2.1 Basis of preparation
The Financial Statements have been prepared on a historical cost basis, except for financial assets recognised through other comprehensive income and other financial assets and liabilities held for trading.
The Financial Statements are presented in Sri Lankan Rupees (LKR)
and all values are rounded to the nearest rupee, except when otherwise indicated.
2.1.1 Changes in accounting policies and disclosures
In these Financial Statements, the Bank has applied SLFRS 9 and
SLFRS 15, effective for annual periods beginning on or after
1 January 2018, for the first time.
SLFRS 9 – Financial Instruments
SLFRS 9 replaces LKAS 39 for annual periods on or after 1 January 2018. The Bank has not restated comparative information for 2017 for financial instruments in the scope of SLFRS 9. Therefore, the comparative information for 2017 is reported under LKAS 39 and is not comparable to the information presented for 2018. Differences arising from the adoption of SLFRS 9 have been recognised directly in retained earnings as of 1 January 2018 and are disclosed in Note 43.
SLFRS 15 – Revenue from Contracts with Customers
Since 1 January 2018, the Bank has also adopted SLFRS 15. The adoption of SLFRS 15 did not impact the timing or amount of fee
and commission income from contracts with customers and the
related assets and liabilities recognised by the Bank.
Apart from the changes mentioned above, the accounting policies have been consistently applied by the Company with those of the previous financial year in accordance with the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements”.
2.1.2 Statement of compliance
The Financial Statements of the Bank which comprise the statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flow and significant accounting policies and notes have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) laid down by The Institute of Chartered Accountants of Sri Lanka and are in compliance with the requirements of the Companies Act No. 07 of 2007. The presentation
of the Financial Statements is also in compliance with the requirements of the Banking Act No. 30 of 1988 and amendments thereto.
2.1.3 Presentation of financial statements
The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current)
and more than 12 months after the statement of financial position
date (non-current) is presented in Note 40.
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.
2.2 Significant accounting judgements, estimates and assumptions
In the process of applying the Bank's accounting policies, management has exercised judgement and estimates in determining the amounts recognised in the Financial Statements. The most significant uses of judgement and estimates are as follows:
(a) Going concern
The Bank’s Management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, Management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the Financial Statements continue to be prepared on the going concern basis.
(b) Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using judgement is required to establish fair values. The judgements include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for
asset backed securities. The valuation of financial instruments is described in more detail in Note 38.
(c) Impairment losses on loans and advances
The Bank reviews its individually significant loans and advances at
each statement of financial position date to assess whether an impairment loss should be recorded in the income statement. In particular, Management judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.
Loans and advances that have been assessed individually and found
to be impaired have been provide for the impairment loss on loans
and advances as disclosed in Note 7 and Note 16. All individually
not insignificant loans and advances and unimpaired individual significant customers are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to Expected Credit Loss (ECL – applicable from 1 January 2018 onwards) events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, remaining maturity, customer identification number, etc.), and judgements to the effect of concentrations of risks and economic data (including levels of unemployment, gross domestic production, interest rate and exchange rate fluctuation).
(d) Deferred tax assets
Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which
the losses can be utilised. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon
the likely timing and level of future taxable profits, together with
future tax planning strategies.
The Bank is subject to income taxes and other taxes including VAT on financial services. Significant judgement was required to determine the total provision for current, deferred and other taxes pending the issue of tax guideline on the treatment of the adoption of SLFRSs in the Financial Statements and the taxable profit for the purpose of imposition of taxes. Uncertainties exist, with respect to the interpretation of the applicability of tax laws, at the time of the preparation of these Financial Statements.
The Bank recognised assets and liabilities for current deferred and other taxes based on estimates of whether additional taxes will be
due. Where the final tax outcome of these matters is different from
the amounts that were initially recorded, such differences will
impact the income.
(f) Defined benefit plan
The cost of the defined benefit plan is determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, salary increment rate, age of retirement, and mortality rates. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. The assumptions used for valuation
is disclosed in more detail in Note 28.1.4.
(g) Useful lifetime of the property and equipment
The Bank reviews the residual values, useful lives and methods of depreciation of assets as at each reporting date. Judgement of the Management is exercised in the estimation of these values, rates, methods’ and hence they are subject to uncertainty.
