Notes to the Financial Statements

1. Reporting Entity

DFCC Bank PLC (“Bank”) is a limited liability public company incorporated and domiciled in Sri Lanka.

The Bank was incorporated in 1955 under DFCC Bank Act, No. 35 of 1955 as a limited liability public company and the ordinary shares of the Bank were listed in the Colombo Stock Exchange.

Consequent to the enactment of the DFCC Bank (Repeal and Consequential Provisions) Act, No. 39 of 2014, the DFCC Bank Act, No. 35 of 1955 was repealed and the Bank was incorporated under the Companies Act, No. 07 of 2007 as a public limited company listed in the Colombo Stock Exchange with the name “DFCC Bank PLC” with effect from 6 January 2015.

The Registrar General of Companies on 1 October 2015 issued the Certificate of Amalgamation in terms of Section 244 (1) (a) of the Companies Act, No. 07 of 2007 that DFCC Vardhana Bank PLC (DVB) has been amalgamated with DFCC Bank PLC in accordance with the provisions of Part VIII of the Companies Act, No. 07 of 2007 with DFCC Bank PLC surviving as the amalgamated entity.

DFCC Bank PLC (DFCC) also obtained a commercial banking license from the Monetary Board of the Central Bank of Sri Lanka in terms of the Banking Act, No. 30 of 1988, as amended, and accordingly upon the amalgamation now operates as a licensed commercial bank.

The registered office of the Bank is at 73/5, Galle Road, Colombo 3.

The Bank does not have an identifiable parent of its own. The Bank is the ultimate parent of the Group companies.

The Bank’s Group comprises subsidiary companies viz, DFCC Consulting (Pvt) Limited, Lanka Industrial Estates Limited and Synapsys Limited.

A joint venture company, Acuity Partners (Pvt) Limited which is equally owned, by the Bank and Hatton National Bank PLC.

The Bank has one associate company viz, National Asset Management Limited.

Total employee population of the Bank and the Group on 31 December 2017 was 1,770and 1,869 respectively.
(31 December 2016 – 1,642 and 1,760 respectively).

A summary of principal activities of DFCC Bank PLC, its subsidiary companies, associate company and joint venture company is as follows:

DFCC Bank PLC

Range of financial services such as accepting deposits, corporate credit and retail banking, personal financial services, project financing, investment banking, foreign currency operations, trade finance and dealing in Government Securities and Treasury-related products.

Subsidiaries

DFCC Consulting (Pvt) Limited

Technical, financial and other professional consultancy services in Sri Lanka and abroad.

Lanka Industrial Estates Limited

Leasing of land and buildings to industrial enterprises.

Synapsys Limited

Information technology services and information technology enabled services.

Associate

National Asset Management Limited

Fund management.

Joint Venture

Acuity Partners (Pvt) Limited

Investment banking-related financial services.

There were no significant changes in the nature of the principal activities of the Group during the financial period under review.

2. Basis of Preparation

2.1 Statement of Compliance

The consolidated financial statements of the Group and the separate financial statements of the Bank, which comprise the statement of financial position, income statement, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes thereto, have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) issued by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and in compliance with the requirements of the Companies Act, No. 07 of 2007 and the Banking Act, No. 30 of 1988 and amendments thereto.

2.2 Approval of Financial Statements by Directors

The financial statements are authorised for issue by the Board of Directors on 19 February 2018.

2.3 Consolidated and Separate Financial Statements

DFCC Bank PLC as the parent of subsidiaries under its control is required to present only the consolidated financial statements as per Sri Lanka Accounting Standard LKAS 27 – “Consolidated and Separate Financial Statements”. In addition to the consolidated financial statements, separate financial statements are also presented as per the Companies Act, No. 07 of 2007 and Banking Act, No. 30 of 1988 and amendments thereto.

2.4 Basis of Measurement

The consolidated and separate financial statements of the Bank have been prepared on the historical cost basis except for the following material items in the statement of financial position:

  • Assets held-for-trading are measured at fair value.
  • Derivative assets and derivative liabilities held for risk management are measured at fair value.
  • Financial assets available-for-sale are measured at fair value.
  • The liability/asset for defined benefit pension obligations is recognised as the present value of the defined benefit pension obligation less the net total of the pension assets maintained in DFCC Bank Pension Fund, a trust separate from the Bank.
  • The liability for defined benefit statutory end of service gratuity obligations is as the present value of the defined benefit gratuity obligation.

The Bank has not designated any financial instrument at fair value which is an option under LKAS 39 – “Sri Lanka Accounting Standard – Financial Instruments: Recognition and Measurement”, since it does not have any embedded derivative and the Bank considers that currently, there are no significant accounting mismatches due to recognition or measurement inconsistency between financial assets and financial liabilities.

2.5 Materiality and Aggregation

Each material class of similar items is presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial.

2.6 Functional and Presentation Currency

The consolidated and separate financial statements of the Bank are presented in Sri Lanka Rupees (LKR) being the, functional and presentation currency, rounded to the nearest thousand and, unless otherwise stated.

2.7 Critical Accounting Estimates and Judgements

2.7.1 General

In the preparation of separate financial statements and consolidated financial statements, the Bank makes judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.

Management discusses with the Board Audit Committee the development, selection and disclosure of critical accounting policies and their application, and assumptions made relating to major estimation uncertainties.

The use of available information and application of judgement are inherent in the formation of estimates; actual results in the future may differ from estimates upon which financial information is prepared.

Estimates and underlying assumptions are reviewed on an ongoing basis. Changes to estimates in a subsequent financial year, if any, are adjusted prospectively.

Management believes that Bank’s critical accounting policies where judgement is necessarily applied are those which relate to impairment of loans and advances, financial leases and goodwill, the valuation of financial instruments, deferred tax assets and provisions for liabilities.

Further information about key assumptions concerning the future and other key sources of estimated uncertainty are set out in the notes to the financial statements.

2.7.2 Loan Losses

The assessment of loan loss as set out in Note 30.2 involves considerable judgement and estimation. Judgement is required firstly to determine whether there are indications that a loss may already have been incurred in individually significant loans and secondly to determine the recoverable amount.

2.7.3 Pension Liability

The estimation of this liability determined by an independent, qualified actuary, necessarily involves
long-term assumptions on future changes to salaries, future income derived from pension assets, life expectancy of covered employees, etc. Key assumptions are disclosed in Note 48.1.3.8.

The pension scheme is closed to new entrants recruited on or after 1 May 2004 and the basic pension and the survivor pension amount is frozen on the date of cessation of tenured employment. These risk mitigation strategies together with annual actuarial valuation and review of key assumptions tend to reduce the probability that the actual results will be significantly different from the estimate.

2.7.4 End of Service Gratuity Liability

The estimation of this liability, which is not externally funded, determined by an independent qualified actuary necessarily involves long-term assumptions on future changes to salaries, resignations prior to the normal retirement age and mortality of covered employees.

Key assumptions are disclosed in Note 48.1.3.8.

2.7.5 Current Tax

The estimation of current tax liability includes interpretation of tax law and judgment on the allowance for losses on loans. The estimation process by the Bank includes seeking expert advice where appropriate and the payment of the current tax liability is on self-assessment basis. In the event, an additional assessment is issued, the additional income tax and deferred tax adjustment, will be in the period in which the assessment is issued, if so warranted.

2.7.6 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 utilized 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 42.2 for details.

2.7.7 Impairment of Tangible and Intangible Assets

The assessment of impairment of tangible and intangible assets includes the estimation of the value in use of the asset computed at the present value of the best estimates of future cash flows generated by the asset adjusted for associated risks. This estimation has inherent uncertainties. Impairment losses, if any, are charged to income statement immediately.

2.8 Changes in Accounting Policies

There are no changes to the accounting policies of the Group and the Group has consistently applied the accounting policies for all periods presented in these consolidated and separate financial statements.

3.Basis of Consolidation

3.1 General

The Consolidated Financial Statements are the Financial Statements of the Group, prepared by consistent application of consolidation procedures, which include amalgamation of the Financial Statements of the parent and subsidiaries and accounting for the investments in associate company and joint venture company on the basis of reported results and net assets of the investee instead of the direct equity interest.

Thus, the Consolidated Financial Statements present financial information about the Group as a single economic entity distinguishing the equity attributable to the parent (controlling interest) and attributable to minority shareholders with non-controlling interest.

3.2 Transactions Eliminated on Consolidation

Intra-group balances and transactions, including income, expenses, and dividend are eliminated in full.

3.3 Financial Statements of Subsidiaries, Associate Company and Joint Venture Company included in the Consolidated Financial Statements

Audited financial statements are used for consolidation of companies which have a similar financial year end, as the Bank and for other a special review is performed.

Financial statements of Lanka Industrial Estates Limited included in the consolidation has financial year ending 31 March.

The financial statements of DFCC Consulting (Pvt) Limited, Acuity Partners (Pvt) Limited, Synapsys Limited and National Asset Management Limited included in the consolidation have financial years ending on 31 December.

3.4 Significant Events and Transactions during the period between Date of Financial Statements of the Subsidiaries, Associate Company and Joint Venture Company and the Date of Financial Statements of the Bank

No adjustments to the results of subsidiaries, associate company and joint venture company have been made as there were no significant events or transactions.

3.5 Financial Statements used for Computation of Goodwill or Negative Goodwill on Date of Acquisition

This is based on unaudited financial statements proximate to the date of acquisition.

3.6 Taxes on the Undistributed Earnings of Subsidiaries, Associate Company and Joint Venture Company

The distribution of the undistributed earnings of the subsidiaries, associate company and joint venture company is remote in the foreseeable future. As such, 10% withholding tax applicable on the distribution has not been treated as a tax expense in the financial statements of the Group.

4. Scope of Consolidation

All subsidiaries have been consolidated.

4.1 Subsidiary Companies

Subsidiaries’ are investees controlled by the Group. The Group “controls” an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases.

Acquisition method of accounting is used when subsidiaries are acquired by the Bank. Cost of acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange.

Acquisition-related costs are recognised as an amount of the expense in the profit or loss in the period of which they are incurred. The acquirer’s identifiable assets, liabilities and contingent liabilities are generally measured at their fair value at the date of acquisition.

Goodwill is measured as the excess of the aggregate consideration transferred, the amount of non-controlling interest and the fair value of banks previously held equity interest if any, over the net of the amount of the identifiable assets acquired and the liabilities assumed.

The amount of non-controlling interest is measured either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s identifiable net assets.

In a business combination achieved in stages, the previously held equity interest is premeasured at the acquisition date fair value with a resulting gain or loss in the income statement.

Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity.

Note 33 contains the financial information relating to subsidiaries.

4.2 Associate Company

Associate company is the enterprise over which the Bank has significant influence that is neither a subsidiary nor an interest in a joint venture. The Bank has only one associate company, National Asset Management Limited. The consolidated financial statements include the Bank’s share of the total comprehensive income of the associate company, on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.

Note 34 contain financial information relating to associate company.

4.3 Joint Venture Company

Joint venture company is an incorporated enterprise in which the Bank owns 50% of the voting shares with a contractual arrangement with the other company, who owns the balance 50% of the voting shares, in terms of which both parties have joint control over that enterprise. The results of the joint venture company are consolidated using equity method. Note 35 contains the financial information relating to joint venture company.

5. Principal Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied consistently by the Bank in presenting and preparing the financial statements. Changes in accounting policies are made, only if the Sri Lanka Accounting Standards require such changes or when a change results in providing more relevant information. New policies are formulated as appropriate to new products and services provided by the Bank or new obligations incurred by the Bank.

5.1 Revenue and Expense Recognition

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.

5.1.1 Interest Income and Expense

Details of interest income and expenses are given in
Note 10.

5.1.2 Net Fees and Commission

Details of commission income and expenses are given in Note 11.

5.1.3 Net Gain from Trading

Details of net gain/loss from trading are given in Note 12.

5.1.4 Net Gain/(Loss) from Financial Instruments at Fair Value Through
Profit or Loss

Details of net gain/(loss) from Financial Instruments at Fair Value Through Profit or Loss are given in Note 13.

5.1.5 Net Gain/(Loss) from Financial Investments

Details of net gain/(loss) from financial instruments are given in Note 14.

5.1.6 Foreign Exchange Gain/(Loss)

Items included in the financial statements of the Bank are measured in Sri Lankan Rupees denoted as LKR which is the currency of the primary economic environment in which the Bank operates (“the functional currency”) as well as the presentation currency.

