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1. CORPORATE INFORMATION
1.1 General
Commercial Bank of Ceylon PLC (the ‘Bank’) is a public limited liability Company listed on the Colombo Stock Exchange incorporated on June 25, 1969 and domiciled in Sri Lanka. It is a Licensed Commercial Bank regulated under the Banking Act No. 30 of 1988 and amendments thereto. The registered office of the Bank is at ‘Commercial House’, No. 21, Bristol Street, Colombo 1. The ordinary shares of the Bank have a primary listing on the Colombo Stock Exchange. The staff strength of the Bank as at December 31, 2008 is 4,041 (3,745 as at December 31, 2007).
1.2 Consolidated Financial Statements
The Consolidated Financial Statements of the Bank for the year ended December 31, 2008 comprise the Bank
(parent company) and its Subsidiaries (together referred to as the ‘Group’) and the Group’s interest in its Associates.
The Bank does not have an identifiable parent of its own.
1.3 Approval of Financial Statements by Directors
The Financial Statements for the year ended December 31, 2008 were authorised for issue on February 18, 2009, in accordance with a resolution of the Board of Directors passed on February 18, 2009.
2. PRINCIPAL ACTIVITIES AND NATURE OF OPERATIONS
2.1 Bank
The Bank provides a comprehensive range of financial services encompassing accepting deposits, personal banking,
trade financing, off-shore banking, resident and non-resident foreign currency operations, travel-related services, corporate and retail credit, project financing, lease financing, rural credit, issuing of local and international credit cards, issuing of debit cards, telebanking facilities, internet banking, money remittance facilities, dealing in Government Securities, bullion trading, export and domestic factoring, pawning etc.
2.2 Subsidiaries
The principal activities of the Bank’s Subsidiaries, namely, Commercial Development Company PLC and ONEzero Company Ltd. are property development and providing IT related services and training, respectively. Commercial Bank Primary Dealer Ltd., whose principal business activity was dealing in Government Securities as a Primary Dealer, ceased its operations as at September 30, 2005, consequent to the Bank obtaining the licence to operate as a Primary Dealer.
The proceedings for voluntary winding up of this Company are in progress. Further, X-pertise Ltd., whose principal business activity was development of human resource, too ceased its operations as at September 30, 2007, consequent to the decision to transfer its operations to the Bank. The proceedings for voluntary winding up of this Company too are in progress.
2.3 Associates
The principal activities of the Bank’s Associates, namely, Equity Investments Lanka Ltd. and Commercial Insurance Brokers (Pvt) Ltd., are fund management and insurance brokering, respectively. The Bank disposed its 30% stake in
the equity of Commercial Leasing Company PLC, on April 30, 2008 and on May 22, 2008, whose principal activity is leasing and factoring. The Bank’s investment in this Company was classified as an Investment held for Sale in accordance with the requirements of the Sri Lanka Accounting Standard No. 38 (Revised 2006) on Non-current Assets Held for Sale and Discontinued Operations, due to the Bank’s decision to dispose its interest in this Company.
There were no significant changes in the nature of the principal activities of the Bank and the Group during the financial year under review.
3. ACCOUNTING POLICIES
3.1 Basis of Preparation
The Financial Statements of the Group are prepared under the historical cost convention, except Government Treasury Bills and Bonds, Dealing Securities and land and buildings which are stated at valuation as explained in Notes 15, 16 and 23 to the Financial Statements. Assets and liabilities are grouped by nature and listed in an order that reflects their relative liquidity. Where appropriate the Significant Accounting Policies are disclosed in the succeeding notes.
These Financial Statements are prepared in Sri Lankan Rupees which is the Group’s functional currency unless
otherwise stated.
3.2 Statement of Compliance
The Consolidated Financial Statements of the Bank are prepared in accordance with the Sri Lanka Accounting
Standards laid down by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements
of the Companies Act No. 7 of 2007 and the Banking Act No. 30 of 1988 and amendments thereto.
3.3. Significant Accounting Judgements, Estimates and Assumptions
In the process of applying the Group’s Accounting Policies, the management is required to make judgements, apart from those involving estimations, which may have a significant effect on the amounts recognised in the Financial Statements. Estimates and underlying assumptions are reviewed on an ongoing basis and the management is required to consider, key assumptions concerning the future and other key sources of estimation uncertainty at the Balance Sheet date, that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
The respective carrying amounts of assets and liabilities are given in the related Notes to the Financial Statements.
The key items which involve these judgements, estimates and assumptions are discussed below:
3.3.1 Impairment Losses on Loans and Advances
In addition to the provisions made for possible loan losses based on the parameters and directives for specific and general provisions on Loans and Advances by the Central Bank of Sri Lanka, the Bank reviews its Loans and Advances portfolio at each reporting date or more frequently, if events or changes in circumstances necessitate to assess whether a further provision for impairment against exposures which, although not specifically identified as requiring specific provisions have a greater risk of default than when originally granted.
The judgements by the management are required in the estimation of these amounts and such estimations are based on assumptions about a number of factors such as any deterioration of country risk, industry and technological obsolescence, as well as identified structural weaknesses and deterioration in cash flows.
