1.1 Corporate information

Commercial Bank of Ceylon PLC (the “Bank”) is a public limited liability company listed on the Colombo Stock Exchange (CSE), incorporated on June 25, 1969 under the Companies Ordinance No. 51 of 1938, and domiciled in Sri Lanka. It is a licensed commercial bank regulated under the Banking Act No. 30 of 1988 and amendments thereto. The Bank was re-registered under the Companies Act No. 07 of 2007 on January 23, 2008, under the Company Registration No. PQ 116. The registered office of the Bank is situated at “Commercial House”, No. 21, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka.

The ordinary shares of the Bank (both Ordinary Voting and Non-Voting shares) have a primary listing on the CSE. The unsecured subordinated debentures of the Bank are also listed on the CSE.

The staff strength of the Group and the Bank was as follows:

As at December 31,	2020	2019
Group	5,693	5,656
Bank	5,057	5,062

Corporate information is presented in the inner back cover of this Annual Report.

1.2 Consolidated Financial Statements

The Consolidated Financial Statements as at and for the year ended December 31, 2020, comprise the Bank (Parent Company) and its Subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in its Associate.

The Bank does not have an identifiable parent of its own. The Bank is the Ultimate Parent of the Group.

1.3 Principal business activities, nature of operations of the Group and ownership by the Bank in its subsidiaries and associate

Figure - 25

Group Structure

[[ diagram ]]

During 2020, the Bank acquired a further 20% stake in Commercial Insurance Brokers (Private) Limited, from the Bank’s subsidiary, Commercial Development Company PLC (which had a stake of 20% in Commercial Insurance Brokers (Private) Limited), for a purchase consideration of Rupees One Hundred and Twenty-Five Million (Rs. 125,000,000/-) after obtaining necessary approvals from the Boards of both the Bank and Commercial Development Company PLC. The Bank also obtained approval of the Central Bank of Sri Lanka (CBSL) for this acquisition of shares. With this acquisition, the Bank’s stake in Commercial Insurance Brokers (Private) Limited increased to 60% from 40% held as at December 31, 2019.

Principal business activities and nature of business operations of the Group

Table - 43

Entity	Principal business activities
Commercial Bank of Ceylon PLC	Banking and related activities such as accepting deposits, personal banking, trade financing, offshore banking, RFC & NRFC operations, travel-related services, corporate and retail credit, syndicated financing, project financing, development banking, lease & hire purchase, rural credit, issuing of local and international debit and credit cards, internet banking, mobile banking, money remittance facilities, dealing in Government Securities and treasury-related products, salary remittance package, bullion trading, export and domestic factoring, pawning, margin trading, digital banking services, bancassurance and Islamic banking products and services etc.
Local subsidiaries
Commercial Development Company PLC (CDC)	Property development, related ancillary services and providing manpower needs for various support services which are unrelated to providing core banking services to the customers of the Bank (parent).
CBC Tech Solutions Limited	Providing Information & Communication Technology (ICT) related products, services and solutions to corporate sector.
CBC Finance Limited	Granting of lease facilities, hire purchase, mortgage loans and other credit facilities and accepting deposits.
Commercial Insurance Brokers (Pvt) Limited (CIB)	Providing professional service and handling all insurance portfolios of individuals as well as many leading and reputed organizations in Sri Lanka engaged in diverse business activities.
Foreign subsidiaries
Commex Sri Lanka S.R.L. (Commex)	Operating as an agent to the Bank (parent) for opening accounts, providing money transfer services, issuance and encashment of foreign currencies and travelers cheques, collecting applications for credit facilities and handling of ATM cards etc.
Commercial Bank of Maldives Private Limited (CBM)	Offering of extensive range of banking and related financial services.
CBC Myanmar Microfinance Company Limited	Providing microfinance services to the people of Myanmar. The company also provides savings, business/livelihood development services for the clients adopting a credit plus approach.
Local associate
Equity Investments Lanka Limited	Providing investment services, risk capital and venture capital management

2.1 Statement of compliance

The Consolidated Financial Statements of the Group and the separate Financial Statements of the Bank, have been prepared and presented in accordance with the Sri Lanka Accounting Standards (SLFRSs and LKASs), laid down by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in compliance with the requirements of the Companies Act and the Banking Act and provide appropriate disclosures as required by the Listing Rules of the CSE. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting.

These SLFRSs and LKASs are available at the website of CA Sri Lanka – www.casrilanka.com

The Group did not adopt any inappropriate accounting treatments, which are not in compliance with the requirements of the SLFRSs and LKASs, regulations governing the preparation and presentation of the Financial Statements.

Details of the Group’s Significant Accounting Policies followed during the year are given in Notes 6 to 10 on pages 164 to 176.

The formats used in the preparation and presentation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL in the Circular No. 02 of 2019 dated January 18, 2019, on “Publication of Annual and Quarterly Financial Statements and Other Disclosures by Licensed Banks”. The Bank also published annual and quarterly financial information and other disclosures in the Annual Report, Press and the Website in compliance with Section 4.2 of the aforementioned Circular.

2.2 Responsibility for Financial Statements

The Board of Directors of the Bank is responsible for the preparation and presentation of the Financial Statements of the Group and the Bank as per the provisions of the Companies Act No. 07 of 2007 and amendments thereto (Companies Act) and Sri Lanka Accounting Standards.

The Board of Directors acknowledges their responsibility for Financial Statements as set out in the “Annual Report of the Board of Directors”, “Statement of Directors’ Responsibility” and the certification on the Statement of Financial Position on pages 3, 107 and 145, respectively.

These Financial Statements include the following components:

• an Income Statement and a Statement of Profit or Loss and Other Comprehensive Income providing the information on the financial performance of the Group and the Bank for the year under review. Refer pages 143 and 144;
• a Statement of Financial Position (SOFP) providing the information on the financial position of the Group and the Bank as at the year end. Refer page 145;
• a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and the Bank. Refer pages 146 to 153;
• a Statement of Cash Flows providing the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation of those cash flows. Refer page 154;
• Notes to the Financial Statements comprising Significant Accounting Policies and other explanatory information. Refer pages 155 to 290.

2.3 Approval of Financial Statements by the Board of Directors

The Financial Statements of the Group and the Bank for the year ended December 31, 2020 (including comparatives for 2019), were approved and authorised for issue by the Board of Directors in accordance with Resolution of the Directors on February 24, 2021 (The Financial Statements of the Group and the Bank for the year ended December 31, 2019, were approved and authorised for issue by the Board of Directors on February 20, 2020).

2.4 Basis of measurement

The Financial Statements of the Group have been prepared on the historical cost basis except for the following material items stated in the SOFP.

Basis of measurement

Table - 44

Items	Basis of measurement	Note No./s
Financial instruments measured at fair value through profit or loss including derivative financial instruments	Fair value	31, 32 & 45
Financial assets measured at fair value through other comprehensive income	Fair value	36
Land and buildings	Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation	39
Investment property	Measured at cost at the time of acquisition and subsequently at Fair value.	40
Defined benefit obligation	Net liability for defined benefit obligations are recognised as the present value of the defined benefit obligation, less net total of the plan assets, plus unrecognised actuarial gains, less unrecognised past service cost, and unrecognised actuarial losses	49
Equity settled share-based payment arrangements	Fair value on grant date	53

2.5 Going concern basis of accounting

The Management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future.

Furthermore, the Management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the Financial Statements of the Group continue to be prepared on a going concern basis.

The outbreak of COVID-19 has caused disruption to business and economic activities, and uncertainty to the global and local economy. Therefore, in the assessment of the existence of a material uncertainty, the management took into consideration the existing and anticipated effects of the Pandemic on the Group’s activities based on all available information about the future that was obtained after the reporting date, up until the date on which the financial statements are issued. Subsequent to the outbreak of COVID-19 in Sri Lanka, the Group has strictly adhered to the guidelines and directions issued by both the Government and CBSL when conducting its business operations. Further, the Bank has provided reliefs for the affected businesses and individuals in line with the directions issued by the CBSL. These relief measures include deferment of repayment terms of credit facilities, offering concessionary rates of interest to eligible loan products (debt moratorium) and waiving off certain fees and charges.

The Management has considered the potential downsides that the COVID-19 pandemic could bring to the business operations of the Group, in making this assessment. However, considering a wide range of factors including history of profitable operations, strong liquidity position and stable external funding sources, diversified lending profile and the initiatives taken by the Bank for strengthening risk monitoring at borrower level, the Management satisfied itself that the going concern basis is appropriate.

2.6 Functional and presentation currency

Items included in these Financial Statements are measured using the currency of the primary economic environment in which the Bank operates (the functional currency).

Each entity in the Group determines its own functional currency and items included in the Financial Statements of these entities are measured using that functional currency. There was no change in the Group’s presentation and functional currency during the year under review.

These Financial Statements are presented in Sri Lankan Rupees, the Group’s functional and presentation currency.

The information presented in US Dollars in the Section on “Supplementary Information” on pages 358 and 359 does not form part of the Financial Statements and is made available solely for the information of stakeholders.

2.7 Presentation of Financial Statements

The assets and liabilities of the Group presented in the SOFP are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern.

No adjustments have been made for inflationary factors affecting the Financial Statements.

An analysis on recovery or settlement within 12 months and more than 12 months from the reporting date is presented in Note 61 on pages 251 to 253.

2.8 Rounding

The amounts in the Financial Statements have been rounded-off to the nearest rupees thousands, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard – LKAS 1 on “Presentation of Financial Statements” (LKAS 1).

2.9 Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the SOFP, 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 liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the IFRS Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank.

2.10 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 LKAS 1 and amendments to the LKAS 1 on “Disclosure Initiative” which was effective from January 1, 2016.

Notes to the Financial Statements are presented in a systematic manner which ensures the understandability and comparability of Financial Statements of the Group and the Bank. Understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

2.11 Comparative information

Comparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year.

2.12 Use of significant accounting judgements and assumptions and estimates

In preparing the Financial Statements of the Group in conformity with SLFRSs and LKASs, the Management has made judgements, estimates and assumptions which affect the application of Accounting Policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively.

The Group considered the impact of COVID-19 in preparing the Financial Statements in line with the circulars and guidelines issued by the CBSL and the CA Sri Lanka. While the specific areas of judgement may not change, the impact of COVID-19 resulted in the application of further judgement within those areas due
to the evolving nature of the pandemic and the limited recent experience of the economic and financial impacts of such an event. Further, changes to estimates were made in the measurement of Group’ assets where applicable.

Significant areas of critical judgements, assumptions and estimation uncertainty, in applying the Accounting Policies that have most significant effects on the amounts recognised in the Financial Statements of the Group are as follows:

A. Significant accounting judgements

Information about judgements made in applying the Accounting Policies that have most significant effects on the amounts recognised in these Financial Statements is included in Notes 2.12.1 and 2.12.3 below.

2.12.1 Determination of control over investees

Management applies its judgement to determine whether the control indicators set out in Note 37 on page 210 indicates that the Group controls the investees.

2.12.2 Classification of financial assets and liabilities

The Significant Accounting Policies of the Group provides scope for financial assets to be classified and subsequently measured into different categories, namely, at Amortised Cost (AC), Fair Value through Other Comprehensive Income (FVOCI) and Fair Value Through Profit or Loss (FVTPL) based on the following criteria;

• The entity’s business model for managing the financial assets as set out in Note 7.1.3.1 on page 166.
• The contractual cash flow characteristics of the financial assets as set out in Note 7.1.3.2 on page 166.

2.12.3 Classification of investment property

Management uses its judgment to determine whether a property qualifies as an investment property. A property that is held either to earn rental income or for capital appreciation or both and thus generates cash flows largely independently of the other assets held by the Group are classified as investment property. On the other hand, a property used in production or supply of goods and services or administrative purposes and thus generates cash flows that are attributable not only to property but also to other assets used in the production or supply process are classified as property, plant & equipment. The Group assesses on an annual basis, the accounting classification of its investment properties, taking into consideration the current use of such properties.

B. Assumptions and estimation uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments are included in Notes 2.12.4 to 2.12.13 below:

2.12.4 Fair Value of financial instruments

The fair values of financial assets and financial liabilities recognised on the SOFP, for which there is no observable market price are determined using a variety of valuation techniques that include the use of mathematical models. The Group measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. Methodologies used for valuation of financial instruments and fair value hierarchy are stated in Note 27 on pages 192 to 196.

2.12.5 Impairment losses on financial assets

The measurement of impairment losses across the categories of financial assets under Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” (SLFRS 9)
requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses.

Accordingly, the Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be provided in the Income Statement. In particular, the Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, Management makes judgements about a borrower’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable. These estimates are based on assumptions about a number of factors and hence actual results may differ, resulting in future changes to the impairment allowance made.

A collective impairment provision is established for:

• groups of homogeneous loans and advances that are not considered individually significant; and
• groups of assets that are individually significant but that were not found to be individually impaired.

As per SLFRS 9, the Group’s Expected Credit Loss (ECL) calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include:

• The Group’s criteria for qualitatively assessing whether there has been a significant increase in credit risk (SICR) and if so allowances for financial assets measured on a Life Time Expected Credit Loss (LTECL) basis.
• The segmentation of financial assets when their ECL is assessed on a collective basis.
• Development of ECL models, including the various statistical formulas and the choice of inputs.
• Determination of associations between macro-economic inputs, such as GDP growth, inflation, interest rates, exchange rates and unemployment and the effect on Probability of Default (PDs), Loss Given Default (LGD) and Exposure At Default (EAD).
• Selection of forward-looking macro- economic scenarios and their probability weightings, to derive the economic inputs into the ECL models.

The accuracy of the provision depends on the model assumptions and parameters used in determining the ECL calculations.

The Bank has provided reliefs such as deferment of repayment terms of credit facilities, for the affected businesses and individuals due to COVID-19 in line with the directions issued by the CBSL. Utilization of a payment deferral program does not, all else being equal, automatically trigger a SICR. As such, key issue will be to distinguish between cases where the payment holidays provide relief from short-term liquidity constraints impacting the borrower that do not amount to a SICR. Given the high degree of uncertainty and unprecedented circumstances in the short-term economic outlook, the Management exercised judgements in the assessment of the impact of the COVID-19 outbreak on the loans and advances portfolio of the Group, relying more on the long-term outlook as evidenced by past experience and taking into consideration various relief measures including concessionary financing and payment moratorium. The impact of the outbreak has been assessed and adjusted in these Financial Statements based on the available information and assumptions made as at reporting date in line with the guidelines issued by the CBSL and the CA Sri Lanka.

In response to COVID-19 and the Group’s expectations of economic impacts, key assumptions used in the Group’s calculation of ECL have been revised. As at the reporting date, the expected impacts of COVID-19 have been captured via the modelled outcome as well as a separate management overlay reflecting the considerable uncertainty remaining in the modelled outcome given the unprecedented impacts of COVID-19. Although the credit model inputs and assumptions, including forward-looking macroeconomic assumptions, were revised in response to the COVID-19 pandemic, the fundamental credit model mechanics and methodology underpinning the Group’s calculation of ECL have remained consistent with prior periods.

Accordingly, the Bank took steps to identify the customers showing distress signs in identifying SICR under the individual impairment assessment. Under the collective assessment, customers operating in risk elevated industries including Tourism and hospitality which includes resort hotels in the Maldives, importing Palm oil, rice and cement, passenger air transport, supplying hardware items, non-metallic mineral product, film production, fund management, venture capital, ornamental fish, tobacco related business, passenger transport and exporting jewellery were assessed for Lifetime ECL. Exposures outstanding from the borrowers operating in these industries have been classified as stage 2 unless such exposures are individually significant and have specifically been identified as stage 1 reflecting forward looking view of the economy in relation to the business.

Further, the Bank decided to increase the weightages assigned for worst case scenario while reducing the weightages assigned for base case scenario and best case scenario when assessing the probability weighted forward looking macro-economic indicators along with management overlays to qualitative indicators relating to forward looking macro-economic environment with the objective of capturing the impact of COVID-19 and uncertainties and volatilities in future outlook on the ECL computation as at the reporting date. In addition, as expert credit judgment, the Bank stressed the ECL parameters such as PDs and LGDs to reflect the real economic scenario that is not reflected due to the deferrals and concessions granted due to COVID-19. Early observations of payment behaviour of expiries for this year were considered in the assessment of the changes in the risk of default occurring over the expected life of a financial instrument when determining staging and is a key input in determining migration.

Refer Note 18 on page 182 for details.

2.12.6 Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for an asset or a Cash Generating Unit (CGU) at each reporting date or more frequently, if events or changes in circumstances necessitate to do so. This requires the estimation of the “Value in use” of such individual assets or the CGUs. Estimating “Value in use” requires the Management to make an estimate of the expected future cash flows from the asset or the CGU and also to select a suitable discount rate in order to calculate the present value of the relevant cash flows. This valuation requires the Group to make estimates about expected future cash flows and discount rates and hence, they are subject to uncertainty.

Refer Note 7.6 on page 172 for details.

2.12.7 Revaluation of property, plant and equipment

The Group measures land and buildings at revalued amounts with changes in fair value being recognised in Equity through Other Comprehensive Income (OCI). The Group engages independent professional valuers to assess fair value of land and buildings in terms of Sri Lanka Accounting Standard – SLFRS 13 on “Fair Value Measurement” (SLFRS 13). The key assumptions used to determine the fair value of the land and building and sensitivity analyses are provided in Notes 39.5 (b) and 39.5 (c) on pages 219 to 224.

2.12.8 Useful life-time of the property, plant and equipment

The Group reviews the residual values, useful lives and methods of depreciation of property, plant and equipment 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.

Refer Note 20 on page 185.

