AdeS/TP/JJ

Independent Auditors’ Report

TO THE SHAREHOLDERS OF SANASA DEVELOPMENT BANK PLC

Report on the audit of the financial statements

Opinion

We have audited the Financial Statements of SANASA Development Bank PLC (“the Bank”), which comprise the statement of financial position as at 31 December 2020, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the Financial Statements, including a summary of significant accounting policies.

In our opinion, the accompanying Financial Statements gives a true and fair view of the financial position of the Bank as at 31 December 2020, and of its financial performance and its cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Basis for opinion

We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditors’ responsibilities for the audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the Code of Ethics issued by CA Sri Lanka (Code of Ethics) and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the Financial Statements of the current period. These matters were addressed in the context of the audit of the Financial Statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditors’ responsibilities for the audit of the Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the Financial Statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Statements.

Key audit matter	How our audit addressed the key audit matter
Impairment allowance for loans and receivables to other customers carried at amortised cost As described in Note(s) 17, impairment allowance for loans and receivables to other customers carried at amortised cost is determined in accordance with Sri Lanka Accounting Standard – SLFRS 9 Financial Instruments (SLFRS 9). This was a key audit matter due to: materiality of the reported impairment allowance which involved complex manual calculations; and the degree of assumptions, judgments and estimation uncertainty associated with the calculations.	We assessed the alignment of the Bank’s expected credit loss model computations and underlying methodology with the requirements of SLFRS 9 with consideration of COVID-19 impacts and related industry responses based on the best available information up to the date of our report. Our audit procedures included amongst others the following: We evaluated the design, implementation and operating effectiveness of controls over estimation of impairment, which included assessing the level of oversight, review and approval of provision for credit impairment policies and procedures by the Board and Management We checked the completeness and accuracy of the underlying data used in the computations by agreeing significant details to source documents and accounting records of the Bank We checked the underlying manual calculations In addition to the above, the following procedures were performed: For a sample of loans and receivables assessed on an individual basis for impairment: – Assessing the reasonableness and timeliness of internal credit quality assessments based on the borrower’s particular circumstances determined by Management; and – Evaluating the associated reasonability of the provisions made with particular focus on the impact of COVID-19 on high risk industries, strategic responsive actions taken, collateral values, and the value and timing of recoveries
Key areas of significant judgments, estimates and assumptions used by management in the assessment of the impairment allowance included the following; the probable impacts of COVID-19 and related industry responses (e.g. Government stimulus packages and debt moratorium relief measures granted by the Bank); the determination on whether or not customer contracts have been substantially modified due to such COVID–19 related stimulus and relief measures granted and related effects on the amount of interest income recognised on affected loans and receivables and forward-looking macroeconomic factors, including developing and incorporating macroeconomic scenarios, given the wide range of potential economic outcomes and probable impacts from COVID-19 that may impact future expected credit losses.	For loans and receivables assessed on a collective basis for impairment: – Assessing the reasonability of assumptions and estimates used by Management including the reasonableness of forward-looking information and scenarios – As relevant, the basis for and data used by Management to determine overlays in consideration of the probable effects of the COVID-19 pandemic – Assessing the reasonableness of the assumptions used to develop the model, test checked the data and calculations For loans and advances affected by government stimulus and debt moratorium relief measures granted – Assessing the reasonableness of judgments, calculations and data used to determine whether customer contracts have been substantially modified or not and to determine the resulting accounting implications; and – Evaluating the reasonability of the interest income recognised on such affected loans and receivables We assessed the adequacy of the related Financial Statement disclosures set out in notes 8,17 & 44
IT systems and controls relevant to financial reporting The Bank uses multiple IT systems in its operations. The COVID-19 pandemic necessitated the Bank to adapt various operating processes and procedures including modification of relevant controls to mitigate the resulting risks. IT systems and controls relevant to financial reporting was a key audit matter due to: A changed working environment of increased remote access The Bank’s financial reporting process being heavily dependent on information derived from its IT systems and Key Financial Statement disclosures involving the use of multiple system – generated reports, collation and spreadsheet – based calculations	Our audit procedures included the following, Understanding the changes made to security monitoring procedures over IT systems relevant to financial reporting, given the increase in remote access Understanding and evaluating the design and operating effectiveness of key automated, IT dependent and manual controls implemented by Management over generation of multiple system reports and collation of required information in calculating the significant information for Financial Statements disclosures Checking the source data of the reports used to generate significant disclosures for accuracy and completeness Checking the underlying calculations and the reasonableness of classifications made by Management Assessing the reasonability of Management’s general ledger reconciliation procedures which includes cross checking to system reports and source data where relevant

Other information included in the Bank’s 2020 Annual Report

Management is responsible for the other information. Other information consists of the information included in the Bank’s 2020 Annual Report, other than the Financial Statements and our auditors’ report thereon. The Bank’s 2020 Annual Report is expected
to be made available to us after the date of this auditors’ report.

Our opinion on the Financial Statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the Financial Statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

Responsibilities of management and those charged with governance for the financial statements

Management is responsible for the preparation of Financial Statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Management determines is necessary to enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the Financial Statements, Management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial Statements.

As part of an audit in accordance with SLAuSs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.
• Conclude on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the Financial Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the Financial Statements, including the disclosures, and whether the Financial Statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the Financial Statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

As required by section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Bank.

CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditors’ report is 2097.

19 March 2021
Colombo