3.3.2 Review of Impairment Losses on Non-Financial Assets
The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date or more frequently if events or changes in circumstances require to do so. This requires the estimation of the ‘value in use’ of the cash generating units. Estimating value in use requires management to make an estimate of the expected future cash flows from the cash generating unit and also to select a suitable discount rate in order to calculate the present value of the relevant cash flows. This valuation requires the Bank to make estimates about expected future cash flows and discount rates, and hence, they are subject to uncertainty.
3.3.3 Defined Benefit Plans
The cost of defined benefit plans - gratuity and pension obligation is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. All assumptions are reviewed at each reporting date.
3.4 Basis of Consolidation
The Bank’s Financial Statements comprise the amalgamation of the Financial Statements of the Domestic Banking Unit, the Off-Shore Banking Centre and the foreign operations of the Bank. The Group's Financial Statements comprise consolidation of the Financial Statements of the Bank, its subsidiaries in terms of the Sri Lanka Accounting Standard
No. 26 (Revised 2005) on Consolidated and Separate Financial Statements and the proportionate share of the profit or loss of its Associates in terms of the Sri Lanka Accounting Standard No. 27 (Revised 2005) on Investments in Associates.
3.4.1 Subsidiaries
Subsidiaries are those entities controlled by the Bank. Control is achieved where the Bank has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presumably are exercisable are taken into account. The Financial Statements of Subsidiaries are fully consolidated from the date on which control is effectively transferred to the Bank. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the date of acquisition until the date that control effectively ceases.
Minority interest in the net assets not owned, directly or indirectly, by the Bank are presented in the Consolidated Balance Sheet within Equity separately from the equity attributable to Equity holders of the Parent (Bank). Minority interests in the profit or loss of the Group are presented separately in the Consolidated Income Statement.
The Consolidated Financial Statements incorporating all Subsidiaries in the Group are prepared to a common financial year ending December 31 using uniform Accounting Policies for like transactions and in similar circumstances are
applied consistently.
A listing of the Bank’s Subsidiaries is set out in Note 21 to the Financial Statements.
3.4.2 Associates
An Associate is an entity in which the Group has significant influence, directly or indirectly and which is neither a subsidiary nor a joint venture. The Group’s investments in Associates are accounted for in the Consolidated Financial Statements using the Equity Method of Accounting in terms of the Sri Lanka Accounting Standard No. 27 (Revised 2005) on Investments in Associates from the date that significant influence commences upto the date that significance influence effectively ceases. The Group discontinues the use of the Equity Method from the date that it ceases to have significance influence over an Associate and accounts for the investment in accordance with the Sri Lanka Accounting Standard No. 22 on Accounting for Investments.
Under the Equity Method, investments in the Associates are carried in the Balance Sheet at cost plus post-acquisition changes in the Group’s share of net assets of the Associates. Losses in excess of the cost of the investment in an Associate are recognised only when the Bank has incurred obligations on its behalf. Goodwill relating to an Associate is included in the carrying amount of the investment and is not amortised. The Income Statement reflects the Group’s share of current year’s profit or loss of the Associate.
Where there has been a change recognised directly in the equity of the Associate, the Bank recognises its share of any changes and discloses this, when applicable, in the Statement of Changes in Equity.
Profits and losses resulting from transactions between the Bank and the Associates are eliminated to the extent of the interest in the Associate.
The reporting dates of the Associates and the Bank are identical and the Associate’s Accounting Policies largely conform to those used by the Bank for like transactions and events in similar circumstances.
A listing of the Group’s Associates is set out in Note 20 to the Financial Statements.
3.4.3 Business Combinations and Goodwill
Business combinations are accounted for using the Purchase Method of Accounting as per the requirements of Sri Lanka Accounting Standard No. 25 (Revised 2004) on Business Combinations. This involves recognising identifiable assets (including previously unrecognised intangibles) and liabilities (including contingent liabilities) of the acquired business at fair value. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired, is recognised as goodwill. If the cost of acquisition is less than the fair values of the identifiable net assets acquired, the difference is identified as discount on acquisition and is recognised directly in the Income Statement in the year of acquisition.
Goodwill acquired in a Business Combination is initially measured at cost, being the excess of the cost of the Business Combination over the Bank’s interests in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Sri Lanka Accounting Standard No. 25 (Revised 2004) on Business Combinations requires that following the initial recognition, goodwill is to be measured at cost less any accumulated impairment losses and goodwill to be reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
However, acquired goodwill is written-off in full in the year of acquisition, since the Bank is not permitted to pay dividends otherwise, as per the Section 22 of the Banking Act No. 30 of 1988.
When Subsidiaries/Associates/other business units are sold, the difference between the selling price and the net assets plus cumulative translation differences and unimpaired goodwill, if any, is recognised in the Income Statement in the year of disposal.
No goodwill/discount on acquisition arose from the treatment of Associates under the Equity Method since the Group had the respective percentages of ownership in Associates from the commencement of those Associates.
3.4.4 Transactions Eliminated on Consolidation
All intra-group transactions and balances, income and expenses and any unrealised gains arising from such inter-company transactions and balances, have been eliminated in full in preparing the Consolidated Financial Statements. Unrealised gains resulting from transactions with Associates are eliminated to the extent of the Group’s interest in the Associates. Unrealised losses are eliminated in the same way as unrealised gains, except that they are eliminated only to the extent that there is no evidence of impairment.
3.4.5 Materiality and Aggregation
Each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately unless they are immaterial as permitted by the Sri Lanka Accounting Standard No. 3 (Revised 2005) on Presentation of Financial Statements.