Transactions in foreign currencies are recorded in the functional currency at the average exchange rate on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the average exchange rate ruling at the reporting date (viz. date of the statement of financial position) and consequently recognised in the “other operating (loss)/income” in the income statement of the Bank. The average exchange rate used is the middle rates quoted by commercial banks for purchase or sale of the relevant foreign currency.

The Bank does not have any non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency.

Foreign exchange income recognised in the income statement is presented as follows, based on the underlying classification:

  • Foreign exchange gain/(loss) which is part of a trading activity comprising profit or loss from the sale and purchase of foreign currencies for spot exchange is included as net gain from trading (Note 12).
  • Foreign exchange income or loss on derivatives held-for-risk management purposes and mandatory measured at fair value through profit or loss is recognised as net gain/loss from financial instruments at fair value through profit or loss (Note 13).

The Bank does not have any foreign operation that is a subsidiary, associate, joint venture or a branch and therefore, there is no exchange differences recognised in other comprehensive income.

5.1.7 Other Expenses

All other expenses are recognised on an accrual basis.

5.2 Other Taxes

5.2.1 Withholding Tax on Dividend Distributed by Subsidiaries, Associate Company and Join Venture Company.

Dividend distributed out of the taxable profit of the subsidiaries, associate company and joint venture company suffers a 10% deduction at source and is not available for set-off against the tax liability of the Bank. Thus the withholding tax deducted at source, is added to the tax expense of the subsidiary companies, the associate company and joint venture company in the Group’s financial statements as a consolidation adjustment.

5.2.2 Withholding Tax 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 .

5.2.3 Economic Services Charge (ESC)

As per provisions of the Economic Services Charge (ESC) Act, No. 13 of 2006 and subsequent amendments thereto, ESC is payable on aggregate turnover of the Bank at 0.5% and is deductible from income tax payable.

5.2.4 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 01st of April 2013 and is payable to the National Insurance Trust Fund. Currently the CIL is payable at 1% of the profit after tax.

5.3 Financial Assets

5.3.1 Recognition and Measurement

The financial asset is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction cost that are directly attributable to its acquisition.

Loans and advances are initially recognised on the date at which they are originated at fair value which is usually the loan amount granted and subsequent measurement is at amortised cost.

The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

All other financial assets are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.

5.3.2 Classification

At the inception, a financial asset is classified and measured at fair value and classified as follows:

  • Loans and receivables – at amortised cost.
  • Held to maturity – non-derivative financial assets with fixed or determinable payments and fixed maturity (for example, bonds, debentures and debt instruments listed in the Colombo Stock Exchange) that the Bank has the positive intent and ability to hold to maturity are measured at amortised cost.
  • Fair value through profit or loss – financial assets held-for-trade measured at fair value with changes in fair value recognised in the income statement.
    • Designated at fair value – this is an option to deal with accounting mismatches and currently the Bank has not exercised this option.
    • Derivative assets – are mandatorily measured at fair value with fair value changes recognised in the income statement.
  • Available for sale – this is measured at fair value and is the residual classification with fair value changes recognised in other comprehensive income.

5.3.3 Reclassification

  • Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial recognition) may be reclassified out of the fair value through profit or loss category, in the following circumstances:
  • Financial assets that would have met the definition of loans and receivables at initial recognition (if the financial asset had not been required to be classified as held for trading) may be reclassified out of the fair value through profit or loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and
  • Financial assets except financial assets that would have met the definition of loans and receivables at initial recognition may be reclassified out of the fair value through profit or loss category and into another category in rare circumstances.

5.3.4 Derecognition of Financial Assets

Financial assets are derecognised when the contractual right to receive cash flows from the asset has expired; or when Bank has transferred its contractual right to receive the cash flows of the financial assets, and either –

  • Substantially all the risks and rewards of ownership have been transferred;
    or
  • Bank has neither retained nor transferred substantially all the risks and rewards, but has not retained control of the financial asset.

5.3.5 Fair Value Measurement

“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 Bank has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Bank 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 price in an active market, then the Bank 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 best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price.

Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

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

5.3.6 Identification and Measurement of Impairment

At each reporting date, the Bank assesses whether there is an objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) that can be estimated reliably.

5.3.6.1 Loans and Advances and Held-to-Maturity Investment Securities

Objective evidence that loans and advances and held-to-maturity investment securities (e.g., debt instruments quoted in the Colombo Stock Exchange, Treasury Bills and Bonds) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Group or economic conditions that correlate with defaults in the Group.

The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific and collective level. Details of the individual and collective assessment of impairments are given in Note 16.

5.3.6.2 Available-for-Sale Financial Assets

At each date of statement of financial position an assessment is made of whether there is any objective evidence of impairment in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a “loss event”) and that loss event (or events) have an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any previous impairment loss recognised in the income statement, is removed from other comprehensive income and recognised in the income statement.

5.3.6.3 Available-for-Sale Debt Securities

When assessing available-for-sale debt securities for objective evidence of impairment at the reporting date. Bank considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in recovery of future cash flows. These events may include a significant financial difficulty of the issuer, a breach of contract such as a default, bankruptcy or other financial recognition, or the disappearance of an active market for the debt security.

These types of specific events and other factors such as information about the issuers’ liquidity, business and financial risk exposures, levels of and trends in default for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees may be considered individually, or in combination, to determine if there is objective evidence of impairment of a debt security.

5.3.6.4 Available-for-Sale Equity Securities

Objective evidence of impairment for available-for-sale equity securities may include specific information about the issuer and information about significant changes in technology, markets, economics or the law that provide evidence that the cost of the equity securities may not be recovered.

A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the period in which the fair value of the asset has been below its original cost at initial recognition.

Once an impairment loss has been recognised on an available-for-sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned:

  • For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, a decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. If there is no longer objective evidence that the debt security is impaired, the impairment loss is also reversed through the income statement.
  • For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income. Impairment losses on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available-for-sale equity security are in the income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security.
5.3.6.5 Impairment of Intangible Assets – Computer Application Software and Goodwill on Consolidation

The Bank reviews on the date of the statement of financial position, whether the carrying amount is lower than the recoverable amount. In such event, the carrying amount is reduced to the recoverable amount and the reduction being an impairment loss is immediately recognised in the income statement. The recoverable amount is the value in use.

5.3.7 Offsetting

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under SLAS or for gains and losses arising from a group of similar transactions.

5.3.8 Fiduciary Assets

Assets held in a fiduciary capacity are not reported in these financial statements as they do not belong to the Bank.

5.4 Financial Liabilities

5.4.1 Recognition and Initial Measurement

Deposits, borrowing from foreign multilateral, bilateral sources and domestic sources, debt securities issued and subordinated liabilities are initially recognised on the date at which they are originated. A financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue.

Subsequent measurement of financial liability is at fair value or amortised cost. The amortised cost of a financial liability is the amount at which the financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount and the maturity amount.

5.4.2 Derecognition of Financial Liabilities

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

5.4.3 Due to Banks, Customers, Debt Securities Issued and Other Borrowing

Financial liabilities are recognised when Group enters into the contractual provisions of the arrangements with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of financial liabilities is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.

5.4.4 Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation.

5.4.5 Sale and Repurchase Agreements

When securities are sold subject to a commitment to repurchase them at a predetermined price (“repos”), they remain on the statement of financial position and a liability is recorded in respect of the consideration received.

Securities purchased under commitments to sell (“reverse repos”) are not recognised on the statement of financial position and the consideration paid is recorded in “loans and advances to banks”, “loans and advances to customers” as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the life of the agreement for loans and advances to banks and customers.

5.5 Stated Capital

Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.

6. Cash Flow

The cash flow has been prepared by using the “Direct Method”. Cash and cash equivalents include cash balances, time deposits and Treasury Bills of three months maturity at the time of issue. For the purpose of cash flow statement, cash and cash equivalents are presented net of bank overdrafts.

7. Directors’ Responsibility

The Directors acknowledge the responsibility for true and fair presentation of the financial statements in accordance with Sri Lanka Accounting Standards.

8. New SLFRS Issued and Not Yet Effective

8.1 SLFRS Applicable for Financial Periods beginning on or after 1 January 2018

8.1.1 SLFRS 9 – “Financial Instruments”

SLFRS 9, issued in 2014, replaces the existing guidance in LKAS 39 – “Financial Instruments: Recognition and Measurement” is effective for annual reporting periods beginning on or after 1 January 2018. The key aspects of SLFRS 9 are:

  • Classification – Financial assets
    SLFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics.
    SLFRS 9 includes three principal classification categories for financial assets – i.e. measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). It eliminates the existing LKAS 39 categories of held-to-maturity, loans and receivables and available for sale.
  • Impairment – Financial assets, loan commitment and financial guarantee contracts
    SLFRS 9 replaces the ‘Incurred Loss Model in LKAS 39 with forward looking “Expected Loss Model ‘(ECL). This will require considerable judgement over how changes in economic factors affect ECL, which will be determined in a probability weighted basis.
    SLFRS 9 requires loan loss to be recognised at an amount equal to either 12 month ECL or life time ECL. Lifetime ECLs are the ECLs that result from possible default events over the expected life of a financial instrument, whereas 12 months ECLs are the portion of the ECLs that results from default events that are possible within 12 months after the reporting date.
  • Inputs into measurement of ECLs
    The key inputs into measurement of ECLs are likely to be the term structures of the following variables which will be derived from internally developed statistical models and other historical data that leverage regulatory models. They will be adjusted to reflect forward looking information.
  • Probability of Default (PD) are estimates at a certain date which will be calculated based on statistical models and assessed using rating tools tailored to the various categories of counterparties and exposures
  • Loss Given Default (LGD) is the magnitude to the likely loss if there is default. The Bank estimates LGD parameters based on history of recovery rates of claims against defaulted counter parties
  • Exposure at Default (EAD) represents the expected exposure in the event of a default. The Bank will derive the EAD from the current exposure to the counter party and potential chances to the current amount allowed under the contract.

The most significant impact on the Bank’s Financial Statements from the implementation of SLFRS 9 is expected to result from the new impairment requirements. Impairment losses will increase and become more volatile for financial instruments within the scope of SLFRS 9.

The Bank has employed statistical models to analyse the data collected and generate estimates of the remaining lifetime PD of exposure and how these are expected to change as a result of the passage of time. This analysis include the identification and calibration of relationship between changes in default rates and changes in key macroeconomic factors as well as analysis of the impact of certain other factors on the risk of default.

The Bank has estimated LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset.

EAD for lending commitments and financial guarantees, include the amount drawn, as well as potential future amounts that may be drawn or repaid under the contract, which has been estimated based on historical observations and forward looking forecasts.

Under SLFRS 9, the Bank has incorporated forward looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL.

The Bank has completed the initial high level assessment of the potential impact on its Financial Statements for the year ended 31 December 2016, resulting from the application of SLFRS 9 with the assistance of an external consultant.

Based on the preliminary assessments undertaken to date which is yet to be audited, the total estimated additional loan loss provision on the financial statements for the year ended 31 December 2016 on adoption of SLFRS 9 is expected to be in the range of 35% to 40%. It will also have an impact on capital adequacy ratio by 99 to 115 basis points on Tier 1 due to the reduction in the retained earnings.

The above assessment which is yet to be audited is preliminary because not all transition work has been finalised. The actual impact of adopting SLFRS 9 on 1 January 2018 may change because:

  • SLFRS 9 will require the Bank to revise accounting process and internal controls and these changes are not yet complete;
  • The Bank is refining and finalising its models for ECL calculations; and
  • The new accounting policies, assumptions, judgements and estimation techniques employed are subject to change until the Bank finalises its first Financial Statements for the year 31 December 2018 that include the date of initial application.

The Bank is in the process of assessing the additional loan loss provision impact on the Financial Statements for the year ended 31 December 2017, resulting from the application of SLFRS 9.

The Group does not expect significant impact on the Consolidated Financial Statements resulting from the application of SLFRS 9 on the other group entities.

8.1.2 SLFRS 15 – “Revenue from Contracts with Customers”

SLFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised . New qualitative and quantitative disclosure requirements aim to enable financial statements users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

Entities will apply five step model to determine when to recognise revenue and at what amount. The model specified that revenue is recognised when or as an entity transfers control of goods and services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised .

It replaces existing revenue recognition guidance, including LKAS 18 – “Revenue” and LKAS 11 – “Construction Contracts” and IFRIC 13 – “Customer Loyalty Programmes”. SLFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The Group/Bank does not expect significant impact on its financial statements resulting from the application of SLFRS 15.

8.1.3 SLFRS 16 – “Leases”

SLFRS 16 eliminates the current dual accounting model for lessees which distinguishes between On-Balance Sheet finance leases and Off-Balance Sheet operating leases.

