3.1 Basis of consolidation
The Consolidated Financial Statements of the Group for the year ended 31 March 2019 include the Company, its subsidiaries and its associate company. The Financial Statements of the Company’s subsidiaries and associate are prepared for the same reporting year except for People’s Insurance PLC, a subsidiary of People’s Leasing & Finance PLC, whose financial year ends on 31 December. For consolidation purpose same reporting year has been used.
3.1.1 Business combination and goodwill
Business combinations are accounted for using the acquisition method as per
the requirements of Sri Lanka
Accounting Standard – SLFRS 3 –
The Group and the Company measure goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquire, less the net recognised amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognised immediately in Statement of Profit or Loss.
Goodwill acquired in a business combination is initially measured
at cost, being the excess of the cost of the business combination over the Group’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities acquired.
Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units (CGUs) or group of CGUs, which are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a CGU (or group of CGUs) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained.
When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognised in the Statement of Profit or Loss.
3.1.2 Common control business combination
Common control business combinations are accounted using the guidelines issued under Statement of Recommended Practice (SoRP) – Merger Accounting for Common Control Business Combinations issued by The Institute of Chartered Accountants of Sri Lanka.
3.1.3 Loss of control
Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary any non-controlling interest and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in Statement of
Profit or Loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost.
3.1.4 Transactions eliminated on consolidation
Intra-group balances and transactions and any unrealised income and expenses 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.
3.2 Foreign currency transactions and balances
All foreign currency transactions are translated into the functional currency which is Sri Lankan Rupees (Rs.) at the spot exchange rate at the date of the transactions were effected. In this regard, the Group’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 at the reporting date are retranslated to the functional currency at the spot rate of exchange at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency 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 at the reporting date.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the spot exchange rates as at the date of recognition. Non-monetary items measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined.
3.3 Changes in accounting policies
The Group has consistently applied the accounting policies to all periods presented in these Financial Statements, except for the changes arising out of transition to SLFRS 9 – Financial Instruments and SLFRS 7 (revised) – “Financial Instruments: Disclosures” and Sri Lanka Accounting Standard SLFRS 15 – “Revenue from Contracts with Customers” as set out below:
New and amended standards and interpretations In these Financial Statements, the Group has applied SLFRS 9, SLFRS 7 and SLFRS 15, which are effective for the annual reporting periods beginning on or after 1 January 2018, for the first time. The Group has not early adopted any other standard, interpretation or amendment that has been issued but not effective.
3.3.1 SLFRS 9 – “Financial Instruments”
SLFRS 9 issued in December 2014 replaced LKAS 39 and is applicable for annual reporting periods beginning on or after 1 January 2018.
In accordance with the option given in SLFRS 9 not to restate the comparatives, the Group has not restated comparative information for 2018 for financial instruments within the scope of SLFRS 9.
Therefore, comparative information for 2017/18 is reported under LKAS 39 and is not comparable with the information presented for 2018/19. Differences arising from the adoption of SLFRS 9 have been recognised directly in equity as of
1 April 2018 and are disclosed in Note 4
on pages 238 to 242.
3.3.2 Changes to classification and measurement
To determine their classification and measurement category, SLFRS 9 requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ cash flow characteristics.
As specified in LKAS 39 for financial assets (FVTPL, HTM, L&R and AFS) have been replaced by –
- Financial assets measured at
- Financial assets measured at fair value through other comprehensive income
- Financial assets measured at fair value through profit or loss (FVTPL)
FVOCI includes equity instruments measured at fair value through other comprehensive income. Cumulative gains or losses on derecognition of equity instruments measured at FVOCI are not reclassified to profit or loss and transferred directly to retained earnings. SLFRS 9 largely retains the existing requirements in LKAS 39 for the classification of financial liabilities. However, under LKAS 39, all fair value changes of liabilities designated under the fair value option were recognised in profit or loss. Under SLFRS 9 fair value changes are generally presented as follows:
- The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in other comprehensive income (OCI); and
- The remaining amount of change in the fair value is presented in profit or loss.
The following assessments have been made on the basis of the facts and circumstances that existed at the transition date; i.e. 1 April 2018.
- The determination of the business model within which a financial asset
- The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL.
- The designation of certain investments in equity instruments not held for trading as at FVOCI.
- For financial liabilities designated at FVTPL, the determination of whether presenting the effects of changes in the financial liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss.