3.4.6 Rounding
The amounts in the Financial Statements have been rounded to the nearest Rupees thousands, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard No. 3 (Revised 2005) on Presentation of Financial Statements.
3.4.7 Comparative Information
The Accounting Policies adopted by the Group are consistent with those of the previous financial year as permitted by the Sri Lanka Accounting Standard No. 3 (Revised 2005) on Presentation of Financial Statements, except where the Bank has adopted the Sri Lanka Accounting Standard No. 16 (Revised 2006) - Employee Benefits, during the year. The Principal
effects of the changes are discussed below:
As per the revised standard, it is required to measure the defined benefit plan using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned in return for their service in the current and prior periods. This requires an entity to determine how much benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality etc.) and financial variables (such as future increases in salaries and interest rates etc.) that will influence the cost of the benefit. The Bank changed its accounting policy on recognition of defined benefit plan liability, to actuarial valuation method.
Comparative information is reclassified wherever necessary to comply with the current presentation.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these Consolidated Financial Statements are set out below:
4.1 Foreign Currency Translation
4.1.1 Functional and Presentation Currency
Items included in the Consolidated Financial Statements are measured using the currency of the primary economic environment in which the Bank operates (the functional currency). The Consolidated Financial Statements are presented in Sri Lankan Rupees, the Bank’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the Financial Statements of each entity are measured using that functional currency.
4.1.2 Foreign Currency Transactions and Balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Monetary assets and liabilities resulting from foreign currency transactions are subsequently translated at the middle exchange rate of the functional currency ruling at reporting date. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different to those at which they were initially recorded are recognised in the Income Statement in the period in which they arise.
Non-monetary items that are measured in terms of historical cost in foreign currency are translated, using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in foreign currency are translated using the exchange rates at the date when the fair value was determined.
Goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and are translated at the rate ruling at the Balance Sheet date.
4.1.3 Transactions of the Off-Shore Banking Centre
These have been recorded in accordance with the Section 4.1.2 above, except the application of the annual weighted average exchange rate for translation of the Income Statement. Net gains and losses are dealt with through the Income Statement.
4.1.4 Foreign Operations
The results and financial position of overseas branch operations that have a functional currency different from the Bank’s presentation currency are translated into the Bank’s presentation currency as follows:
•
Assets and liabilities are translated at the rates of exchange ruling at the Balance Sheet date.
• Revenue and expenses are translated at the average exchange rate for the period, unless this average rate is not a reasonable approximation of the rate prevailing at the transaction date, in which case revenue and expenses are translated at the exchange rate ruling at transaction date and all resulting exchange differences are recognised in the foreign currency translation reserve, which is a separate component of equity.
• When a foreign operation is disposed, the deferred cumulative translation gain or loss recognised in equity relating to that particular foreign operation is recognised in the Income Statement as part of the gain or loss on sale.
4.2 Taxation
Income tax expense comprises of current and deferred income tax and social responsibility levy. Income tax expense is recognised in the Income Statement except to the extent it relates to items recognised directly in equity, in which case it is recognised in equity.
4.2.1 Current Taxation
Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the taxation authorities in respect of the current as well as prior years. The tax rates and tax laws used to compute the amounts are those that are enacted or substantially enacted by the Balance Sheet date. Accordingly, provision for taxation is made on the basis of the profit for the year as adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto, at the rates specified in Note 9.1 to the Financial Statements.
Provision for taxation on the overseas branch operations is made on the basis of the profit for the year as adjusted for taxation purposes in accordance with the provisions of the relevant statutes in those countries.
4.2.2 Deferred Taxation
Deferred tax is provided using the liability method on temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all temporary differences, except:
• Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised, except:
• Where the deferred tax assets relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and
• In respect of deductible temporary differences associated with investments in Subsidiaries and Associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each Balance Sheet date and are recognised to the extent that it is probable that future taxable profits will allow the deferred tax assets to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the assets are realised or the liabilities are settled, based on tax rates and tax laws that have been enacted or substantially enacted at the Balance Sheet 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 liabilities are set off 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.
4.2.3 Withholding Tax on Dividends Distributed by Subsidiaries and Associates
The withholding tax deducted at source is added to the tax expense in the Group Financial Statements as a consolidation adjustment.
4.2.4 Social Responsibility Levy (SRL)
As per the provisions of the Finance Act No. 5 of 2005, and amendments thereto, the SRL was introduced with effect from January 1, 2005. SRL is payable at the rate of 1.5% on all taxes and levies chargeable as specified in the First Schedule of the Act.
4.2.5 Economic Service Charge (ESC)
As per the provisions of the Finance Act No. 11 of 2004, and amendments thereto, the ESC was introduced with effect from April 1, 2004. ESC is payable at 1% on ‘Liable Turnover’ and is deductible from the income tax payments. Any unclaimed tax can be carried forward and set off against the income tax payable in the four subsequent years.
4.3 Events after the Balance Sheet Date
All material and important events after the Balance Sheet date have been considered and appropriate adjustments/disclosures have been made in Note 39 to the Financial Statements, where necessary.
4.4 Assets and Bases of their Valuation
4.4.1 Cash and Short-Term Funds
Cash and short-term funds include cash in hand, balances with banks, placements with banks and money at call at short notice. They are brought to Financial Statements at the face value, or the gross value, where appropriate.
