NFRS 16 for banks and financial institutions in Nepal: a practical guide

For a bank or financial institution in Nepal, leases are everywhere. Branches, extension counters, ATM sites, regional offices and data recovery sites are almost all rented. NFRS 16 brings each of those agreements onto the balance sheet, and for an institution with a large branch network that means hundreds of separate calculations that have to be right every reporting period.

This guide explains what NFRS 16 requires, where banks, development banks, finance companies and microfinance institutions most often get it wrong, and how to keep the work manageable.

What NFRS 16 changes

Under NFRS 16, a lessee no longer treats rent as a simple operating expense. For each lease it recognises:

a lease liability: the present value of the lease payments still to be made, and
a right-of-use (ROU) asset: normally the initial lease liability plus any rent paid in advance and initial direct costs.

Over the lease term, the liability is reduced by rent payments and increased by interest. The ROU asset is depreciated, usually on a straight-line basis. The total expense in the income statement is interest plus depreciation, which is higher in the early years of a lease and lower later on, even though the rent paid may be flat or rising.

Measuring the lease liability

Four inputs drive the liability for each agreement:

Lease term. The non-cancellable period, plus any extension periods the institution is reasonably certain to use. A branch with a five-year agreement and a strong history of renewal may need a longer term.
Lease payments. The fixed rent, including fixed escalations written into the agreement. A clause such as "rent increases by 10% every two years" is part of the payments from day one. It is not a later remeasurement.
Timing. Rent paid in advance (common for branch premises in Nepal) and rent paid in arrears produce different present values.
Discount rate. The rate implicit in the lease if it can be determined, which is rare for property, and otherwise the institution's incremental borrowing rate (IBR) for a similar amount and term.

Refundable security deposits paid to landlords are not lease payments. They are accounted for separately.

Exemptions

NFRS 16 allows two practical exemptions. Leases of 12 months or less with no purchase option can be treated as short-term leases, with rent expensed as it is paid. Leases of low-value assets can also be expensed. Branch and office premises will rarely qualify as low-value, but a temporary counter used for a festival season may well be short-term.

Branch moves, rent revisions and closures

A lease portfolio does not stand still. The most common events at a bank are:

Renegotiated rent or an extended term. These are lease modifications. When the lease term changes, the liability is remeasured using a revised discount rate.
Branch closure or downsizing. A partial or full termination reduces the ROU asset and the liability, with any difference recognised in profit or loss.
Relocation. Usually the old lease ends and a new lease begins, each with its own accounting.

Each of these needs a dated entry and a recalculated schedule. In spreadsheets, this is where errors build up.

Tax: rent paid vs NFRS 16 expense

For income tax, the Income Tax Act 2058 looks at the rent actually paid. The NFRS 16 expense in the accounts is interest plus depreciation. The two figures differ every year, and the difference is a temporary difference for deferred tax. Keeping a lease-by-lease summary of rent paid next to the NFRS 16 expense makes the tax computation and the deferred tax note much easier to support.

Mergers and acquisitions

Consolidation among development banks, finance companies and microfinance institutions has brought many lease portfolios together. After a merger, the combined institution has to bring both portfolios onto one set of policies: consistent lease terms, consistent discount rates and one register. Branches that are closed as part of the merger also need termination entries.

What auditors look for

Escalation clauses missing from the liability, or added later as "remeasurements".
Lease terms that ignore renewals the institution is clearly going to take.
Discount rates with no documented basis.
Advance rent and security deposits mixed together.
Closed or relocated branches still carried in the register.
No maturity analysis of lease liabilities for the disclosures.
No link between the lease register, the journals and the general ledger.

Keeping it manageable

For a handful of leases, a well-built spreadsheet can work. For a branch network, the risk and the time involved grow with every agreement and every change. Dedicated NFRS 16 software keeps one register for all leases, applies the same calculation every time, records modifications and terminations with dates, and produces the journals, maturity analysis and tax summary directly from the data.

SF Tech's NFRS 16 Lease Software was designed with chartered accountants who specialise in the standard, and it is used by Nepal Telecom for its nationwide lease portfolio. You can try it now with sample bank leases, or request a demo using a few of your own agreements.

This article is general guidance and does not replace advice on your institution's specific circumstances.

Supreme Fintech Pvt. Ltd., Koteshwor, Kathmandu. +977-9849624350. info@supremefintechnepal.com