Nepal Accounting Standards for Micro Entities (NAS for MEs)

Part 1: The Basics and Eligibility

Before we open the accounting books, we need to know if we are allowed to use this simple rulebook. NAS for MEs is built specifically for small businesses to save them from the heavy costs and complexities of full corporate accounting.

Who is a Micro Entity? (Updated 2026 Limits) To use these standards, your business must stay below ALL of these updated limits:

• Annual Turnover (Revenue): Up to NPR 20 Crore.

• Total Assets: Up to NPR 20 Crore.

• Bank Borrowings or Public Funds: Up to NPR 10 Crore.

• Fiduciary Assets (Holding money for others): Up to NPR 10 Crore.

The Golden Two Year Rule: A business must meet all these limits for two consecutive years to qualify as a micro entity. Once qualified, you must exceed at least one limit for two consecutive years to lose your status and move up to the NFRS for SMEs.

The Core Accounting Principles:

1. The Accrual Basis: You must record income and expenses when they happen, not just when cash changes hands. If you sell goods on credit in Ashadh, it counts as income this year, even if you get the cash in Shrawan.

2. Going Concern: We assume the business will keep running for at least the next 12 months.

3. No Offsetting: You cannot hide a liability by deducting it from an asset. If you owe a supplier 5 Lakhs, and they owe you 2 Lakhs, you must show both separately unless a specific rule allows offsetting.

Part 2: The Statement of Financial Position (Balance Sheet)

This statement shows the financial health of your business on the last day of the year. You must divide your items into "Current" (short term, within 12 months) and "Non-Current" (long term).

1. Property, Plant, and Equipment (PPE)

These are physical assets used for business, like land, buildings, delivery vans, or computers, expected to last more than one year.

• How to Apply (Initial Cost): Record them at their purchase price plus any direct costs to get them ready for use, like installation or delivery fees. Do not include general administrative costs or training costs.

• How to Apply (Depreciation): You must spread the cost over the asset's useful life. You can use the Straight Line Method (equal amounts every year) or Diminishing Balance Method (a percentage of the remaining value).

• Example: You buy a machine for NPR 10 Lakhs. It costs NPR 50,000 to install. Your total PPE cost is NPR 10.5 Lakhs. If it lasts 10 years, you record a depreciation expense of NPR 1.05 Lakhs every year using the straight line method.

2. Inventories (Unsold Stock)

These are goods you hold to sell, like electronics in a shop or raw materials in a small factory.

• How to Apply: Always measure inventory at cost OR the estimated selling price minus costs to sell, whichever is lower.

• Cost Formulas: You must use First-In, First-Out (FIFO) or the Weighted Average method. The Last-In, First-Out (LIFO) method is strictly prohibited.

• Example: You run a shoe store. You bought a batch of shoes for NPR 2,000 each. However, they went out of style, and now you can only sell them for NPR 1,500. You must record their value on the balance sheet as NPR 1,500.

3. Financial Instruments (Cash, Debtors, Shares)

• How to Apply: Most basic financial items like Trade Receivables (debtors) and Trade Payables (creditors) are measured at their original transaction price.

• Investments in Shares: If you buy shares of a listed company to trade, measure them at the current market price, and record any gain or loss in your profit statement. If you hold them for the long term (available for sale), measure them at cost or market price, whichever is lower.

4. Provisions and Contingencies

• Provisions: A liability where the exact timing or amount is uncertain, but it is "probable" you will have to pay.

  • How to Apply: You must record the best estimate as a liability. Example: A provision for warranty claims on products you sold.

• Contingent Liabilities: A "possible" obligation. Maybe a customer sued you, but your lawyer says you will probably win.

  • How to Apply: Do not record this as a liability on the balance sheet. Just explain it in the Notes to the Financial Statements.

Part 3: The Statement of Income (Profit and Loss)

This statement is the video recording of your business performance over the year.