2.12.9 Fair valuation of investment property

Fair valuation of the investment property is ascertained by independent valuations carried out by Chartered valuation surveyors, who have recent experience in valuing properties of similar location and category. They have made reference to market evidence of transaction prices for similar properties, with appropriate adjustments for size and location. The key assumptions used to determine the fair value of investment property are provided in detail in Note 40 on page 225.

2.12.10 SLFRS 16 – Leases

2.12.10.1 Determination of the lease term for lease contracts with renewal and termination options (Group as a lessee)

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group has several lease contracts that include extension and termination options. The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination option. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control that affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customisation of the leased asset).

2.12.10.2 Estimating the incremental borrowing rate

As the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (“IBR”) to measure the lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group “would have to pay’’, which requires estimation when no observable rates are available (or when they need to be adjusted to reflect the terms and conditions of the lease).The Group estimates the IBR using observable input when available and is required to make certain entity-specific adjustments.

2.12.11 Deferred tax assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available and can be utilised against such tax losses. 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.

Refer Note 42 on page 228 for details.

2.12.12 Defined benefit obligation

The costs of the defined benefit plans are determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, future pension increase, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.

Refer Note 49 on pages 233 to 239 for the assumptions used.

2.12.13 Provisions for liabilities, commitments and contingencies

The Group receives legal claims in the normal course of business. Management has made judgements as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due processes in respective legal jurisdictions.

Information about significant areas of estimation uncertainty and critical judgements in applying Accounting Policies other than those stated above that have significant effects on the amounts recognised in the Consolidated Financial Statements are described in Notes 7.10 to 7.15 on pages 174 and 175.

2.13 Events after the reporting period

Events after the reporting period are those events, favourable and unfavourable, that occur between the reporting date and the date when the Financial Statements are authorised for issue.

In this regard, all material and important events that occurred after the reporting period have been considered and appropriate disclosures are made in Note 69 on page 290, where necessary.

3.1 Introduction and overview

Risk is inherent in the Bank’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.

The Group has exposure mainly to the following risks arising out of financial activities that are undertaken in its day to day businesses:

• Credit risk;
• Liquidity risk;
• Market risk; and
• Operational and Reputational risk.

Types of risk

Figure - 26

[[ Figure ]]

3.2 Bank’s risk management framework

The Board of Directors of the Bank has the overall responsibility for the establishment and oversight of the Bank’s Risk Management Framework.

The Risk Management Policy Framework of the Bank translates overall risk appetite on business activities in a holistic approach to provide the guidance required for convergence of strategic and risk perspectives of the Bank.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Risk Management Policy Framework constitutes the Credit Policy, Lending Guidelines, ALM Policy including Contingency Funding Plan, Foreign Exchange Policy, Operational Risk Policy, IT Risk Policy, Market Risk Policy, Stress Testing Policy, Environmental Risk Management Policy and Reputational Risk Management Policy etc., which have been firmly established to provide control and guidance for decision-making throughout the Bank in a uniform manner.

The Committee structure embedded to the system acts as a fact finding and decision making authority through deliberations and arriving at consensus arising out of multiple points of views. The Risk Management Committees effectively deliberate on matters at hand to provide guidance to the business lines with a view to managing risk in accordance with the strategic goals and risk appetite of the Bank.

The Board of Directors of the Bank has formed the Board Integrated Risk Management Committee (BIRMC) as a mandatory Board Committee, as per Banking Act Direction No. 11 of 2007 on Corporate Governance. The performance of the Committee and the duties and roles of members are reviewed by the Board annually.

The meetings of the Executive Integrated Risk Management Committee (EIRMC) are conducted on a monthly basis to discuss Credit, Operational, Market and IT risk matters of the Bank. Assets and Liabilities Committee (ALCO),that convene at least once a fortnight, gives priority for liquidity, funding and profitability in line with the changes taken place in the market.

Risk and Control Self-Assessment (RCSA) framework is adopted to identify risks involved in business activities of the Bank and to implement appropriate risk mitigatory measures after assessing criticality of such risks. The Integrated Risk Management Department (IRMD) carries out semi-annual Bank-wide RCSA function focusing on adherence to laws, regulations, and regulatory guidelines as well as internal controls and approved policies.

Further, the Internal Audit function of the Bank independently monitors and evaluates the risk management function of the Bank and provides their views on the adequacy of the Risk Management Framework to the Board Audit Committee (BAC).

Bank‘s Financial Risk Management Framework

Figure - 27

[[ Figure ]]

Credit risk

The risk that the Bank will incur a loss due to its customers or counterparties fail to discharge their contractual obligations, considered generally under the credit risk assessment.

The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographies and industry concentrations by monitoring exposures and possible adverse external factors in relation to such limits.

Management of credit risk

Lending Guidelines of the Bank formulated based on evolving practices of Lending to provide expected granularity of credit assessment, risk grading, their acceptability of collateral as well as limits on exposures and concentration levels to various sectors, counterparties, geographies and segments etc.

A robust risk grading system incorporating Basel guidelines on rating of facilities and counterparties is adopted by the Bank for evaluation of credit proposals. This risk grading framework consists 10 grades of varying degrees of risks as indicators for the Lending Officers to evaluate and arrive at suitable risk-reward trade-offs in their propositions. These risk grades are reviewed by the IRMD regularly.

Portfolio level credit risk analyses are taken up at monthly EIRMC meetings as well as quarterly at BIRMC meetings. Individual credit proposals evaluated by the Lending Officers are approved by the Authorising Officers within the hierarchy in Delegated Authority Levels whilst ensuring a minimum of Four Eyes principle when approving them. Escalation of approving levels occurs based on Delegated Authority levels attached to exposure levels, final risk ratings as well as negative deviation of performance levels of previous facilities extended to borrowers.

The Executive Credit Committee (ECC) and the Board Credit Committee (BCC) are entrusted with approval of high value facilities while the Board will be the ultimate authority for approving facilities beyond predetermined threshold levels. Deliberations take place at BCC level on facilities taken up for approval beyond the specified threshold and recommendations for approval of the Board are made based on quantum of exposures at various levels.

The IRMD provides risk approval for individual proposals above predetermined threshold levels, consequent to a rigorous independent risk evaluation guided by Credit Policy, Lending Guidelines, and circular instructions within a limit framework stemming from risk appetite of the Bank.

Market risk

The risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices. The Bank classifies exposures to Market Risk into either Trading or Non-Trading portfolios and manages each of those portfolios separately.

The Market risk for the Trading portfolio is monitored and managed closely having paid attention to the changes on the prices of market.

Management of market risk

Market Risk Policy, ALM Policy and Foreign Exchange Risk Policy are the three main policies that constitute the framework governing the Market Risk Management function of the Bank.

Due to the business model adopted by the Bank, exposure to equity and commodity risk was kept at bay throughout the year.

However, Interest Rate Risk arising from the Banking Book as well as Trading Book and Foreign Exchange Risk arising from dealing in assets and liabilities denominated in currencies other than local currency, continued to expose the Bank to associated risk elements.

Downward interest rate scenarios experienced by the country during the period impacted the financial market in Sri Lanka and challenged the Net Interest Margin. Interest Rates of the Banking Book is subjected to varying degrees of rate shocks to identify impact on earnings perspective in such rate scenarios. The results reflected predictions which assisted the Bank in formulating strategies to manage the financial position in an effective manner with the limited choices available in the local Market.

Trading Book too was subjected to Value at Risk (VaR) framework internally carried out by the Bank on a regular basis. The Bank also carried out sensitivity analysis on a regular basis to ascertain the impact on portfolios maintained, mainly in Government Securities and Marking to Market such portfolios to reflect fair value for decision-making process.

Foreign exchange positions were maintained within the regulatory framework in a market where a high volatility is observed in the major currency, compared to the previous year that the Bank deals in, i.e., US Dollars. The positions were subjected to sensitivity analysis to provide insight to possible losses/gains arising from currency appreciation/depreciation, as the reporting currency of the Bank being Sri Lankan Rupees.

Liquidity risk

The risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset is focussed on this risk domain. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations or not receiving what is due to the Bank when they fall due under both normal and stress circumstances.

To limit this risk, Management has arranged diversified funding sources in addition to its core deposit base and adopted a policy of managing assets with liquidity in mind and monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding, if required.

Management of liquidity risk

Market Risk Management Policy and the ALM Policy of the Bank approved by the Board of Directors set the tone for managing liquidity risk of the Bank. Liquidity risk of the Bank is given utmost priority when managing a wide range of other risks due to the fact that it is considered as the most critical risk for any financial institution.

The Bank’s Treasury Department is entrusted with managing liquidity of the Bank on real time basis to ensure smooth functioning of business activities of all other business units of the Bank.

Having access to a substantial stable Current Account and Savings Account (CASA) base due to its wide branch network and the top of the mind perception created in the depositors in general, for stability provides immense strength to the Bank in managing liquidity.

Having high quality liquid assets at the disposal of the Bank is another plus factor for the Bank. The strength of such was amply reflected in the Basel III computation the Bank carries out for arriving at Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as per the CBSL Directions that recorded very healthy results as compared to regulatory minimum threshold levels.

The Bank has experienced accumulation of liquidity above the minimum regulatory requirements as a result of slowness of economic performance of the country in 2020. However, the Bank has adopted many strategies to invest excess liquidity at optimum yields but in staggered maturities and thereby to minimise the negative impact on the bottom line as well as Liquidity. The Bank has also adopted many strategies to maintain Foreign Currency liquidity having evaluated the commitments and contingencies frequently amidst the economic conditions prevailed in the country in 2020.

Contingency funding plans in force, constant monitoring of salient liquidity ratios and scenario based stress testing being carried out regularly would enable the Bank to take proactive measures towards overcoming adverse liquidity position that may arise on a future date.

Recent downgrading of the country by Rating Agencies could pose challenges in managing foreign currency liquidity position of the financial sector amidst Global pandemic situation, a risk is that the Bank is closely monitoring and taking measures to mitigate at the moment.

Operational risk and reputational risk

The risk that the Bank will incur a loss due to failure of systems, human errors, frauds or external events is focussed on this risk domain. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring, escalating, reporting and responding to potential risks.

The risk that the Bank’s reputation will damage by one or more than one reputation event, as reflected from negative publicity about the Bank’s business practices, conduct or financial condition. Such negative publicity, whether true or not, may impair public confidence in the Bank, result in costly litigation, or lead to a decline in its customer base, business or revenue.

Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, such as the use of internal audit.

Management of operational risk and reputational risk

Sound Operational Risk Management practices are embedded into the work process through the Bank’s culture, internal policy framework and as per regulatory requirements.

Circular instructions and Operational Risk Management Policy play a major part in bringing together business practices with accepted benchmarks to ensure minimum disruption to processes, personnel, technology and infrastructure.

Internal control framework and audit function with firmly established “three lines of defences” serve the Bank to manage operational risk at current acceptable levels.

IT Risk of the Bank is managed through strict monitoring of Key IT Risk Indicators while Vulnerability Assessment and Penetration Tests are being carried out by both internal and external parties at regular intervals to identify the relevant risks.

Refer Note 68 on pages 261 to 290 for “Financial Risk Review”.

A detailed write-up on how the risk management is carried out within the Bank’s Risk Management Framework with due consideration given to factors such as governance, identification, assessment, monitoring, reporting and mitigation are discussed in the Section on “Risk Governance and Management” on pages 114 to 133 The said write-up on “Managing Risk: An Overview” does not form part of the Financial Statements.

“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 in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

When one is available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted pricing in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The fair value of an asset or a liability is measured using the assumptions that market participants would use the fair value hierarchy when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

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. External professional valuers are involved for valuation of significant assets such as land and building.

An analysis of fair value measurement of financial and non-financial assets and liabilities is provided in Note 27 on pages 192 to 196.

The Group has consistently applied the Accounting Policies as set out in Notes 6 to 10 on pages 164 to 176 to all periods presented in these Financial Statements, except for changes arising out of amendments to Accounting Standards as set out below:

5.1 New and amended standards and interpretations

In these Financial Statements, the Group applied for the first time following amendments to Accounting Standards, which are effective for annual periods beginning on or after January 1, 2020. The Group has not early adopted any other accounting standard, interpretation or amendment that has been issued but not effective.

5.1.1 Amendments to SLFRS 3: Definition of a Business

In November 2018, the CA Sri Lanka issued amendments to the definition of a business in SLFRS 3 on “Business Combinations” (SLFRS 3) to help entities determine whether an acquired set of activities and assets is a business or not. These amendments clarified the minimum requirements for a business, removed the assessment of whether market participants are capable of replacing any missing elements and added guidance to help entities assess whether an acquired process is substantive, narrowed the definitions of a business and of outputs, and introduced an optional fair value concentration test.

These amendments had no impact on the Consolidated Financial Statements of the Group, but may impact future periods should the Group enter into any business combinations.

5.1.2 Amendments to LKAS 1 and LKAS 8: Definition of Material

In November 2018, the CA Sri Lanka issued amendments to LKAS 1 and Sri Lanka Accounting Standard – LKAS 8 on “Accounting Policies, Changes in Accounting Estimates and Errors” to align the definition of ‘material’ across the standards and to clarify certain aspects of the term ‘definition’. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose Financial Statements make on the basis of those Financial Statements, which provide financial information about a specific reporting entity.’

These amendments had no impact on the Consolidated Financial Statements of, nor is there expected to be any future impact to, the Group.

5.1.3 Amendments to the conceptual framework for financial reporting

CA Sri Lanka issued a revised Conceptual Framework which included some new concepts, updated definitions and recognition criteria for assets and liabilities and clarified some important concepts. Key changes include:

• increasing the prominence of stewardship in the objective of financial reporting
• reinstating prudence as a component of neutrality
• defining a reporting entity, which may be a legal entity, or a portion of an entity
• revising the definitions of an asset and a liability
• removing the probability threshold for recognition and adding guidance on derecognition
• adding guidance on different measurement basis, and
• stating that profit or loss is the primary performance indicator and that, in principle, income and expenses in other comprehensive income should be recycled where this enhances the relevance or faithful representation of the financial statements.

These amendments had no impact on the Consolidated financial statements of the Group.

Significant accounting policies

The Significant Accounting Policies set out below have been applied consistently to all periods presented in the Financial Statements of the Group except as specified in Note 2.11 on page 158.

These Accounting Policies have been applied consistently by Group entities.

Set out below is an index of Significant Accounting Policies, the details of which are available on the pages that follow:

Index of significant accounting policies

Table - 45

Note	Description	Reference to the Notes in Financial Statements
6.	Significant accounting policies – General
6.1	Basis of consolidation
6.2	Foreign currency
7.	Significant accounting policies – Recognition of assets and liabilities
7.1	Financial instruments – Initial recognition, classification and subsequent measurement	26
7.2	Non-current assets held for sale and disposal groups
7.3	Property, plant and equipment	39
7.4	Investment property	40
7.5	Intangible assets	41
7.6	Impairment of non-financial assets	37
7.7	Dividends payable	25
7.8	Employee benefits	49.2 to 49.5
7.9	Other liabilities	49
7.10	Restructuring
7.11	Onerous contracts
7.12	Bank levies
7.13	Financial guarantees, letters of credit and undrawn loan commitments	58
7.14	Commitments	58
7.15	Contingent liabilities and commitments	58
7.16	Stated capital and reserves	52, 54, 55 & 56
7.17	Earnings per Share (EPS)	24
7.18	Operating segments	62
7.19	Fiduciary assets
8.	Significant accounting policies – Recognition of income and expense
8.1	Interest income and expense	13
8.2	Fee and commission income and expense	14
8.3	Net gains/(losses) from trading	15
8.4	Net gains/ (losses) from derecognition of financial assets	16
8.5	Dividend income	15 & 17
8.6	Leases	34.3, 39 & 49.1
8.7	Rental income and expense	17 & 21
9.	Significant accounting policies – Tax Expense
9.1	Income tax expense	23, 42 & 48
9.2	Crop Insurance Levy (CIL)
9.3	Withholding tax (WHT) on dividends distributed by the Bank, subsidiaries, and associate	25
9.4	Economic Service Charge (ESC)
9.5	Value Added Tax on financial services (VAT FS)	22
9.6	Nation Building Tax on financial services (NBT FS)	22
9.7	Debt Repayment Levy on financial services (DRL FS)	22
10.	Significant accounting policies – Statement of Cash Flows
10.1	Statement of Cash Flows

6.1 Basis of consolidation

The Group’s Financial Statements comprise, Consolidated Financial Statements of the Bank and its Subsidiaries in terms of the Sri Lanka Accounting Standard – SLFRS 10 on “Consolidated Financial Statements” (SLFRS 10) and the proportionate share of the profit or loss and net assets of its Associates in terms of the Sri Lanka Accounting Standard – LKAS 28 on “Investments in Associates and Joint Ventures” (LKAS 28). The Bank’s Financial Statements comprise the amalgamation of the Financial Statements of the Domestic Banking Unit, the Offshore Banking Centre and the international operations of the Bank.

6.1.1 Business combinations

Business combinations are accounted for using the acquisition method when control is transferred to the Group as per Sri Lanka Accounting Standard – SLFRS 3 on “Business Combinations” (SLFRS 3). The consideration transferred in the acquisition and identifiable net assets acquired are measured at fair value. Any goodwill that arises is tested annually for impairment (Refer Note 7.6 on page 172). Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

6.1.2 Non-Controlling Interests (NCI)

Details of NCI are given in Note 57 on page 248.

6.1.3 Subsidiaries

Details of the Bank’s subsidiaries, how they are accounted in the Financial Statements of the Bank and their contingencies are set out in Notes 37 and 58.4 (a) on pages 210 to 212 and 250.