2.3 Summary of significant accounting policies
2.3.1 Foreign currency translation
The Financial Statements are presented in Sri Lankan Rupees (LKR).
Transactions and balances
Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to “Other operating income” in the income statement.
2.3.2 Financial instruments
184.108.40.206 Initial recognition and subsequent measurement
(a) Date of recognition
All financial assets and liabilities are initially recognised on the trade date, i.e., the date that the Bank becomes a party to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place.
(b) Initial measurement of financial instruments
The classification of financial instruments at initial recognition
depends on the purpose and the Management’s intention for which the financial instruments were acquired and their characteristics.
All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss.
(c) Subsequent measurement
(a) Financial Instruments (Policies applicable after 1 January 2018)
(i) Classification of financial instruments
The Bank classifies its financial assets into the following
- Measured at fair value (either through other comprehensive
income, or through Profit or Loss); and
- Measured at amortised cost.
The classification depends on the Bank’s business model for managing financial assets and the contractual terms of the financial assets cash flows. The Bank classifies its Financial Liabilities at amortised cost unless it has designated liabilities at fair value through profit.
(ii) Financial assets measured at amortised cost
Placements, loans and receivables to other customers and debt and other instruments are measured at amortised cost where they have:
- Contractual terms that give rise to cash flows on specified dates, that represent solely payments of principal and profits on the principal amount outstanding; and
- Are held within a business model whose objective is achieved by holding to collect contractual cash flows.
These instruments are initially recognised at fair value plus directly attributable transaction costs and subsequently measured at
amortised cost. The measurement of credit impairment is based on
the three-stage expected credit loss model described below in
Note (vi) Impairment of Financial Assets.
(iii) Financial assets measured at fair value through other comprehensive income
Investment in equity instruments that are neither trading financial assets recognised through profit or loss, nor contingent consideration recognised by the Bank in a business combination to which SLFRS 3 – “Business Combinations” applies, are measured at fair value through other comprehensive income, where an irrevocable election has been made by Management. Long-term nature of investment for portfolios where Management does not consider an irrevocable election of adopting fair value through other comprehensive income, by default such investments shall be measured at fair value through profit and loss.
Amounts presented in other comprehensive income are not subsequently transferred to profit or loss. Dividends on such investments are recognised in profit or loss.
(iv) Fair value through profit or loss
Fair value through profit or loss comprise:
- Financial investments – for trading;
- Instruments with contractual terms that do not represent solely payments of principal and profit.
Financial instruments held at fair value through profit or loss are initially recognised at fair value, with transaction costs recognised in the statement of profit or loss as incurred. Subsequently, they are measured at fair value and any gains or losses are recognised in the statement of profit or loss as they arise.
Where a financial asset is measured at fair value, a credit valuation adjustment is included to reflect the creditworthiness of the counterparty, representing the movement in fair value attributable
to changes in credit risk.
(a) Financial investments – for trading
A financial investment is classified as financial assets recognised through profit or loss if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking, or it is a derivative not in a qualifying hedge relationship.
Government Securities and investment in Unit Trust Securities are classified as financial assets recognised through profit or loss and recognised at fair value. Refer Note 15.
(b) Financial instruments designated as measured at fair value through profit or loss
Upon initial recognition, financial instruments may be designated as measured at fair value through profit or loss. A financial asset may only be designated at fair value through profit or loss if doing so eliminates or significantly reduces measurement or recognition inconsistencies (i.e. eliminates an accounting mismatch) that would otherwise arise from measuring Financial Assets or Liabilities on a different basis. The Bank does not designate any financial instruments under this category.
(v) Impairment of financial assets
The Bank applies a three-stage approach to measuring Expected Credit Losses (ECLs) for the following categories of financial assets that are not measured at fair value through profit or loss:
- Instruments measured at amortised cost and fair value through other comprehensive income;
- Loans and receivables to other customers; and
- Financial Guarantee Contracts
ECL is not recognised on equity instruments.
Financial assets migrate through the following three stages based on the change in credit risk since initial recognition:
Stage 1: 12 months ECL
For exposures where there has not been a significant increase in
credit risk since initial recognition and that are not credit impaired upon origination, the portion of the lifetime ECL associated with
the probability of default events occurring within the next 12 months is recognised.
