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 nine 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, which is not the same as the taxable income at the bottom of your computation.
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. 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.
Nine Errors We Keep Finding in These Workbooks
We recently audited the formulas in a NAS for MEs workbook that had been passed between firms for years. Every one of these was live in it. If you are using an inherited spreadsheet, check all nine.
1. Section 119 interest hardcoded to three months
Applied to the full tax liability on every return, regardless of when it was paid. Should be driven by the due date and the payment date, and should default to zero.
2. Advance-tax deposits left as zeros
The instalments-paid column was hardcoded to nil, so the sheet computed a full shortfall and the maximum s.118 interest for a company that had in fact paid. These are inputs, not constants.
3. Penalty interest buried inside “income tax expense”
Interest under ss.118 and 119 was added into the tax expense line in the Income Statement. It is not income tax, and burying it there both misstates the tax charge and hides the penalty from whoever is reading the accounts.
4. 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.
5. No 5% withholding on that dividend
Having declared one, the workbook showed no s.88 withholding liability anywhere — so the Balance Sheet was short a payable the company genuinely owed.
6. Donation cap measured on the wrong base
The 5% was taken on assessable income before brought-forward losses were set off, rather than on adjusted taxable income. It does not bite when there are no losses, which is exactly why nobody notices it until the year it does.
7. The financial year ending on the wrong day
Ashadh runs 31 or 32 days depending on the year. The workbook had the year end on the wrong date, and because depreciation was computed on day counts, every depreciation figure in the file was wrong. Check the year-end date against the official patro before trusting anything downstream of it.
8. No rounding anywhere
Figures carried to many decimal places, so printed totals differed from the sum of the lines by a rupee. Present in whole rupees and state the rounding, as the presentation requirements expect.
9. Links to other people’s files
158 external links pointing at unrelated companies’ old workbooks, and several thousand stale named ranges. Beyond being a correctness risk, that is other clients’ data travelling inside your file.
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.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). 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 nine checks above.