6.1.4 Loss of control

When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

Subsequently, it is accounted for as an Associate or in accordance with the Group’s Accounting Policy for financial instruments depending on the level of influence retained.

6.1.5 Associates

Details of associate, how they are accounted in the Financial Statements of the investee, together with their fair values and the Group’s share of contingent liabilities of the associate is set out in Notes 38 and 58.4 (b) on pages 212 and 250.

6.1.6 Transactions eliminated on consolidation

Intra-group balances, transactions and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions are eliminated in preparing the Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

6.1.7 Material gains or losses, provisional values or error corrections

There were no material gains or losses, provisional values or error corrections recognised during the year in respect of business combinations that took place in previous periods.

6.2 Foreign currency

6.2.1 Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates of the transactions. In this regard, the Bank’s practice is to use the middle rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies as at the reporting date are translated into the functional currency at the middle exchange rate of the functional currency ruling as at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency as at the beginning of the year adjusted for effective interest and payments during the year and the amortised cost in foreign currency translated at the exchange rate as at the reporting date.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the transaction.

Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of the following items are recognised in OCI:

• Equity instruments measured at fair value through other comprehensive income
• A financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and
• Qualifying cash flow hedges to the extent that the hedge is effective.

6.2.2 Foreign currency translations

The Group’s Consolidated Financial Statements are presented in Sri Lankan Rupees, which is also the Bank’s Functional Currency. The Financial Statements of the Offshore Banking Centre of the Bank and the Financial Statements of the foreign operations of the Bank have been translated into the Group’s Presentation Currency as explained under Notes 6.2.3 and 6.2.4 below.

6.2.3 Transactions of the offshore banking centre

These are recorded in accordance with Note 6.2.1 above, except the application of the annual weighted average exchange rate for translation of the Income Statement and the Statement of Profit or Loss and Other Comprehensive Income. Net gains and losses are dealt through the profit or loss.

6.2.4 Foreign operations

The results and financial position of foreign 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, including goodwill and fair value adjustments arising on acquisition, are translated at the rates of exchange ruling as at the reporting date.
• Income 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 income and expenses are translated at the exchange rates ruling at the transaction date.
• All resulting exchange differences are recognised in the OCI and accumulated in the Foreign Currency Translation Reserve (Translation Reserve), which is a separate component of Equity, except to the extent that the translation difference is allocated to the NCI.

When a foreign operation is disposed of such that the control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of only part of its interest in a subsidiary that includes a
foreign operation while retaining control, then the relevant proportion of the cumulative amount of the translation reserve is re-attributed to NCI.

7.1 Financial instruments – initial recognition, classification and subsequent measurement

7.1.1 Date of recognition

The Group initially recognises loans and advances, deposits and subordinated liabilities, etc., on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument.

7.1.2 Initial measurement of financial instruments

The classification of financial instruments at initial recognition depends on their cash flow characteristics and the business model for managing the instruments. Refer Notes 7.1.3 and 7.1.4 for further details on classification of financial instruments.

A financial asset or financial liability is measured initially at fair value plus or minus transaction costs that are directly attributable to its acquisition or issue, except in the case of financial assets and financial liabilities at fair value through profit or loss as per SLFRS 9 and trade receivables that do not have a significant financing component as defined by SLFRS 15.

Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Income Statement.

Trade receivables that do not have significant financing component are measured at their transaction price at initial recognition as defined in SLFRS 15.

When the fair value of financial instruments (except trade receivables that do not have significant financing component) at initial recognition differs from the transaction price, the Group accounts for the Day 1 profit or loss, as described below.

Refer Notes 13 and 19 on pages 178 and 185.

7.1.3 Classification and subsequent measurement of financial assets

As per SLFRS 9, the Group classifies all of its financial assets based on the business model for managing the assets and the assets’ contractual terms measured at either;

• Amortised cost
• Fair value through other comprehensive income (FVOCI)
• Fair value through profit or loss (FVTPL)

The subsequent measurement of financial assets depends on their classification.

7.1.3.1 Business model assessment

The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level and not assessed on instrument-by-instrument basis because this best reflects the way the business is managed and information is provided to management. The information considered includes:

• the stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;
• how the performance of the portfolio is evaluated and reported to the Bank’s management;
• the risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed;
• how managers of the business are compensated – e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and
• the frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realized.

The business model assessment is based on reasonably expected scenarios without taking “worst case” or “stress case” scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Bank's original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

7.1.3.2 Assessment of whether contractual cash flows are solely payments of principal and interest (SPPI test)

As a second step of its classification process the Group assesses the contractual terms of financial assets to identify whether they meet the SPPI test.

For the purposes of this assessment, “principal” is defined as the fair value of the financial asset on initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).

“Interest” is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as profit margin.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. In such cases, the financial asset is required to be measured at FVTPL.

In assessing whether the contractual cash flows are solely payments of principal and interest on principal amount outstanding, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers:

• contingent events that would change the amount and timing of cash flows;
• leverage features;
• prepayment and extension terms;
• terms that limit the Group’s claim to cash flows from specified assets; and
• features that modify consideration of the time value of money.

The Group holds a portfolio of long-term fixed rate loans for which the Group has the option to propose to revise the interest rate at periodic reset dates. These reset rights are limited to the market rate at the time of revision. The borrowers have an option to either accept the revised rate or redeem the loan at par without penalty. The Group has determined that the contractual cash flows of these loans are solely payments of principal and interest because the option varies the interest rate in a way that is consideration for the time value of money, credit risk, other basic lending risks and costs associated with the principal amount outstanding.

Refer Notes 7.1.3.3 to 7.1.3.5 below for details on different types of financial assets recognised on the SOFP.

7.1.3.3 Financial assets measured at amortised cost

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

• The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets measured at amortised cost are given in Notes 7.1.3.3.1 to 7.1.3.3.6 below:

7.1.3.3.1 Loans and advances to banks and other customers

Loans and advances to banks and other customers include amounts due from banks, loans and advances and lease receivables of the Group.

Details of “Loans and advances to banks and other customers” are given in Notes 33 and Note 34 on pages 201 to 205.

7.1.3.3.2 Securities purchased under resale agreements (reverse repos)

When the Group purchases a financial asset and simultaneously enters into an agreement to resale the asset (or a similar asset) at a fixed price on a future date (reverse repo), the arrangement is accounted for as a financial asset in the SOFP reflecting the transaction’s economic substance as a loan granted by the Group. Subsequent to initial recognition, these securities issued are measured at amortised cost using the EIR with the corresponding interest income/ receivable being recognised as interest income in profit or loss.

Details of “Securities purchased under resale agreements” are given in the SOFP on page 145.

7.1.3.3.3 Debt and other financial instruments measured at amortised cost

Details of “Debt and other financial instruments measured at amortised cost” are given in Note 35 on page 206.

7.1.3.3.4 Cash and cash equivalents

Details of “Cash and cash equivalents” are given in Note 28 on page 196.

7.1.3.3.5 Balances with central banks

Details of “Balances with central banks” are given in Note 29 on page 197.

7.1.3.3.6 Placements with banks

Details of “Placements with banks” are given in Note 30 on page 197.

7.1.3.4 Financial assets measured at FVOCI

Financial assets at FVOCI include debt and equity instruments measured at fair value through other comprehensive income.

For financial assets measured at FVOCI refer Notes 7.1.3.4.1 and 7.1.3.4.2.

7.1.3.4.1 Debt instruments measured at FVOCI

Debt instruments are measured at FVOCI if they are held within a business model whose objective is to hold for collection of contractual cash flows and selling financial assets, where the asset’s contractual cash flows represent payments that are solely payments of principal and interest on principal outstanding. Details of “Debt instruments at FVOCI” are given in Note 36 on page 207.

7.1.3.4.2 Equity instruments designated at FVOCI

Upon initial recognition, the Group elects to classify irrevocably some of its equity instruments held for strategic and regulatory purposes as equity instruments at FVOCI. Details of “Equity instruments at FVOCI” are given in Note 36 on page 207.

7.1.3.5 Financial assets measured at FVTPL

All financial assets other than those classified at amortised cost or FVOCI are classified as measured at FVTPL. Financial assets measured at FVTPL include financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Financial assets measured at FVTPL are discussed in Notes 7.1.3.5.1 and 7.1.3.5.2 below.

7.1.3.5.1 Financial assets held for trading

Details of “Financial Assets held for trading” are given in Note 32 on page 198.

7.1.3.5.1.1 Derivatives recorded at FVTPL

Details of “Derivative financial assets” recorded at fair value through profit or loss are given in Note 31 on page 198.

7.1.3.5.2 Financial assets designated FVTPL

On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL when such designation eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis.

Financial assets designated at FVTPL are recorded in the SOFP at fair value. Changes in fair value are recorded in “Net gain or loss on financial assets and liabilities designated at FVTPL”. Interest earned is accrued in “Interest Income”, using the EIR, while dividend income is recorded in “Other operating income” when the right to receive the payment has been established.

The Group has not designated any financial assets upon initial recognition as at FVTPL as at the end of the reporting period.

7.1.4 Classification and subsequent measurement of financial liabilities

The Group classifies financial liabilities, other than financial guarantees and loan commitments into one of the following categories:

• Financial liabilities at FVTPL, and within this category as –

  – Held-for-trading; or

  – Designated at FVTPL;

• Financial liabilities measured at amortised cost.

The subsequent measurement of financial liabilities depends on their classification.

Refer Notes 7.1.4.1 and 7.1.4.2 as detailed below:

7.1.4.1 Financial liabilities at FVTPL

Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVTPL. Refer Notes 7.1.4.1.1 and 7.1.4.1.2 below.

7.1.4.1.1 Financial liabilities held for trading

Details of “Derivative financial liabilities” classified under financial liabilities held for trading are given in Note 45 on page 231.

7.1.4.1.2 Financial liabilities designated at FVTPL

Financial liabilities designated at FVTPL are recorded in the SOFP at fair value when;

• 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, or
• A group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to entity’s key management personnel, or
• The liabilities containing one or more embedded derivatives, unless they do not significantly modify the cash flows that would otherwise be required by the contract, or it is clear with little or no analysis when a similar instrument is first considered that separation of the embedded derivative(s) is prohibited.

Changes in fair value are recorded in “Net fair value gains/ (losses) from financial instruments at FVTPL” with the exception of movements in fair value of liabilities designated at FVTPL due to changes in the Bank’s own credit risk. Such changes in fair value are recorded in the own credit reserve through OCI and do not get recycled to profit or loss. Interest paid/payable is accrued in “Interest expense”, using the EIR.

The Group has not designated any financial liabilities as at FVTPL as at the end of the reporting period.

7.1.4.2 Financial liabilities at amortised cost

Financial liabilities issued by the Group that are not designated at FVTPL are classified as financial liabilities at amortised cost under “Due to banks”, “Securities sold under repurchase agreements”, “Due to depositors”, “Other borrowings” or “Subordinated liabilities” as appropriate, where the substance of the contractual arrangement results in the Group 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 asset for a fixed number of own equity shares.

The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

After initial recognition, such financial liabilities are subsequently measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR.

The EIR amortisation is included in “Interest expense” in the profit or loss. Gains and losses too are recognised in the profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

7.1.4.2.1 Due to banks

Details of “Due to banks” are given in Note 44 on page 230.

7.1.4.2.2 Securities sold under repurchase agreements (repos)

When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date (repos), the arrangement is accounted for as a financial liability in the SOFP reflecting the transaction’s economic substance as a deposit. Subsequent to initial recognition, these securities are measured at amortised cost using the EIR with the corresponding interest payable being recognised as “Interest expense” in profit or loss.

Details of “Securities sold under repurchase agreements (repos)” are given in the SOFP on page 145.

7.1.4.2.3 Due to depositors

Details of “Due to depositors” are given in Note 46 on page 231.

7.1.4.2.4 Other Borrowings

Details of “Other borrowings” are given in Note 47 on page 232.

7.1.4.2.5 Subordinated liabilities

Details of “Subordinated liabilities” are given in Note 51 on page 240.

7.1.5 Derivatives held for risk management purposes and hedge accounting

Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the SOFP.

The Group designates certain derivatives held for risk management as well as certain non-derivative financial instruments as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument and hedged item, including risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instrument is expected to be highly effective in offsetting the changes in fair value or cash flow of the respective hedged item during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80% to 125%. The Group makes an assessment for a cash flow hedge of a forecast transaction, of whether the forecast transaction is highly probable to occur and presents an exposure to variations in cash flows that could ultimately affect profit or loss.

The Group currently uses cash flow hedging relationships for risk management purposes as discussed in Notes 7.1.5.1 to 7.1.5.5 below:

7.1.5.1 Fair value hedges

When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect the profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss in the same line item as the hedged item that is attributable to the hedged risk.

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated.

Any adjustment up to the point of discontinuation to a hedged item for which the effective interest method is used, is amortised to profit or loss as a part of the recalculated EIR of the item over its remaining life.

7.1.5.2 Cash flow hedges

When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect the profit or loss, the effective portion of changes in the fair value of the derivative are recognised in OCI and presented in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss.

The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the Statement of Profit or Loss and OCI.

If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those are necessary for the novation, then the derivative is not considered as expired or terminated.

Details of “Cash flow hedges” are given in Note 45.1 on page 231.

7.1.5.3 Net investment hedges

When a derivative instrument or a non-derivative financial liability is designated as the hedging instrument in a hedge of a net investment in a foreign operation, the effective portion of changes in the fair value of the hedging instrument is recognised in OCI and presented in the translation reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. The amount recognised in OCI is reclassified to profit or loss as a reclassification adjustment on disposal of the foreign operation.

7.1.5.4 Other non-trading derivatives

If the derivative is not held for trading, and is not designated in a qualifying hedging relationship, then all changes in its fair value are recognised immediately in profit or loss as a component of net income from other financial instruments at FVTPL.

7.1.5.5 Embedded derivatives

An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument.

Derivatives may be embedded in another contractual arrangement (a host contract). The Group treats derivatives embedded in financial liabilities and non-financial host contracts as separate derivatives, if:

• The host contract is not itself carried at FVTPL;
• The terms of the embedded derivative would meet the definition of a derivative if they were contained in a separate contract; and
• The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract.

Separated embedded derivatives are measured at fair value, with all changes in fair value recognised in profit or loss unless they form part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the SOFP together with the host contract. Derivatives embedded in financial assets are classified based on the business model and their contractual terms and are not separated as explained in Notes 7.1.3.1 and 7.1.3.2 on page 166.

Separated embedded derivatives are measured at fair value, with all changes in fair value recognised in profit or loss unless they formed part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the SOFP together with the host contract.

7.1.6 Reclassification of financial assets and liabilities

Financial assets are not reclassified subsequent to their initial recognition, except and only in those rare circumstances when the Group changes its objective of the business model for managing such financial assets which may include the acquisition, disposal or termination of a business line.

During the year, the Bank reclassified part of its Sri Lanka Sovereign Bond (SLSB) Portfolio from Fair Value Through Other Comprehensive Income (FVOCI) to Amortised Cost, as a result of changes to the business model of managing the assets, in line with the guidelines issued by the CA Sri Lanka on Accounting Consideration with the COVID-19 Outbreak. Refer Note 36.1 on page 208 for further details.

Financial Liabilities are not reclassified as such reclassifications are not permitted by SLFRS 9.

7.1.6.1 Timing of reclassification of financial assets

Consequent to the change in the business model, the Bank reclassifies all affected assets prospectively following the change in the business model (the reclassification date). Accordingly, prior periods are not restated.

7.1.6.2 Measurement of reclassification of financial assets

7.1.6.2.1 Reclassification of Financial Instruments at ‘FVTPL’

• To Fair Value Through Other Comprehensive Income

  The fair value on reclassification date becomes the new gross carrying amount. The EIR is calculated based on the new gross carrying amount. Subsequent changes in the fair value is recognised in OCI.

• To Amortised Cost

  The fair value on reclassification date becomes the new carrying amount. The EIR is calculated based on the new gross carrying amount.

7.1.6.2.2 Reclassification of Financial Instruments at ‘FVOCI’

• To Fair Value Through Profit or Loss

  The accumulated balance in OCI is reclassified to profit or loss on the reclassification date.

• To Amortised Cost

  The financial asset is reclassified at fair value. The cumulative balance in OCI is removed and is used to adjust fair value on the reclassification date. The adjusted amount becomes the amortised cost.

  EIR determined at initial recognition and gross carrying amount are not adjusted as a result of reclassification.

7.1.6.2.3 Reclassification of Financial Instruments at ‘Amortised Cost’

• To FVOCI

  The asset is remeasured to fair value, with any difference recognised in OCI. EIR determined at initial recognition is not adjusted as a result of reclassification.

• To FVTPL

  The fair value on the reclassification date becomes the new carrying amount. The difference between amortised cost and fair value is recognised in profit and loss.

7.1.7 Derecognition of financial assets and financial liabilities

7.1.7.1 Financial assets

The Group derecognises a financial asset (or where applicable a part of thereof) when the contractual rights to the cash flows from the financial asset expire or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss.

However, cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities.

Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability.

The Group enters into transactions whereby it transfers assets recognised on its SOFP, but retains either all or substantially all risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised.

When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to sale and repurchase transactions because the Group retains all or substantially all risks and rewards of ownership of such assets.

When the Group has transferred its right 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 Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on the basis that reflected the rights and obligations that the Group has retained.

7.1.7.2 Financial liabilities

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

7.1.8 Modification of financial assets and financial liabilities

7.1.8.1 Modification of Financial assets

If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value.

If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses measured using pre modification interest rate. In other cases, it is presented as interest income.