4.4.2 Balances with Central Banks
The Monetary Law Act requires that all commercial banks operating in Sri Lanka to maintain a statutory reserve equal to 7.75% on all deposit liabilities denominated in Sri Lankan Rupees. The Bank’s Bangladesh Operation is required to maintain the Statutory Liquidity Requirement of 18% on time and demand liabilities, inclusive 5% Cash Reserve Requirement and the balance 13% by way of foreign currency and/or in the form of unencumbered securities held
with the Bangladesh Bank.
4.4.3 Government Treasury Bills and Bonds
4.4.3.1 Investments in Government Treasury Bills and Treasury Bonds held for Trading
Investments in Government Treasury Bills and Treasury Bonds in the trading portfolio are mark to market and carried at that market value in the Balance Sheet. Gains and losses on mark to market valuation are dealt with through the Income Statement.
4.4.3.2 Investments in Government Treasury Bills and Bonds held to Maturity
Investments in Government Treasury Bills and Bonds held to maturity are reflected at the value of the Bills/Bonds purchased and the discount/premium accrued thereon. Discount received/premium paid is taken to the Income
Statement based on a pattern reflecting a constant periodic rate of return.
4.4.4 Securities Purchased under Resale Agreements
These are advances collateralised by purchase of Government Treasury Bills and Treasury Bonds from the public subject to an agreement to resell them at a predetermined price. Such securities remain on the Balance Sheet of the Bank and the asset is recorded in respect of the consideration paid and interest accrued thereon.
4.4.5 Investments
4.4.5.1 Dealing Securities
These are marketable securities acquired and held with the intention of resale over a short period of time. Such securities are carried at the market value at the Balance Sheet date. Adjustment for changes in market values is accounted for in the Income Statement.
4.4.5.2 Investments held for Sale
These are investments classified as held for sale as at the Balance Sheet date. The Bank intends to recover the value of these assets principally through a sales transaction rather than continuing to hold. These assets are available for immediate sale in its present condition subject only to terms that are usual and customary for sale of such assets and
its sale is highly probable.
As per the Sri Lanka Accounting Standard No. 38 (Revised 2006) on Non-Current Assets Held for Sale and Discontinued Operations, these assets are measured at the lower of the carrying amount and fair value-less costs to sell. Thereafter the Bank assesses at each reporting date or more frequently if events or changes in circumstances indicate that the investment or a group of investment is impaired. The Bank recognises an impairment loss for any initial or subsequent write down of the assets to fair value less costs to sell and also recognises a gain for any subsequent increase in fair value-less costs to sell of an asset, only to the extent of the cumulative impairment losses that have been recognised previously. As a result, the Bank neither amortise nor depreciate the assets classified as held for sale.
4.4.5.3 Investment Securities
These are acquired and held for yield or capital growth in the medium to long term. Such securities are recorded at cost. Changes in market values of these securities are not taken into account, unless it is considered to be a diminution in value which is other than temporary.
4.4.5.4 Investments in Associates
Investments in Associates are accounted for under the Cost Method in the Bank’s Financial Statements and under the Equity Method in the Consolidated Financial Statements in accordance with the Sri Lanka Accounting Standard No. 27 (Revised 2005) on Investments in Associates.
4.4.5.5 Investments in Subsidiaries
Investments in Subsidiaries are stated at cost in the Bank’s Financial Statements in accordance with the
Sri Lanka Accounting Standard No. 26 (Revised 2005) on Consolidated and Separate Financial Statements.
4.4.6 Loans and Advances to Customers
Loans and advances to customers are stated in the Balance Sheet net of provisions for possible loan losses and net of interest, which is not accrued to revenue.
4.4.6.1 Non-Performing Loans and Advances
Loans and advances which are in arrears of due capital and/or interest are classified as non-performing as per the Direction No. 3 of 2008 as amended by the Direction No. 9 of 2008 of the Central Bank of Sri Lanka.
4.4.6.2 Foreclosed Properties
Foreclosed properties acquired in full or partial satisfaction of debts, are accounted for at the lower of cost or market value on an individual property basis. The shortfall between the prevailing market value of the foreclosed asset and the related loan outstanding, is recognised as a provision for loan losses in the Income Statement in the year of taking over the foreclosed properties, in satisfaction of the debt. The Bank reviews these properties at each reporting date or more frequently, if events or changes in circumstances indicate that the property is impaired.
Foreclosed properties are shown under Non-Performing Loans and Advances (Note 19.4 to the Financial Statements) until they are disposed. Subsequent gains and losses on the disposal of the foreclosed properties are treated as provisions written back or charged to Income Statement, respectively.
4.4.6.3 Provision for Loan Losses
4.4.6.3.1 Specific Provisions
Specific provisions for possible loan losses are based on a continuous review of the loans and advances portfolio in accordance with the parameters set by the Central Bank of Sri Lanka and disclosures are made as required by the Sri Lanka Accounting Standard No. 23 on Revenue Recognition and Disclosures in the Financial Statements of Banks.
However, the Bank’s provisioning policy is more stringent than the guidelines issued by the Central Bank of Sri Lanka.
A full provision net of realisable value of securities are made for all loans and advances classified as substandard as per the guidelines issued by the Central Bank of Sri Lanka.