Instead, there will be a single On-Balance Sheet accounting model that is similar to current finance lease accounting.

SLFRS 16 is effective for annual reporting periods beginning on or after 01 January 2019. The Group/Bank is assessing the potential impact on its financial statements resulting from the application of SLFRS 16.

9. Income

Accounting Policy

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Interest income (Note 10) 32,986,590 24,194,158 32,994,636 24,206,112
Fee and commission income (Note 11) 1,591,336 1,309,049 1,591,943 1,309,049
Net gain from trading (Note 12) 361,647 340,456 361,647 340,456
Net loss from financial instruments at fair value
through profit or loss (Note 13)
(404,586) (179,727) (404,586) (179,727)
Net gain from financial investments (Note 14) 2,238,166 1,165,389 1,945,118 1,081,129
Other operating (loss)/income – net (Note 15) (831,541) (75,430) (501,667) 223,064
35,941,612 26,753,895 35,987,091 26,980,083

 

10. Net Interest Income

Accounting Policy

Interest income and expense for all interest-bearing financial instruments are recognised in “Interest Income” and “Interest Expense” in the income statement, using the effective interest rate of the financial assets or financial liabilities to which they relate.

The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments earned or paid on a financial asset or financial liability through its expected life (or, where appropriate, a shorter period) to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, bank estimates future cash flows considering all contractual terms of the financial instruments but not future credit losses.

The calculation of the effective interest includes all transaction cost, premiums or discounts and fees paid or received by the Bank that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Interest income includes income from finance leases, dividend from preference shares and notional tax credit on interest income from Treasury Bills and Bonds.

Finance lease income is recognised on a pattern reflecting a constant periodic rate of return on the Bank’s net investment in the finance lease.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Interest income
Placements with banks 123,369 203,105 131,415 215,059
Loans to and receivables from banks 928,176 531,828 928,176 531,828
Loans to and receivables from other customers 26,789,982 20,559,370 26,789,982 20,559,370
Other financial assets held for trading 41,523 154,544 41,523 154,544
Financial investments – available for sale 2,433,596 1,587,178 2,433,596 1,587,178
Financial investments – held to maturity 2,669,944 1,158,133 2,669,944 1,158,133
Total interest income 32,986,590 24,194,158 32,994,636 24,206,112
Interest expenses
Due to banks 979,281 1,293,423 979,281 1,293,423
Due to other customers 15,293,031 9,552,556 15,246,422 9,522,440
Other borrowing 1,645,138 1,366,328 1,645,138 1,366,328
Debt securities issued 3,726,532 3,080,715 3,726,532 3,080,715
Total interest expenses 21,643,982 15,293,022 21,597,373 15,262,906
Net interest income 11,342,608 8,901,136 11,397,263 8,943,206
Interest income on Sri Lanka Government Securities 5,032,032 2,485,194 5,032,032 2,485,194

This income includes notional tax credit of 10% imputed for the withholding tax deducted/paid at source.

 

11. Net Fee and Commission Income

Accounting Policy

Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period.

Fees for guarantees and trade related commissions are recognised on a straight line basis over the period of the contract. Other fees and commission expense relate mainly to transaction and service fees, which are expensed, as the services are received.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Fee and commission income 1,591,336 1,309,049 1,591,943 1,309,049
Fee and commission expenses
Net fee and commission income 1,591,336 1,309,049 1,591,943 1,309,049
Comprising:
Loans and advances 553,094 403,589 553,094 403,589
Credit cards 4,932 4,820 4,932 4,820
Trade and remittances 429,528 390,020 429,528 390,020
Customer accounts 342,984 281,056 342,984 281,056
Guarantees 206,798 161,805 206,798 161,805
Management and consulting and other fees 54,000 67,759 54,607 67,759
Net fee and commission income 1,591,336 1,309,049 1,591,943 1,309,049

 

12. Net Gain from Trading

This comprises all gains less losses from changes in fair value of financial assets held for trading (both realised and unrealised) together with related dividend and foreign exchange differences.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Foreign exchange from banks 270,395 176,346 270,395 176,346
Fixed income 67,536 164,110 67,536 164,110
Equities 23,716 23,716
361,647 340,456 361,647 340,456

 

13. Net loss from financial instruments at fair value through profit or loss

Accounting Policy

Bank has not chosen the option to designate financial instruments at fair value through profit or loss as a compensatory mechanism for accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising gains or losses on them on different bases.

The Bank has non-trading derivatives held for risk management purposes (e.g., forward foreign exchange purchase or sale contracts) that do not form part of qualifying hedge relationship, that are mandatorily fair valued through profit or loss. In respect of such financial instruments, all realised and unrealised fair value changes and foreign exchange differences are included.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Forward exchange fair value changes
  Contracts with commercial banks (314,489) (93,944) (314,489) (93,944)
  Contract with CBSL (Note 41.1) (86,277) (83,606) (86,277) (83,606)
Interest rate swap fair value changes (3,820) (2,177) (3,820) (2,177)
(404,586) (179,727) (404,586) (179,727)

 

14. Net Gain from Financial Investments

Accounting Policy

Dividend income is recognised when the right to receive payment is established. Dividend income are presented in net gains/(loss) from trading and net gains/(loss) from financial investment, based on underlying classification of the equity investment.

Net gain/loss from financial investments includes realised gain or loss on sale of available-for-sale securities (e.g., Treasury Bills and Bonds, ordinary shares – both listed in the Colombo Stock Exchange and unlisted) and dividend income from ordinary shares classified as available for sale. Wh ere the dividend clearly represents a recovery of part of the cost of the investment, it is presented in other comprehensive income.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Assets available for sale
  Gain on sale of equity securities 1,150,368 152,186 948,783 152,186
  Gain on sale of Government Securities 1,559 4,202 1,559 4,202
Dividend income 798,420 772,046 798,420 772,046
Dividend income from subsidiaries, joint venture and associate 91,463 84,260
Net gain from repurchase transactions 196,356 152,695 196,356 152,695
2,238,166 1,165,389 1,945,118 1,081,129

 

15. Other operating income/(loss) – net

Accounting Policy

Rental income and expenses are accounted on a straight-line basis over the entire period of the tenancy incorporating predetermined rent escalation during the period of the tenancy.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Premises rental income 39,383 37,815 262,021 228,951
Gain on sale of property, plant and equipment 11,299 7,694 11,299 13,631
Foreign exchange loss (849,494) (330,157) (849,494) (330,154)
Recovery of loans written off 36,769 24,499 36,769 24,499
Amortisation of deferred income on Government Grant – CBSL Swap (Note 41.2) (85,973) 180,106 (85,973) 180,106
Others 16,475 4,613 123,711 106,031
(831,541) (75,430) (501,667) 223,064

 

16. Impairment for Loans and Other Losses

Accounting Policy

Individually Assessed Loans and Advances and Held-to-Maturity Debt Instruments

These are exposures, where evidence of impairment exists and that are individually significant meriting individual assessment for objective evidence of impairment and computation of impairment allowance. The factors considered in determining that the exposures are individually significant include

  • the size of the loan; and
  • the number of loans in the portfolio.

For all loans and held-to-maturity debt instruments that are considered individually significant, Bank assesses on a case by case basis, whether there is any objective evidence of impairment. The criteria used by the Bank to determine that there is such objective evident include

  • contractual payments for either principal or interest being past due for a prolonged period;
  • the probability that the borrower will enter bankruptcy or other financial realisation;
  • a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial difficulty that results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant; and
  • there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is considered doubtful.

For those loans and held-to-maturity investment securities where objective evidence of impairment exists, impairment losses are determined considering the following factors:

  • Bank’s aggregate exposure to the customer;
  • The viability of the customer’s business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations;
  • the amount and timing of expected receipts and recoveries;
  • the likely dividend available on liquidation or bankruptcy;
  • the extent of other creditors’ commitments ranking ahead of or pari passu with, the Bank and
  • the likelihood of other creditors continuity to support the Company;
  • the realisable value of security (or other credit mitigants) and likelihood of successful repossession or enforcement of security;
  • the likely deduction of any costs involved in recovery of amounts outstanding.

Impairment allowance on loans and advances and held-to-maturity investment securities measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

Collective Assessment, this includes:

All loans and advances of smaller value where there is no evidence of impairment and those individually assessed for which no evidence of impairment has been specifically identified on an individual basis.

  • Import loans
  • Export loans
  • Corporate term loans
  • Overdraft
  • Personal loans
  • Finance leases
  • Project Loans
  • Credit Cards

These loans and advances are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective impairment.

In assessing collective impairment, the Bank uses statistical modelling of historical trends of the default rates, the timing of recoveries and the amount of loss incurred, adjusted for experience adjustment by the management, where current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

Default rates, loss rates and the expected timing of future recoveries will be regularly benchmarked against actual outcomes to ensure that they remain appropriate.

Individually assessed loans for which, no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective impairment. This reflects impairment losses that Bank has incurred as a result of events occurring before the reporting date which the Bank is not able to identify on an individual basis and that can be reliably estimated. These losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans and held-to-maturity investment securities within the Group, these are removed from the Group and assessed on an individual basis for impairment. The collective impairment allowance is based on historical loss experience adjusted by Management’s experienced judgement.

Impairment allowance on loans and advances and held-to-maturity investment securities measured at mortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

Reversals of Impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment allowance accordingly. The write back is recognised in the income statement.

Renegotiated Loans

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up-to-date loans for measurement purposes once a minimum number of payments required have been received.

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or derecognition.

Write-off of Loans and Advances

Loans (and the related impairment allowance) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

Asset-Backed Securities

These are included in loans and advances. When assessing for objective evidence of impairment, Bank considers the performance of underlying collateral.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Loans to and receivables from other customers
Specific allowance for impairment (Note 30.2.1) 724,402 792,389 724,402 792,389
Collective allowance for impairment (Note 30.2.2) 405,973 81,772 405,973 81,772
Impairment charge/(recoveries) – other debts 17,748 5,371 21,597 5,371
Impairment charge – investment in other equity securities 12,915 33,929 12,915 33,929
Impairment charge – investment in subsidiaries (Note 33.1) 9,896 20,923
Write-offs – loans to and receivables from other customers 5,479 2,883 5,479 2,883
1,176,413 937,267 1,170,366 916,344

 

17. Personnel Expenses

Accounting Policy

Employee Benefits

Defined Benefit Plans (DBPs)

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

Pension Liability Arising from Defined Benefit Obligations

Description of the Plan and Employee Groups Covered

The Bank established a trust fund in May 1989, for payment of pension which operates the pension scheme approved by the Commissioner General of Inland Revenue. The fund of the scheme is managed by trustees appointed by the Bank and is separate from the Bank. The scheme provides for payment of pension to retirees, spouse and minor children of deceased retirees based on pre-retirement salary. All members of the permanent staff who joined prior to 1 May 2004 are covered by this funded pension scheme subject to fulfilment of eligibility conditions prescribed by the Bank.

The scheme was amended on 31 August 1998 and the amended plan will apply to all members of the permanent staff who joined the Bank on or after this date and prior to 1 May 2004. The amendment reduced the scope of the benefit in the interest of long-term sustainability of the pension plan as advised by the independent actuary.

The defined benefit pension plan does not permit any post-retirement increases in pension nor any other benefit (e.g. medical expenses reimbursement).

Funding Arrangement

The Bank’s contributions to the trust fund are made annually based on the recommendation of an independent actuary. The employees make no contributions to qualify for the basic pension, which is therefore a non-contributory benefit to the employees.

Eligible employees who desire to provide for the payment of pension to spouse and minor children, who survive them are however, required to contribute monthly, an amount based on a percentage of gross emoluments, excluding bonus, if they joined the Bank on or after 31 August 1998 and prior to 1 May 2004.

Recognition of Actuarial Gains and Losses

The net actuarial gains or losses arising in a financial year is due to increases or decreases in either the present value of the promised pension benefit obligation or the fair value of pension assets.

The causes for such gains or losses include changes in the discount rate, differences between the actual return and the expected return on pension assets and changes in the estimates of actual employee turnover, mortality rates and increases in salary.

The Bank recognises the total actuarial gains and losses that arise in calculating the Bank’s obligation in respect of the plan in other comprehensive income and the expense under personnel expenses in the income statement during the period in which it occurs.

Recognition of Past Service Cost

Past service cost arises when a defined benefit plan is introduced for the first time or subsequent changes are made to the benefits payable under an existing defined benefit plan. Bank will recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested. To the extent the benefits are already vested following the introduction of or changes to a defined benefit plan, the Bank will recognise past service cost immediately.