As per the Circular Nos. 4 and 5 of 2020 issued by CBSL dated March 24, 2020 and March 27, 2020 respectively, the Bank granted payment deferrals to eligible customers affected by COVID-19, modifying the original contract. In this regard, banks were allowed to charge upto a maximum of 7% per annum on the deferred instalments during the moratorium period of equated monthly instalments (EMI) loans. For other loans various types of interest rate concessions were given to the customers. Further, with the view of meeting the challenges faced by businesses and individuals due to the second wave of COVID-19, CBSL directed banks to extend the debt moratorium to such businesses and individuals for a further period of six months commencing from October 01, 2020. Licensed banks are expected to convert the capital and interest falling due during the moratorium period commencing from October 01, 2020 to March 31, 2021, into a term loan. Repayment period of the new loans shall be minimum of two years, however may vary based on the terms and conditions agreed with the borrower. The banks were allowed to recover interest at a rate not exceeding the latest auction rate for 364-days Treasury Bills, available by April 01, 2021, plus 1 per cent per annum.

Modifications to the original terms and conditions of the loans due to the above COVID-19 moratoriums, did not result in de-recognition of the original loans as the Management concluded that the modifications were not substantial. Accordingly, a modification loss (Day 1 Modification Loss) has been recognized under interest income in Note 13.1, representing the difference between the original carrying amount of the loan (before modification) and the discounted present value of the revised cash flows (at the Original EIR) at the date of the loan modification. The Group recognizes the interest income on recalculated gross carrying amount based on the Original EIR from the commencement of moratorium to the end of the lifetime of the instrument.

7.1.8.2 Modification of Financial Liabilities

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. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss.

7.1.9 Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the SOFP 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 assets and settle the liabilities simultaneously.

Income and expenses are presented on a net basis only when permitted under SLFRSs, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity.

7.1.10 Amortised cost and gross carrying amount

The “amortised cost” of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the EIR method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any ECL allowance.

The “gross carrying amount of a financial asset” is the amortised cost of a financial asset before adjusting for any ECL allowance.

7.1.11 Fair value of financial instruments

Fair value measurement of financial instruments including the fair value hierarchy is explained in Notes 4 and 27 on pages 163 and 192.

7.2 Non-current assets held for sale and disposal groups

The Group intends to recover the value of Non-Current Assets and disposal groups classified as held for sale as at the reporting date principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available-for-sale in its present condition, Management has committed to the sale and the sale is expected to have been completed within one year from the date of classification.

As per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-current Assets Held for Sale and Discontinued Operations”, (SLFRS 5) these assets are measured at the lower of the carrying amount and fair value, less costs to sell. Thereafter, the Group 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 Group 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. Impairment loss is first allocated to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to financial assets, deferred tax assets or employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. As a result, once classified, the Group neither amortises nor depreciates the assets classified as held-for-sale.

In the Income Statement of the reporting period and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when the Group retains a NCI in a subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the Income Statement.

7.3 Property, plant and equipment

Details of “Property, plant and equipment” are given in Note 39 on pages 214 to 225.

7.3.1 Depreciation

Details of “Depreciation” are given in Note 20 on pages 185 and 186.

7.3.2 Borrowing costs

As per the Sri Lanka Accounting Standard – LKAS 23 on “Borrowing Costs” (LKAS 23), the Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset 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.

7.4 Investment Property

Investment properties are initially measured at cost, including transaction costs. The Group subsequently measures investment properties under fair value model. Any gain or loss arising from a change in fair value and the rental income from the investment property is recognised under Net other operating income.

Details of “Investment Property” are given in Note 40 on pages 225 and 226.

7.5 Intangible assets

Details of “Intangible assets” are given in Note 41 on pages 226 to 228.

Amortisation recognised during the year in respect of intangible assets is included under the item of “Amortisation of intangible assets” under “Depreciation and amortisation” in profit or loss.

Refer Note 20 on pages 185 and 186.

7.6 Impairment of non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The “recoverable amount” of an asset or CGU is the greater of its value in use and its fair value less costs to sell. “Value in use” is based on the estimated future cash flows, 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 or CGU.

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are allocated.

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

7.7 Dividends payable

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are recommended and declared by the Board of Directors and approved by the 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 reporting date and not provided for, are disclosed as an event after the reporting period in accordance with the Sri Lanka Accounting Standard – LKAS 10 on “Events after the reporting period” (LKAS 10) in Note 69 on page 290.

7.8 Employee benefits

7.8.1 Defined Benefit Plans (DBPs)

A DBP is a post-employment benefit plan other than a Defined Contribution Plan (DCP) as defined in the Sri Lanka Accounting Standard – LKAS 19 on “Employee Benefits” (LKAS 19).

7.8.1.1 Defined benefit pension plans

7.8.1.1.1 Description of the plans and employee groups covered

The Bank operates three types of Defined Benefit Pension Plans for its employees as described below:

(a) 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 those who joined the Bank before January 1, 2000, became eligible for this pension scheme.

During 2006, the Bank offered a restructured pension scheme to convert the DBP to a DCP for the pensionable employees of the Bank 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;

(b) Provision for pensions has been made for those employees who retired before January 1, 2000, and on whose behalf the Bank could not make contributions to the Retirement Pension Fund for more than 10 years. This liability although not funded has been provided for in full in the Financial Statements;

The subsidiaries of the Bank do not operate Pension Funds.

The Bank’s net obligation in respect of Defined Benefit Pension Plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets, as per LKAS 19 as detailed in Note 49 on pages 233 to 239.

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.

7.8.1.1.2 Recognition of actuarial gains or losses

Actuarial gains or losses are recognised in the OCI in the period in which they arise.

7.8.1.1.3 Recognition of retirement benefit obligation

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 calculation of defined benefit obligations is performed annually by a qualified actuary using the Projected Unit Credit Method. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Remeasurement of the net defined benefit liability, which comprises actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Group determines the net interest expense/(income) on the net defined benefit liability/(asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net-defined benefit liability/(asset), taking into account any changes in the net-defined benefit liability/(asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to DBPs are recognised in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a DBP when the settlement occurs.

Amounts recognised in profit or loss as expenses on DBPs and provisions made on DBPs together with the details of valuation methods are given in Notes 19 and 49 on pages 185 and 233 to 239, respectively.

7.8.2 Defined Contribution Plans (DCPs)

A DCP is a post-employment plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligations to pay a further amount. Obligations to DCPs are recognised in the profit or loss as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. The Group has three such plans as explained in Notes 7.8.2.1, 7.8.2.2 and 7.8.2.3.

Amounts recognised in profit or loss as expenses on DCPs are given in Note 19 on page 185.

7.8.2.1 Defined contribution pension plan

As explained in Note 7.8.1.1.1(a), during 2006, the Bank restructured its pension scheme which was a DBP to a 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 shortfall 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, which are estimated to increase for this purpose at 10% p.a. based on the salary levels that prevailed as at the date of implementation of this scheme. In addition, interest to be earned on the assets of the DCP is also allocated to the employees who opted for the restructured scheme.

The assets of this Fund are held separately from those of the Bank and are independently administered by the Trustees as per the provisions of the Trust Deed.

7.8.2.2 Employees’ Provident Fund

The Bank and employees contribute to an approved Private Provident Fund at 12% and 8% respectively, on the salaries of each employee. Other local entities of the Group and their employees contribute at the same percentages as above to the Employees’ Provident Fund managed by the CBSL.

7.8.2.3 Employees’ Trust Fund

The Bank and other local entities of the Group contribute at the rate of 3% of the salaries of each employee to the Employees’ Trust Fund managed by the CBSL.

7.8.2.4 Defined Contribution Pension Fund (DCPF)

A DCPF was established on March 1, 2020, which is managed by a Board of Trustees consisting of representatives of Employee Organizations and the Management.

Employees who joined since the year 2000, and who are not covered under the Re-Structured Pension Scheme of the Bank and are in the service of the Bank as at March 1, 2020 are eligible for the new DCPF. The initial lump sum, based on Gratuity entitlement as at February 29, 2020, is being transferred to the accounts opened in the names of individual eligible employees. The Bank contributes monthly, a percentage equivalent of seven decimals five per centum (7.5%) of the monthly salary of each eligible employee starting from March 1, 2020 until cessation of employment to the DCPF.

Employees cannot withdraw money from the DCPF before cessation of employment. In the event of early separation prior to retirement (excluding death), eligible employees are entitled to withdraw the accumulated amounts in their respective DCPF accounts. However, the eligible employees are not entitled to receive any DCPF payment where the completed service is less than 5 years (similar to the Gratuity payments done in case of a separation as per the Gratuity Act at the point of termination and separation). In the event of death of an employee whilst in service, the accumulated funds in the members account will be released in full to the nominated parties/legal heirs as the case may be, where the completed service is more than 5 years.

7.8.3 Other long-term employee benefits

The Group’s net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefits that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate used as the yield as at the reporting date is the current market rate that has been extrapolated to reflect long-term rate of discount based on market rates of interest on short-term Corporate/Government Bonds and anticipated long-term rate of inflation. The calculation is performed using the Projected Unit Credit Method. Remeasurements are recognised in profit or loss in the period in which they arise.

The Group does not have any other long-term employee benefit plans.

7.8.4 Terminal benefits

Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be wholly settled within 12 months of the reporting date, then they are discounted.

7.8.5 Short-term employee benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

7.8.6 Share-based payment arrangements

Share-based payment arrangements in which the Bank receives services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Bank. Executive Employees of the Bank receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The Group does not operate any cash-settled share-based payment transactions.

The Group applies the requirements of the Sri Lanka Accounting Standard – SLFRS 2 on “Share-based Payment” (SLFRS 2) in accounting for equity-settled share-based payment transactions, if any, that were granted after January 1, 2012 and had not vested at the same date. As per SLFRS 2, on the grant date, fair value of equity-settled share-based payment awards (i.e., share options) granted to employees is recognised as personnel expense, with a corresponding increase in equity, over the period in which the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are expected to be met, so that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

The Employee Share Option Plans – 2015 and 2019, which granted are subjected to the above accounting treatment.

The details of Employee Share Option Plans are given in Note 53 on page 241.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted Earnings per Share as disclosed in Note 24.1 and Note 24.2 on page 189.

7.9 Other liabilities

Details of “Other liabilities” are given in Note 49 on pages 233 to 239.

7.10 Restructuring

Provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses arising on such restructuring are not provided for.

The Group does not have any provision for restructuring as at the reporting date.

7.11 Onerous contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.

The Group does not have any onerous contracts as at the reporting date.

7.13 Financial guarantees, letters of credit and undrawn loan commitments

“Financial guarantees” are contracts that require the Group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Undrawn loan commitments and letters of credits are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified terms to the customer.

Financial 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 cumulative amortisation recognised in the income statement and ECL provision if appropriate.

The premium received is recognised in profit or loss in Note 14.1 on “Fee and commission income” on a straight line basis over the life of the guarantee.

The nominal contractual value of financial guarantees, letters of credit and undrawn loan commitments, where the loan agreed to be provided is on market terms, are not recorded on in the SOFP. The nominal values of these instruments together with the corresponding ECLs are disclosed in Note 58 on page 248.

Loan commitments at below market interest rates drawdown are initially measured at fair value and subsequently measured at the higher of the amount of the ECL allowance and the amount initially recognised less, when appropriate, the cumulative amount of income recognised.

7.14 Commitments

All discernible risks are accounted for in determining the amount of known liabilities as explained in Note 7.9 above.

Details of the Commitments are given in Note 58 on page 248.

7.15 Contingent liabilities and commitments

A detailed list of “Contingent liabilities and commitments” and “Litigation against the Bank” are given in Notes 58 and 60 on pages 248 and 250.

7.16 Stated capital and reserves

Details of the “Stated capital and reserves” are given in Notes 52, 54, 55 and 56 to the Financial Statements on pages 241 and 244 to 248.

7.17 Earnings per Share (EPS)

Details of “Basic and Diluted EPS” are given in Note 24 on page 189.

7.18 Operating segments

Details of “Operating segments” are given in Note 62 on pages 253 to 255.

7.19 Fiduciary assets

The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity are not reported in these Financial Statements as they do not belong to the Bank.

Details of “Income and expense” are given in Notes 12 to 21 on pages 178 to 187.

8.1 Interest income and expense

Details of “Interest income and expense” are given in Note 13 on pages 178 to 180.

8.2 Fee and commission income and expense

Details of “Fee and commission income and expense” are given in Note 14 on pages 180 and 181.

8.3 Net gains/(losses) from trading

Details of “Net gains/(losses) from trading” are given in Note 15 on page 181.

8.4 Net gains/ (losses) from derecognition of financial assets

Details of “Net gains/ (losses) from derecognition of financial assets” are given in Note 16 on page 181.

8.5 Dividend income

Dividend income is recognised when the right to receive income is established. Usually, this is the ex-dividend date for quoted equity securities.

Dividends are presented in net gains/(losses) from trading, net gains/(losses) from financial investments or other income (net) based on the underlying classification of the equity investment.

Details of “Dividend income” are given in Notes 15 and 17 on pages 181 and 182.

8.6 Leases

The Group assesses at the inception of a contract, whether a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration as per the guidelines of SLFRS 16. This assessment considers whether, throughout the period of use, the lessee has both the right to obtain all of the economic benefits from the use of the identified asset and the right to direct how and for what purpose the identified asset is used.

After the assessment of whether a contract is, or contains, a lease, the Group determines whether it contains additional lease or non-lease (service) components based on the detailed guidance provided in SLFRS 16. Accordingly, the right to use of an identifying asset is a separate lease component if the lessee can benefit from the use of underlying asset either on its own or together with other resources readily available to the lessee and the underlying asset is neither highly dependent on, nor highly interrelated with, the other underlying assets in the contract.

8.6.1 Group as a lessee

As per SLFRS 16, when the Group has determined that a contract contains a lease component and one or more additional lease components or non-lease components, the consideration in the contract is allocated to each lease component on the basis of relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

At the commencement date, the Group recognises right-of-use of an asset and a lease liability which is measured at the present value of the lease payments that are payable on that date. Lease payments are discounted using the IBR.

After initial recognition, the Group applies cost model for the right-of-use of an asset and depreciate the asset from commencement date to the end of the useful life of the underlying asset. Where the right does not transfer the ownership of the asset, the Group depreciates it from commencement date to the earlier of the end of the useful life of the right-of-use asset or end of the lease term. In addition, interest expense on the lease liability is recognised in the profit or loss.

Details of “Right-of-use asset” and “Lease liability” are given in Notes 39 and 49 respectively on pages 214 and 233.

8.6.2 Group as a lessor

Similar to above, at the commencement of the contract, the Group determines whether the contract contains a lease component and one or more additional lease components or non-lease components. When there is one or more additional lease or non-lease component, the Group allocates consideration based on the guidelines given in SLFRS 15.

8.6.2.1 Finance leases – Group as a lessor

As per SLFRS 16, a lease which transfers substantially all the risks and rewards incidental to ownership of an underlying asset is classified as a finance lease. At the commencement date, the Group recognises assets held under finance lease in the SOFP and present them as a lease receivable at an amount equal to the net investment in the lease. Net investment in the lease is arrived by discounting lease payments receivable at the interest rate implicit in the lease, i.e. the rate which causes present value of lease payments to equal to the fair value of the underlying asset and initial direct costs. The Group’s net investment in lease is included in Note 33 on “Loans and advances to banks” or Note 34 “Loans and advances to other customers”, as appropriate. The finance income receivable is recognised in “interest income” over the periods of the leases so as to achieve a constant rate of return on the net investment in the leases.

8.6.2.2 Operating leases – Group as a lessor

As per SLFRS 16, a lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. The Group recognises lease payments from operating leases as income on straight-line basis. 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.

Details of “Operating leases” are given in Note 67 on page 261.

8.7 Rental income and expenses

Rental income and expense are recognised in profit or loss on an accrual basis.

9.1 Income tax expense

9.1.1 Current tax

Details of “Income tax expense” are given in Note 23 on pages 187 and 188.

9.1.2 Deferred tax

Details of “Deferred tax assets and liabilities” are given in Note 42 on pages 228 to 230.

9.1.3 Tax exposures

In determining the amount of current and deferred tax, the Group considers the impact of tax exposures, including whether additional taxes and penalties are due. Finalisation of the tax liability with authorities may change the position already recorded in the Financial Statements and such changes to tax liabilities could impact the tax expense in the period in which such a determination is made either as an over or under provision.

9.1.4 Changes proposed to Income Tax from Government Tax Proposals

As per notice dated April 08, 2020 issued by the Inland Revenue Department on “Implementation of Proposed Changes to the Inland Revenue Act No. 24 of 2017”, effective from January 01, 2020;

• Corporate Income Tax rate was revised from 28% to 24%. However, such revisions were not considered in computing the income tax liabilities, pending legal enactment and formal amendments to the Inland Revenue Act.
• Exemption announced as per the aforementioned notice on interest income from Sri Lanka Development Bonds, effective from April 01, 2018 was availed by the Bank. However, other exemptions eligible to be claimed effective from January 01, 2020, were not considered in computing the income tax liability as at December 31, 2020, pending legal enactment and formal amendments to the Inland Revenue Act.

9.2 Crop Insurance Levy (CIL)

As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from April 1, 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

9.3 Withholding Tax (WHT) on dividends distributed by the Bank, subsidiaries and associates

9.3.1 WHT on dividends distributed by the Bank

Withholding tax that arises from the distribution of dividends by the Bank is recognised at the time the liability to pay the related dividend is recognised up to December 31, 2019. As per Notice dated February 18, 2020 published by the Department of Inland Revenue, requirement to deduct WHT on dividends has been removed effective January 1, 2020.