4.4.6.3.2 General Provisions
In addition, a general provision is made at the rate of 0.1% per quarter over 10 quarters on performing and special mention loans and advances portfolio commencing the fourth quarter 2006, as per a Direction from the Central Bank of Sri Lanka, which requires that a general provision up to 1% on total performing and overdue loans and advances portfolio be made on or before the end of the first quarter 2009. Further, general provisions in Bangladesh is made as per the prudential guidelines issued by the Bangladesh Bank.
4.4.6.4 Finance Leases
Assets leased to customers which transfer substantially all the risks and rewards incidential to the ownership other than legal title are classified as finance leases in accordance with the Sri Lanka Accounting Standard No. 19 (Revised 2005) on Leases.
Amounts receivable under finance leases net of initial rentals received, unearned lease income and provision for rentals doubtful of recovery are classified as Lease Receivable in the Balance Sheet.
4.4.6.4.1 Provision for Lease Receivable
Specific provisions have been made in relation to bad and doubtful leases as stated in 4.4.6.3.1 above.
In addition, a general provision for possible losses on Lease Receivable is made as specified in 4.4.6.3.2 above.
4.4.6.5 Credit Card Receivable
Amounts receivable on Credit Cards are included in Loans and Advances at the amounts expected to be recovered.
4.4.6.5.1 Provision for Credit Card Receivable
100% specific provision is made on Credit Card Receivable where minimum payments are outstanding for 6 months and over.
In addition, a general provision is made at 3% on the capital included in Credit Card Receivable up to 6 months.
4.4.7 Property, Plant & Equipment
4.4.7.1 Basis of Recognition
Property, Plant & Equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the Bank and cost of the asset can be reliably measured.
4.4.7.2 Measurement
An item of Plant & Equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and subsequent costs as explained below. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the old items and restoring the site on which they are located.
Cost Model
The Bank applies the Cost Model to all plant and equipment which comprises the cost of purchase together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.
Revaluation Model
The Bank applies the Revaluation Model for the entire class of freehold land and buildings. Such properties are carried at a revalued amount, being their fair value at the date of revaluation less any subsequent accumulated depreciation on buildings and any accumulated impairment losses charged subsequent to the date of valuation. Freehold land and buildings of the Bank are revalued at least once in 7 years to ensure that the carrying amounts do not differ materially from the fair values at the Balance Sheet date.
On revaluation of an asset, any increase in the carrying amount is credited directly to equity, under Revaluation Reserve or used to reverse a previous loss on revaluation of the same asset, which was debited to the Income Statement. In this circumstance, the increase is recognised as income only to the extent of the previous write down. Any decrease in the carrying amount is recognised as an expense in the Income Statement or debited directly to Revaluation Reserve under equity only to the extent of any credit balance existing in that reserve in respect of that asset. Any balance remaining in the revaluation surplus in respect of an asset, is transferred directly to Retained Profits on retirement or disposal of the asset.
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.
Restoration Cost
Expenditure incurred on replacements, repairs or maintenance of Property, Plant & Equipment in order to restore or maintain the future economic benefits expected from the originally assessed standard of performance is recognised as an expense when incurred.
Derecognition
An item of Property, Plant & Equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognising of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in the Income Statement in the year the asset is derecognised.
Capital Work-in-Progress
These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation. These are stated in the Balance Sheet at cost.
4.4.7.3 Depreciation
The provision for depreciation is calculated by using the straight line method on the cost or valuation of Property, Plant & Equipment other than freehold land, in order to write-off such amounts over the estimated useful economic lives of these assets by equal instalments. Effective rates are as follows:
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| Freehold and Leasehold Buildings |
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2.5% per annum |
| Motor Vehicles |
|
20% per annum |
| Computer Equipment |
16.67% - |
20% per annum |
| Office Equipment |
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20% per annum |
| Furniture & Fittings |
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10% per annum |
| Office Interior Work |
|
10% per annum |
| Machinery & Equipment |
|
10% per annum |
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|
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The depreciation charges are determined separately for each significant part of an item of Property, Plant & Equipment and begin to depreciate when it is available for use and ceases on disposal of such assets.
The assets residual value, useful life and method of depreciation are reviewed at each reporting date and adjusted prospectively if appropriate, as changes in accounting estimates.
4.4.8 Leasehold Property
Leasehold property is stated at recorded carrying value as per the Sri Lanka Accounting Standard No. 19 (Revised 2005) on Leases. Such carrying amounts are amortised over the remaining lease term or useful life of the leased property whichever is shorter. No further revaluations of these leasehold property will be carried out.
4.4.9 Intangible Assets
4.4.9.1 Basis of Recognition
An Intangible Asset is recognised if it is probable that future economic benefits that are attributable to the asset will flow to the entity and the cost of the asset can be measured reliably in accordance with the Sri Lanka Accounting Standard
No. 37 on Intangible Assets. Accordingly, these assets are stated in the Balance Sheet at cost less accumulated amortisation and accumulated impairment losses, if any.
4.4.9.2 Subsequent Expenditure
Subsequent expenditure on Intangible Assets is capitalised only when it increases the future economic benefits embodied in these assets. All other expenditure is expensed when incurred.
4.4.9.3 Amortisation
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 lives. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each reporting date. 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 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.
Intangible assets are amortised using the straight line method to write down the cost over its estimated useful economic lives. Effective rates are as follows:
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| Computer Software |
16.67% |
per annum |
| Copyright |
20% |
per annum |
4.4.9.4 Impairment
The unamortised balances of Intangible Assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised as expenses in the Income Statement to the extent that they are no longer probable of being recovered from the expected future benefits.