Provision for End of Service Gratuity Liability under a Defined Benefit Plan

Description of the Plan and Employee Groups Covered

The Bank provides for the gratuity payable under the Payment of Gratuity Act, No. 12 of 1983 as amended for all employees who do not qualify under the pension scheme. Therefore, this applies to employees recruited to the permanent cadre on or after 1 May 2004 on tenured or fixed term contract employment in the Bank. The subsidiary companies, which do not have a non-contributory pension scheme provide for the gratuity payable under the Payment of Gratuity Act, No. 12 of 1983 for all employees. The promised benefit is half a month pre-termination salary for each completed year of service, provided a minimum qualifying period of 5 years is served prior to termination of employment.

The Bank however, recognises the liability by way of a provision for all employees in tenured employment from the date they joined the permanent cadre, while fixed term employees liability is recognised only if the fixed term contract of service provides for unbroken service of 5 years or more either singly or together with consecutive contracts.

Funding Arrangement

The Bank and the subsidiaries adopt a pay-as-you-go method whereby the employer makes a lump sum payment only on termination of employment by resignation, retirement at the age of 55 years or death while in service. Recognition of Actuarial Gains and Losses The Bank recognises the total actuarial gains and losses in the other comprehensive income during the period in which it occurs.

Recognition of Past Service Cost

Since end of service gratuity defined benefit is a statutory benefit, the recognition of past service cost will arise only if th e Payment of Gratuity Act, No. 12 of 1983 is amended in future to increase the promised benefit on termination of employment. In such event, the Bank will adopt the accounting policy currently used for defined benefit pension plan.

Defined Contribution Plans

This provides for a lump sum payment on termination of employment by resignation, retirement at the age of 55 years or death while in service.

Lump sum payment is by an outside agency to which contributions are made.

All employees of the Bank are members of the Mercantile Service Provident Society and the Employees’ Trust Fund to which the Bank contributes 15% and 3% respectively of such employee’s consolidated salary.

Contributions to defined contribution plans are recognised as an expense in the income statement as incurred.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Salaries and other benefits 2,770,383 2,429,063 2,880,514 2,574,073
Provision for staff retirement benefits (Note 17.1) 396,126 380,679 422,279 405,996
3,166,509 2,809,742 3,302,793 2,980,069

17.1 Provision for Staff Retirement Benefits

17.1.1 Amount Recognised as Expense

17.1.1.1 Funded Pension Liability
Current service cost 60,496 71,746 60,496 71,746
Interest on obligation 228,094 206,681 228,094 206,681
Expected return on pension assets (233,917) (193,785) (233,917) (193,785)
54,673 84,642 54,673 84,642
17.1.1.2 Unfunded Pension Liability
Interest on obligation 5,794 5,688 5,794 5,688
5,794 5,688 5,794 5,688
17.1.1.3 Unfunded End of Service Gratuity Liability
Current service cost 35,041 29,417 41,507 33,853
Interest on obligation 22,096 17,440 23,877 19,218
57,137 46,857 65,384 53,071
Total defined benefit plans 117,604 137,187 125,851 143,401
17.1.1.4 Defined Contribution Plan
Employer's contribution to employees’ provident fund 232,102 202,910 245,952 218,284
Employer's contribution to employees’ trust fund 46,420 40,582 50,476 44,311
Total defined contribution plans 278,522 243,492 296,428 262,595
Total expense recognised in the income statement 396,126 380,679 422,279 405,996

 

18. Other Expenses

BANK GROUP
For the period ended 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Directors’ remuneration 17,241 18,582 18,117 19,472
Auditors’ remuneration
  Audit fees and expenses 5,207 3,900 5,975 4,623
  Audit related fees and expenses 1,706 1,265 1,889 1,316
  Fees for non-audit services 4,750 1,150 4,750 1,150
Depreciation – investment property 13,718 13,800
– property, plant and equipment 259,548 233,079 286,424 257,532
Amortisation – intangible assets 109,573 98,262 110,807 98,567
Expenses on litigation 4,728 2,767 4,728 2,767
Premises, equipment and establishment expenses 1,285,640 1,049,987 1,309,156 1,048,935
Other overhead expenses 1,015,253 905,232 995,866 873,475
2,703,646 2,314,224 2,751,430 2,321,637

Directors’ remuneration include fees paid to Non-Executive Directors. Remuneration paid to Executive Directors are included under salaries and other benefits in Note 17.

 

19. Value Added Tax and Nation Building Tax on Financial Services

Value Added Tax on Financial Services (VAT)

Accounting Policy

VAT on financial services is calculated in accordance with Value Added Tax Act, No. 14 of 2002 and subsequent amendments thereto.

The value base for computation of VAT is the operating profit before value added tax and nation building tax on financial services adjusted for emoluments of employees and depreciation computed as per prescribed rates.

Nation Building Tax on Financial Services (NBT)

NBT on financial services is calculated in accordance with Nation Building Tax Act, No. 09 of 2009 and subsequent amendments thereto. NBT is chargeable on the same base used for calculation of VAT on financial services.

BANK GROUP
For the period ended 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000

19.1 Value Added Tax on Financial Services

Financial services VAT – Current year 1,286,661 854,680 1,286,661 854,680
– (Over)/under provision in respect of previous year 2,495 2,495
1,286,661 857,175 1,286,661 857,175

19.2 Nation Building Tax on Financial Services

Nation building tax on
Financial services – Current year 171,554 137,105 171,554 137,105
– Over provision in respect of previous year 534 (8,170) 534 (8,170)
172,088 128,935 172,088 128,935
1,458,749 986,110 1,458,749 986,110

 

Income Tax Expense

Accounting Policy

Income Tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in the income statement except to the extent that they relate to items recognized directly in equity and other comprehensive income.

Current Taxation

Current tax is the amount of income tax payable on the taxable profit for the financial year calculated using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Taxable profit is determined in accordance with the provisions of Inland Revenue Act, No 10 of 2006 as amended.

Deferred Taxation

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets.

Withholding Tax on Dividend Distributed by Subsidiaries, Associate Company and Joint Venture Company

Dividend distributed out of the taxable profit of the subsidiaries, associate company and joint venture company suffers a 10% deduction at source and is not available for set off against the tax liability of the Bank. Thus the withholding tax deducted at source is added to the tax expense of the subsidiary companies, the associate company and joint venture company in the Group financial statements as a consolidation adjustment.

BANK GROUP
For the year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000

20.1 Composition

Current tax 1,321,584 1,027,194 1,388,734 1,084,646
(Over)/Under provision in previous years (20,655) 57,912 (20,627) 57,827
Deferred tax – Origination and reversal of temporary differences (Note 42) 76,420 39,701 89,546 62,621
1,377,349 1,124,807 1,457,653 1,205,094

 

20.1.1 Reconciliation of Effective Tax Rate with Income Tax Rate

BANK GROUP
For the year ended 31 December 2017 2016 2017 2016
% LKR 000 % LKR 000 % LKR 000 % LKR 000
Tax using 28% tax rate on
profit before tax (PBT)
28.00 1,621,847 28.00 1,235,788 28.00 1,648,943 28.00 1,308,767
Non-deductible expenses 15.25 883,444 16.64 734,605 15.13 890,726 15.94 745,177
Allowable deductions (5.01) (290,324) (7.79) (343,916) (4.97) (292,919) (7.54) (352,204)
Dividend income (3.66) (212,156) (5.24) (231,478) (3.60) (212,156) (4.95) (231,478)
Tax incentives (10.26) (594,350) (7.36) (324,683) (10.16) (598,048) (6.95) (324,973)
Taxable timing difference
from capital allowances
on assets
(1.50) (86,877) 0.64 28,148 (1.48) (86,939) 0.60 28,143
Tax losses from prior year (1.61) (71,270) (0.01) (470) (1.53) (71,651)
Adjustments 0.67 39,597 (0.37) (17,135)
Current tax expense 22.82 1,321,584 23.28 1,027,194 23.58 1,388,734 23.20 1,084,646

 

21. Basic Earnings per Ordinary Share

Basic earnings per share of the Bank has been calculated by dividing the profit after income tax by the weighted average number of shares in issue during the financial year.

Basic group earnings per share has been calculated by dividing the profit after income tax attributable to the equity holders of the Bank by the weighted average number of shares in issue during the financial year.

BANK GROUP
Year ended 31 December 2017
LKR 000
2016
LKR 000
2017
LKR 000
2016
LKR 000
Profit attributable to equity holders of the Bank (LKR ’000) 4,414,964 3,288,723 4,362,407 3,414,980
Number of ordinary shares (Note 50) 265,097,688 265,097,688 265,097,688 265,097,688
Basic earnings per ordinary share – LKR 16.65 12.41 16.46 12.88

 

22. Dividend per Share

Dividend per share (LKR)

The Board of Directors of the Bank has approved the payment of a first and final dividend of LKR 5.00 per share for the year ended 31 December 2017.

23. Analysis of Financial Instruments by Measurement Basis

As at 31 December 2017 Fair value
through
profit or loss –
mandatory
LKR 000
Fair value
held for trading


LKR 000
Fair value
through other
comprehensive
income
LKR 000
Amortised
cost


LKR 000
Held to
maturity


LKR 000
Total



LKR 000

23.1 Bank

Financial Assets
Cash and cash equivalents 4,106,225 4,106,225
Balances with Central Bank of
Sri Lanka
10,557,688 10,557,688
Placements with banks 6,691,381 6,691,381
Derivative assets held-for-risk
management
66,440 66,440
Other financial assets held for trading 310,922 310,922
Loans to and receivables from banks 10,984,266 10,984,266
Loans to and receivables from other
customers
213,675,866 213,675,866
Financial investments 56,866,054 23,507,632 80,373,686
Due from subsidiaries 12,083 12,083
Government grant receivable 642,583 642,583
Other assets 2,775,741 2,775,741
709,023 310,922 56,866,054 248,803,250 23,507,632 330,196,881
Financial Liabilities
Due to banks 9,640,735 9,640,735
Derivative liabilities held-for-risk
management
367,435 367,435
Due to other customers 193,307,534 193,307,534
Other borrowing 41,319,591 41,319,591
Debt securities issued 24,443,767 24,443,767
Subordinated term debt 9,202,870 9,202,870
Other liabilities 4,078,984 4,078,984
367,435 281,993,481 282,360,916

 

As at 31 December 2016 Fair value
through
profit or loss –
mandatory
LKR 000
Fair value
held for
trading

LKR 000
Fair value
through other
comprehensive
income
LKR 000
Amortised
cost


LKR 000
Held to
maturity


LKR 000
Total



LKR 000

23.2 Bank

Financial Assets
Cash and cash equivalents 4,330,934 4,330,934
Balances with Central Bank of
Sri Lanka
8,062,567 8,062,567
Placements with banks 1,351,117 1,351,117
Derivative assets held-for-risk
management
122,977 122,977
Loans to and receivables from banks 12,300,398 12,300,398
Loans to and receivables from other
customers
185,784,979 185,784,979
Financial investments 49,272,243 23,189,085 72,461,328
Due from subsidiaries 19,855 19,855
Government grant receivable 861,915 861,915
Other assets 2,562,978 2,562,978
984,892 49,272,243 214,412,828 23,189,085 287,859,048
Financial Liabilities
Due to banks 18,103,587 18,103,587
Derivative liabilities held-for-risk
management
105,741 105,741
Due to other customers 140,514,373 140,514,373
Other borrowing 40,751,346 40,751,346
Debt securities issued 29,179,185 29,179,185
Subordinated term debt 9,205,637 9,205,637
Other liabilities 3,850,825 3,850,825
105,741 241,604,953 241,710,694

 

As at 31 December 2017 Fair value
through
profit or loss –
mandatory
LKR 000
Fair value
held for
trading

LKR 000
Fair value
through other
comprehensive
income
LKR 000
Amortised
cost


LKR 000
Held to
maturity


LKR 000
Total



LKR 000

23.3 Group

Financial Assets
Cash and cash equivalents 4,120,230 4,120,230
Balances with Central Bank of Sri Lanka 10,557,688 10,557,688
Placements with banks 6,712,131 6,712,131
Derivative assets held-for-risk
management
66,440 66,440
Other financial assets held for trading 310,922 310,922
Loans to and receivables from banks 10,984,266 10,984,266
Loans to and receivables from other
customers
213,675,866 213,675,866
Financial investments 56,866,054 23,507,632 80,373,686
Government grant receivable 642,583 642,583
Other assets 2,804,798 2,804,798
709,023 310,922 56,866,054 248,854,979 23,507,632 330,248,610
Financial Liabilities
Due to banks 9,640,735 9,640,735
Derivative liabilities held-for-risk
management
367,435 367,435
Due to other customers 192,920,147 192,920,147
Other borrowing 41,290,874 41,290,874
Debt securities issued 24,443,767 24,443,767
Subordinated term debt 9,202,870 9,202,870
Other liabilities 4,195,940 4,195,940
367,435 281,694,333 282,061,768

