NFRS Compliance in Nepal: What Changes for Small and Medium Businesses

A trading company in Kalanki that has run the same set of books since 2015 — cash-basis revenue, straight-line depreciation picked to match the income tax schedule, no concept of a right-of-use asset — is not doing anything illegal. It is simply not the entity NFRS was written for, until the year it crosses a threshold and suddenly is.

Prepared by Nishant Marasini and team · Position stated as at 22 September 2026

The Institute of Chartered Accountants of Nepal (ICAN) has pushed full Nepal Financial Reporting Standards — Nepal's word-for-word adaptation of IFRS — down the size ladder faster than most business owners have noticed. The practical question for a mid-sized private limited company is no longer whether NFRS applies in principle. It is which version applies, from which year, and what actually moves in the trial balance once it does.

Two different rulebooks, not one

ICAN operates a two-track system. Full NFRS, aligned closely with full IFRS, is mandatory for public interest entities — listed companies, banks and financial institutions, insurance companies, and any entity that holds assets in a fiduciary capacity for a broad group of outsiders. These entities also carry the heaviest disclosure burden: segment reporting, financial instrument classification under the expected-credit-loss model, and fair value hierarchies that a typical SME will never need to build.

Below that sits NFRS for SMEs, a single, self-contained standard rather than a cut-down version of the full suite. It applies to entities that do not have public accountability and that publish general-purpose financial statements for external users — banks assessing a loan, a minority shareholder, a prospective investor. ICAN's applicability framework further layers company size into the picture: companies above prescribed turnover and paid-up capital thresholds are pushed toward full NFRS or a more complete SME application, while smaller companies get a lighter reporting framework closer to what many businesses already produce. A private limited company that is still using a simplified format because "the auditor has always accepted it" needs to actually check where its turnover and capital base sit against the current ICAN classification, because that threshold has been revised more than once in recent cycles and companies drift across it without anyone re-checking.

The entities most exposed to a rude surprise are mid-market manufacturers, distributors, and service companies that have grown past the point where informal bookkeeping was defensible, but whose accounts staff and auditors have never sat down to actually apply Section 23 (Revenue) or Section 20 (Leases) of NFRS for SMEs line by line.

What changes in the numbers, not just the paperwork

Three areas cause almost all of the actual restatement work.

Revenue recognition timing

Under the accounting many Nepali SMEs still practise, revenue is booked when the invoice is raised or when cash is collected — whichever the bookkeeper finds simpler. NFRS requires revenue to be recognised as control of goods or services transfers to the customer, applied through a five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate that price across obligations, and recognise revenue as each obligation is satisfied. For a construction or interior-fit-out business billing on milestones, this usually means moving from invoice-date recognition to percentage-of-completion or output-based recognition — which can pull revenue forward or push it back by a full quarter relative to what was previously reported. For a distributor selling with a right of return or year-end rebate arrangements with retailers — common in Nepal's FMCG and hardware trade — it means holding back a portion of revenue as a refund liability rather than booking the full invoice value, something almost no legacy trial balance in the country currently does.

Leases move onto the balance sheet

This is the single biggest structural shift for Nepali SMEs, most of whom lease their retail space, warehouse, or vehicle fleet rather than own it. Under the old treatment, an operating lease was simply a rent expense in the profit and loss account — nothing on the balance sheet, nothing in the notes beyond a commitment disclosure. Under NFRS (Section 20 for SMEs, or NFRS 16 for full-NFRS entities), a lease running longer than twelve months and above a low-value threshold is capitalised: a right-of-use asset appears on the asset side, a corresponding lease liability appears on the liability side, and the P&L expense splits into depreciation of the right-of-use asset plus interest on the lease liability instead of a single flat rent line. For a retail chain with a dozen leased outlets on five- to nine-year Kathmandu Valley leases, this is not a cosmetic change — it inflates both total assets and total liabilities, moves the debt-to-equity ratio in a direction that can trip loan covenants at the bank, and changes EBITDA because rent, previously an operating expense, is now split between depreciation and finance cost, both of which sit below the EBITDA line.

Inventory valuation method

NFRS prohibits LIFO outright and requires inventory to be stated at the lower of cost and net realisable value, with cost determined by FIFO or weighted average. Nepali businesses that have historically run LIFO for tax convenience, or that have never formally tested slow-moving stock against realisable value at year end, find this is where the auditor's first material adjustment usually lands — particularly in import-heavy trading businesses holding six to nine months of stock, where currency movement on landed cost and genuine obsolescence in fashion, electronics, or seasonal goods routinely produce a gap between book cost and what the stock would actually fetch.

Where the transition actually hurts

The standard itself is rarely the hard part. The friction shows up in three places, in this order.

Restating opening balances. First-time adoption of NFRS requires an opening statement of financial position at the transition date, restated as if NFRS had always applied, with every adjustment routed through retained earnings rather than through current-year profit. This means going back through several years of lease agreements to reconstruct right-of-use assets and liabilities from inception, recomputing depreciation schedules under NFRS-permitted methods, and re-testing every major revenue contract against the five-step model — for a company with weak historical documentation, this single exercise can consume more time than the current year's audit.

Retraining accounts staff. Most in-house accountants in Nepal's SME sector were trained on a cash-and-tax-driven bookkeeping model, not on accrual judgment calls like estimating variable consideration, assessing lease terms for renewal options, or determining net realisable value. NFRS is not a checklist standard; it requires estimates and management judgment that have to be documented and defended, and that is a different skill set from posting journal entries against a tax return. Firms that treat this as a software upgrade rather than a staff capability gap end up with numbers that pass a cursory review but collapse under audit query.

Auditor pushback on prior-period figures. Once a company adopts NFRS, the comparative year in the financial statements also has to be restated on the same basis, not left on the old accounting policy. This is where disagreements surface: management wants last year's profit figure to stay close to what was previously reported and already discussed with the bank or with shareholders, while the restated figures under lease capitalisation and revised revenue timing can move that number materially in either direction. An auditor who signs off on a restated comparative that does not reconcile cleanly to the prior audited statements is taking on real professional risk, and pushback at this stage is usually not obstruction — it is the audit doing exactly what it is meant to do.

The practical sequence

Businesses that get through this cleanly tend to run the same sequence: confirm which NFRS tier actually applies based on current turnover and capital, not last year's assumption; inventory every lease, revenue contract, and inventory costing policy that will be touched; build the opening balance sheet restatement well before year-end, not during the audit; and brief accounts staff on the specific judgment areas — lease term, variable consideration, net realisable value — rather than handing them a copy of the standard and expecting osmosis. None of this is exotic work. It is simply work that has to happen before the auditor sits down, not during the meeting where the numbers are supposed to already be right.