Bank determines 12-month ECL from customers who are not significantly credit deteriorated (i.e. less than 30 days past due):
Stage 2: Lifetime ECL – not credit impaired
For exposures where there has been a significant increase in credit risk since initial recognition but are not credit impaired, a lifetime ECL (i.e. reflecting the remaining lifetime of the financial asset) is recognised.
In being consistent with the policies of the Bank, significant deterioration is measured through the rebuttable presumption of 30 days past due in line with the requirements of the standard.
Stage 3: Lifetime ECL – credit impaired
Exposures are assessed as credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of that asset have occurred. For exposures that have become credit impaired, a lifetime ECL is recognised and financing income is calculated by applying the effective rate to the amortised cost (net of provision) rather than the gross carrying amount.
Determining the stage for impairment
At each reporting date, the Bank assesses whether there has been a significant increase in credit risk for exposures since initial recognition by comparing the risk of default occurring over the expected life between the reporting date and the date of initial recognition.
The Bank considers reasonable and supportable information that
is relevant and available without undue cost or effort for this
purpose. This includes quantitative and qualitative information
and also, forward-looking analysis.
An exposure will migrate through the ECL stages as asset quality deteriorates. If, in a subsequent period, asset quality improves and also reverses any previously assessed significant increase in credit risk since origination, then the provision for impairment loss reverts from lifetime ECL to 12-months ECL. Exposures that have not deteriorated significantly since origination, or where the deterioration remains within the Bank’s investment grade criteria, or which are less than 30 days past due, are considered to have a low credit risk. The provision for impairment loss for these financial assets is based on a 12-month ECL. When an asset is uncollectible, it is written off against the related provision. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off reduce the amount of the expense in the statement of profit or loss.
The Bank assesses whether the credit risk on an exposure has increased significantly on an individual or collective basis. For the purposes of a collective evaluation of impairment, financial instruments are grouped on the basis of shared credit risk characteristics, taking into account instrument type, credit risk ratings, date of initial recognition, remaining term to maturity, industry, geographical location of the borrower and other relevant factors.
Measurement of ECLs
ECLs are derived from unbiased and probability-weighted estimates of expected loss, and are measured as follows:
- Financial assets that are not credit-impaired at the reporting date:
as the present value of all cash shortfalls over the expected life of
the financial asset discounted by the effective rate. The cash shortfall is the difference between the cash flows due to the Bank in accordance with the contract and the cash flows that the Bank expects to receive.
- Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows discounted by the effective rate.
- Undrawn commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive.
- Financial guarantee contracts: as the expected payments to reimburse the holder less any amounts that the Bank expects
For further details on how the Bank calculates ECLs including the use of forward-looking information, refer to the credit quality of financial assets section in Note 23. For details on the effect of modifications of loans and receivables to other customers on the measurement of ECL refer to note on provision for expected credit loss.
ECLs are recognised using a provision for impairment loss account in statement of profit and loss. The Bank recognises the provision charge in statement of profit or loss, with the corresponding amount recognised in other comprehensive income, with no reduction in the carrying amount of the asset in the statement of financial position.
The mechanics of the ECL calculations are outlined below and the key elements are, as follows:
PD: The probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio.
EAD: The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of capital and financing income, whether scheduled by contract or otherwise, expected draw downs on committed facilities, and accrued financing income from missed payments.
LGD: The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Bank would expect to receive, including the realisation of any collateral.
(vi) Recognition and derecognition of financial instruments
A financial asset or financial liability is recognised in the Statement of Financial Position when the Bank becomes a party to the contractual provisions of the instrument, which is generally on trade date. Loans and Receivables to other customers are recognised when cash is advanced (or settled) to the borrowers.
Financial assets at fair value through profit or loss are recognised initially at fair value. All other financial assets are recognised initially at fair value plus directly attributable transaction costs.
The Bank derecognises a financial asset when the contractual cash flows from the asset expire or it transfers its rights to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred.
Any interest in transferred financial assets that is created or retained
by the Bank is recognised as a separate asset or liability.
A financial liability is derecognised from the Statement of Financial Position when the Bank has discharged its obligation or the contract is cancelled or expires.
Financial assets and liabilities are offset and the net amount is presented in the balance sheet when the Bank has a legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. Refer to note on financial risk management – Offsetting of Financial Assets and Liabilities.