The Group’s classification of its financial assets and liabilities is given in Note 20 on pages 258 and 261. The quantitative impact of applying SLFRS 9 as at 1 April 2018 is disclosed in Note 4 on pages 238 to 242.
Changes to the impairment calculation the adoption of SLFRS 9 has fundamentally changed the Group’s accounting for loan loss impairments by replacing the incurred loss approach under LKAS 39 with a forwardlooking expected credit loss (ECL) approach. SLFRS 9 requires the Group to record an allowance for ECLs for all loans and other debt financial assets not held at FVTPL, together with loan commitments and financial guarantee contracts but not to equity investments. Under SLFRS 9, credit losses are recognised earlier than under LKAS 39.
The allowance is based on the ECLs associated with the Probability of Default (PD) in the next twelve months unless there has been a significant increase in credit risk since origination. Lifetime expected credit loss is provided for financial assets for which the credit risk has increased significantly from initial recognition and the credit impaired assets subsequent to initial recognition.
If the financial asset meets the definition of purchased or originated credit
impaired (POCI), the allowance is based
on the change in the ECLs over the life of the asset.
If a debt security had low credit risk at the date of initial application of SLFRS 9, then the Group has assumed that credit risk on the asset had not increased significantly since its initial recognition.
Details of the Group’s impairment
method are disclosed in Note 25.7 on
pages 284 to 288.
3.3.3 SLFRS 7 (Revised) – “Financial Instruments: Disclosures”
The Group adopted SLFRS 7 together with SLFRS 9, effective from 1 January 2018. Changes including transition disclosures as shown in Note 4 on pages 238 to 242 together with detailed qualitative and quantitative information about the ECL calculations such as the assumptions and inputs used are disclosed as per the requirements of the Standards in Note 25.7 on pages 284 to 288.
Movements during the year in the ECL allowances are presented in Note 25.9
on page 291.
3.3.4 SLFRS 15 – “Revenue from contracts with customers”
SLFRS 15 replaces revenue recognition guidance, including LKAS 18 – “Revenue”, LKAS 11 – “Construction Contracts” and IFRIC 13 – “Customer Loyalty Programmes” and is effective for annual reporting periods beginning on or after 1 April 2018.
SLFRS 15 provides a comprehensive framework for determining whether, how much, and when revenue is recognised. SLFRS 15 requires new qualitative and quantitative disclosure aimed at enabling users of Financial Statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Entities are required to apply five-step model to determine when to recognise revenue and at what amount. The model specifies that revenue is recognised when or as an entity transfers control of goods and services to a customer at the amount at which the entity expects to be entitled.
There is no significant impact on the Financial Statement of the Group and the Company resulting from the application of SLFRS 15.
3.4 Financial instruments – Initial recognition and subsequent measurement
3.4.1 Date of recognition
All financial assets and liabilities except “regular way trades” are initially recognised on the trade date, i.e., the date that the Group becomes a party to the contractual provisions of the instrument. “regular way trades” means purchases or sales of financial assets that requires delivery of assets within the time frame generally established by regulation or convention in the market place. Those trades are initially recognised on the settlement date.
3.4.2 Classification and subsequent measurement of financial assets
184.108.40.206 After 1 April 2018
From 1 April 2018 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.
Up to 31 March 2018 as per LKAS 39, the Group classified its financial assets into one of the following categories:
- Financial assets at fair value through profit or loss (FVTPL), and within this category
- Held for trading
- Designated at fair value through
profit or loss
- Loans and receivables
- Held to maturity
- Available for sale
Details of the impact on reclassification and measurement from LKAS 39 to SLFRS 9 are disclosed in transition disclosures given in Note 4 on pages 238 to 242.
Business model assessment
With effect from 1 April 2018, 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 Group’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 Group’s stated objective for managing the financial assets is achieved and how cash flows are realised.
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 Group’s original expectations, the Group 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.
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 minimise 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.
Details on different types of financial assets recognised on the SOFP.
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 22,23,25,26, and 35.
Financial assets measured at FVOCI
Financial assets at FVOCI include debt and equity instruments measured at fair value through other comprehensive income. Financial assets measured at FVOCI are given in Note 27.
Financial assets measured at FVTPL
As per SLFRS 9, all financial assets other than those classified at amortised cost or FVOCI are classified as measured at FVTPL. Financial assets at fair value through profit or loss include financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis as they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets and financial assets designated upon initial recognition at fair value through profit or loss which are discussed in Note 24 below.
Financial assets designated at fair value through profit or loss
As per SLFRS 9 – “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.