9.3.2 WHT on dividends distributed by the subsidiaries and associate

Dividends received by the Bank from its subsidiaries and associate, have attracted a 14% deduction at source upto December 31,2019. Effective from January 1, 2020, requirement to deduct WHT had been removed (as mentioned under Note 9.3.1 above).

9.4 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 was payable at 0.5% of the total turnover and is deductible from the income tax payments. Unclaimed ESC, if any, could be carried forward and set-off against the income tax payable in the three subsequent years including the current year of assessment.

As per Notice published dated January 1, 2020 by the Department of Inland Revenue, ESC was abolished with effect from January 01, 2020.

9.5 Value Added Tax on Financial Services (VAT FS)

The value addition attributable to the supply of financial services is calculated by adjusting the economic depreciation computed on rates prescribed by the Department of Inland Revenue to the accounting profit before income tax and emoluments payable. Emoluments payable include benefits in money and not in money including contribution or provision relating to terminal benefits.

The amount of VAT FS charged in determining the profit or loss for the period is given in Note 22 on page 187.

9.6 Nation Building Tax on Financial Services (NBT FS)

With effect from January 1, 2014, NBT of 2% was introduced on supply of financial services via an amendment to the NBT Act No. 09 of 2009. Upto November 30, 2019, NBT was chargeable on the same base used for calculation of VAT on financial services as explained in Note 9.5 above. As per Notice published by the Department of Inland Revenue dated November 29, 2019, NBT was abolished with effect from December 01, 2019.

The amount of NBT FS charged in determining the profit or loss in 2019 is given in Note 22 on page 187.

9.7 Debt Repayment Levy on Financial Services (DRL FS)

As per the Finance Act No. 35 of 2018, with effect from October 1, 2018, DRL FS of 7% was introduced on the value addition attributable to the supply of financial services by each financial institution. DRL FS was chargeable on the same base used for calculation of VAT FS on financial services as explained in Note 9.5 above. As per notice published by the Department of Inland Revenue dated January 20, 2020, DRL FS was abolished with effect from January 01, 2020.

The amount of DRL FS charged in determining the profit or loss in 2019 is given in Note 22 on page 187.

10.1 Statement of Cash Flows

The Statement of Cash Flows is prepared using the “Indirect Method” of preparing cash flows in accordance with the Sri Lanka Accounting Standard – LKAS 7 on “Statement of Cash Flows” (LKAS 7). Gross cash and cash equivalents comprise of 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 Statement of Cash Flows are comprised of those items as explained in Note 28 on page 196.

The Statement of Cash Flows is given on page 154.

The amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s Financial Statements are disclosed below. The Group/Bank intends to adopt these standards, if applicable, when they become effective.

Amendments to SLFRS 9, LKAS 39, SLFRS 7, SLFRS 4 and SLFRS 16 – Interest Rate Benchmark Reform (Phase 1 & 2) – (“IBOR reform”)

The amendments to SLFRS 9 & LKAS 39 provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument.

IBOR reforms Phase 2 include number of reliefs and additional disclosures. Amendments supports companies in applying SLFRS when changes are made to contractual cash flows or hedging relationships because of the reform.

These amendments to various standards are effective for the annual reporting periods beginning on or after January 01, 2021.

The Group/Bank is currently assessing the potential impact on its Financial Statements resulting from this amendment.

Amendments to SLFRS 16 - COVID-19 Related Rent Concessions

The amendments provide relief to lessees from applying SLFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 Pandemic.

As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from COVID-19 related rent concession the same way it would account for the change under SLFRS16, if the change were not a lease modification.

The amendment applies to annual reporting periods beginning on or after June 01, 2020.

This amendment is not expected to have a material impact on the Financial Statements of the Group/Bank in the foreseeable future.

13.1 Interest income

		GROUP		BANK
For the year ended December 31,	Note	2020	2019	2020	2019
		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents		1,053,757	1,290,697	1,049,426	1,281,772
Balances with central banks		1,175,509	62,572	1,149,924	34,632
Placements with banks		777,425	931,571	754,313	918,690
Securities purchased under resale agreements		836,773	1,906,902	836,773	1,906,667
Financial assets recognised through profit or loss		1,831,327	474,478	1,831,327	474,478
Derivative financial instruments		34,902	67,453	34,902	67,453
Other financial instruments		1,796,425	407,025	1,796,425	407,025
Financial assets at amortised cost – Loans and advances to other customers (*)		84,257,196	100,444,369	82,933,026	99,263,719
Financial assets at amortised cost – Debt and other financial instruments		13,194,851	7,819,563	12,891,769	7,572,183
Financial assets measured at fair value through other comprehensive income		18,053,545	15,091,368	18,031,388	15,067,335
Interest accrued on impaired loans and advances to other customers	34.2 (a) & 34.2 (b)	2,895,955	1,258,339	2,850,806	1,258,339
Other interest income		11,375	7,884	1,634	1,725
Total		124,087,713	129,287,743	122,330,386	127,779,540

(*) Interest concessions and refunds along with the modification losses relating to COVID-19 relief measures amounting to Rs. 2,640.810 Mn. (approx) have been netted off in the interest income.

13.2 Interest expense

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Due to banks		2,845,641	2,484,166	2,657,662	2,201,489
Derivative financial liabilities		65,473	63,161	65,473	63,161
Securities sold under repurchase agreements		3,516,363	3,256,622	3,524,261	3,267,124
Financial liabilities at amortised cost – due to depositors		61,416,382	69,503,417	61,120,047	69,387,322
Refinance borrowings		578,780	472,813	578,780	472,813
Foreign currency borrowings		603,597	872,931	603,597	872,931
Subordinated liabilities		3,756,921	3,848,979	3,756,921	3,848,979
Interest expense on lease liabilities	49.1	435,754	429,263	452,304	457,449
Total		73,218,911	80,931,352	72,759,045	80,571,268

14.1 Fee and commission income

	GROUP		BANK
For the year ended December 31,	2020	2019	2020	2019
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and advances related services	861,317	881,213	787,785	813,785
Credit and debit cards related services	3,723,129	4,566,923	3,723,129	4,566,923
Trade and remittances related services	4,431,425	3,998,926	4,250,211	3,783,596
Deposits related services	1,151,909	1,852,565	1,122,747	1,788,810
Guarantees related services	908,508	942,615	900,485	936,720
Other financial services	763,401	632,724	484,186	516,750
Total	11,839,689	12,874,966	11,268,543	12,406,584

14.2 Fee and commission expense

	GROUP		BANK
For the year ended December 31,	2020	2019	2020	2019
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and advances related services	48,591	54,028	47,443	51,637
Credit and debit cards related services	1,811,962	1,877,797	1,811,962	1,877,797
Trade and remittances related services	55,456	62,299	50,728	58,634
Other financial services	102,005	129,004	102,005	129,004
Total	2,018,014	2,123,128	2,012,138	2,117,072

Accounting policy

“Net gains/(losses) from trading” comprises gains less losses related to trading assets and trading liabilities, and also include all realised and unrealised fair value changes, related capital gains and losses, dividend income from trading assets, and foreign exchange gains/(losses).

	GROUP		BANK
For the year ended December 31,	2020	2019	2020	2019
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Derivative financial instruments	977,206	1,078,749	977,206	1,078,749
Foreign exchange gains/(losses) from banks and other customers	977,206	1,078,749	977,206	1,078,749
Financial assets recognised through profit or loss – measured at fair value
Government Securities	557,579	67,548	557,579	67,548
Net mark-to-market gains/(losses)	226,036	26,386	226,036	26,386
Net capital gains	331,543	41,162	331,543	41,162
Equities	343,275	214,536	343,301	214,561
Net mark-to-market gains/(losses)	303,612	200,299	303,612	200,327
Net capital gains	20,468	916	20,506	919
Dividend income	19,195	13,321	19,183	13,315
Total	1,878,060	1,360,833	1,878,086	1,360,858

Accounting policy

Net gains/(losses) from derecognition of financial assets comprises all realised gains less losses related to debt instruments measured at FVOCI and financial assets measured at amortised cost.

	GROUP		BANK
For the year ended December 31,	2020	2019	2020	2019
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets measured at fair value through other comprehensive income
Government Securities	6,390,197	1,135,711	6,390,197	1,135,711
Net capital gains	6,390,197	1,135,711	6,390,197	1,135,711
Total	6,390,197	1,135,711	6,390,197	1,135,711

Accounting policy

Net other operating income includes foreign exchange gains and losses, dividend income from equity instruments designated at fair value through other comprehensive income, dividend income from group entities, gains/losses on disposal of property, plant and equipment, and rental income.

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Gains/(losses) on sale of property, plant and equipment	17.1	5,820	19,731	926	7,958
Gains on revaluation of foreign exchange		7,395,513	5,783,595	7,361,099	5,647,577
Recoveries o/a loans written off		157,103	20,360	157,103	20,360
Dividend income from subsidiaries		–	–	98,200	85,397
Dividend income from other equity securities		28,739	40,076	28,419	39,796
Profit due to change in ownership		–	14,498	–	14,498
Rental and other income	17.2	183,579	218,114	198,522	208,005
Less: Profit due to change in ownership		–	(14,498)	–	–
Total		7,770,754	6,081,876	7,844,269	6,023,591

17.1 Gains/(losses) on sale of property, plant and equipment

Accounting policy

The gains or losses on disposal of property, plant and equipment are determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal, net of incremental disposal costs. This is recognised as an item in “other operating income” in the year in which the Group transfers control of the asset to the buyer.

17.2 Rental income

Accounting policy

Rental income is recognised in the Income Statement on an accrual basis.

Accounting policy

Impairment charges as per SLFRS 9

The Group recognises loss allowances for expected credit loss (ECL) on the following financial instruments that are not measured at FVTPL:

• Cash and cash equivalents;
• Placements with banks;
• Loans and advances to banks;
• Loans and advances to other customers;
• Financial assets at amortised cost –
  Debt and other financial instruments;
• Debt instruments at fair value through other comprehensive income;
• Loan commitments and financial guarantee contracts.

No impairment loss is recognised on equity investments.

The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information relevant to the assessment, including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money.

Impairment charges on loans and advances to customers

For loans and advances above a predefined threshold, the Group individually assesses for significant increase in credit risk (SICR). If a particular loan is credit-impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. If the Group determines that no provision is required under individual impairment, such financial assets are then collectively assessed for any impairments along with the remaining portfolio.

The Group computes ECL using three main components; a probability of default (PD), a loss given default (LGD) and the exposure at default (EAD) under the collective assessment. These parameters are generally derived from internally developed statistical models and historical data and then adjusted to reflect forward-looking information.

• PD – The probability of default represents the likelihood of a borrower defaulting on its financial obligations (as per Note 7.1.12.3) either over the next 12 months (12m PD) or over the remaining lifetime (Lifetime PD) of the obligation. PD estimates are estimates at a certain date and days past due (DPD) is the primary input into the determination of the term structure of PD for exposures. DPD are determined by counting the number of days since the due date. The Group employs statistical models to analyse the data collected and generates estimates of the remaining lifetime PD of exposures and how these are expected to change as a result of the passage of time.
• 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 lender would expect to receive, including from the realisation of any collateral. The Group estimates LGD parameters based on historical recovery rates of claims against defaulted counterparties. They are calculated on a discounted cash flow basis using EIR as the discounting factor. LGD is usually expressed as a percentage of the EAD.
• EAD – The exposure at default represents the expected exposure in the event of a default. The Group estimates EAD, taking into account the repayment of principal and interest from the reporting date to the default event together with any expected drawdowns of committed facilities.
  To calculate EAD for a Stage 1 loan, the Group assesses the possible default events within 12 months. For all other loans, the EAD is considered for default events over the lifetime of the financial instrument.

Impairment charges on financial investments

Impairment charges on financial investments include ECL on debt instruments at FVOCI and financial assets at amortised cost.

The Group does not have historical loss experience on debt instruments at amortised cost and debt instruments at FVOCI. Thus the Group considers PDs published by the external sources (i.e. Bloomberg)

LGD for debt securities issued by the government of Sri Lanka in rupees is considered as 0%, LGD for foreign currency denominated securities issued by the government (Sri Lanka Development Bonds (SLDBs) and Sri Lanka Sovereign Bonds(SLSBs)) is considered as 20% and for all other instruments LGD is considered as 45% in accordance with the guideline issued by the Central Bank of Sri Lanka.

EAD of a debt instrument is its gross carrying amount.

Credit cards and revolving facilities

The Group’s product offering includes a variety of corporate and retail overdraft and credit cards facilities. The Group reviews the sanction limits at least annually and therefore has the right to cancel and/or reduce the limits. Therefore, the Group calculates only the 12-month ECL (12m ECL) allowance on these facilities. The EAD is arrived by taking the maximum of either sanction limit adjusted for Credit Conversion Factor (CCF) and the gross carrying amount of the loan (utilised amount). EAD of Stage 3 contracts are limited to the gross carrying amount which is the utilised amount since it is assumed that the Group freeze the limits of those contracts up to the utilised amount. The expected 12-month default probabilities are applied to EAD and multiplied by the expected LGD and discounted by an approximation to the original EIR.

Undrawn loan commitments

When estimating Life Time ECL (LTECL) for undrawn loan commitments, the Group estimates the expected portion of the loan commitment that will be drawn down over its expected life. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down. The expected cash shortfalls are discounted at an approximation to the expected EIR on the loan. For loan commitments and letters of credit, the allowances for ECLs are recognised within “other liabilities”.

Financial guarantee contracts

The Bank’s liability under each guarantee is measured at the higher of the amount initially recognised less cumulative amortisation recognised in the Income Statement, and the ECL provision. For this purpose, the Bank estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The shortfalls are discounted by the risk-adjusted interest rate relevant to the exposure. The allowances for ECLs related to financial guarantee contracts are recognised within “other liabilities”.

Forward-looking information

The Group incorporates forward-looking information into both its assessment as to whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The Group also obtained experienced credit judgement from economic experts and Credit and Risk Management Departments to formulate a base case, a best case and a worst case scenario. The base case represents a most-likely outcome and is aligned with information used by the Group for strategic planning and budgeting. The Group has identified and documented key drivers of credit risk both quantitative and qualitative for various portfolio segments. Quantitative economic factors are based on economic data and forecasts published by the CBSL and other reliable sources.

Quantitative drivers of credit risk	Qualitative drivers of credit risk
GDP growth	Status of industry business
Unemployment rate	Regulatory impact
Interest rate (AWPLR)	Government policies
Rate of inflation
Exchange rate

The calculation of ECLs

The Group measures loss allowance at an amount equal to LTECL, except for following, which are measured as 12m ECL.

• Loans and advances on which credit risk has not increased significantly since the initial recognition.
• Debt instruments that are determined to have low credit risk at the reporting date.

The Group considers a debt instrument to have a low credit risk when they have an “investment grade” credit risk rating. ECLs are measured as follows:

• Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls
  (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group 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 expected cash flows;
• Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive;
• Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover.

Financial assets that are not credit-impaired at the reporting date

As described above, the Group calculates 12m ECL allowance based on the expectation of a default occurring in the 12 months following the reporting date. These expected 12-month default probabilities are applied to EAD and multiplied by the economic factor adjustment, expected LGD and discounted by an approximation to the original EIR. When the loan has shown a SICR since origination, the Group records an allowance for LTECLs based on PDs estimated over the lifetime of the instrument.

Financial assets that are credit-impaired at the reporting date

Impairment allowance on credit-impaired financial assets assessed on individual basis is computed as the difference between the asset’s gross carrying amount and the present value of estimated future cash flows. The expected future cash flows are based on the estimates made by credit risk officers' as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries and expected future receipts of interest. The Group regularly reviews the assumptions for projecting future cash flows.

Further, the loans and advances identified as credit impaired in Note 7.1.12.3 will be assessed for impairment with 100% PD.

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, gold, Government Securities, Letters of Credit/Guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements, etc.

Collateral repossessed

The Bank’s policy is to carry collaterals repossessed at fair value at the repossession date and such assets will be disposed at the earliest possible opportunity. These assets are recorded under assets held for sale as per the Sri Lanka Accounting Standard – SLFRS 5 on “Non-Current Assets Held for Sale and Discontinued Operations”.

Write-off of financial assets

Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due.

As at the reporting date, the Bank has captured the impact on ECL due to COVID-19 via the modelled outcome as well as management overlays. Management overlays include additional ECL provisions of Rs. 2,899.290 Mn. (approx) on assessing lifetime ECL on the exposures outstanding from the borrowers operating in the risk elevated industries, impact on stressing the PDs and LGDs in the ECL model amounting to Rs. 1,182.754 Mn. (approx) and impact on changing the probability weightages assigned for multiple economic scenarios and stressing the qualitative factors used to assess forward looking macro economic indicators on ECL amounting to Rs. 1,106.486 Mn. (approx).

Scenario probability weighting (Bank)

As at December 31, 2020	Best case %	Base case %	Worst case %
Scenario probability weighting	15.00	40.00	45.00

Further, the Group is of the view that there was no significant impact of COVID-19 on the value of assets pledged as collateral and therefore no additional adjustment made to ECL in this regard.

Refer Note 2.12.5 on page 158 for detailed explanation on significant assumptions and estimates used with the objective of capturing the impact of COVID-19 to ECL provisions .