Intangible assets with indefinite useful lives are not amortised but are tested for impairment annually either individually
or at the cash generating unit level as appropriate, when circumstances indicate that the carrying value is impaired.
The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is
made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net
disposal proceeds and the carrying amount of the asset and are recognised in the Income Statement when the
asset is derecognised.
4.4.10 Impairment of Non-Financial Assets
The Bank assesses at each reporting date or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, whether there is an indication that a non-financial asset may be impaired. If any such indication exists, or when an annual impairment testing for an asset is required, the Bank makes an estimate of the asset’s recoverable amount. When the carrying amount of an asset (or cash generating unit) exceeds its recoverable amount, the asset (or cash generating unit) is considered impaired and is written down to its recoverable amount.
Impairment losses of continuing operations are recognised in the Income Statement in those expense categories consistent with the function of the impaired asset, except for property previously revalued where the revaluation was taken to equity. In this case the impairment is also recognised in equity up to the amount of any previous revaluation.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exists or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. Impairment losses relating to goodwill cannot be reversed for subsequent increase in its recoverable amount in future.
5. LIABILITIES AND PROVISIONS
5.1 Deposits from Customers
Deposits include non-interest bearing deposits, savings deposits, term deposits, deposits payable at call and certificate of deposits. They are stated in the Balance Sheet at amounts payable. Interest paid/payable on these deposits is charged to the Income Statement.
5.2 Dividends payable
Provision for dividends payable is recognised at the time the dividend is recommended and declared by the Board of Directors and approved by the shareholders.
5.3 Borrowings
Borrowings include refinance borrowings, call money borrowings, vostro balances and borrowings from financial institutions. They too are stated in the Balance Sheet at amounts payable. Interest paid/payable on these borrowings is charged to the Income Statement.
5.4 Securities Sold under Repurchase Agreements
These are borrowings collateralised by sale of Treasury Bills and Treasury Bonds held by the Bank to the counterparty from whom the Bank borrowed, subject to an agreement to repurchase them at a predetermined price. Such securities remain on the Balance Sheet of the Bank and the liability is recorded in respect of the consideration received and interest accrued thereon.
5.5 Provisions
A provision is recognised in the Balance Sheet when the Bank has a legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligations and the amount of the provision can be measured reliably in accordance with the Sri Lanka Accounting Standard No. 36 on Provisions, Contingent Liabilities and Contingent Assets. The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation at reporting date. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
5.6 Derivative Instruments
The Bank in its ordinary course of business enters into transactions such as interest rate and foreign exchange contracts and uses derivative instruments to manage exposure to interest rates, foreign currencies, commodity price volatility, including exposure arising from forecast transactions. In order to account for such transactions, the Bank applies hedge accounting principles based on best accounting practices which are discussed below.
Basis of Recognition
Forward contracts, swaps, options and futures are recognised as Off-Balance Sheet Assets and Liabilities. Upon maturity or crystallisation of related Assets or Liabilities, the gains or losses are recognised in the Income Statement in the period in which maturity or crystallisation takes place. In situations where the gains or losses are recognised periodically prior to crystallisation of related Assets or Liabilities, such gains or losses are incorporated in determining the profit or loss for the relevant period.
Basis of Measurement
Exposure on commodity hedges are measured by taking the price differential between the strike price agreed and the market price as per contract on the exposure for the remaining contacted period, which is converted to Sri Lanka rupees based on the exchange rate ruling at each reporting date. Exposure on forward contracts, swaps, options and futures are stated at values at which they are expected to crystallise at each reporting date.
Accounting for Hedging Transactions
At inception of hedging transactions, the Bank formally documents the relationship between the underlying hedged item and the hedging instrument including the nature of the risk, the objective and the strategy for undertaking the hedge and the method used to assess the effectiveness of the hedging relationship.
In addition, at the inception and on an ongoing basis, formal assessments are undertaken to ensure that the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item. In situations where the hedged item is a forecast transaction, the Bank assesses whether the transaction is a highly probable one and evaluates the exposure to variations in cash flows that could ultimately affect the profit or loss for the period. The ineffective portion of the profit or loss of the hedging instrument is recognised immediately in the Income Statement.
5.7 Pension & Retirement Benefits
5.7.1 Defined Benefit Pension Plans
5.7.1.1 Description of the Plans and Employee Groups Covered
The Bank operates three types of defined benefit pension plans for its employees as described below:
• The Bank has an approved Pension Fund, which was established in 1992. As per the Deed of Trust, only those employees who were less than 45 years of age as at January 1, 1992 were covered by the Pension Fund in order to leave a minimum contribution for a period of 10 years before they are eligible to draw pension from the Pension Fund. Further, only the employees who joined the Bank on or before December 31, 2001 were in pensionable service of the Bank.
As detailed in 5.8.1 below, the Bank offered a restructured pension scheme to convert the Defined Benefit Plan (DBP) to a Defined Contribution Plan (DCP) for the pensionable employees of the Bank during 2006 and over 99% of them accepted it. As a result, the above Pension Fund now covers only those employees who did not opt for the restructured pension scheme and those employees who were covered by the pension fund previously but retired before the restructured pension scheme came into effect.