The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss as at the end of the reporting period.
220.127.116.11 Before 1 April 2018
At inception a financial asset is classified under one of the following categories:
- Financial Assets at fair value through profit or loss (FVTPL);
– Financial assets – Held for trading or
– Financial assets – Designated at fair value through profit or loss
- Financial assets – Loans and receivables (L&R);
- Financial assets – Held to maturity (HTM); or
- Financial assets – Available-for-sale (AFS).
The Group determine the classification of its financial assets at initial recognition. The classification depends on the purpose for which the investments were acquired or originated (i.e. intention) and based on the Group’s ability to hold.
The subsequent measurement of financial assets depends on their classification.
Financial assets at fair value through profit or loss (FVTPL)
Financial assets at fair value through profit or loss include financial assets Held for trading and financial assets designated upon initial recognition at fair value through profit or loss.
Financial assets – Designated at fair value through profit or loss
The Group designates financial assets at fair value through profit or loss in the following circumstances:
- The assets are managed, evaluated and reported internally at fair value;
- The designation eliminates or significantly reduces an accounting mismatch, which would otherwise have arisen; or
- The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise have been required under the contract.
Financial assets designated at fair value through profit or loss is recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in “net trading income”. Interest earned is accrued in ‘interest income’ using EIR while dividend income is recorded in “other operating income” when the right to receive the payment has been established.
Financial assets –
Loans and receivables (L&R)
Details of “financial assets – loans and receivables” are given in Note 25 on pages 273 to 292.
Financial assets –
Held to maturity (HTM)
Details of “financial assets – held to maturity” are given in Note 28 on pages 296 and 297.
Financial assets –
Available for sale (afs)
Details of “financial assets – available for sale” are given in Note 27 on pages 294 to 296.
3.4.3 Classification and subsequent measurement of financial liabilities
At the inception the Group and Company determines the classification of its financial liabilities. Accordingly financial liabilities are classified as:
- Financial liabilities at fair value through profit or loss (FVTPL);
- Financial liabilities held for trading; or
- Financial liabilities designated at fair value through profit or loss.
- Financial liabilities at amortised cost.
The subsequent measurement of financial liabilities depends on their classification.
18.104.22.168 Financial liabilities at fair value through profit or loss
Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Subsequent to initial recognition, financial liabilities at FVTPL are measured at fair value, and changes therein recognised in Statement of Profit or Loss.
Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term profit or position taking. This category includes derivative financial instruments entered into by the Company and the Group that are not designated as hedging instruments in hedge relationships as defined by the Sri Lanka
Accounting Standard – LKAS 39 – “Financial Instruments: Recognition and Measurement”. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognised in the Statement
of Profit or Loss.
22.214.171.124 Financial liabilities at amortised cost
Financial instruments issued by the Group that are not designated at fair value through profit or loss, are classified as liabilities under ‘due to banks’, ‘due to customers’, “debt securities issued” and ‘other financial 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 at amortised cost using the EIR method.
After initial recognition, such financial liabilities are substantially measured at amortised cost using the EIR method. Amortised cost is calculated by taking
into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the Statement of Profit or Loss. Gains and losses are recognised in the Statement of Profit or Loss when the liabilities are derecognise as well as through the EIR amortisation process.
The details of the Group’s financial liabilities at amortised cost are shown
in Note 36 (pages 311), Note 37 (page 314), Note 38 (page 315), Note 39 (page 318) and Note 40 (page 318) to the Financial Statements.
3.4.4 Reclassification of financial instruments
The Group does not reclassify any financial instrument into the “fair value through profit or loss” category after initial recognition. Also the Group does not reclassify any financial instrument out of the “fair value through profit or loss” category if upon initial recognition it was designated as at fair value through profit or loss.
The Group reclassifies non-derivative financial assets out of the “held for trading” category and into the “available for sale”, “loans and receivables”, or “held to maturity” categories as permitted by the Sri Lanka Accounting Standard –
LKAS 39 – “Financial Instruments: Recognition and Measurement”. In certain circumstances the Group is also permitted to reclassify financial assets out of the “available for sale” category and into the “loans and receivables”, “held for trading” or “held to maturity” category.
Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortised cost.
For a financial asset reclassified out of the “available for sale” category, any previous gain or loss on that asset that has been recognised in equity is amortised to Statement of Profit or Loss over the remaining life of the investment using the effective interest rate (EIR). Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to the Statement of Profit or Loss.