(c) Critical accounting assumptions and estimates applicable for financial assets
The application of the Bank’s accounting policies requires the use of judgements, estimates, and assumptions. If different assumptions or estimates were applied, the resulting values would change, impacting the net assets and income of the Bank.
Assumptions made at each reporting date are based on best estimates at that date. Although the Bank has internal control systems in place to ensure that estimates are reliably measured, actual amounts may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.
The accounting policies which are most sensitive to the use of judgement, estimates, and assumptions are specified below:
(i) Fair value measurement
A significant portion of financial instruments are carried on the statement of financial position at fair value. Fair value is the price
that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
Where the classification of a financial asset or liability results in it being measured at fair value, wherever possible, the fair value is determined by reference to the quoted bid or offer price in the most advantageous active market to which the Bank has immediate access. An adjustment for credit risk is also incorporated into the fair value as appropriate.
Fair value for a net open position that is a financial liability quoted
in an active market is the current offer price, and for a financial asset the bid price, multiplied by the number of units of the instrument
held or issued.
Where no active market exists for a particular asset or liability, the Bank uses a valuation technique to arrive at the fair value, including the use of transaction prices obtained in recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques, based on market conditions and risks existing at reporting date. In doing so, fair value is estimated using a valuation technique that makes maximum use of observable market inputs and places minimal reliance upon entity-specific inputs.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Bank recognises the difference between the transaction price and the fair value in profit or loss on initial recognition (i.e. on day one).
(ii) Impairment charges on loans and receivables to other customers
Judgement is required by Management in the estimation of the amount and timing of future cash flows when determining an impairment loss for loans and receivables to other customers. In estimating these cash flows, the Bank makes judgements about the customer’s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the impairment allowance.
A collective assessment of impairment takes into account data from the advance portfolio (such as credit quality, levels of arrears, credit utilisation, advances to collateral ratios etc.), and concentrations of risk and economic data (including levels of unemployment, Inflation, GDP Growth Rate, country risk and the performance of different individual groups). The impairment loss on financing and receivables is disclosed in more detail in Note 23 – Provision for Expected Credit Losses.
(d) Subsequent measurement (Policies applicable before 1 January 2018)
The subsequent measurement of financial assets depends on their classification as described below:
(a) Financial assets held for trading
Financial assets or financial liabilities held for trading are recorded in the statement of financial position at fair value. Changes in fair value are recognised in “Net operating income”. Interest and dividend income or expense is recorded in “Net trading income” according to the terms of the contract, or when the right to the payment has been established. Included in this classification are debt securities, listed equities and Unit trusts.
(b) Financial assets and financial liabilities designated at fair value through profit or loss
Financial assets and financial liabilities classified in this category are those that have been designated by Management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument by instrument basis:
The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis.
The assets and liabilities are part of a financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.
Financial assets and financial liabilities at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at fair value through profit or loss”. Interest is earned or incurred is accrued in “Interest income” or “Interest expense”, respectively, using the effective interest rate (EIR), while dividend income is recorded in “Other operating income” when the right to the payment has been established.
The Bank has not designated any financial assets and liabilities upon initial recognition as at fair value through profit or loss.
(c) “Day 1” profit or loss
When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data
from observable markets, the Bank immediately recognises the difference between the transaction price and fair value (“Day 1” profit or loss) in “Net operating income”. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised
in the income statement when the inputs become observable, or
when the instrument is derecognised.
(d) Held-to-maturity financial investments
Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the EIR, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in “Interest and similar income” in the income statement. The losses arising from impairment of such investments are recognised in the income statement line “Impairment for loans and other losses”. If the Bank were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available for sale. Furthermore, the Bank would be prohibited from classifying any financial asset as held to maturity during the following two years.
Included in this classification are debt securities and investment in debentures.
(e) Due from banks, loans and advances to customers
(Loans and receivables)
“Due from banks” and “Loans and advances to customers” include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:
- Those that the Bank intends to sell immediately or in the near term and those that the Bank upon initial recognition designates as at
fair value through profit or loss.
- Those that the Bank, upon initial recognition, designates as
available for sale.
- Those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration.