• Provision for pensions has been made for those employees who retired on or before December 31, 2001 and on whose behalf the Bank could not make contributions to the Retirement Pension Fund for more than 10 years. This liability is not funded.
• Provision has been made in these Financial Statements for retirement gratuity from the first year of service for all the employees who joined the Bank on or after January 1, 2002, as they are not in pensionable service of the Bank under either the DBP or DCP. However, if any of these employees presently covered by the DBP resigns before retirement, the Bank is liable to pay gratuity to such employees. This liability too is not funded.
The Subsidiaries of the Bank do not operate Pension Funds.
5.7.1.2 Principal Actuarial Assumptions
The principal financial assumptions used in the valuation are as follows:
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|
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| Long-term rate of interest |
12.0% |
per annum |
| Salary increases |
10.0% |
per annum |
|
|
|
|
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The demographic assumptions underlying the valuation are retirement age (55 or 60 years), early withdrawals from service and retirement on medical grounds, death before and after retirement, etc.
5.7.1.3 Actuarial Valuation and Actuarial Valuation Method
The cost of providing benefits under the defined benefit plans is determined separately for each plan using the projected unit credit actuarial valuation method, as per the Sri Lanka Accounting Standard No. 16 (Revised 2006) on Employee Benefits.
Actuarial gains or losses are recognised in the Income Statement in the period in which they arise. The past service cost is recognised as an expense on a straight line basis over the period until the benefits become vested. If the benefits are already vested following the introduction of, or changes to, a pension plan, past service cost is recognised immediately.
The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.
The results of the actuarial valuation carried out as at December 31, 2008 by M/s. Actuarial and Management Consultants (Pvt) Ltd., are summarised below:
• The results of the actuarial valuation carried out to determine the liability on account of employees who are covered by the pension fund and did not opt for the restructured pension scheme and those employees who retired before the restructured pension scheme came into effect revealed that the liability has been adequately funded as at December 31, 2008.
• The pensions payable to those employees who retired on or before December 31, 2001 and on whose behalf the Bank could not make contributions to the Pension Fund for more than 10 years by December 31, 2001, revealed the present value of the promised retirement benefits to be Rs. 106.350 million. The Bank made this provision in full in its Financial Statements as at December 31, 2008.
• The results of the actuarial valuation carried out to determine the gratuity liability revealed that the provision kept in the Financial Statements as at December 31, 2008 was insufficient to meet the present value of the promised retirement benefits by Rs. 14.192 million, and the Bank provided this shortfall in full in its Financial Statements as at December 31, 2008.
5.8 Defined Contribution Plans (DCPs)
Contributions to Defined Contribution Pension Plans are recognised as an expense in the Income Statement
as incurred.
5.8.1 Defined Contribution Pension Plans
During 2006, the Bank restructured its pension scheme which was a Defined Benefit Plan (DBP) to a Defined Contribution Plan (DCP). This restructured plan was offered on a voluntary basis to the eligible employees of the Bank. The scheme provides for lump sum payments instead of commuted/monthly pensions to the eligible employees at the point of their separation, in return for surrendering their pension rights. The lump sum offered consisted of a past service package and a future service package. The cost to be incurred on account of the past service package in excess of the funds available in the Pension Fund was borne by the Bank in 2006.
The future service package includes monthly contributions to be made by the Bank for the employees who accepted the offer, to be made during their remaining period of service, at predetermined contribution rates to be applied on their salaries, estimated to increase for this purpose at 10% p.a. In addition, interest to be earned on the assets of the DCP is also allocated to the employees who joined the restructured scheme.
5.8.2 Management of the Fund's Assets
The assets of the Fund are held separately from those of the Bank and are independently administered by the Trustees as per the provisions of the Trust Deed.
5.8.3 Employees’ Provident Fund
The Bank and employees contribute to the approved private Provident Fund at 12% and 8% on the salaries of each employee respectively.
5.8.4 Employees’ Trust Fund
The Bank/Group contributes to the Employees' Trust Fund at 3% on the salaries of each employee.
5.9 Commitments and Contingencies
All discernible risks are accounted for in determining the amount of other liabilities. The Bank's share of any contingencies and capital commitments of a subsidiary or an associate for which the Bank is also liable severally
or otherwise is included with appropriate disclosures.
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be readily measured. Contingent liabilities are not recognised in the Balance Sheet but are disclosed unless its occurrence is remote.
6. INCOME STATEMENT
6.1 Revenue Recognition
6.1.1 Interest Income on Loans and Advances
In terms of the provisions of the Sri Lanka Accounting Standard No. 23 on Revenue Recognition and Disclosures in the Financial Statements of Banks, the interest receivable on loans and advances is recognised on accrual basis. Interest ceases to be taken into revenue when the relevant loans and advances are classified as non-performing, as explained in 4.4.6.1 above. Interest falling due on non-performing loans and advances is credited to Interest in Suspense Account which is netted in the Balance Sheet against the relevant loans and advances. Interest receivable on loans and advances classified as non-performing is accounted for on cash basis.
6.1.2 Lease Income
In terms of the provisions of the Sri Lanka Accounting Standard No. 19 (Revised 2005) on Leases, the recognition of finance income on leasing is accounted based on a pattern reflecting a constant periodic rate of return on capital outstanding.
