool. Anything above the cap is not disallowed outright. It is capitalised, added to the pool’s basis for the next year, and recovered through depreciation thereafter.
Donations are capped twice over
Section 12 allows a deduction for a donation to a tax-exempt organisation approved by the Department, limited to the lesser of NPR 1,00,000 or 5% of adjusted taxable income. Both limbs bite: a company with a large profit is still capped at NPR 1,00,000, and a company with a thin profit is capped well below that. Note the base is adjusted taxable income: under s.2, taxable income computed without deducting the donation itself (or the interest and expense limits in s.14(2), s.17 and s.18). Brought-forward losses are deducted first, because s.20 deducts them in computing income from the business.
Losses carry forward seven years
Section 20 lets a business carry a loss forward for seven income years. Twelve years is available, but only for specific cases: build-own-operate-transfer public infrastructure handed to the Government, powerhouse construction and electricity generation and transmission, and petroleum operations under the Nepal Petroleum Act 2040. An ordinary trading or service company gets seven.
Expenses with no support come out
Whatever your books say, an expense the auditor cannot vouch (an estimate bill, a missing lease agreement, a notional impairment, an unrealised fair-value loss) is added back in the tax computation. A good statement set shows this as a column beside each expense with the reason stated, not as one lump “disallowed” figure.
Advance Tax, and the Interest Nobody Checks
Under s.94 a company pays its tax in three instalments during the year, each measured against the estimated tax for the year:
| Instalment | By | Cumulative |
|---|---|---|
| First | End of Poush | 40% |
| Second | End of Chaitra | 70% |
| Third | End of Ashadh | 100% |
Two separate interest charges hang off this, and they are routinely confused:
- Section 118 charges interest where the instalments actually paid fall short of the required proportion of the assessed tax. It is a penalty for under-estimating during the year.
- Section 119 charges interest where tax is not paid by its due date. It runs from the due date until the tax is actually paid.
If you filed on time, section 119 interest is zero
This is the single most common error we see in tax computations. Section 119 interest is a function of how late you paid (the penalty calculator works it out by the month). A company that files its return and pays by the deadline owes nothing under s.119. A spreadsheet that applies a flat three months of interest to every return is inventing a liability, and the amount is not small: on a tax bill of NPR 2,33,000 it fabricates roughly NPR 8,700.
Both are computed at the normal rate of interest, 15% per annum, charged for each month and part of a month.
Dividends Carry a 5% Final Tax
If the company distributes a dividend, s.88(2)(a) requires 5% to be withheld, and under s.92 that withholding is final. The shareholder has no further liability on it, and the company has an obligation to deduct and remit. A statement set that declares a dividend in the Statement of Changes in Equity but shows no withholding liability on the Balance Sheet is missing a payable.
Declaring a dividend is also constrained by Companies Act 2063 s.182. It is a decision for the shareholders, not a default.
Twelve Errors We Found in One Inherited Workbook
We audited, formula by formula, a NAS for MEs workbook that had been passed between firms for years, and then fixed it. Every one of these was live in the copy we were given. If you are using an inherited spreadsheet, check all twelve. Fixing the depreciation workings alone moved the sample company’s depreciation from NPR 9,07,506 to NPR 11,33,167.
1. The depreciation period pointed at last year
The “FY End” cell that every depreciation formula counted days to was linked to the previous year’s start date. Assets were depreciated for 1, 56 or 183 days instead of a full year, and nothing on the face of the statements looked wrong.
2. The financial year ending on the wrong day
Ashadh runs 31 or 32 days depending on the year. The workbook’s fiscal-year table ended 2081/82 on 31 Ashadh 2082; it ends on 32 Ashadh 2082 (16 July 2025). Later years were wrong too, and one ran a month long. Check the year-end date against the official patro before trusting anything downstream of it.
3. Book value on disposal deducted depreciation twice
The written-down value of a sold asset subtracted the opening accumulated depreciation twice, so any gain or loss on disposal was wrong by that amount.
4. The prior year was forced to balance
The comparative column’s “proceeds from issue of shares” was a typed-in −10,72,000, a plug that made the cash flow agree with the bank, not a share transaction. The same column also started from net profit instead of profit before tax.