 

As at 31 December 2016 Fair value
through
profit or loss –
mandatory
LKR 000
Fair value
held for
trading

LKR 000
Fair value
through other
comprehensive
income
LKR 000
Amortised
cost


LKR 000
Held to
maturity


LKR 000
Total



LKR 000

23.4 Group

Financial Assets
Cash and cash equivalents 4,344,260 4,344,260
Balances with Central Bank of
Sri Lanka
8,062,567 8,062,567
Placements with banks 1,415,985 1,415,985
Derivative assets held-for-risk
management
122,977 122,977
Loans to and receivables from banks 12,300,398 12,300,398
Loans to and receivables from other customers 185,784,979 185,784,979
Financial investments 49,272,243 23,189,085 72,461,328
Government grant receivable 861,915 861,915
Other assets 2,609,655 2,609,655
984,892 49,272,243 214,517,844 23,189,085 287,964,064
Financial Liabilities
Due to banks 18,103,587 18,103,587
Derivative liabilities held-for-risk
management
105,741 105,741
Due to other customers 140,219,872 140,219,872
Other borrowing 40,736,300 40,736,300
Debt securities issued 29,179,185 29,179,185
Subordinated term debt 9,205,637 9,205,637
Other liabilities 3,961,249 3,961,249
105,741 241,405,830 241,511,571

 

24. Cash and Cash Equivalents

Accounting Policy

For the purpose of the statement of cash flows, cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with three months or less than three months’ maturity from the date of acquisition. Cash and cash equivalents include cash and short-term Treasury Bills with maximum three months’ maturity from date of acquisition.

Cash and cash equivalents are carried at amortised cost in the statement of financial position.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Cash in hand 3,603,883 3,193,720 3,617,888 3,193,825
Balances with banks 502,342 1,137,214 502,342 1,150,435
4,106,225 4,330,934 4,120,230 4,344,260

 

25. Balances with Central Bank of Sri Lanka

Accounting Policy

Balances with Central Banks are carried at amortised cost in the statement of financial position.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Statutory balances with Central Bank of Sri Lanka 10,557,688 8,062,567 10,557,688 8,062,567

As required by the provisions of Section 93 of Monetary Law Act, a minimum cash balance is maintained with the Central Bank of Sri Lanka. The minimum cash reserve requirement on rupee deposit liabilities is prescribed as a percentage of rupee deposit liabilities. The percentage is varied from time to time. Applicable minimum rate was 7.5%. There are no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposit liabilities in the Domestic Banking Unit.

 

26. Placements with Banks

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Placements with Banks 6,691,381 1,351,117 6,712,131 1,415,985

 

27. Derivatives Held-for-Risk Management

Accounting Policy

Derivative assets held-for-risk management purposes include all derivative assets that are not classified as trading assets and are measured at fair value in the statement of financial position.

Bank has not designated any derivative held-for-risk management purposes as a qualifying hedge relationship and therefore the Bank has not adopted hedge accounting.

Derivatives are classified as assets, when their fair value is positive or as liabilities, when their fair value is negative. Derivative assets and liabilities arising from different transactions are only offset, if the transactions are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net basis.

27.1 Assets

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Forward foreign exchange contracts – Currency Swaps 65,552 104,902 65,552 104,902
– Other 888 18,075 888 18,075
66,440 122,977 66,440 122,977

 

27.2 Liabilities

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Forward foreign exchange contracts – Currency Swaps 355,580 94,327 355,580 94,327
– Interest Rate Swaps 6,028 2,177 6,028 2,177
– Other 5,827 9,237 5,827 9,237
367,435 105,741 367,435 105,741

28. Other Financial Assets Held for Trading

Accounting Policy

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 hold as a part of a portfolio that is managed together for short-term profit or position taking; or

Financial assets Held-for-trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in profit or loss. 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.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Government of Sri Lanka Treasury bonds 279,094 279,094
Equity securities
Quoted (Note 28.1) 31,828 31,828
310,922 310,922

 

28.1 Quoted Ordinary Shares – Bank/Group

As at 31.12.2017 31.12.2016
Number of
ordinary
shares
Cost
LKR 000
Fair
value
LKR 000
Number of
ordinary
shares
Cost
LKR 000
Fair
value
LKR 000
Commercial Bank of Ceylon PLC – voting 234,032 26,586 31,828
26,586 31,828

 

29. Loans to and Receivables from Banks

Accounting Policy

Loans and receivables from Bank include amount due from Banks.

The carrying amount includes interest receivable from the Banks on these loans. This also includes investment by the Bank in any debentures, bonds, commercial paper or any other debt instrument which is not listed in the Colombo Stock Exchange or in any recognised market. The amount includes the principal amount and interest due and/or accrued on the date of the statement of financial position.

Principal amount of loans and advances (for example, over drawn balances in current account) are recognised when cash is advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans are written off, or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less any reduction for impairment or uncollectibility.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Gross loans and receivables 10,984,266 12,300,398 10,984,266 12,300,398
Allowance for impairment
Net loans and receivables 10,984,266 12,300,398 10,984,266 12,300,398

29.1 Analysis

29.1.1 By Product

Refinanced Loans – Plantation development project 27,977 84,148 27,977 84,148
KFW* DFCC (V) SME in the North and East 2,940 2,940
Sri Lanka development bonds 10,956,289 12,213,310 10,956,289 12,213,310
Gross loans and receivables 10,984,266 12,300,398 10,984,266 12,300,398
* KFW – Kreditanstalt Fur Wiederaufbau

29.1.2 By Currency

Sri Lankan Rupee 27,977 87,088 27,977 87,088
United States Dollar 10,956,289 12,213,310 10,956,289 12,213,310
Gross loans and receivables 10,984,266 12,300,398 10,984,266 12,300,398

 

30. Loans to and Receivables from Other Customers

Accounting Policy

Loans to and receivables from other customers include loans and advances and lease receivables of the Group.

The carrying amount includes capital and interest receivable from the customers on these loans. This also includes investment by the Bank in any debentures, bonds, commercial paper or any other debt instrument which is not listed in the Colombo Stock Exchange or in any recognised market. The amount includes the principal amount and interest due and/or accrued on the date of the statement of financial position.

Principal amount of loans and advances (for example, over drawn balances in current account) are recognised when cash is advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans are written off, or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less any reduction for impairment or uncollectibility.

When the Bank is th e lessor in a lease agreement th at transfers substantially all of the risk and rewards incidental to the ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised and presented within loans and advances.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Gross loans and receivables 221,309,571 192,454,529 221,309,571 192,454,529
Specific allowance for impairment (Note 30.2.1) (5,388,754) (4,778,752) (5,388,754) (4,778,752)
Collective allowance for impairment (Note 30.2.2) (2,244,951) (1,890,798) (2,244,951) (1,890,798)
Net loans and receivables 213,675,866 185,784,979 213,675,866 185,784,979

30.1 Analysis

30.1.1 By Product

Overdrafts 40,204,544 29,115,220 40,204,544 29,115,220
Trade finance 29,778,452 24,726,990 29,778,452 24,726,990
Lease rentals receivable (Note 30.1.1.1) 16,493,374 15,909,152 16,493,374 15,909,152
Credit cards 276,432 242,091 276,432 242,091
Pawning 2,597,441 2,109,667 2,597,441 2,109,667
Staff loans 1,544,400 1,397,579 1,544,400 1,397,579
Term loans 129,086,941 116,395,228 129,086,941 116,395,228
Commercial papers and asset back notes 1,140,487 962,763 1,140,487 962,763
Debenture loans 71,119 71,119
Preference shares unquoted 187,500 517,500 187,500 517,500
Securities purchased under resale agreements 1,007,220 1,007,220
Gross loans and receivables 221,309,571 192,454,529 221,309,571 192,454,529
30.1.1.1 Lease rentals receivable
Gross investment in leases:
Lease rentals receivable
– within one year 8,167,382 7,260,287 8,167,382 7,260,287
– one to five years 11,774,307 11,667,471 11,774,307 11,667,471
19,941,689 18,927,758 19,941,689 18,927,758
Less: Deposit of rentals 12,551 11,480 12,551 11,480
Unearned income on rentals receivable
– within one year 1,720,165 1,483,826 1,720,165 1,483,826
– one to five years 1,715,599 1,523,300 1,715,599 1,523,300
16,493,374 15,909,152 16,493,374 15,909,152

30.1.2 By Currency

Sri Lankan Rupee 199,579,777 175,840,682 199,579,777 175,840,682
United States Dollar 20,885,187 16,021,231 20,885,187 16,021,231
Great Britain Pound 511,472 428,982 511,472 428,982
Australian Dollar 16,099 18,140 16,099 18,140
Euro 317,036 145,494 317,036 145,494
Gross loans and receivables 221,309,571 192,454,529 221,309,571 192,454,529

30.1.3 By Industry

Agriculture and fishing 22,513,650 21,177,351 22,513,650 21,177,351
Manufacturing 50,116,479 42,467,362 50,116,479 42,467,362
Tourism 13,818,386 11,345,823 13,818,386 11,345,823
Transport 7,022,585 6,561,001 7,022,585 6,561,001
Construction 25,916,910 14,769,286 25,916,910 14,769,286
Trading 44,461,385 42,917,888 44,461,385 42,917,888
Financial and business services 9,856,842 8,285,786 9,856,842 8,285,786
Infrastructure 15,160,210 13,767,614 15,160,210 13,767,614
Other services 14,819,671 14,643,050 14,819,671 14,643,050
Consumer durables 8,006,853 8,096,930 8,006,853 8,096,930
New economy 1,585,722 1,399,681 1,585,722 1,399,681
Others 8,030,878 7,022,757 8,030,878 7,022,757
Gross loans and receivables 221,309,571 192,454,529 221,309,571 192,454,529

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

30.2 Movements in Specific and Collective Allowance for Impairment

30.2.1 Specific Allowance for Impairment

Balance at beginning 4,778,752 4,240,756 4,778,752 4,240,756
Charge to income statement 724,402 792,389 724,402 792,389
Effect of foreign currency movement 21,782 22,903 21,782 22,903
Write-off of loans and receivables (136,182) (277,296) (136,182) (277,296)
Balance on 31 December 5,388,754 4,778,752 5,388,754 4,778,752

30.2.2 Collective Allowance for Impairment

Balance at beginning 1,890,798 1,924,882 1,890,798 1,924,882
Charge to income statement 405,973 81,772 405,973 81,772
Effect of foreign currency movement 382 3,712 382 3,712
Transfer to dues on terminated leases* (4,671) (3,344) (4,671) (3,344)
Write-off of loans and receivables (47,531) (116,224) (47,531) (116,224)
Balance on 31 December 2,244,951 1,890,798 2,244,951 1,890,798
Total 7,633,705 6,669,550 7,633,705 6,669,550

* Included in debtors in other assets Note 43.

 

31. Financial Investments – Available for Sale

Accounting Policy

Available-for-sale investments are non-derivative investments that were designated as available for sale or not classified as another category of financial assets. These include Treasury Bills, Bonds, Debt Securities and unquoted and quoted equity securities. They are carried at fair value except for unquoted equity securities whose fair value cannot reliably be measured and therefore carried at cost.

Interest income is recognised in profit or loss, using the effective interest method. Dividend income was recognised in profit or loss when the Bank become entitled to the dividend.

Fair value changes are recognised in other comprehensive income until the investment is sold or impaired, where upon the cumulative gains and losses previously recognised in other comprehensive income are reclassified to profit or loss as are classification adjustment.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Government of Sri Lanka Treasury bills 19,484,244 16,993,057 19,484,244 16,993,057
Government of Sri Lanka Treasury bonds 18,261,795 12,372,198 18,261,795 12,372,198
Equity securities
Quoted (Note 31.1) 18,195,008 18,797,640 18,195,008 18,797,640
Unquoted (Note 31.2) 85,555 112,484 85,555 112,484
Preference shares (Note 31.3) 500 500 500 500
Quoted units in Unit Trust (Note 31.4) 194,590 190,153 194,590 190,153
Unquoted units in Unit Trust (Note 31.5) 644,362 806,211 644,362 806,211
Total 56,866,054 49,272,243 56,866,054 49,272,243

All the financial investments are carried at fair value except for unquoted equity securities and irredeemable preference shares whose fair value cannot reliably be measured is carried at cost.