The excess of aggregate lease rentals receivable over the cost of the leased assets constitutes the total unearned finance income at the commencement of a lease. The unearned finance income included in the lease rentals receivable is taken into revenue over the term of the lease commencing from the month in which the lease is executed in proportion to capital outstanding.
Finance income in respect of lease rentals due ceases to be taken to revenue when the relevant lease facilities are classified as non-performing as explained in 4.4.6.1 above. Thereafter such income is recognised on cash basis. In addition, interest accrued up to the date of classification as non-performing leases is also reversed from the interest income and transferred to interest in suspense which is netted in the Balance Sheet against the relevant lease receivable outstanding.
6.1.3 Income from Government Securities and Securities Purchased under Resale Agreements
Discounts/Premiums on Treasury Bills and Treasury Bonds are amortised over the period to reflect a constant yield. The coupon interest on Treasury Bonds is recognised on an accrual basis. The interest income on Securities Purchased under Resale Agreements are recognised in the Income Statement on an accrual basis over the period of the agreement.
6.1.4 Income on Discounting of Bills of Exchange
Income on discounting of Bills of Exchange is recognised on cash basis.
6.1.5 Fees and Commission Income
The Bank recognises fees and commission income from a diverse range of services it provides to its customers on a cash basis. This includes fees and commission income arising on financial services provided by the Bank including Trade Finance, Travel, Investment Banking, e-Banking, Legal Services, Hedging Transactions etc.
6.1.6 Dividend Income on Shares and Units
Dividend income from shares and units is recognised on an accrual basis when the Bank's right to receive the payment is established.
6.1.7 Interest Income on Investments in Debentures and Trust Certificates
Interest income on investments in Debentures and Trust Certificates is recognised on an accrual basis.
6.1.8 Rental Income
Rental income is recognised on an accrual basis.
6.1.9 Interest and Fees Receivable on Credit Cards
Interest and fees receivable on Credit Cards are recognised on an accrual basis. Interest and fees cease to be taken into revenue when the recovery of minimum payment is in arrears for over three months. Thereafter, interest and fees are accounted for on a cash basis.
6.1.10 Gains and/or Losses on Disposal of Property, Plant & Equipment, Non-Current Investments Held for Sale, Dealing Securities, Investment Securities and Foreclosed Properties
Gains and/or losses resulting from the disposal of Property, Plant & Equipment, Non-Current investments held for sale, Dealing Securities, Investment Securities and Foreclosed Properties have been accounted for on a cash basis in the Income Statement, in the period in which the sale occurs.
6.2 Interest on Deposits, Borrowings, Securities Sold under Repurchase Agreements and Other Expenses
In terms of the provisions of the Sri Lanka Accounting Standard No. 23 on Revenue Recognition and Disclosures in the Financial Statements of Banks, the interest on deposits and borrowings and other expenses payable are recognised on an accrual basis in the Income Statement. The interest expenses on securities sold under repurchase agreements are recognised in the Income Statement on an accrual basis over the period of the agreement.
6.3 Borrowing Costs
Costs incurred in respect of funds specifically obtained for the acquisition of Property, Plant & Equipment have been recognised as an expense in the Income Statement, in the period in which they are incurred in terms of the Sri Lanka Accounting Standard No. 20 on Borrowing Costs.
6.4 Terminal Benefits
The amounts paid as pension to those employees who are not covered by the previous Pension Fund as per 5.7.1 above and retiring gratuity paid, are recognised as a reduction of the provisions created in this regard. Any shortfall between the actuarially valued liabilities and the balances outstanding in these provision accounts is recognised immediately as a charge to the Income Statement in the period of the valuation. The actual amounts paid as pension to those employees who are covered by the Pension Fund are borne by the Retirement Pension Fund.
7. CASH FLOW STATEMENT
The Cash Flow Statement has been prepared by using the ‘Direct Method’ of preparing cash flows in accordance with the Sri Lanka Accounting Standard No. 9 on Cash Flow Statements, whereby gross cash receipts and gross cash payments on operating activities, investing activities and financing activities have been recognised. Cash and Cash Equivalents comprise short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. Cash and Cash Equivalents as referred to in the Cash Flow Statement comprise those items as explained in 4.4.1 above.
8. SEGMENT REPORTING
A segment is a distinguishable component of the Group that is engaged in providing services (Business Segment) 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 Sri Lanka Accounting Standard No. 28 on Segment Reporting, segmental information is presented in respect of the Group. The segments comprise of banking, leasing, dealing and property/investment.
Segment results, assets and liabilities include items directly attributable to a segment, as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly of Head Office expenses.
Inter-segment transactions are accounted for at fair market prices charged to inter-bank counterparts for similar services. Such transfers are eliminated on consolidation.
Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one accounting period.
9. FIDUCIARY ASSETS
Assets held in a fiduciary capacity are not reported in these Financial Statements as they do not belong to the Bank.
10. DIVIDENDS ON ORDINARY AND PREFERENCE 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 are no longer at the discretion of the Bank.
Dividends on ordinary shares for the year that are recommended by the Directors after the Balance Sheet date for approval of the shareholders at the Annual General Meeting are disclosed in Note 11 to the Financial Statements.
Dividends on preference shares are accrued in the Financial Statements.
11. DIRECTORS' RESPONSIBILITY STATEMENT
The Board of Directors is responsible for the preparation and presentation of these Financial Statements. Please refer page 95 for the Statement of Directors’ Responsibility. |
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