5. “Income tax paid” was the tax expense
Cash paid is the expense less the increase in the tax liability. The workbook used the expense, and the gain or loss on disposal was added back with the wrong sign.
6. Brought-forward losses were never deducted
The loss carry-forward line in the tax column was a typed zero, so the s.20 losses listed in the notes never reached taxable income. The list itself started two years back, skipping the year just before, the one most likely to have a loss.
7. Donation cap measured on book profit
The 5% limit was taken on the accounts column, not the tax computation, and the deduction itself sat in the books column. The correct base is adjusted taxable income, which is after brought-forward losses, so fixing the base without fixing the losses still gets it wrong in a loss year.
8. Deductions were typed-in numbers
The “amount as per Income Statement” column for the s.13 deductions held the previous company’s figures as constants. Change the trial balance and the tax computation does not move.
9. Section 119 interest hardcoded to three months, on nil instalments
s.119 interest was charged for three months on the full liability on every return, regardless of when it was paid, and the advance-tax instalments were zeros, so s.118 interest was charged on a full shortfall too. Interest should be driven by the due date and payment date, default to zero, and the instalments should be inputs.
10. Dividend defaulting to 100% of reserves
The template declared the entire distributable reserve as a dividend unless someone changed it. A template’s default becomes somebody’s filed number. It should default to nil.
11. Key management pay counted twice
Employee expenses counted key management compensation a second time, on top of the salary lines it was already part of. Smaller slips of the same kind: a bank subtotal that left out the working-capital loan, and opening reserves that ignored prior dividends.
12. Links to other people’s files
158 external links pointing at unrelated companies’ old workbooks, and thousands of stale named ranges. Anyone opening the file got an “update links” prompt showing those paths. Beyond being a correctness risk, that is other clients’ data travelling inside your file. Removing them took it from 890 KB to 150 KB.
The Filing Calendar
The statements are only useful once they are filed. The two deadlines that matter:
| Filing | To | Deadline |
|---|---|---|
| Income tax return with financial statements | Inland Revenue Department | End of Ashwin, three months after year end. An extension to end of Poush can be applied for |
| Annual return under s.80 | Office of the Company Registrar | Within the period the Companies Act 2063 prescribes after the accounts are finalised |
Missing the OCR filing attracts fines under s.81 that fall on the company and can reach the directors. We covered that in detail in annual compliance for a Pvt. Ltd., and the tax side in company tax filing deadlines. If the company never traded, a nil audit is still required; dormancy is not an exemption.
Frequently Asked Questions
Does a dormant company still need financial statements?
Yes. A company that never began operations still files a balance sheet, an income statement showing nil activity, and an audit report. See nil audit.
Can I prepare the statements myself?
You can prepare them, but they must be audited by a registered auditor before filing, and the auditor has to be appointed and notified under the Companies Act. In practice the auditor will want the trial balance and the supporting schedules, not a finished statement set.
Why is my taxable income higher than my book profit?
Usually three things: tax depreciation came out lower than book depreciation, repairs hit the 7% cap under s.16, or expenses without supporting documents were added back. All three are normal and all three should be visible as separate lines in the computation.
Is deferred tax required under NAS for MEs?
No. That is one of the main simplifications of the micro-entity standard: the timing differences between book and tax depreciation are not recognised as deferred tax assets or liabilities.
Where do I get the official model?
From ICAN’s own website, which publishes the model financial statements under NAS for MEs in Nepali and English. Use that rather than a copy inherited from another firm.
Sources
Income Tax Act 2058: s.2 (adjusted taxable income), s.5 (taxable income), s.12 (donation), s.16 (repair and improvement), s.19 and Schedule 2 (depreciation pools and absorption), s.20 (loss carry forward), s.88 and s.92 (dividend withholding), s.94 (instalments), s.117, s.118 and s.119 (fee and interest). Companies Act 2063: s.80 (annual return), s.81 (fines), s.182 (dividend). Framework and model statements: Institute of Chartered Accountants of Nepal. Verified Ashwin 24, 2083 (10 October 2026); workbook errors revised Ashwin 27, 2083 (13 October 2026). This is general guidance on preparation and filing, not an audit opinion or tax advice on your facts.
Need your statements prepared or checked?
We prepare NAS for MEs statement sets and the tax computation that goes with them, and we review workbooks you already have, including the twelve checks above.