After initial measurement, amounts “Due from banks” and “Loans and advances to customers” are subsequently measured at amortised cost using the EIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR.
The amortisation is included in “Interest income” in the comprehensive income. The losses arising from impairment are recognised in the comprehensive income in “Impairment for loans and receivables”.
Included in this classification are placement with local banks, other financial asset classified under loans and receivable and loans and receivable to customers.
(f) Available-for-sale financial investments
Available-for-sale investments include equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. The Bank has not designated any loans or receivables as available for sale. After initial measurement, available-for-sale financial investments are subsequently measured at fair value.
Unrealised gains and losses are recognised directly in equity in the “Available-for-sale reserve”. When the investment is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement in “Other operating income”. Where the Bank holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Dividends earned whilst holding available-for-sale financial investments are recognised in the income statement as “Other operating income” when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the income statement in “Impairment losses on financial investments” and removed from
the “Available-for-sale reserve”.
Included in this classification is unquoted equity securities.
The initial and subsequent measurement of financial liabilities depends on their classification as described below:
At the inception the Bank determines the classification of its financial liabilities. Accordingly, financial liabilities are classified as:
- Financial liabilities at Fair Value through Profit or Loss (FVTPL)
– Financial liabilities held for trading
– Financial liabilities designated at fair value through profit or loss
- Financial liabilities at amortised cost
The subsequent measurement of financial liabilities depends on
(i) Financial liabilities at Fair Value through Profit or Loss (FVTPL)
Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Subsequent to initial recognition, financial liabilities at FVTPL are fair value, and changes therein recognised in profit or loss.
Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of the portfolio that is managed together for short-term profit or position taking. This category includes derivative financial instruments entered into by the Bank which are not designated as hedging instruments in the hedge relationships as defined by the Sri Lanka Accounting Standards – LKAS 39 on “Financial Instruments: Recognition and Measurements”. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement.
The Bank does not have any financial liabilities under this category.
(ii) Financial liabilities at amortised cost
Financial instruments issued by the Bank that are not designated at fair value through profit or loss, are classified as liabilities at amortised cost under “due to customers and other borrowings” as appropriate, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial assets for a fixed number of own equity shares at amortised cost using EIR method.
After initial recognition, such financial liabilities are substantially measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are integral parts of the EIR. The EIR amortisation is included in “Interest expenses” in the Income Statement. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the EIR amortisation process.
This category consists of due to other customers, other borrowings, debt securities issued, and subordinated term debts.
220.127.116.11 Determination of fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
- In the principal market for the asset or liability, or
- In the absence of a principal market, in the most advantageous market for the asset or liability
The principal or the most advantageous market must be accessible by the Bank.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the Financial Statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable –
For assets and liabilities that are recognised in the Financial Statements on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
The disclosure of fair value of financial instruments is disclosed in Note 38.
18.104.22.168 Impairment of financial assets
The Bank assesses at each statement of financial position date
whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events
that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganisation, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
(a) Financial assets carried at amortised cost
For financial assets carried at amortised cost (such as placement with banks, loans and advances to customers as well as held-to-maturity investments), the Bank first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit
risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which
an impairment loss is, or continues to be, recognised are not
included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets’ carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of “Interest and similar income”. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the “Income Statement”.
The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Bank has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank’s credit risk characteristics such as asset type, industry, geographical location, past-due status and other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
See Note 7 for details of impairment losses on financial assets carried at amortised cost, Note 16 for an analysis of the impairment allowance on loans and advances.
(b) Available-for-sale financial investments
For available-for-sale financial investments, the Bank assesses at each reporting date whether there is objective evidence that an investment is impaired.
In the case of debt instruments classified as available for sale,
the Bank assesses individually whether there is objective evidence
of impairment based on the same criteria as financial assets carried
at amortised cost.
However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement. Future profit income is based on the reduced carrying amount and is accrued using the rate of return used to discount the future cash flows for the purpose of measuring the impairment loss.
In the case of equity investments classified as available for sale, objective evidence would also include a “significant” or “prolonged” decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement – is removed from equity and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in the fair value
after impairment are recognised in other comprehensive income.
(c) Renegotiated loans
Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original EIR.
(d) Collateral valuation
The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and based on the guidelines issued by the Central Bank of Sri Lanka. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent values and Audited Financial Statements.