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and advances to other customers	34.2 (a) & 34.2 (b)	18,124,673	10,309,857	17,865,214	10,043,643
Individual impairment		3,983,706	1,938,437	3,967,287	1,931,678
Collective impairment		14,140,967	8,371,420	13,897,927	8,111,965
Other financial assets and off-balance sheet credit exposures		3,291,313	1,020,414	3,287,083	1,016,571
Total impairment charges	18.1 & 18.2	21,415,986	11,330,271	21,152,297	11,060,214
Investments in subsidiaries	37.1	–	–	327,855	–
Direct write-offs		3,546	1,252	3,546	1,252
Total		21,419,532	11,331,523	21,483,698	11,061,466

18.1 Impairment charge to the Income Statement – Group

For the year ended December 31,		2020				2019
	Note	Stage 1 Rs. ’000	Stage 2 Rs. ’000	Stage 3 Rs. ’000	Total Rs. ’000	Stage 1 Rs. ’000	Stage 2 Rs. ’000	Stage 3 Rs. ’000	Total Rs. ’000
Cash and cash equivalents	28.1	(2,526)	–	–	(2,526)	1,350	–	–	1,350
Placements with banks	30.1	(5,633)	–	–	(5,633)	(2,120)	–	–	(2,120)
Financial assets at amortised cost – Loans and advances to banks	33.1	(26)	–	–	(26)	75	–	–	75
Financial assets at amortised cost – Loans and advances to other customers	34.2 (a)	3,863,356	3,901,554	10,359,763	18,124,673	(108,915)	2,511,088	7,907,684	10,309,857
Individual impairment		–	–	3,983,706	3,983,706	–	–	1,938,437	1,938,437
Collective impairment		3,863,356	3,901,554	6,376,057	14,140,967	(108,915)	2,511,088	5,969,247	8,371,420
Financial assets at amortised cost – Debt and other financial instruments	35.1 (a)	1,685,968	–	–	1,685,968	8,569	–	152,870	161,439
Financial assets measured at fair value through other comprehensive income	36.2	814,141	–	–	814,141	265,999	–	–	265,999
Contingent liabilities and commitments	58.3 (a)	767,211	57,245	(25,067)	799,389	239,399	98,060	256,212	593,671
Total		7,122,491	3,958,799	10,334,696	21,415,986	404,357	2,609,148	8,316,766	11,330,271

18.2 Impairment charge to the Income Statement – Bank

For the year ended December 31,		2020				2019
	Note	Stage 1 Rs. ’000	Stage 2 Rs. ’000	Stage 3 Rs. ’000	Total Rs. ’000	Stage 1 Rs. ’000	Stage 2 Rs. ’000	Stage 3 Rs. ’000	Total Rs. ’000
Cash and cash equivalents	28.1	(2,526)	–	–	(2,526)	1,350	–	–	1,350
Placements with banks	30.1	(5,651)	–	–	(5,651)	(2,144)	–	–	(2,144)
Financial assets at amortised cost – Loans and advances to banks	33.1	(26)	–	–	(26)	75	–	–	75
Financial assets at amortised cost – Loans and advances to other customers	34.2 (b)	3,856,007	3,925,463	10,083,744	17,865,214	(41,669)	2,447,313	7,637,999	10,043,643
Individual impairment		–	–	3,967,287	3,967,287	–	–	1,931,678	1,931,678
Collective impairment		3,856,007	3,925,463	6,116,457	13,897,927	(41,669)	2,447,313	5,706,321	8,111,965
Financial assets at amortised cost – Debt and other financial instruments	35.1 (b)	1,681,829	–	–	1,681,829	7,940	–	152,870	160,810
Financial assets measured at fair value through other comprehensive income	36.2	814,141	–	–	814,141	265,999	–	–	265,999
Contingent liabilities and commitments	58.3 (b)	767,138	57,245	(25,067)	799,316	236,209	98,060	256,212	590,481
Total		7,110,912	3,982,708	10,058,677	21,152,297	467,760	2,545,373	8,047,081	11,060,214

Accounting policy

See Note 7.8 on pages 172 to 174.

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Salary and bonus	19.1	11,522,602	11,141,489	11,174,423	10,865,886
Pension costs	19.1	1,937,810	1,882,058	1,884,067	1,843,048
Contributions to defined contribution/benefit plans – Funded schemes		1,702,824	1,396,492	1,673,272	1,373,102
Contributions to defined benefit plans – Unfunded schemes	49.2 (c) & 49.3 (c)	234,986	485,566	210,795	469,946
Equity-settled share-based payment expense	19.2 & 56.5	112,203	–	112,203	–
Other expenses	19.3	1,420,133	1,385,367	1,393,306	1,373,725
Total		14,992,748	14,408,914	14,563,999	14,082,659

19.1 Salary, bonus, and pension costs

Salary, bonus, and contributions to defined contribution/benefit plans, reported above also include amounts paid to and contributions made on behalf of Executive Directors.

19.2 Share-based payment

The Bank has an equity-settled share-based compensation plan, the details of which are given in Note 53 on page 241.

19.3 Other expenses

This includes expenses such as overtime payments, leave encashment benefits, medical and hospitalisation charges, expenses incurred on staff training/recruitment and staff welfare activities, etc.

Accounting policy

Depreciation

Depreciation is calculated to write-off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives and is recognised in the Income Statement. Freehold land is not depreciated. Right-of-use assets are depreciated over the useful lives of the assets. However, if there is no reasonable certainty that the Group will obtain the ownership by the end of the lease term, the assets are depreciated over the shorter of the estimated useful lives and the lease terms. The estimated useful lives of the property, plant and equipment of the Bank as at December 31, 2020 are as follows:

Class of asset	Depreciation percentage per annum	Period (years)
Freehold and leasehold buildings	2.5	40
Motor vehicles	20	5
Computer equipment	20	5
Office equipment, furniture, and fixtures
Office equipment	20	5
Office interior work	20	5
Furniture and fittings	10	10

The above rates are compatible with the rates used by all Group entities, and these rates have not been changed during the year.

The depreciation rates are determined separately for each significant part of an item of property, plant and equipment and depreciation commences 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 the Management.Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is derecognised.

All classes of property, plant and equipment together with the reconciliation of carrying amounts and accumulated depreciation at the beginning and at the end of the year together with other relevant information are given in Note 39 on pages 214 to 225.

Depreciation methods, useful lives, and residual values are reassessed at each reporting date and adjusted, if required.

Amortisation of intangible assets

Intangible assets are amortised using the straight-line method to write down the cost over its estimated useful economic lives from the date on which it is available for use, at the rates specified below:

Class of asset	Amortisation percentage per annum	Period (years)
Computer software	20	5
Trademarks	20	5

The above rates are compatible with the rates used by all Group entities, and these rates have not been changed during the year.

The unamortised balances of intangible assets with finite lives are reviewed for impairment whenever there is an indication for impairment and recognised in the Income Statement to the extent that they are no longer probable of being recovered from the expected future benefits.

Amortisation method, useful lives, and residual values are reviewed at each reporting date and adjusted, if required.

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Depreciation of property, plant and equipment	39.1 & 39.3	1,592,636	1,541,788	1,459,513	1,415,096
Depreciation of right-of-use assets	39.1 & 39.3	1,199,104	1,047,075	1,271,927	1,126,185
Amortisation of computer software	41.1	310,946	252,392	257,591	213,240
Amortisation of trademarks		9	9	–	–
Total		3,102,695	2,841,264	2,989,031	2,754,521

Accounting policy

These expenses are recognised in the Income Statement on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenses incurred in running the business and in maintaining the property, plant and equipment in a state of efficiency are charged to the Income Statement.

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Directors’ emoluments	21.1	81,117	80,247	53,249	52,448
Auditors’ remuneration		34,298	32,574	23,530	22,530
Audit fees and expenses		20,140	21,188	11,500	11,500
Audit-related fees and expenses		7,725	7,655	7,600	7,600
Non-audit fees and expenses		6,433	3,731	4,430	3,430
Professional and legal expenses		834,415	1,073,590	1,197,049	1,403,364
Deposit insurance premium paid to the Central Banks		977,846	839,685	975,824	839,313
Donations including contribution made to the CSR Trust Fund		96,925	94,010	96,855	93,991
Establishment expenses		1,644,397	1,878,292	1,482,800	1,748,143
Maintenance of property, plant, and equipment		1,797,222	1,649,310	1,814,939	1,638,747
Loss on fair valuation of investment properties	40	12,096	–	–	–
Loss on revaluation of land & buildings	39.1	39,872	–	39,872	–
Office administration expenses		2,648,982	3,227,608	2,202,818	2,789,920
Total		8,167,170	8,875,316	7,886,936	8,588,456

21.1 Directors’ emoluments

Directors’ emoluments represent the salaries paid to both Executive and Non-Executive Directors of the Group and the Bank.

Accounting policy

Refer Notes 9.5 to 9.7 on page 176.

		GROUP		BANK
For the year ended December 31,		2020	2019	2020	2019
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Value Added Tax	9.5	4,531,381	4,233,302	4,505,322	4,191,758
Nation Building Tax (Abolished w.e.f. December 1, 2019)	9.6	–	553,802	–	548,708
Debt Repayment Levy (Abolished w.e.f. January 1, 2020)	9.7	–	2,468,624	–	2,451,271
Total		4,531,381	7,255,728	4,505,322	7,191,737

Accounting policy

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the Income Statement, except to the extent it relates to items recognised directly in Equity or in OCI.

Current tax

“Current tax” comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax receivable or payable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted, as at the reporting date. Current tax also includes any tax arising from dividends.

Accordingly, provision for taxation is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the provisions of the Inland Revenue Act No. 24 of 2017, effective from April 1, 2018. This also includes the major components of tax expense, the effective tax rates and a reconciliation between the profit before tax and tax expense, as required by the Sri Lanka Accounting Standard – LKAS 12 on “Income Taxes”.

Provision for taxation on the overseas operations is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the provisions of the relevant statutes in those countries, using the tax rates enacted or substantively enacted as at the reporting date. Additional taxes that arise from the distribution of dividends by the Group, are recognised at the same time as the liability to pay the related dividend is recognised. These amounts are generally recognised in profit or loss as they generally relate to income arising from transactions that were originally recognised in profit or loss.

Deferred tax

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:

• temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
• temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and
• taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available, against which they can be used.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted as at the reporting date.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects as at the reporting date to recover or settle the carrying amount of its assets and liabilities.

Entity-wise breakup of income tax expense in the Income Statement is as follows:

			GROUP		BANK
For the year ended December 31,	Note	Applicable Income Tax Rate %	2020 Rs. ’000	2019 Rs. ’000	2020 Rs. ’000	2019 Rs. ’000
Current year tax expense			10,178,040	8,600,748	9,866,955	8,308,597
Income tax expense of Domestic Banking Unit		28	6,547,171	4,877,077	6,547,171	4,877,077
Income tax expense of Off-shore Banking Centre		28	899,668	882,204	899,668	882,204
Income tax expense of Bangladesh operation		40	2,144,365	2,209,134	2,144,365	2,209,134
Profit remittance tax of Bangladesh operation		20	275,751	325,672	275,751	325,672
Withholding tax on dividends received		14	–	14,930	–	14,510
Income tax expense of Commercial Development Company PLC		28	56,035	44,289	–	–
Income tax expense of CBC Tech Solutions Limited		28	38,155	32,113	–	–
Income tax expense of CBC Finance Limited		28	83,977	59,057	–	–
Income tax expense of Commercial Bank of Maldives Private Limited		25	109,076	147,259	–	–
Income tax expense of Commex Sri Lanka S.R.L. – Italy		24	–	–	–	–
Income tax expense of CBC Myanmar Micro Finance Company Limited		25	6,714	417	–	–
Income tax expense of Commercial Insurance Brokers Private Limited		28	17,128	8,596	–	–
Prior years
Under/(Over) provision of taxes in respect of prior years	48		(121,298)	(989,148)	(113,565)	(991,884)
Deferred tax reversal	42.1		(2,623,679)	(2,048,100)	(2,615,567)	(2,002,575)
Total			7,433,063	5,563,500	7,137,823	5,314,138
Effective tax rate (including deferred tax) (%)					30.36	23.79
Effective tax rate (excluding deferred tax) (%)					41.48	32.75

As per Notice dated April 08, 2020 issued by the Inland Revenue Department on “Implementation of Proposed Changes to the Inland Revenue Act No. 24 of 2017”, effective from January 01, 2020, Corporate Income Tax rate was revised from 28% to 24%.

However, the Bank did not consider the above revisions in computing the income tax liabilities, pending legal enactment and formal amendments to the Inland Revenue Act.

If the above proposal was considered, the impact to the Income Statement for the year ended December 31, 2020 would be an Income Tax reversal of Rs. 306.956 Mn. (reversal of Rs. 1,063.834 Mn. from Income Tax payable and a Deferred Tax expense of Rs. 756.878 Mn.).

Further, the impact to the Statement of Profit or Loss and Other Comprehensive Income would have been a Deferred Tax reversal of Rs. 445.812 Mn. Exemption announced as per the aforementioned Notice on interest income from Sri Lanka Development Bonds, effective from April 01, 2018 was availed by the Bank. However, other exemptions eligible to be claimed effective from January 01, 2020, were not considered in computing the income tax liability as at December 31, 2020, pending legal enactment and formal amendments to the Inland Revenue Act.

23.1 Reconciliation of the accounting profit to income tax expense

A reconciliation between taxable income and the accounting profit multiplied by the statutory tax rates is given below:

			GROUP		BANK
For the year ended December 31,	Note	Applicable Income Tax Rate %	2020 Rs. ’000	2019 Rs. ’000	2020 Rs. ’000	2019 Rs. ’000
Accounting profit before tax from operations			24,519,860	22,983,896	23,511,312	22,339,105
Tax effect at the statutory income tax rate			7,591,619	7,299,517	7,300,199	6,914,931
Domestic banking operation of the Bank		28	4,780,070	3,567,991	4,780,070	3,567,991
Off-shore banking operation of the Bank		28	209,320	1,007,313	209,320	1,007,313
Bangladesh operation of the Bank		40	2,310,809	2,339,627	2,310,809	2,339,627
Subsidiaries		24, 25 & 28	291,420	384,586	–	–
Tax effect of exempt income			(1,528,341)	(1,844,454)	(1,528,341)	(1,844,454)
Tax effect of non-deductible expenses			10,912,337	10,410,356	10,683,266	10,237,579
Tax effect of deductible expenses			(7,070,526)	(7,605,273)	(6,861,120)	(7,339,641)
Qualifying payments			(2,800)	–	(2,800)	–
Profit remittance tax of Bangladesh operation			275,751	325,672	275,751	325,672
Under/(over) provision of taxes in respect of prior years	48		(121,298)	(989,148)	(113,565)	(991,884)
Withholding tax on dividends received			–	14,930	–	14,510
Deferred tax reversal	42.1		(2,623,679)	(2,048,100)	(2,615,567)	(2,002,575)
Income tax expense reported in the Income Statement at the effective income tax rate			7,433,063	5,563,500	7,137,823	5,314,138

Accounting policy

The Group computes basic and diluted EPS for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding, adjusted for the effects of all potentially dilutive ordinary shares, which comprise share options granted to employees under Employee Share Option Plans (ESOP).

Details of Basic and Diluted EPS are given below:

24.2 Weighted average number of ordinary shares for basic and diluted earnings per share

		Outstanding number of shares		Weighted average number of shares
	Note	2020	2019	2020	2019
Number of shares in issue as at January 1,		1,027,506,586	1,010,722,577	1,027,506,586	1,010,722,577
Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2018	52.1	–	16,490,624	–	16,490,624
Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2019	52.1	24,201,866	–	24,201,866	24,201,866
Add: Number of shares issued to IFC parties (Private placement)	52.1	115,197,186	–	27,068,191	–
		1,166,905,638	1,027,213,201	1,078,776,643	1,051,415,067
Add: Number of shares issued under ESOP-2008	52.1	–	293,385	–	266,687
Add: Number of shares issued under ESOP-2015		–	–	–	–
Add: Number of shares issued under ESOP-2019		–	–	–	–
Weighted average number of ordinary shares for basic earnings per ordinary share calculation		1,166,905,638	1,027,506,586	1,078,776,643	1,051,681,754
Add: Bonus element on number of outstanding options under ESOP 2008 as at the year end		–	–	–	–
Add: Bonus element on number of outstanding options under ESOP 2015 as at the year end		–	–	–	–
Add: Bonus element on number of outstanding options under ESOP 2019 as at the year end		–	–	–	–
Weighted average number of ordinary shares for diluted earnings per ordinary share calculation (*)		1,166,905,638	1,027,506,586	1,078,776,643	1,051,681,754

(*) The weighted average number of ordinary shares for Basic EPS and for diluted EPS are equal, due to the market price of the ordinary voting share being below the offer price of the ESOPs as at December 31, 2020.

Accounting policy

Refer Note 7.7 on page 172.

	GROUP & BANK
	2020 Second interim Rs. 3.00 per share for 2019 (paid on February 24, 2020)	2019 Second interim Rs. 3.00 per share for 2018 (paid on February 15, 2019)	2020	2019 First interim Rs. 1.50 per share for 2019 (paid on November 18, 2019)
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Net dividend paid to the ordinary shareholders out of normal profits	3,082,520	2,638,304	–	1,334,442
Withholding tax deducted at source	–	394,565	–	206,818
Gross ordinary dividend paid	3,082,520	3,032,869	–	1,541,260

Dividends for 2019 (Paid in 2020)

The Board of Directors of the Bank declared a second interim dividend of Rs. 3.00 per share on January 31, 2020, for both voting and non-voting ordinary shareholders of the Bank for the year ended December 31, 2019, and this dividend was paid on February 24, 2020.