 

As at 31.12.2017 31.12.2016
Number of
ordinary
shares
Cost*

LKR 000
Fair
value
LKR 000
Number of
ordinary
shares
Cost*

LKR 000
Fair
value
LKR 000

31.1 Quoted Ordinary Shares

Banks, finance and insurance
Commercial Bank of Ceylon PLC – voting 126,696,192 4,839,953 17,230,682 122,747,994 3,508,069 17,798,459
Commercial Bank of Ceylon PLC – non-voting 257,805 20,790 27,070 230,726 18,246 26,649
National Development Bank PLC 2,076,280 364,017 283,412 2,000,000 352,369 312,000
5,224,760 17,541,164 3,878,684 18,137,108
Beverages, Food and Tobacco
Ceylon Tobacco Company PLC 34,532 1,949 33,154 59,532 3,360 47,626
1,949 33,154 3,360 47,626
Chemicals and Pharmaceuticals
Chemical Industries (Colombo) PLC – voting 247,900 14,131 16,535 247,900 14,131 22,311
Chemical Industries (Colombo) PLC – non-voting 389,400 15,577 20,249 389,400 15,577 26,479
29,708 36,784 29,708 48,790
Construction and Engineering
Access Engineering PLC 473,000 9,737 11,163 473,000 9,737 11,730
Colombo Dockyard PLC 160,000 12,160 14,048 160,000 12,160 12,160
21,897 25,211 21,897 23,890
Diversified Holdings
Carson Cumberbatch PLC 46,967 7,745 8,454 46,967 12,681 8,360
Hayleys PLC 7,333 2,225 1,760 7,333 2,225 1,980
Hemas Holdings PLC 496,560 16,297 62,567 496,560 16,297 49,159
John Keells Holdings PLC 219,907 18,362 32,700 219,907 18,362 31,886
Melstacorp Limited 1,669,940 69,829 99,361 1,669,940 69,829 100,196
Richard Pieris & Co. PLC 612,956 5,047 7,907 1,000,000 8,234 8,100
119,505 212,749 127,628 199,681
Healthcare
Ceylon Hospitals PLC – voting 100,000 2,306 8,300 100,000 2,306 8,740
Ceylon Hospitals PLC – non-voting 240,000 4,167 15,672 240,000 4,167 17,976
6,473 23,972 6,473 26,716
Hotels and Travels
Dolphin Hotels PLC 100,000 964 2,900 100,000 964 3,940
964 2,900 964 3,940

Sector classification and fair value per share are based on the list published by Colombo Stock Exchange, as at the reporting date.

* Cost is reduced by write-off of diminution in value other than temporary in respect of investments.

 

As at 31.12.2017 31.12.2016
Number of
ordinary
shares
Cost*

LKR 000
Fair
value
LKR 000
Number of
ordinary
shares
Cost*

LKR 000
Fair
value
LKR 000
Investment Trusts
Ceylon Guardian Investment Trust PLC 152,308 5,918 13,251 152,308 5,918 17,058
Ceylon Investment PLC 288,309 9,428 12,887 288,309 9,429 14,704
15,346 26,138 15,347 31,762
Telecommunications
Dialog Axiata PLC 2,050,000 18,860 26,855 2,050,000 18,860 21,525
Manufacturing
ACL Cables PLC 40,000 2,278 1,688
Ceylon Grain Elevators PLC 148,997 9,197 9,834 48,997 1,297 4,042
Chevron Lubricants Lanka PLC 761,628 27,907 90,634 761,628 27,907 119,576
Kelani Tyres PLC 75,000 4,538 3,330
Piramal Glass Ceylon PLC 5,000,000 14,024 29,000 5,000,000 14,024 26,500
Royal Ceramics Lanka PLC 139,800 16,996 16,007 139,800 16,996 16,217
Teejay Lanka PLC 75,000 3,141 2,550
Tokyo Cement Company (Lanka) PLC – voting 120,000 5,734 7,920 100,000 5,734 5,950
Tokyo Cement Company (Lanka) PLC –
non-voting
1,472,515 25,759 86,878 1,227,096 25,759 63,196
109,574 247,841 91,717 235,481
Power & Energy
Vallibel Power Erathna PLC 2,400,000 6,400 18,240 2,400,000 6,400 21,120
6,400 18,240 6,400 21,120
Total quoted ordinary shares – Bank 5,555,436 18,195,008 4,201,038 18,797,640
Commercial Bank of Ceylon PLC –
Equity Adjustment
2,297,772 2,499,357
Total quoted ordinary shares – Group 7,853,208 18,195,008 6,700,395 18,797,640

Sector classification and fair value per share are based on the list published by Colombo Stock Exchange, as at the reporting date.

* Cost is reduced by write-off of diminution in value other than temporary in respect of Investments.

 

As at 31.12.2017 31.12.2016
Number of
ordinary
shares
Cost*

LKR 000
Number of
ordinary
shares
Cost*

LKR 000

31.2 Unquoted Ordinary Shares

Credit Information Bureau of Sri Lanka 9,184 918 9,184 918
Durdans Medical & Surgical Hospital (Pvt) Limited 1,273,469 16,029 1,273,469 16,029
Fitch Ratings Lanka Limited 62,500 625 62,500 625
Lanka Clear (Private) Limited 100,000 1,000 100,000 1,000
Lanka Financial Services Bureau Limited 100,000 1,000 100,000 1,000
Samson Reclaim Rubber Limited 116,700 116,700 2,334
Sinwa Holdings Limited 460,000 9,200
Society for Worldwide Interbank Financial Telecommunication 6 3,385 6 3,385
Sun Tan Beach Resorts Limited 9,059,013 62,598 9,059,013 67,943
The Video Team (Private) Limited 30,000 30,000 300
Wayamba Plantations (Private) Limited 2,750,000 9,750
Total unquoted ordinary shares – Bank/Group 85,555 112,484

* Cost is reduced by write-off of diminution in value other than temporary in respect of investments.

 

As at 31.12.2017 31.12.2016
Number of
ordinary
shares
Cost

LKR 000
Fair
value
LKR 000
Number of
ordinary
shares
Cost

LKR 000
Fair
value
LKR 000

31.3 Unquoted Irredeemable Preference Shares

Arpico Finance Company PLC 50,000 500 500 50,000 500 500
Total investments in unquoted irredeemable preference shares –
Bank/Group 500 500 500 500

 

As at 31.12.2017 31.12.2016
Number of
units
Cost

LKR 000
Fair
value
LKR 000
Number of
units
Cost

LKR 000
Fair
value
LKR 000

31.4 Quoted Units in Unit Trust

NAMAL Acuity Value Fund 2,112,810 106,070 194,590 2,112,810 106,070 190,153
Total investments in quoted unit – Bank/Group 106,070 194,590 106,070 190,153

31.5 Unquoted Units in Unit Trust

NAMAL Growth Fund 2,125,766 251,539 288,256 2,125,766 251,539 272,867
NAMAL Income Fund 5,810,424 59,322 80,778 11,162,129 113,961 143,719
NAMAL Money Market Fund 11,679,366 118,457 125,616
National Equity Fund 250,000 2,657 8,417 250,000 2,657 8,352
Guardian Acuity Equity Fund 9,052,505 150,000 154,486 9,052,504 150,000 151,432
JB Vantage Value Equity Fund 5,224,660 100,000 112,425 5,224,660 100,000 104,225
Total investments in unquoted unit trusts – Bank/Group 563,518 644,362 736,614 806,211

 

Ordinary Shares Preference Unit Trusts Total
As at Quoted
LKR 000
Unquoted
LKR 000
Unquoted
LKR 000
Quoted
LKR 000
Unquoted
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

31.6 Equity Securities

31.6.1 Composition *

31.6.1.1 Bank
Performing investments 18,180,960 22,957 500 194,590 356,107 18,755,114 19,556,127
Non-performing investments 14,048 62,598 288,255 364,901 350,860
18,195,008 85,555 500 194,590 644,362 19,120,015 19,906,987
31.6.1.2 Group
Performing investments 18,180,960 22,957 500 194,590 356,107 18,755,114 19,556,127
Non-performing investments 14,048 62,598 288,255 364,901 350,860
18,195,008 85,555 500 194,590 644,362 19,120,015 19,906,987

* Disclosure as per the direction on the prudential norms for classification, valuation and operation of the Bank's investment portfolio.

 

32. Financial Investments – Held-to-maturity

Accounting Policy

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that Bank positively intends, and is able, to hold to maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method, less any impairment losses.

A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in there classification of all investment securities as available for sale for the current and the subsequent two financial years.

However, sales and reclassifications in any of the following circumstances would not trigger a reclassification:

  • Sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;
  • Sales or reclassifications after the Bank has collected substantially all of the asset’s original principal; and
  • Sales or reclassifications attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated.

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Quoted debentures (Note 32.1) 5,131,404 5,949,747 5,131,404 5,949,747
Sri Lanka Government Securities
  Treasury Bills 941,938 2,357,188 941,938 2,357,188
  Treasury Bonds 17,434,290 14,882,150 17,434,290 14,882,150
Total 23,507,632 23,189,085 23,507,632 23,189,085

 

As at 31.12.2017 31.12.2016
Number of
debentures
Cost of
investment
LKR 000
Number of
debentures
Cost of
investment
LKR 000

32.1 Quoted Debentures

Abans Limited 2,500,000 267,917
Access Engineering PLC 2,500,000 253,031 2,500,000 253,031
Alliance Finance Company PLC 4,221,693 461,755 5,721,693 623,823
Central Finance Company PLC 1,793,900 191,604 2,075,700 221,626
Commercial Credit & Finance PLC 4,500,000 461,913 4,500,000 461,879
HDFC Bank 532,200 55,227
Hemas Holdings PLC 827,900 85,055 827,900 85,049
Lanka Orix Leasing Company PLC 3,000,000 306,806 3,000,000 306,787
LB Finance PLC 1,155,200 116,344
Lion Brewery (Ceylon) PLC 1,440,900 173,420 1,462,200 195,446
People’s Leasing and Finance PLC 13,326,300 1,391,594 13,326,300 1,391,578
Richard Pieris and Company PLC 1,201,000 123,303
Senkadagala Finance PLC 3,650,000 371,981 3,650,000 371,981
Singer (Sri Lanka) PLC 6,441,900 668,738 8,975,800 942,964
Siyapatha Finance Limited 2,000,000 217,802 2,000,000 217,802
Softlogic Finance PLC 706,500 72,431 706,500 72,429
Vallibel Finance PLC 3,500,000 358,930 3,500,000 358,905
Total investments in quoted debentures – Bank/Group 5,131,404 5,949,747

 

33. Investments in Subsidiaries

Accounting Policy

Bank’s investments in subsidiaries are stated at cost less impairment losses. Reversals of impairment losses are recognised in the income statement, if there has been a change in the estimates used to determine the recoverable amount of the investment.

As at DFCC
Consulting
(Pvt) Limited
ownership
100%
LKR 000
Lanka
Industrial
Estates Limited
ownership
51.16%
LKR 000
Synapsys
Limited
ownership
100%

LKR 000
BANK
31.12.2017


LKR 000
31.12.2016


LKR 000
Balance at beginning 5,000 97,036 70,000 172,036 172,036
Investments during the year 65,000 65,000
Less: Allowance for impairment (Note 33.1) 70,000 70,000 60,104
Balance net of impairment at the end 5,000 97,036 65,000 167,036 111,932

33.1 Movements in Impairment Allowance

Balance at beginning 60,104 39,181
Charge to income statement 9,896 20,923
Balance on 31 December 70,000 60,104

Investment in Synapsys Limited is classified as non-performing (no dividend for three consecutive years).

 

33.2 Non-Controlling Interest (NCI) in Subsidiaries

Accounting Policy

The Non-Controlling Interest are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

Percentage of
ownership
interest
held by NCI
Percentage of
voting rights
held by
NCI
Share of total comprehensive
income of NCI for the
year ended
NCI as at Dividends paid to NCI
for the year ended
31.12.2017
%
31.12.2016
%
31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Lanka Industrial Estates Limited 48.84 48.84 71,572 54,270 276,872 259,900 54,600 46,796
71,572 54,270 276,872 259,900 54,600 46,796

 

33.3 Summarised Financial Information of Subsidiaries

Lanka Industrial Estates Limited

As at 31.12.2017
LKR 000
31.12.2016
LKR 000
Assets 782,569 702,868
Liabilities 215,730 170,777
Equity 566,839 532,091
For the year ended
Revenue 322,161 293,687
Profit after tax 146,078 110,748
Other comprehensive income 456 361
Total comprehensive income 146,534 111,109

 

34. Investments in Associate (Unquoted)

Accounting Policy

Investments in associates are recognised using the equity method, initially stated at cost, including attributable goodwill, and are adjusted thereafter for the postacquisition change in Bank’s share of net assets.