(e) Collateral repossessed
The Bank’s policy is to determine whether a repossessed asset is best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset.
22.214.171.124 Derecognition of financial assets and financial liabilities
(A) Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:
- The rights to receive cash flows from the asset have expired.
- The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass–through” arrangement; and either:
- the Bank has transferred substantially all the risks and rewards of the asset, or
- The Bank has neither transferred nor retained substantially all
the risks and rewards of the asset, but has transferred control
of the asset.
When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank’s continuing involvement in the asset. In that case, the Bank also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.
(B) Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing
financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in profit or loss.
126.96.36.199 Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in statement of financial position.
2.3.3 Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase at a specified future date are not derecognised from the statement of financial position as the Bank retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within “repurchase agreements”, reflecting the transaction’s economic substance as a loan to the Bank. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the EIR. When the counterparty has the right to sell or replace the securities, the Bank reclassifies those securities in its statement of financial position to “Financial assets held-for-trading pledged as collateral” or to “Financial investments available-for-sale pledged as collateral”, as appropriate. Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within “reverse repurchase agreements”, reflecting the transaction’s economic substance as a loan by the Bank.
The difference between the purchase and resale prices is recorded in “Net interest income” and is accrued over the life of the agreement using the EIR. If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within “Financial liabilities held-for-trading” and measured at fair value with any gains or
losses included in “Net operating income”.
2.3.4 Securities lending and borrowing
Securities lending and borrowing transactions are usually collateralised by securities or cash. The transfer of the securities to counterparties is only reflected on the statement of financial position if the risks and rewards of ownership are also transferred. Cash advanced or received as collateral is recorded as an asset or liability. Securities borrowed are not recognised on the statement of financial position, unless they are then sold to third parties, in which case the obligation to return the securities is recorded as a trading liability and measured at fair value with any gains or losses included in “Net operating income”.
The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
188.8.131.52 Operating Leases
Bank as a lessor
Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
184.108.40.206 Finance leases
Bank as a lessor
Assets leased to customers which transfer substantially all the risks
and rewards associated with ownership other than legal title, are classified as “Finance leases”. Amounts receivable under finance leases are included under “Loans and receivables to customers” in the statement of financial position after deduction of initial rentals received, unearned lease income and the accumulated impairment losses. When assets are held subject to a finance lease, the present value of the lease payments, discounted at the rate of interest implicit in the lease, is recognised as a receivable. The difference between
the total payments receivable under the lease and the present value
of the receivable is recognised as unearned finance income, which
is allocated to accounting periods reflect a constant periodic rate
2.3.6 Cash and cash equivalents
Cash and cash equivalents as referred to in the cash flow statement comprises cash on hand and balances with banks on demand or with an original maturity of three months or less.
2.3.7 Property and equipment
Property, plant and equipment are tangible items that are held for servicing, or for administrative purposes, and are expected to be used during more than one year.
Property and equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably in accordance with LKAS 16 on “Property, Plant and Equipment”. Initially property and equipment are measured at cost.
(i) Basis of recognition and measurement
An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its costs. Costs include expenditure that is directly attributable to the acquisition of the asset and cost is incurred subsequently to add to or replace a part of it. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to working condition for its intended use and the costs of dismantling and removing the items and restoring at the site on which they are located and capitalised borrowing costs. Purchase of software that is integral to the functionality of the related equipment is capitalised as a part of computer equipment.
When parts of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
The Bank applies the cost model to property, plant and equipment and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.
Changes in the expected useful life are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates.
(ii) Subsequent cost
These are costs that are recognised in the carrying amount of an item, if it is probable that the future economic benefits embodied within that part will flow to the Bank and it can be reliably measured.
(iii) Repairs and maintenance
Repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred. The cost of major renovations is included in the carrying amount of the assets when it is probable that future economic benefits in excess of the most recently assessed standard of performance of the existing assets will flow to the Bank and the renovation replaces an identifiable part of the asset. Major renovations are depreciated during the remaining useful life of the related asset.
(iv) Capital Work in progress
Capital work in progress is stated at cost. It would be transferred to the relevant asset when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by Management. Capital work in progress is stated at cost less any accumulated impairment losses.