Further, the Board of Directors of the Bank recommended and paid a final dividend of Rs. 2.00 per share which was satisfied in the form of issue and allotment of new shares for both voting and non-voting ordinary shares of the Bank for the year ended December 31, 2019, and these new shares were listed on July 06, 2020.

Dividends for 2020

It is pertinent to mention that although the Bank has been declaring and paying interim dividends in the form of cash dividends in the past, the Bank did not declare cash dividends during 2020 (for the year ended December 31, 2020), in conformity with the restrictions imposed by the Central Bank of Sri Lanka on payment of interim cash dividends for the financial year 2020, as per instructions issued via the Banking Act Direction No 03 of 2020, dated May 13, 2020, on “Restrictions on Discretionary Payments of Licensed Banks”.

The tables below provide a reconciliation between line items in the Statement of Financial Position and categories of financial assets and financial liabilities of the Group and the Bank:

26.1 Classification of financial assets and financial liabilities – Group

		As at December 31, 2020				As at December 31, 2019
		Financial instruments recognised through profit or loss (FVTPL)	Financial instruments at amortised cost (AC)	Financial instruments at fair value through other comprehensive income (FVOCI)	Total	Financial instruments recognised through profit or loss (FVTPL)	Financial instruments at amortised cost (AC)	Financial instruments at fair value through other comprehensive income (FVOCI)	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	28	–	51,255,030	–	51,255,030	–	53,681,118	–	53,681,118
Balances with Central Banks	29	–	115,358,732	–	115,358,732	–	46,101,232	–	46,101,232
Placements with banks	30	–	16,421,867	–	16,421,867	–	24,903,809	–	24,903,809
Securities purchased under resale agreements		–	–	–	–	–	13,147,534	–	13,147,534
Derivative financial assets	31	2,636,717	–	–	2,636,717	1,830,927	–	–	1,830,927
Financial assets recognised through profit or loss – Measured at fair value	32	35,189,471	–	–	35,189,471	21,468,033	–	–	21,468,033
Financial assets at amortised cost – Loans and advances to banks	33	–	779,705	–	779,705	–	757,787	–	757,787
Financial assets at amortised cost – Loans and advances to other customers	34	–	909,829,172	–	909,829,172	–	893,919,311	–	893,919,311
Financial assets at amortised cost – Debt and other financial instruments	35	–	302,059,529	–	302,059,529	–	107,059,021	–	107,059,021
Financial assets measured at fair value through other comprehensive income	36	–	–	278,716,794	278,716,794	–	–	197,825,017	197,825,017
Total financial assets		37,826,188	1,395,704,035	278,716,794	1,712,247,017	23,298,960	1,139,569,812	197,825,017	1,360,693,789
Financial liabilities
Due to banks	44	–	88,248,056	–	88,248,056	–	53,807,425	–	53,807,425
Derivative financial liabilities	45	1,501,262	–	–	1,501,262	1,495,317	–	–	1,495,317
Securities sold under repurchase agreements		–	91,411,522	–	91,411,522	–	51,117,342	–	51,117,342
Financial liabilities at amortised cost – Due to depositors	46	–	1,286,616,399	–	1,286,616,399	–	1,068,982,587	–	1,068,982,587
Financial liabilities at amortised cost – Other borrowings	47	–	54,555,933	–	54,555,933	–	23,248,893	–	23,248,893
Subordinated liabilities	51	–	38,247,138	–	38,247,138	–	37,886,789	–	37,886,789
Total financial liabilities		1,501,262	1,559,079,048	–	1,560,580,310	1,495,317	1,235,043,036	–	1,236,538,353

26.2 Classification of financial assets and financial liabilities – Bank

		As at December 31, 2020				As at December 31, 2019
		Financial instruments recognised through profit or loss (FVTPL)	Financial instruments at amortised cost (AC)	Financial instruments at fair value through other comprehensive income (FVOCI)	Total	Financial instruments recognised through profit or loss (FVTPL)	Financial instruments at amortised cost (AC)	Financial instruments at fair value through other comprehensive income (FVOCI)	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	28	–	50,250,627	–	50,250,627	–	52,534,730	–	52,534,730
Balances with Central Banks	29	–	110,971,105	–	110,971,105	–	39,461,127	–	39,461,127
Placements with banks	30	–	15,938,982	–	15,938,982	–	24,527,241	–	24,527,241
Securities purchased under resale agreements		–	–	–	–	–	13,147,534	–	13,147,534
Derivative financial assets	31	2,636,717	–	–	2,636,717	1,830,927	–	–	1,830,927
Financial assets recognised through profit or loss – Measured at fair value	32	35,189,471	–	–	35,189,471	21,468,033	–	–	21,468,033
Financial assets at amortised cost – Loans and advances to banks	33	–	779,705	–	779,705	–	757,787	–	757,787
Financial assets at amortised cost – Loans and advances to other customers	34	–	896,845,453	–	896,845,453	–	884,645,744	–	884,645,744
Financial assets at amortised cost – Debt and other financial instruments	35	–	292,727,566	–	292,727,566	–	101,144,819	–	101,144,819
Financial assets measured at fair value through other comprehensive income	36	–	–	278,461,369	278,461,369	–	–	197,568,330	197,568,330
Total financial assets		37,826,188	1,367,513,438	278,461,369	1,683,800,995	23,298,960	1,116,218,982	197,568,330	1,337,086,272
Financial liabilities
Due to banks	44	–	87,451,306	–	87,451,306	–	51,505,694	–	51,505,694
Derivative financial liabilities	45	1,501,262	–	–	1,501,262	1,495,317	–	–	1,495,317
Securities sold under repurchase agreements		–	91,437,612	–	91,437,612	–	51,220,023	–	51,220,023
Financial liabilities at amortised cost – Due to depositors	46	–	1,265,965,918	–	1,265,965,918	–	1,053,307,660	–	1,053,307,660
Financial liabilities at amortised cost – Other borrowings	47	–	54,555,933	–	54,555,933	–	23,248,893	–	23,248,893
Subordinated liabilities	51	–	38,247,138	–	38,247,138	–	37,886,789	–	37,886,789
Total financial liabilities		1,501,262	1,537,657,907	–	1,539,159,169	1,495,317	1,217,169,059	–	1,218,664,376

Accounting policy

The Group measures the fair value using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurement. An analysis of fair value measurement of financial and non-financial assets and liabilities is provided below:

Level 1

Inputs that are quoted market prices (unadjusted) in an active market for identical instruments.

When available, the Group measures the fair value of an instrument using active quoted prices or dealer price quotations (assets and long positions are measured at a bid price; liabilities and short positions are measured at an ask price), without any deduction for transaction costs. A market is regarded as active if transactions for asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

Inputs other than quoted prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using;

• (a) quoted prices in active markets for similar instruments,
• (b) quoted prices for identical or similar instruments in markets that are considered to be less active, or
• (c) other valuation techniques in which almost all significant inputs are directly or indirectly observable from market data.

Level 3

Inputs that are unobservable.

This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation.

This category includes instruments that are valued based on quoted prices of similar instruments for which significant unobservable adjustments or assumptions are required to reflect difference between the instruments.

Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, risk premiums in estimating discount rates, bond and equity prices, foreign exchange rates, expected price volatilities and corrections.

Observable prices or model inputs such as market interest rates are usually available in the market for listed equity securities and Government Securities such as Treasury Bills and Treasury Bonds. Availability of observable prices and model inputs reduces the need for Management judgement and estimation while reducing uncertainty associated in determining the fair values.

Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded (“Day 1” profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument.

27.1 Assets and liabilities measured at fair value and fair value hierarchy

The following table provides an analysis of assets and liabilities measured at fair value as at the reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. These amounts were based on the values recognised in the Statement of Financial Position:

		GROUP				BANK
As at December 31, 2020		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Non-financial assets
Property, plant and equipment
Land and buildings	39	–	–	15,417,319	15,417,319	–	–	14,616,368	14,616,368
Investment properties	40	–	–	67,116	67,116	–	–	–	–
Total non-financial assets at fair value		–	–	15,484,435	15,484,435	–	–	14,616,368	14,616,368
Financial assets
Derivative financial assets	31
Currency swaps		–	1,880,510	–	1,880,510	–	1,880,510	–	1,880,510
Forward contracts		–	741,521	–	741,521	–	741,521	–	741,521
Spot contracts		–	9,872	–	9,872	–	9,872	–	9,872
Currency options		–	4,814	–	4,814	–	4,814	–	4,814
Financial assets recognised through profit or loss – measured at fair value	32
Government Securities		33,867,593	–	–	33,867,593	33,867,593	–	–	33,867,593
Equity shares		1,321,878	–	–	1,321,878	1,321,878	–	–	1,321,878
Financial assets measured at fair value through other comprehensive income	36
Government Securities		223,589,375	56,511,184	–	280,100,559	223,334,074	56,511,184	–	279,845,258
Equity securities		239,773	–	52,296	292,069	239,773	–	52,172	291,945
Total financial assets at fair value		259,018,619	59,147,901	52,296	318,218,816	258,763,318	59,147,901	52,172	317,963,391
Total assets at fair value		259,018,619	59,147,901	15,536,731	333,703,251	258,763,318	59,147,901	14,668,540	332,579,759
Financial liabilities
Derivative financial liabilities	45
Currency swaps		–	1,132,513	–	1,132,513	–	1,132,513	–	1,132,513
Interest rate swaps		–	142,376	–	142,376	–	142,376	–	142,376
Forward contracts		–	216,709	–	216,709	–	216,709	–	216,709
Spot contracts		–	5,016	–	5,016	–	5,016	–	5,016
Currency options		–	4,648	–	4,648	–	4,648	–	4,648
Total liabilities at fair value		–	1,501,262	–	1,501,262	–	1,501,262	–	1,501,262

		GROUP				BANK
As at December 31, 2019		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Non-financial assets
Property, plant and equipment
Land and buildings	39	–	–	11,810,606	11,810,606	–	–	11,078,500	11,078,500
Investment properties	40	–	–	46,350	46,350	–	–	–	–
Total non-financial assets at fair value		–	–	11,856,956	11,856,956	–	–	11,078,500	11,078,500
Financial assets
Derivative financial assets	31
Currency swaps		–	1,410,476	–	1,410,476	–	1,410,476	–	1,410,476
Forward contracts		–	411,958	–	411,958	–	411,958	–	411,958
Spot contracts		–	8,493	–	8,493	–	8,493	–	8,493
Financial assets recognised through profit or loss – measured at fair value	32
Government Securities		20,484,895	–	–	20,484,895	20,484,895	–	–	20,484,895
Equity shares		983,138	–	–	983,138	983,138	–	–	983,138
Financial assets measured at fair value through other comprehensive income	36
Government Securities		141,456,023	57,009,964	–	198,465,987	141,199,460	57,009,964	–	198,209,424
Equity securities		169,013	–	51,710	220,723	169,013	–	51,586	220,599
Total financial assets at fair value		163,093,069	58,840,891	51,710	221,985,670	162,836,506	58,840,891	51,586	221,728,983
Total assets at fair value		163,093,069	58,840,891	11,908,666	233,842,626	162,836,506	58,840,891	11,130,086	232,807,483
Financial liabilities
Derivative financial liabilities	45
Currency swaps		–	1,140,261	–	1,140,261	–	1,140,261	–	1,140,261
Interest rate swaps		–	53,295	–	53,295	–	53,295	–	53,295
Forward contracts		–	295,838	–	295,838	–	295,838	–	295,838
Spot contracts		–	5,923	–	5,923	–	5,923	–	5,923
Total liabilities at fair value		–	1,495,317	–	1,495,317	–	1,495,317	–	1,495,317

27.2 Level 3 fair value measurement

Property, plant and equipment (PPE)

Reconciliation from the beginning balance to the ending balance for the land and buildings in the Level 3 of the fair value hierarchy is given in Notes 39.1 to 39.4 on pages 215 to 218.

Reconciliation of Revaluation Reserve pertaining to land and buildings categorised as Level 3 in the fair value hierarchy is given in the Statement of Changes in Equity on pages 146 to 153.

Note 39.5 (b) on page 219 provides information on significant unobservable inputs used as at December 31, 2020 in measuring fair value of land and buildings categorised as Level 3 in the fair value hierarchy.

Note 39.5 (c) on page 224 provides details of valuation techniques used and sensitivity of fair value measurement to changes in significant unobservable inputs.

Investment properties

Reconciliation from the beginning balance to the ending balance for the investment properties in the Level 3 of the fair value hierarchy is available in Note 40 on page 225.

Note 40.1 (b) on page 226 provides information on significant unobservable inputs used as at December 31, 2020 in measuring fair value of investment properties categorised as level 3 in the fair value hierarchy.

Note 40.1 (c) on page 226 provides details of valuation techniques used and the sensitivity of fair value measurement to changes in significant unobservable inputs.

27.3 Financial instruments not measured at fair value and fair value hierarchy

Methodologies and assumptions used to determine fair value of financial instruments which are not already recorded at fair value in the Statement of Financial Position are as follows:

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost (e.g. fixed rate loans and advances, due to depositors, subordinated liabilities) are estimated based on the Discounted Cash Flow approach. This approach employs the current market interest rates of similar financial instruments as a significant unobservable input in measuring the fair value and hence it is categorised under Level 3 in the fair value hierarchy.

Sensitivity of significant unobservable inputs used to measure fair value of fixed rate financial instruments

A significant increase/(decrease) in the market interest rate would result in
lower/(higher) fair value being disclosed.

Assets for which fair value approximates carrying value

For financial assets and liabilities with short-term maturities or with short-term re-pricing intervals, it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings deposits which do not have a specific maturity.

The following table sets out the fair values of financial assets and liabilities not measured at fair value and related fair value hierarchy used:

		GROUP					BANK
As at December 31, 2020		Level 1	Level 2	Level 3	Total fair values	Total carrying amount	Level 1	Level 2	Level 3	Total fair values	Total carrying amount
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	28	–	51,255,030	–	51,255,030	51,255,030	–	50,250,627	–	50,250,627	50,250,627
Balances with Central Banks	29	–	115,358,732	–	115,358,732	115,358,732	–	110,971,105	–	110,971,105	110,971,105
Placements with banks	30	–	16,421,867	–	16,421,867	16,421,867	–	15,938,982	–	15,938,982	15,938,982
Securities purchased under resale agreements		–	–	–	–	–	–	–	–	–	–
Financial assets at amortised cost – Loans and advances to banks	33	–	779,705	–	779,705	779,705	–	779,705	–	779,705	779,705
Financial assets at amortised cost – Loans and advances to other customers	34	–	–	913,411,806	913,411,806	909,829,172	–	–	900,428,087	900,428,087	896,845,453
Financial assets at amortised cost – Debt and other financial instruments	35	258,101,089	10,530,450	–	268,631,539	302,059,529	248,769,126	10,530,450	–	259,299,576	292,727,566
Total financial assets		258,101,089	194,345,784	913,411,806	1,365,858,679	1,395,704,035	248,769,126	188,470,869	900,428,087	1,337,668,082	1,367,513,438
Financial liabilities
Due to banks	44	–	–	88,248,056	88,248,056	88,248,056	–	–	87,451,306	87,451,306	87,451,306
Securities sold under repurchase agreements		–	91,411,522	–	91,411,522	91,411,522	–	91,437,612	–	91,437,612	91,437,612
Financial liabilities at amortised cost – Due to depositors	46	–	–	1,290,852,077	1,290,852,077	1,286,616,399	–	–	1,270,201,596	1,270,201,596	1,265,965,918
Financial liabilities at amortised cost – Other borrowings	47	–	–	54,555,933	54,555,933	54,555,933	–	–	54,555,933	54,555,933	54,555,933
Subordinated liabilities	51	–	–	39,803,997	39,803,997	38,247,138	–	–	39,803,997	39,803,997	38,247,138
Total financial liabilities		–	91,411,522	1,473,460,063	1,564,871,585	1,559,079,048	–	91,437,612	1,452,012,832	1,543,450,444	1,537,657,907

		GROUP					BANK
As at December 31, 2019		Level 1	Level 2	Level 3	Total fair values	Total carrying amount	Level 1	Level 2	Level 3	Total fair values	Total carrying amount
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial assets
Cash and cash equivalents	28	–	53,681,118	–	53,681,118	53,681,118	–	52,534,730	–	52,534,730	52,534,730
Balances with Central Banks	29	–	46,101,232	–	46,101,232	46,101,232	–	39,461,127	–	39,461,127	39,461,127
Placements with banks	30	–	24,903,809	–	24,903,809	24,903,809	–	24,527,241	–	24,527,241	24,527,241
Securities purchased under resale agreements		–	13,147,534	–	13,147,534	13,147,534	–	13,147,534	–	13,147,534	13,147,534
Financial assets at amortised cost – Loans and advances to banks	33	–	757,787	–	757,787	757,787	–	757,787	–	757,787	757,787
Financial assets at amortised cost – Loans and advances to other customers	34	–	–	896,280,708	896,280,708	893,919,311	–	–	887,007,141	887,007,141	884,645,744
Financial assets at amortised cost – Debt and other financial instruments	35	105,056,577	–	–	105,056,577	107,059,021	99,142,375	–	–	99,142,375	101,144,819
Total financial assets		105,056,577	138,591,480	896,280,708	1,139,928,765	1,139,569,812	99,142,375	130,428,419	887,007,141	1,116,577,935	1,116,218,982
Financial liabilities
Due to banks	44	–	–	53,807,425	53,807,425	53,807,425	–	–	51,505,694	51,505,694	51,505,694
Securities sold under repurchase agreements		–	51,117,342	–	51,117,342	51,117,342	–	51,220,023	–	51,220,023	51,220,023
Financial liabilities at amortised cost – Due to depositors	46	–	–	1,067,138,675	1,067,138,675	1,068,982,587	–	–	1,051,463,748	1,051,463,748	1,053,307,660
Financial liabilities at amortised cost – Other borrowings	47	–	–	23,248,893	23,248,893	23,248,893	–	–	23,248,893	23,248,893	23,248,893
Subordinated liabilities	51	–	–	39,479,119	39,479,119	37,886,789	–	–	39,479,119	39,479,119	37,886,789
Total financial liabilities		–	51,117,342	1,183,674,112	1,234,791,454	1,235,043,036	–	51,220,023	1,165,697,454	1,216,917,477	1,217,169,059

27.4 Valuation techniques and inputs in measuring fair values

The table below provides information on the valuation techniques and inputs used in measuring the fair values of derivative financial assets and liabilities in the Level 2 of the fair value hierarchy, as given in Note 27.1 on page 193.