1. Revenue (Income)

• Sale of Goods: Recognize revenue only when the significant risks and rewards of ownership have transferred to the buyer. Usually, this is when goods are delivered.

• Rendering Services: Recognize revenue based on the "stage of completion".

• Example: If you sign a contract for NPR 5 Lakhs to build a website and you finish 50 percent of the work by Ashadh end, you record NPR 2.5 Lakhs as revenue for this year.

2. Expenses and Borrowing Costs

• Borrowing Costs: Interest paid on bank loans must be recorded as an expense immediately in the year it occurs. You cannot add interest to the cost of an asset (no capitalization).

• Leases: If you rent an office (operating lease), record the rent as an expense on a straight line basis over the lease term.

3. Employee Benefits

• Short Term: Salaries, bonuses, and paid leave are recorded as expenses in the period the employee works for you.

• Retirement Benefits (Gratuity/Provident Fund): For a defined contribution fund (like Provident Fund), record the amount you are supposed to contribute this year. For Gratuity, measure the liability based on what you would have to pay if all eligible employees left on the last day of the reporting period.

4. Income Tax and Government Grants

• Income Tax: Calculate your tax based on the local tax laws and record the expected payable amount as an expense.

• Government Grants: If the government gives you a grant to buy an asset, do not record it all as income immediately. You must recognize it systematically over the useful life of the asset. If it is for an immediate expense, record the income in the same period you record the expense.

Part 4: Statement of Changes in Equity

Equity is the owner's leftover interest in the business after paying all liabilities. This statement tracks how the owner's wealth changed during the year.

• How to Apply: Start with the opening balance of your Share Capital and Retained Earnings. Add the Net Profit from the Income Statement. Subtract any dividends distributed to the owners. The final number is your closing equity.

Part 5: Statement of Cash Flows

This statement tracks actual cash moving in and out of your bank accounts and cash box. It is divided into three activities:

1. Operating Activities: Your day to day business cash flows.

   • How to Apply: NAS for MEs strictly requires you to use the Indirect Method. You start with your Net Profit, add back non cash expenses (like depreciation), and adjust for changes in your working capital (like increases in inventory or debtors).

2. Investing Activities: Cash spent on buying long term assets (like PPE) or cash received from selling them.

3. Financing Activities: Cash from taking bank loans, issuing new share capital, or paying dividends to owners.

Part 6: The Notes to the Financial Statements

The numbers do not tell the whole story. The notes explain the rules you used and provide vital extra details.

1. Accounting Policies, Estimates, and Errors

• Changes in Estimates: If you realize a machine will only last 5 years instead of 10, that is a change in estimate. You fix this prospectively (meaning you just change the depreciation for the current and future years).

• Prior Period Errors: If you discover you forgot to record a major expense last year, that is an error. You must fix this retrospectively by restating the opening balances of your equity, as if the error never happened.

2. Related Party Disclosures

If the business does deals with its owners, directors, their close family members, or parent companies, these are related party transactions.

• How to Apply: You must disclose the nature of the relationship, the amount of the transactions, and any outstanding balances. You cannot just say "it was done at normal market rates" unless you can definitively prove it.

3. Events After the Reporting Period

Sometimes things happen between the end of the year (Ashadh end) and the day the financials are signed.

• Adjusting Events: Events that give more information about conditions that already existed at year end. Example: A customer goes bankrupt in Shrawan, proving their debt from Ashadh is bad. You must adjust the financial statements.

• Non-Adjusting Events: Events that happen entirely after year end. Example: Your warehouse floods in Bhadra. You do not adjust the numbers, but you should disclose it in the notes.

Summary

That is the ultimate playbook for the Nepal Accounting Standard for Micro Entities. By following these specific rules for valuing assets, recognizing revenue, and formatting your statements, your business ensures complete legal compliance. It builds immense trust with banks, the tax office, and investors, creating a rock solid foundation for your micro entity to grow into a massive enterprise!