(v) Borrowing costs
As per LKAS 23 on “Borrowing Costs”, the Bank capitalises the borrowing costs that are directly attributable to acquisition, construction or production of qualifying assets as part of the cost of the asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognised in the profit or loss in the period in which they occur.
Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in “Other operating income' in the income statement in the year the asset is derecognised.
Depreciation is calculated using the straight-line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:
|| 20 years
| Computer hardware
|| 3 years
| Machinery and equipment
|| 5 years
| Motor vehicles
|| 4 years
| Furniture and fittings
|| 5 years
2.3.8 Investment properties
Properties held to earn rental income have been classified as investment properties. Investment properties initially recognised
at cost. After initial recognition the Bank uses the cost method to measure all of its investment property in according with
requirements in LKAS 16 on “Property, Plant and Equipment”.
Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal.
Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner occupation, commencement of an operating lease to another party or completion of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner occupation or commencement of development with a view to sale.
Depreciation is calculated using the straight-line method to write down the cost of investment property to their residual values over their estimated useful lives. The estimated useful lives are as follows:
2.3.9 Asset classified as held for sale
Non-current assets are classified as Investments – “held for sale” when their carrying amounts will be recovered principally through sale, they are available for sale in their present condition and their sale is highly probable. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of SLFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations” such as deferred taxes, financial instruments, investment properties, insurance contracts, and assets and liabilities arising from employee benefits.
2.3.10 Intangible assets
The Bank’s intangible assets include the value of computer software.
(i) Basis of recognition
An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank in accordance with LKAS 38 on “Intangible Assets”.
Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses if any.
(ii) Subsequent expenditure
Subsequent expenditure on intangible asset is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
(iii) Useful economic life, amortisation and impairment
The useful lives of intangible assets are assessed to be either
finite or indefinite.
Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and they are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.
Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual value over their estimated useful life as follows:
| The class of intangible assets
|| Useful life
|| Amortisation method
| Computer software
|| 7 years
|| Straight-line method
The unamortised balances of intangible assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised in profit or loss to the extent that they
are no longer probable of being recovered from the expected
Intangible assets are derecognised on disposal or when no future economic benefits are expected from their use. Any gain or loss arising on derecognition of the asset, (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in the profit or loss in the year the asset is derecognised.
2.3.11 Impairment of non-financial assets
The Bank assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used.
For assets, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Bank estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement.
2.3.12 Financial guarantees
In the ordinary course of business, the Bank gives financial guarantees, consisting of bank guarantees. Bank guarantees are initially recognised in the Financial Statements (within “other liabilities”) at fair value, being the premium received. Subsequent to initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortisation recognised in the income statement, and the best estimate of expenditure required settling any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the income statement in “Credit loss expense”. The premium received is recognised in the income statement in “Net fees and commission income’ on a straight-line basis over the life of the guarantee.
Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement.
2.3.14 Retirement Benefit Obligations
(a) Defined Benefit Plan-Gratuity
Based on LKAS 19 on “Employee Benefits”, the Bank has adopted the actuarial valuation method for employee benefit liability an actuarial valuation is carried out every year to ascertain the liability. A separate fund is not maintained for this purpose.
The principal assumptions, which have the most significant effects
on the valuation, are the rate of discount, rate of increase in salary,
rate of turnover at the selected ages, rate of disability, death benefits and expenses.
The liability is measured on an actuarial basis using the projected
unit credit method, adjusted for unrecognised actuarial gains and losses. The defined benefit plan liability is discounted using rates equivalent to the market yields at the date of statement of financial position that are denominated in the currency in which benefits will be paid, and that have a maturity approximating to the terms of the related pension liability.
The Bank recognises all actuarial gains and losses arising from the defined benefit plan in other comprehensive income (OCI) and all
other expenses related to defined benefit plans are recognised as personnel expenses in income statement.
(b) Defined Contribution Plan – Employees' Provident Fund and Employees' Trust Fund
Employees are eligible for Employees’ Provident Fund contributions and Employees’ Trust Fund contributions in line with the respective Statutes and Regulations. The Bank contributes a minimum 12% and 3%.
2.3.15 Recognition of income and expenses
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.
(a) Interest and similar income and expense
For all financial instruments measured at amortised cost, interest bearing financial assets classified as available for sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.