Type of financial instruments	Fair value as at December 31, 2020 (Rs. ’000)	Valuation technique	Significant valuation inputs
Derivative financial assets	2,636,717	Adjusted forward rate approach This approach considers the present value of projected forward exchange rate as at the reporting date as the fair value. The said forward rate is projected, based on the spot exchange rate and the forward premium/discount calculated using extrapolated interest rates of the currency pairs under consideration. In computing the present value, interest rate differential between two currencies under consideration is used as the discount rate.	Spot exchange rate
Derivative financial liabilities	1,501,262		Interest rate differentials between currencies under consideration

Accounting policy

Cash and cash equivalents include cash in hand, demand placements with banks and loans at call/short notice and highly liquid financial assets with original maturities within three months or less from the date of acquisition. These are subject to an insignificant risk of changes in fair value and are used by the Group in the management of its short-term commitments. These items are brought to Financial Statements at face values or the gross values, where appropriate. There were no cash and cash equivalents held by the Group companies that were not available for use by the Group. Cash and cash equivalents are carried at amortised cost in the Statement of Financial Position.

		GROUP		BANK
As at December 31,		2020	2019	2020	2019
	Note	Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Cash in hand		26,681,454	26,592,518	26,152,779	26,094,112
Coins and notes held in local currency		24,502,554	22,633,898	24,502,675	22,636,242
Coins and notes held in foreign currency		2,178,900	3,958,620	1,650,104	3,457,870
Balances with banks		22,759,243	9,420,183	22,283,515	8,857,498
Local banks		173,152	172,295	–	–
Foreign banks		22,586,091	9,247,888	22,283,515	8,857,498
Money at call and at short notice		1,817,574	17,674,124	1,817,574	17,588,827
Gross cash and cash equivalents (*)		51,258,271	53,686,825	50,253,868	52,540,437
Less: Provision for impairment	28.1	3,241	5,707	3,241	5,707
Net cash and cash equivalents		51,255,030	53,681,118	50,250,627	52,534,730

(*) Gross cash and cash equivalents are reported in the Statement of Cash Flows.

Accounting policy

Balances with Central Banks consist of Statutory/Non-statutory balances with central banks and are carried at amortised cost in the Statement of Financial Position.

	GROUP		BANK
As at December 31,	2020	2019	2020	2019
	Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Statutory balances with Central Banks
Balances with Central Bank of Sri Lanka	11,241,860	31,213,972	11,241,860	31,213,972
Balances with Bangladesh Bank	5,323,929	8,247,155	5,323,929	8,247,155
Balances with Maldives Monetary Authority	1,275,457	1,481,327	–	–
Non-statutory balances with Central Banks
Balances with Central Bank of Sri Lanka	94,405,316	–	94,405,316	–
Balances with Bangladesh Bank	–	–	–	–
Balances with Maldives Monetary Authority	3,112,170	5,158,778	–	–
Total	115,358,732	46,101,232	110,971,105	39,461,127

The maturity analysis of balances with Central Banks is given in Note 61 on pages 251 to 253.

Balances with Central Bank of Sri Lanka

The Monetary Law Act requires that all commercial banks operating in Sri Lanka to maintain a statutory reserve on all deposit liabilities denominated in Sri Lankan Rupees. As required by the provisions of Section 93 of the Monetary Law Act, a cash balance is maintained with the Central Bank of Sri Lanka. As at December 31, 2020, the minimum cash reserve requirement was 2.00% of the rupee deposit liabilities and this rate was applicable from June 16, 2020. The minimum cash reserve requirement during the period from March 16, 2020 to June 15, 2020 was 4.00%.(5.00% in 2019 and this rate was applicable upto March 15, 2020). There is no reserve requirement for foreign currency deposits liabilities of the Domestic Banking Unit (DBU) and the deposit liabilities of the Offshore Banking Centre (OBC) in Sri Lanka.

Balances with Bangladesh Bank

The Bank’s Bangladesh operation is required to maintain the statutory liquidity requirement on time and demand liabilities (both local and foreign currencies), partly in the form of a Cash Reserve Requirement and the balance by way of foreign currency and/or in the form of unencumbered securities held with the Bangladesh Bank. As per the Bangladesh Bank regulations, the Statutory Liquidity Requirement as at December 31, 2020 was 17.00% (18.50% in 2019) on time and demand liabilities (both local and foreign currencies), which includes a 4.00% (5.50% in 2019) cash reserve requirement and the balance 13.00% (13.00% in 2019) is permitted to be maintained in foreign currency and/or also in unencumbered securities held with the Bangladesh Bank.

Balances with Maldives Monetary Authority

The Maldives Banking Act No. 24 of 2010 Section 25 requires the Bank to maintain a statutory reserve on all deposits liabilities denominated in both foreign currency and local currency deposits excluding interbank deposits of other banks in Maldives and Letter of Credit margin deposits. According to the Bank regulations of Maldives Monetary Authority, the Minimum Reserve Requirement (MRR) as at December 31, 2020 was 5.00% for Rufiyaa deposits while it was 7.50% for US Dollar deposits. (10.00% in 2019). The reserve requirement for local currency is to be met in the form of Rufiyaa deposits, while reserve requirement for foreign currency is to be met in the form of US dollar deposits.

		GROUP		BANK
As at December 31,	Note	2020	2019	2020	2019
		Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Placements – Within Sri Lanka		10,759,821	14,395,454	10,370,393	14,018,861
Placements – Outside Sri Lanka		5,665,092	10,516,976	5,571,592	10,516,976
Gross placements with banks		16,424,913	24,912,430	15,941,985	24,535,837
Less: Provision for impairment	30.1	3,046	8,621	3,003	8,596
Net placements with banks		16,421,867	24,903,809	15,938,982	24,527,241

30.1 Movement in provision for impairment during the year

		GROUP		BANK
		2020	2019	2020	2019
	Note	Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Movement in Stage 1 impairment
Balance as at January 1,		8,621	10,784	8,596	10,784
Charge/(write back) to the Income Statement	18.1 & 18.2	(5,633)	(2,120)	(5,651)	(2,144)
Exchange rate variance on foreign currency provisions		58	(43)	58	(44)
Balance as at December 31,		3,046	8,621	3,003	8,596

The maturity analysis of placements with banks is given in Note 61 on pages 251 to 253.

Accounting policy

The Bank uses derivatives such as interest rate swaps, foreign currency swaps forward foreign exchange contracts, currency options, etc. Derivative financial assets are recorded at fair value. Changes in the fair value of derivatives are included in “Net Gains/(Losses) from Trading” in the Income Statement.

Under SLFRS 9, embedded derivatives are not separated from a host financial asset and are classified entirely based on the business model and their contractual terms.

Derivatives embedded in non-financial host contracts are treated separately and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, a separate instrument with the same terms as embedded derivative would meet the definition of derivative and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the Income Statement.

		GROUP		BANK
As at December 31,		2020	2019	2020	2019
	Note	Rs. ‘000	Rs. ‘000	Rs. ‘000	Rs. ‘000
Derivative financial assets – Held for trading
Foreign currency derivatives		2,636,717	1,830,927	2,636,717	1,830,927
Currency swaps		1,880,510	1,410,476	1,880,510	1,410,476
Forward contracts		741,521	411,958	741,521	411,958
Spot contracts		9,872	8,493	9,872	8,493
Currency options		4,814	–	4,814	–
Total		2,636,717	1,830,927	2,636,717	1,830,927

The maturity analysis of derivative financial assets is given in Note 61 on pages 251 to 253.

Accounting policy

This includes financial assets that are held for trading purposes. The financial assets are classified as held for trading if:

• They are acquired principally for the purpose of selling or repurchasing in the near term; or
• They are held as part of portfolio that is managed together for short-term profit or position taking; or
• They form part of derivative financial instruments entered into by the Group that are not financial guaranteed contracts or designated as hedging instruments in effective hedging relationships.

Financial assets held for trading are measured at fair value through profit or loss in the SOFP. Interest and dividend income are recorded in “Interest Income” and “Net Gains/(Losses) from Trading” respectively in the Income Statement, according to the terms of the contract, or when the right to receive the payment has been established.

Financial assets held for trading include instruments such as Government and other debt securities and equity instruments that have been acquired principally for the purpose of selling or repurchasing in the near term.

Further as per SLFRS 9, financial assets recognised through profit or loss includes all financial assets other than those classified under FVOCI and amortised cost.

		GROUP		BANK
As at December 31,	Note	2020 Rs. ‘000	2019 Rs. ’000	2020 Rs. ’000	2019 Rs. ’000
Government Securities	32.1	33,867,593	20,484,895	33,867,593	20,484,895
Equity securities	32.2	1,321,878	983,138	1,321,878	983,138
Total		35,189,471	21,468,033	35,189,471	21,468,033

32.1 Government securities

	GROUP		BANK
As at December 31,	2020 Rs. 000	2019 Rs.’000	2020 Rs.’000	2019 Rs.’000
Treasury Bills	7,641,631	15,715,187	7,641,631	15,715,187
Treasury Bonds	26,225,962	4,769,708	26,225,962	4,769,708
Total	33,867,593	20,484,895	33,867,593	20,484,895

The maturity analysis of financial assets recognised through profit or loss is given in Note 61 on pages 251 to 253.

32.2 Equity securities – Group and Bank

	As at December 31, 2020				As at December 31, 2019
Sector/Name of the Company	Number of shares	Market price	Market value	Cost of the investment	Number of shares	Market price	Market value	Cost of the investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Automobiles and Components
Kelani Tyres PLC	71,000	86.50	6,142	5,836	–	–	–	–
Subtotal			6,142	5,836			–	–
Banks
DFCC Bank PLC	3,516	65.30	230	234	–	–	–	–
Hatton National Bank PLC	152,745	126.50	19,322	17,546	85	172.20	15	12
Hatton National Bank PLC (Non-voting)	48,000	100.60	4,829	5,000	–	–	–	–
National Development Bank PLC	244,110	78.10	19,065	36,021	226,595	100.00	22,660	34,381
Nations Trust Bank PLC	1,396	60.00	84	85	–	–	–	–
Sampath Bank PLC	206,437	135.60	27,993	28,331	59,973	162.40	9,740	9,756
Seylan Bank PLC	1,107	46.00	51	51	–	–	–	–
Subtotal			71,574	87,268			32,415	44,149
Capital Goods
ACL Cables PLC	100,000	76.60	7,660	3,676	100,000	57.50	5,750	3,676
Aitken Spence PLC	239,409	57.80	13,838	9,684	350,000	46.50	16,275	14,157
Colombo Dockyard PLC	75,000	85.30	6,398	16,685	75,000	62.00	4,650	16,685
Hayleys PLC	68,313	414.50	28,316	19,269	68,313	174.90	11,948	19,269
Hemas Holdings PLC	–	–	–	–	62	80.00	5	2
John Keells Holdings PLC	165,000	149.60	24,684	25,728	130,611	167.60	21,890	20,527
Lanka Walltiles PLC	–	–	–	–	60	72.50	4	5
Renuka Holdings PLC	117,158	15.00	1,757	3,180	117,158	19.30	2,261	3,180
Renuka Holdings PLC (Non-voting)	265,368	11.00	2,919	4,958	265,368	13.50	3,582	4,958
Royal Ceramics Lanka PLC	155,927	177.10	27,615	17,337	155,927	88.50	13,800	18,057
Subtotal			113,187	100,517			80,165	100,516
Consumer Durables and Apparel
Teejay Lanka PLC	40,000	38.00	1,520	1,213	–	–	–	–
Subtotal			1,520	1,213			–	–
Consumer Services
John Keells Hotels PLC	267,608	11.00	2,944	3,473	267,608	11.60	3,104	3,473
Tal Lanka Hotels PLC	212,390	16.90	3,589	6,625	212,390	14.40	3,058	6,625
Subtotal			6,533	10,098			6,162	10,098
Diversified Financials
Central Finance Company PLC	202,767	83.00	16,830	19,177	199,734	104.00	20,772	18,937
Citizen Development Business Finance PLC (Non-voting)	105,390	65.00	6,850	3,398	105,390	67.50	7,114	3,398
Lanka Ventures PLC	100,000	54.50	5,450	3,033	100,000	40.00	4,000	3,033
VISA Inc.	19,424	USD 218.73	794,490	–	19,424	USD 187.90	663,346	–
Subtotal			823,620	25,608			695,232	25,368
Energy
Lanka IOC PLC	685,975	22.40	15,366	15,013	685,984	19.00	13,034	15,013
Subtotal			15,366	15,013			13,034	15,013
Food, Beverage and Tobacco
Ceylon Grain Elevators PLC	250,000	111.00	27,750	18,156	250,000	68.50	17,125	18,156
Kotagala Plantations PLC	302,625	9.00	2,724	9,172	302,625	7.20	2,179	9,172
Lanka Milk Foods (CWE) PLC	250,000	148.90	37,225	27,866	250,000	100.10	25,025	27,866
Lion Brewery Ceylon PLC	10,000	585.00	5,850	5,560	–	–	–	–
Melstacorp PLC	245,960	52.00	12,790	9,814	245,960	43.50	10,699	9,814
Pelwatte Sugar Industries PLC	12,300	0.10	1	351	12,300	0.10	1	351
Renuka Foods (Non-voting)	1,000	13.90	14	15	1,000	12.30	12	15
Subtotal			86,354	70,934			55,041	65,374
Health Care Equipment and Services
Ceylon Hospitals PLC	121,900	103.20	12,580	12,868	121,900	78.00	9,508	12,868
Ceylon Hospitals PLC (Non-voting)	61,100	90.00	5,499	4,423	61,100	67.40	4,118	4,423
Subtotal			18,079	17,291			13,626	17,291
Insurance
People's Insurance PLC	126,500	28.20	3,567	1,898	126,500	21.70	2,745	1,898
Softlogic Life Insurance PLC	120,000	34.80	4,176	3,739	–	–	–	–
Subtotal			7,743	5,637			2,745	1,898
Materials
Chemical Industries Colombo Holding PLC (Non-voting)	161,400	151.60	24,468	11,692	161,400	47.60	7,683	11,692
Dipped Products PLC	200,000	347.30	69,460	24,239	200,000	84.00	16,800	24,239
Haycarb PLC	90,100	568.60	51,231	13,388	107,100	190.00	20,349	15,914
Subtotal			145,159	49,319			44,832	51,845
Real Estate
Overseas Reality Ceylon PLC	183,320	14.40	2,640	2,717	183,320	16.00	2,933	2,717
CT Land Development PLC	–	–	–	–	25,000	30.00	750	531
Subtotal			2,640	2,717			3,683	3,248
Retailing
RIL Property PLC	–	–	–	–	3,333,333	5.90	19,667	26,667
Subtotal			–	–			19,667	26,667
Telecommunication Services
Dialog Axiata PLC	1,399,172	12.40	17,350	11,442	949,172	12.30	11,675	6,300
Subtotal			17,350	11,442			11,675	6,300
Utilities
LVL Energy Fund PLC	648,100	10.20	6,611	6,481	648,100	7.50	4,861	6,481
Subtotal			6,611	6,481			4,861	6,481
Total			1,321,878	409,374			983,138	374,248
Mark to market gains/(losses)				912,504				608,890
Market value of equity securities				1,321,878				983,138

32.3 Industry/Sector composition of equity securities – Group and Bank

	As at December 31, 2020			As at December 31, 2019
Industry/Sector	Market value	Cost of the investment		Market value	Cost of the investment
	Rs. ’000	Rs. ’000	%	Rs. ’000	Rs. ’000	%
Automobiles and Components	6,142	5,836	0.46	–	–	–
Banks	71,574	87,268	5.41	32,415	44,149	3.30
Capital Goods	113,187	100,517	8.56	80,165	100,516	8.15
Consumer Durables and Apparel	1,520	1,213	0.11	–	–	–
Consumer Services	6,533	10,098	0.49	6,162	10,098	0.63
Diversified Financials	823,620	25,608	62.33	695,232	25,368	70.71
Energy	15,366	15,013	1.16	13,034	15,013	1.33
Food, Beverage and Tobacco	86,354	70,934	6.53	55,041	65,374	5.60
Health Care Equipment and Services	18,079	17,291	1.37	13,626	17,291	1.39
Insurance	7,743	5,637	0.59	2,745	1,898	0.28
Materials	145,159	49,319	10.98	44,832	51,845	4.56
Real Estate	2,640	2,717	0.20	3,683	3,248	0.37
Retailing	–	–	–	19,667	26,667	2.00
Telecommunication Services	17,350	11,442	1.31	11,675	6,300	1.19
Utilities	6,611	6,481	0.50	4,861	6,481	0.49
Subtotal	1,321,878	409,374	100.00	983,138	374,248	100.00
Mark to market gains/(losses)		912,504			608,890
Market value of equity securities	1,321,878	1,321,878	100.00	983,138	983,138	100.00