The Group may reclassify a non-derivative trading asset out of the “held for trading” category and into the “loans and receivables” category if it meets the definition of loans and receivables and the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.
Reclassification is at the election of Management, and is determined on an instrument-by-instrument basis.
3.4.5 Derecognition of financial assets and financial liabilities
A financial asset (or, where applicable
a part of a financial asset or part of a group of similar financial assets) is derecognised when-
- The rights to receive cash flows from the asset which have expired;
- The Group and Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass–through” arrangement; and either:
- The Group and Company has transferred substantially all the risks and rewards of the asset; or
- The Group and Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
On derecognition of a financial asset, the difference between the carrying amount of the asset and consideration received and any cumulative gain or loss that has been recognised in Statement of Comprehensive Income is recognised in Statement of Profit or Loss.
When the Group and Company has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, and has neither transferred nor retained substantially all of 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 a basis that reflects the rights and obligations that
the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in Statement of Profit or Loss.
3.4.6 Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the Statement of Financial Position.
Income and expenses are presented on a net basis only when permitted under
LKASs/SLFRSs, or for gains and losses arising from a group of similar transactions such as in the Group’s
3.4.7 Determination of fair value
The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.
An analysis of fair values of financial instruments and further details as to
how they are measured are provided in Note 21.
3.5 Impairment of non-financial assets
The carrying amounts of the Group’s non-financial assets, other than deferred tax assets are reviewed at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing of an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the time value
of money and risks specific to the asset.
In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share price for publicly traded subsidiaries or other available fair value indicators.
For assets excluding goodwill,
an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may have decreased. If such indication exists the Group estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised, the reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation/amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in Statement of Profit or Loss.
Provisions are recognised in the Statement of Financial Position when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation in accordance with the Sri Lanka Accounting Standard –
LKAS 37 – “Provision, Contingent Liabilities and Contingent Assets”. The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation at that date. The expense relating to any provision is presented in the Statement of Profit or Loss net of any reimbursement.
3.7 Borrowing costs
As per Sri Lanka Accounting Standard – LKAS 23 – “Borrowing Costs”, the Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of 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 Statement of Profit or Loss in the period in which they occur.
3.8 Current tax
Details of the “income tax expense” are given in Note 17 to the Financial Statements.
3.9 Deferred tax
Details of the “deferred tax” are given in Note 42 to the Financial Statements.
3.10 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 1 April 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.
3.11 Tax on financial services
Details of the 'VAT, NBT and debt repayment levy on financial services are given in Note 16 to the Financial Statements.
3.12 Standards issued but not yet effective
The following Sri Lanka Accounting Standards were issued by The Institute of Chartered Accountants of Sri Lanka but not yet effective as at 31 March 2019. Accordingly these accounting standards have not been applied in the preparation of the Financial Statements for the year ended 31 March 2019.
SLFRS 16 – Leases
SLFRS 16 will replace Sri Lanka Accounting Standard (LKAS 17) – Leases, IFRIC 4 – Determining whether an arrangement contains a lease, SIC 15 – Operating Leases Incentives and SIC 27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. SLFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under LKAS 17. The standard includes two recognition exemptions for lessees – leases of low-value assets and short-term leases.
At the commencement date of a lease, a lessee will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-ofuse asset. Lessor accounting under SLFRS 16 is substantially unchanged from today’s accounting under LKAS 17.
Lessors will continue to classify all leases using the same classification principle as in LKAS 17 and distinguish between two types of leases: operating and finance leases. SLFRS 16 also requires lessees and lessors to make more extensive disclosures than under LKAS 17. SLFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted. Lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. Pending a detailed impact analysis, possible impact from SLFRS 16 is not reasonably estimable as of the reporting date.
Operating lease commitments (payables)
The Group has taken on leased a number of branches under operating leases. These leases have an average life of between five to ten years. Lease agreements include clauses to enable upward revision of the rental payments on a periodic basis to reflect market conditions. These leases have an average life of between one to five years. Future minimum rentals receivables under operating leases are as follows:
| Less than one year
| Between one to five years
| Over five years
IFRIC interpretation 23 (Uncertainty over income tax treatment)
The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under Sri Lanka Accounting Standards – LKAS 12 – Income Tax. IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted.
IFRS 17–Insurance contracts
After a very long journey, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 17 on Insurance Contracts (IFRS 17). This standard will be mandatorily. effective for annual reporting periods beginning on or after 1 January 2022. IFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure, and will give user of financial statements a whole new persepective .for the first time,insurers will be on a level footing internationally.