The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as “Other operating income”. However, for a reclassified financial asset for which the Bank subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of
the change in estimate.
Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
(b) Fee and commission income
The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:
- Fee income earned from services that are provided over a certain period of time
- Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income
and asset management, custody and other management and advisory fees.
Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight-line basis.
- Fee income from providing transaction services
Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.
(c) Dividend income
Dividend income is recognised when the Bank’s right to receive the payment is established.
(d) Net operating income
Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities “held for trading”.
(a) Current tax
Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date.
(b) Deferred tax
Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences.
Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised.
The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset
to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.
Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not in the income statement.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
(c) Value Added Tax (VAT) on financial services
Value Added Tax on financial services is calculated in accordance with the Value Added Tax Act No.14 of 2002 and subsequent amendments thereto. The base for the computation of Value Added Tax on financial services is the accounting profit before income tax adjusted for the economic depreciation and emoluments of employees’ computed on prescribed rate.
(d) Withholding tax on dividends
Withholding tax on dividends distributed by the Bank that arise from the distribution of dividends of the Bank is recognised at the time of liability to pay the related dividend is recognised. At present, the rate
of 14% is deducted at source.
(e) Economic Service Charge (ESC)
As per the provisions of Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, the ESC is calculated on liable turnover. Currently, the ESC is payable at 0.5% and is deductible from the income tax payable. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the two subsequent years.
(f) Crop Insurance Levy (CIL)
As per the provisions of Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from 1 April 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1%
of the profit after tax.
(g) Nation Building Tax ( NBT) on financial services
According to the Nation Building Tax Act No. 09 of 2009 and subsequent amendments thereto, Nation Building Tax should be paid on the liable turnover. The business of banking or finance is exempted from Nation Building Tax up to 31 December 2013 and the exemption was removed with effect from 1 January 2014. NBT on financial services is calculated as 2% of the value addition used for the purpose of VAT on financial services.
(h) Debts Repayments Levy (DRL)
DRL on financial service is calculated in accordance with the Finance Act No. 35 of 2018 of a period from 1 October 2018 to December 2021. DRL on financial services is calculated based on the total value addition used for the purpose of VAT on financial services. The DRL rate applied in 2018 is 7%.
Grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, it is recognised as deferred income and released
to income in equal amounts over the expected useful life of the
2.3.18 Dividends on ordinary shares
Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank.
Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the reporting date.
2.3.19 Equity reserves
The reserves recorded in equity on the Bank’s statement of financial position include:
“Available-for-sale” reserve which comprises changes in fair value of available-for-sale investments.
2.3.20 Segment reporting
A segment is a distinguishable component of the Bank that is engaged in providing services (Business segments) or in providing services within a particular economic environment (Geographical segment) which is subject to risks and rewards that are different from those of other segments.
In accordance with the SLFRS 8 on “Segmental Reporting”, segmental information is presented in respect of the Bank based on Bank Management and Internal Reporting Structure.
The Bank’s segmental reporting is based on the following operating segments.
|| Individual customers’ deposits and consumer financing,
equipment financing, home and property financing
|| Lease and hire purchase facility customers
|| Placements of funds with other banks and financial institutions,
|| Pawning advances to customers
Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss of respective segment.
2.4 Standards issued but not yet effective as at 31 December 2018
The following Sri Lanka Accounting Standards have been issued by The Institute of Chartered Accountants of Sri Lanka which are not yet effective as at 31 December 2018.
SLFRS 16 – Leases
SLFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract, i.e. the customer (“Lessee”) and the supplier (“Lessor”). SLFRS 16 will replace Sri Lanka Accounting Standard – LKAS 17 on “Leases” and related interpretations. SLFRS 16 introduces a single accounting
model for the lessee, eliminating the present classification of leases
in LKAS 17 as either operating leases or finance leases.
The new Standard requires a lessee to:
- recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value
- present depreciation of lease assets separately, from interest on lease liabilities in the income statement.
SLFRS – 16 substantially carries forward the lessor accounting requirement in LKAS – 17. Accordingly, a lessor continues to classify its leases as operating lease or finance lease, and to account for those two types of leases differently.
SLFRS –16 will become effective on 1 January 2019. The Bank is currently assessing the impact on the implementation of the
Year ended 31 December