Unrealised gains on transactions between Bank and its associates are eliminated to the extent of Bank’s interest in the respective associate. Unrealised losses are also eliminated to the extent of Bank’s interest in the associate.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
National Asset Management Limited (Ownership 30%)
Balance at beginning 35,270 35,270 64,873 66,980
Share of profit after tax 9,414 11,752
Share of other comprehensive income/(expenses) 479 (3,359)
Dividend received – Elimination on consolidation (7,500) (10,500)
Balance on 31 December 35,270 35,270 67,266 64,873

 

34.1 Summarised Financial Information of Associate

National Asset Management Limited
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
Assets 238,743 239,051
Liabilities 14,576 22,861
Equity 224,167 216,190
For the year ended
Revenue 128,102 134,075
Profit after tax 31,380 39,174
Other comprehensive income/(expenses) 1,596 (11,198)
Total comprehensive income 32,976 27,976

 

35. Investments in Joint Venture (Unquoted)

Accounting Policy

Investments in Joint Ventures are recognised using the equity method, initially stated at cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in Bank’s share of net assets.

Unrealised gains on transactions between Bank and its Joint Ventures are eliminated to the extent of Bank’s interest in the respective Joint Ventures. Unrealised losses are also eliminated to the extent of Bank’s interest in the Joint Ventures.

As at 31.12.2017
Cost of
investment
LKR 000
31.12.2016
Cost of
investment
LKR 000

35.1 Investments in Joint Venture – Bank

Acuity Partners (Pvt) Limited (ownership 50%) 755,000 755,000
755,000 755,000

 

As at 31.12.2017
LKR 000
31.12.2016
LKR 000

35.2 Investment in Joint Venture – Group

Share of identifiable asset and liabilities of joint venture as at
the beginning of the year
1,562,942 1,365,507
Share of unrealised profit on disposal of investments (184,688) (184,688)
Balance at beginning 1,378,254 1,180,819
Investment made during the year 100,000
Share of profit net of tax 175,616 149,399
Share of other comprehensive income (21,416) (21,154)
Change in holding – through subsidiary of joint venture 117,478 (610)
Dividend received during the year (33,220) (30,200)
Group’s share of net assets 1,616,711 1,378,254

 

35.3 Summarised Financial Information of Joint Venture – Acuity Partners (Pvt) Limited

For the year ended 31.12.2017
Cost of
investment
LKR 000
31.12.2016
Cost of
investment
LKR 000
Revenue 808,127 671,603
Depreciation 48,601 34,654
Income tax expense 50,241 61,499
Profit after tax 564,879 534,885
Other comprehensive expenses (69,456) (48,143)
Total comprehensive income 495,423 486,742

 

As at 31.12.2017
LKR 000
31.12.2016
LKR 000
Current assets 5,241,692 4,085,610
Non-current assets 9,299,827 7,488,394
Current liabilities 7,688,029 6,098,931
Non-current liabilities 1,025,766 1,063,494

 

BANK
As at 31.12.2017
LKR 000
31.12.2016
LKR 000

36. Due from Subsidiaries

DFCC Consulting (Pvt) Limited 906 2,265
Synapsys Limited 11,177 17,590
12,083 19,855

 

37. Investment Property

Accounting Policy

Investment property of the Group (held by Subsidiary Lanka Industrial Estates Limited) is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business. The Group has chosen the cost model instead of fair value model and therefore investment property is measured at cost. Cost includes expenditure that is directly attributable to the acquisition of the investment property.

Any gain or loss on disposal of an investment property (calculated as the difference between the next proceeds from disposal and the carrying amount of the item) is recognised in the Income Statement.

GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
Cost
Balance at beginning 363,329 313,909
Acquisition 165,336 49,420
Transfers (64,317)
Cost as at 31 December 464,348 363,329
Less: Accumulated Depreciation
Balance at beginning 131,977 118,177
Charge for the year 13,718 13,800
Accumulated depreciation as at 31 December 145,695 131,977
Carrying amount as at 31 December 318,653 231,352

 

As at 31 December 2017 Buildings


sq.ft
Extent of
Land
perches*
Cost


LKR 000
Accumulated
depreciation/
impairment
LKR 000
Net Book
value

LKR 000
Fair
value

LKR 000

37.1 Details of Investment Properties

Pattiwila Road, Sapugaskanda, Makola 280,000 20,000 464,348 145,695 318,653 2,344,314

* 1 Perch = 25.2929 m2; 1 Sq. ft = 0.0929 m2

The fair value of investment property as at 31 December 2017 situated at Pattiwila Road, Sapugaskanda, Makola was based on market valuations carried out in December 2016 by Mr P B Kalugalagedara, Fellow Members of Institute of Valuers (Sri Lanka), Chartered Valuer.

Rental income from investment property of Group for 2017, LKR 225 million (2016 – LKR 198 million).Operating expenses on investment property of Group for 2017 – LKR 29 million (2016 – LKR 28 million).

38. Property, Plant and Equipment

Accounting Policy

Recognition and Measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset.

Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in the income statement.

Subsequent Costs

Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Bank. Ongoing repairs and maintenance costs are expensed as incurred.

Capital work-in-Progress

These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation. These are stated in the Statement of Financial Position at cost. Capital work-in-progress would be transfered to the relevant asset when it is available for use i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Capital work-in-progress is stated at cost less any accumulated impairment losses.

Depreciation

Items of property, plant and equipment are depreciated from the month they are available for use up to the month of disposal. Depreciation is calculated to write-off the cost of items of property, plant and equipment less their estimated residual values using the straight-line basis over their estimated useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods of significant items of property, plant and equipment are as follows:

  Year
Buildings 20
Office equipment and motor vehicles 5
Fixtures and fittings 10

Derecognition

The carrying amount of property and equipment is derecognised on disposal or when no-future economic benefits are expected from its use of the gain or loss arising from the derecognition (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in the income statement.

Land and
buildings
LKR 000
Office
equipment
LKR 000
Furniture
and fittings
LKR 000
Motor
vehicles
LKR 000
Total
31.12.2017
LKR 000
Total
31.12.2016
LKR 000

38.1 Composition: Bank

Cost at beginning 467,861 1,573,810 840,181 269,276 3,151,128 2,947,897
Acquisitions 11,324 486,099 85,664 22,210 605,297 218,550
Less: Disposals 16,228 911 30,404 47,543 15,319
Cost as at 31 December 479,185 2,043,681 924,934 261,082 3,708,882 3,151,128
Accumulated depreciation
at beginning
214,541 1,238,231 524,366 246,133 2,223,271 2,004,880
Depreciation for the years 18,833 158,558 67,820 14,337 259,548 233,079
Less: Accumulated depreciation
on disposals
16,183 599 30,405 47,187 14,688
Accumulated depreciation as at
31 December
233,374 1,380,606 591,587 230,065 2,435,632 2,223,271
Carrying amount as at 31 December 245,811 663,075 333,347 31,017 1,273,250 927,857

 

As at 31 December 2017 Buildings

Sq. Ft.
Extent of
land
Perches*
Cost

LKR 000
Accumulated
depreciation
LKR 000
Net book
value
LKR 000

38.1.1 List of Freehold Land and Buildings

73/5, Galle Road, Colombo 3 57,190 106.81 85,518 75,716 9,802
5, Deva Veediya, Kandy 6,260 12.54 16,195 7,408 8,787
259/30, Kandy Road, Bambarakelle,
Nuwara-Eliya
93.5 7,279 7,279
73, W A D Ramanayake Mawatha, Colombo 2 37,538 45.00 197,268 132,537 64,731
4 A, 4th Cross Lane, Borupana, Ratmalana 20.00 2,600 2,600
454, Main Street, Negombo 19,087 29.00 170,325 17,713 152,612
479,185 233,374 245,811

* 1 perch = 25.2929m2; 1 sq ft = 0.0929m2

 

LKR million Date of
valuation

38.1.2 Market Value of Properties

73/5, Galle Road, Colombo 3 1,509 31.12.2017
5, Deva Veediya, Kandy 125 31.12.2017
73, W A D Ramanayake Mawatha, Colombo 2 705 31.12.2017
4 A, 4th Cross Lane, Borupana, Ratmalana 15 31.12.2017
454, Main Street, Negombo 250 05.05.2015
259/30, Kandy Road, Bambarakelle, Nuwara-Eliya 80 26.05.2015

(Valued by Mr A A M Fathihu – Former Government Chief Valuer and Mr J S M I B Karunatilaka, Associate Member of the Institute of Valuers of Sri Lanka).

38.1.3 Fully-Depreciated Property, Plant and Equipment – Bank

The initial cost of fully-depreciated property, plant and equipment as at 31 December 2017, which are still in use as at the reporting date is as follows:

BANK
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
Buildings 79,312 58,739
Office equipment 1,007,584 909,043
Furniture and fittings 267,954 158,184
Motor vehicles 199,691 183,925
1,554,541 1,309,891

 

Land
buildings
LKR 000
Office
equipment
LKR 000
Furniture
& fittings
LKR 000
Motor
vehicles
LKR 000
Total
31.12.2017
LKR 000
Total
31.12.2016
LKR 000

38.2 Composition – Group

Cost at beginning 691,570 1,620,996 853,094 320,850 3,486,510 3,254,738
Acquisitions 18,492 488,220 86,390 22,210 615,312 258,492
Less: Disposals 16,799 911 30,651 48,361 26,360
Write-off 360
Cost as at 31 December 710,062 2,092,417 938,573 312,409 4,053,461 3,486,510
Accumulated depreciation at beginning 356,983 1,268,873 541,168 276,867 2,443,891 2,212,437
Depreciation for the year 31,092 164,642 68,811 21,879 286,424 257,532
Less: Accumulated depreciation
on disposals
16,764 599 30,652 48,015 25,718
Write-off 360
Accumulated depreciation
as at 31 December
388,075 1,416,751 609,380 268,094 2,682,300 2,443,891
Carrying amount as at 31 December 321,987 675,666 329,193 44,315 1,371,161 1,042,619

 

39. Intangible Assets

Accounting Policy

Intangible Assets – Computer Application Software

All software licensed for use by the Bank, not constituting an integral part of related hardware are included in the statement of financial position under the category intangible assets and carried at cost less cumulative amortisation and any impairment losses.

The initial acquisition cost comprises licence fee paid at the inception, import duties, non-refundable taxes and levies, cost of customising the software to meet the specific requirements of the Bank and other directly attributable expenditure in preparing the asset for its intended use.

The initial cost is enhanced by subsequent expenditure incurred by further customisation to meet ancillary transaction processing and reporting requirements tailormade for the use of the Bank constituting an improvement to the software.

The cost is amortised, using the straight-line method, at the rate of 20% per annum commencing from the date the application software is available-for-use. The amortised amount is based on the best estimate of its useful life, such that the cost is amortised fully at the end of the useful life during which the Bank has legal right of use. The amortisation cost is recognised as an expense.

An intangible asset is derecognised on disposal or when no future economic benefits are expected from its use and subsequent disposal.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
Software (refer 39.1) 369,777 203,742 374,104 208,382
Software under development (refer 39.2) 128,307 128,307
Total 498,084 203,742 502,411 208,382

39.1 Software

Cost at beginning 1,024,450 1,313,816 1,031,330 1,316,581
Acquisitions 275,608 58,833 276,529 62,948
Less: Write-off* 348,199 348,199
Cost as at 31 December 1,300,058 1,024,450 1,307,859 1,031,330
Accumulated amortisation at beginning 820,708 1,066,701 822,948 1,068,636
Amortisation for the year 109,573 98,262 110,807 98,567
Less: Write-off* 344,255 344,255
Accumulated amortisation as at 31 December 930,281 820,708 933,755 822,948
Carrying amount as at 31 December 369,777 203,742 374,104 208,382

* Software not in use

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

39.2 Software Under Development

As at begining
Addition to working progress 128,307 128,307
Transfers/adjustments
As at 31 December 128,307 128,307

 

40. Goodwill on Consolidation

Accounting Policy

Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquire exceed the amount of the identifiable assets and liabilities acquired. If the amount of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the income statement. Goodwill arises on the acquisition of interests in joint ventures and associates when the cost of investment exceeds Bank’s share of the net fair value of the associate’s or joint venture’s identifiable assets and liabilities.

GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
DFCC Vardhana Bank PLC 146,603 146,603
Lanka Industrial Estates Limited 9,623 9,623
156,226 156,226

In accordance with the provisions of part VIII of the Companies Act, DFCC Vardhana Bank PLC (DVB) has been amalgamated with DFCC Bank PLC with effect from 1 October 2015. The amalgamation between two entities is considered as a common control transaction, as DFCC Bank continues to control the operations of DVB after amalgamation. Thus the results of amalgamation of two entities are economically the same before and after the amalgamation as the entity will have identical net assets. Therefore, DFCC will continue to record carrying values including the remaining goodwill that resulted from the original acquisition of DVB in the consolidated financial status.

41. Government Grant Receivable/Deferred Income – CBSL Swap

Accounting Policy

Government grants are recognised initially as deferred income at fair value, when there is a reasonable assurance that they will be received and Group will comply with the conditions associated with the grant, and are then recognised in profit or loss as other income on a systematic basis in the period in which the expenses (losses) are recognised.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

41.1 Government Grant – Receivable

Fair value at beginning 861,915 539,758 861,915 539,758
Change in fair value on the renewal of contract (133,055) 405,763 (133,055) 405,763
Change in fair value during the year (86,277) (83,606) (86,277) (83,606)
Fair value at 31 December 642,583 861,915 642,583 861,915

41.2 Government Grant – Deferred Income

Fair value at beginning 701,665 476,008 701,665 476,008
Change in fair value on the renewal of contract (133,055) 405,763 (133,055) 405,763
Change in fair value during the year (86,277) (83,606) (86,277) (83,606)
Foreign exchange gain/(loss) on revaluation 172,250 (96,500) 172,250 (96,500)
Amortisation of deferred income on Government grant –
CBSL Swap
85,973 (180,106) 85,973 (180,106)
Fair value at 31 December 654,583 701,665 654,583 701,665

 

DFCC Bank PLC in October 2013 raised USD 100 million by Issue of Notes abroad repayable in October 2018. The proceeds of this note issue are to be deployed predominantly in LKR denominated monetary assets. In order to hedge the resulting net open foreign currency liability position, DFCC Bank PLC has entered into a annualy renewable currency SWAP arrangement with Central Bank of Sri Lanka (CBSL) for 75% of the US Dollar (USD) denominated liability. Accordingly this contract was renewed in November 2016.

The currency SWAP arrangement, pursuant to Government policy for the principal amount only is designed to reimburse DFCC Bank by CBSL for any exchange loss incurred and conversely for DFCC Bank to pay CBSL any exchange gain arising from depreciation of LKR vis-a-vis USD or appreciation of LKR vis-a-vis USD respectively. Although, USD denominated notes are repayable at the end of 5 years, the currency SWAP arrangement contract is renewed annually up to the date of repayment of the notes so as to exchange cash flow arising from movement in USD/LKR spot exchange rate that occurs at the time of renewal of the annual contract.

The currency SWAP arrangement with CBSL provides for SWAP of LKR to USD at the end of the contract at the same spot rate as the initial SWAP of USD to LKR at the commencement of the annual contract. (i.e. CBSL SWAP arrangement amounts to a full discount to USD LKR spot rate at the end of the contract.)

The hedging instrument for currency swap is deemed to be a derivative asset recognised at the fair value at the inception of the contract.

The fair value of this derivative asset is measured by reference to forward exchange quotes for USD purchase contracts by commercial banks, who are the normal market participants. Thus the fair value gain at the inception of the contract is the full amount of the forward premium quote at the end of one year.

The subsequent change in fair value is recognised in the income statement.

CBSL normally does not enter into forward exchange contracts with market participants providing 100% discount to the USD LKR spot rate at the time of the maturity of the contract. Thus this arrangement has features of both derivative instrument and Government grant through the agency of CBSL.

The initial gain by reference to forward price of an equivalent forward exchange dollar purchase contract is recognised as a Government grant and deferred income.

The deferred income is amortised on a systematic basis over the period in which the Bank recognises the fall in value of derivative which the grant is intended to compensate.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

42. Deferred Tax Asset/Liability

Deferred tax liability (Note 42.1) 1,194,027 851,662 1,232,478 873,912
Deferred tax asset (Note 42.2) 3,160 628
Net total 1,194,027 851,662 1,229,318 873,284

42.1 Deferred Tax Liability

Balance at beginning 991,492 1,021,744 1,013,742 1,022,192
Recognised in income statement 87,393 (30,252) 103,594 (8,002)
Recognised in other comprehensive income 190,583 190,583 (448)
1,269,468 991,492 1,307,919 1,013,742
Transferred from deferred tax asset (75,441) (139,830) (75,441) (139,830)
Balance as at 31 December 1,194,027 851,662 1,232,478 873,912

42.2 Deferred Tax Asset

Balance at beginning 139,830 141,254 140,458 143,238
Recognised in income statement 10,973 (69,953) 14,048 (70,623)
Recognised in other comprehensive income (75,362) 68,529 (75,905) 67,843
75,441 139,830 78,601 140,458
Offset against deferred tax liability (75,441) (139,830) (75,441) (139,830)
Balance as at 31 December 3,160 628

42.3 Recognised Deferred Tax Assets
and Liabilities

Assets
Property, equipment and software (898) (1,234)
Gratuity liability and actuarial losses
on defined benefit plans
75,441 61,868 79,499 63,730
Fair value of available-for-sale financial assets 77,962 77,962
75,441 139,830 78,601 140,458
Liabilities
Property, equipment and software 176,168 133,762 200,418 156,012
Finance leases 902,717 857,730 902,717 857,730
Fair value of available-for-sale financial assets 190,583 190,583
Undistributed profits of the group 14,201
1,269,468 991,492 1,307,919 1,013,742

 

42.3.1 Tax on Gains on Disposal

With the introduction of new Inland Revenue Act No. 24 of 2017 the business assets/capital assets will attract tax at the corporate tax rate on the gains at the time of disposal. Accordingly deferred tax liability is expected to be provided for free hold land. However as the Bank/Group is under cost model, no deferred tax liability has been provided in these Financial Statements.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

42.4 Unrecognised Deferred Tax Assets

Accumulated tax losses
DFCC Consulting (Pvt) Limited – Subsidiary 5,956 6,114
Synapsys Limited – Subsidiary 6,972 7,321
12,928 13,435

43. Other Assets

Refundable deposits and advances 370,300 323,819 372,070 330,694
Debtors 805,204 720,796 834,334 760,598
Clearing account balances 1,600,238 1,521,021 1,600,238 1,521,021
Receivable from pension fund 181,820 165,363 181,820 165,363
2,957,562 2,730,999 2,988,462 2,777,676

44. Due to Banks

Balances with foreign banks 1,067,474 1,536,573 1,067,474 1,536,573
Borrowing – local banks 8,573,261 12,063,868 8,573,261 12,063,868
Securities sold under repurchase (Repo) agreements 4,503,146 4,503,146
9,640,735 18,103,587 9,640,735 18,103,587

45. Due to Other Customers

Total amount due to other customers 193,307,534 140,514,373 192,920,147 140,219,872

45.1 Analysis

45.1.1 By Product

Demand deposits (current accounts) 4,468,869 4,649,369 4,468,192 4,648,714
Savings deposits 36,660,313 23,798,492 36,657,366 23,776,214
Fixed deposits 151,284,299 111,052,817 150,900,536 110,781,249
Certificate of deposits 477,711 739,483 477,711 739,483
Other deposits 416,342 274,212 416,342 274,212
193,307,534 140,514,373 192,920,147 140,219,872

45.1.2 By Currency

Sri Lanka Rupee 151,552,198 112,168,697 151,172,107 111,881,136
United States Dollar (USD) 37,950,742 23,790,651 37,943,446 23,783,711
Great Britain Pound (GBP) 1,044,429 1,521,875 1,044,429 1,521,875
Others 2,760,165 3,033,150 2,760,165 3,033,150
193,307,534 140,514,373 192,920,147 140,219,872

46. Other Borrowing

Repayable in foreign currency
Borrowing sourced from
Multilateral institutions 3,281,998 3,820,210 3,281,998 3,820,210
Bilateral institutions 11,266,708 3,995,545 11,266,708 3,995,545
14,548,706 7,815,755 14,548,706 7,815,755
Repayable in Rupees
Borrowing sourced from
Multilateral Institutions 19,395,507 18,536,211 19,395,507 18,536,211
Bilateral Institutions 1,369,093 1,154,259 1,369,093 1,154,259
Central Bank of Sri Lanka – refinance loans (secured) 199,625 250,548 199,625 250,548
Securities sold under repurchase (Repo) agreements 5,806,660 12,994,573 5,777,943 12,979,527
26,770,885 32,935,591 26,742,168 32,920,545
41,319,591 40,751,346 41,290,874 40,736,300

 

46.1 Assets Pledged as Security

Nature Amount
31.12.2017
LKR 000
Assignment in terms of Section 88 A of the Monetary Law of Loans refinanced by Central Bank 199,625

 

47. Debt Securities Issued

BANK/GROUP
Year of Issuance Face value
LKR 000
Interest rate
%
Repayment terms Issue date Maturity date 31.12.2017
LKR 000
31.12.2016
LKR 000
Issued by Bank
i. Debenture issue (LKR)
– Listed 8.36 3 Years 18 Aug. 14 18 Aug. 17 5,138,232
3,000,000 9.10 5 Years 10 Jun. 15 10 Jun. 20 3,136,708 3,131,330
5,315,450 10.63 3 Years 18 Mar. 16 18 Mar. 19 5,747,779 5,745,558
ii. Notes issue (USD) 15,360,000 9.63 5 Years 31 Oct. 13 31 Oct. 18 15,559,280 15,164,065
23,675,450 24,443,767 29,179,185
Due within one year 15,559,280 5,138,232
Due after one year 8,884,487 24,040,953
24,443,767 29,179,185

Carrying values are the discounted amounts of principal and interest.

 

47.1 Debt Securities Issued – Listed Debentures

Debenture category Interest payable
frequency
Applicable
interest rate %
Interest rate of
Comparative
Government
securites
(Gross) p.a.
%
Balance as at
31-12-2017



LKR 000
Market price Yield last
traded



%
Highest Lowest Last traded
Fixed Rate
2015-2020 Annually 9.1 9.62 3,136,708 N/T N/T N/T N/A
2016-2019 Annually 10.63 9.29 5,747,779 N/T N/T N/T N/A

 

Other Ratios 31.12.2017 31.12.2016
Debt to equity Ratio 1.77 2.12
Interest cover 0.99 1.01
Liquid asset ratio (%) 26.8 27.2

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

48. Other Liabilities

Accruals 416,079 395,545 420,742 412,010
Prior year's dividends 47,318 57,538 47,318 57,538
Security deposit for leases 4,065 4,065 81,544 44,888
Prepaid loan and lease rentals 56,836 57,166 108,980 84,442
Account payables 3,086,110 2,925,313 3,120,922 2,978,449
Provision for staff retirement benefits (Note 48.1) 330,578 282,684 352,710 306,640
Other provisions (Note 48.2) 525,412 468,364 525,412 468,364
4,466,398 4,190,675 4,657,628 4,352,331

48.1 Provision for Staff Retirement Benefits

Defined benefit – unfunded pension (Note 48.1.1) 61,147 61,728 61,147 61,728
– unfunded end of service gratuity (Note 48.1.2) 269,431 220,956 291,563 244,912
– funded pension (Note 48.1.3)
330,578 282,684 352,710 306,640

 

BANK/GROUP
As at 2017
LKR 000
2016
LKR 000

48.1.1 Unfunded Pension Liability

Balance at beginning 61,728 66,994
Interest on obligation 5,794 5,688
Benefits paid (6,995) (6,995)
Actuarial experience loss 620 608
Actuarial gain due to changes in assumptions (4,567)
Present value of defined benefit pension obligations 61,147 61,728

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

48.1.2 Unfunded End of Service Gratuity

Balance at beginning 220,956 180,163 244,812 206,016
Liability transferred 2,414 3,416
Current Service cost 35,041 29,417 41,507 33,853
Interest on obligation 22,096 17,440 23,877 19,218
Benefits paid (20,363) (20,488) (24,652) (22,396)
Actuarial experience loss 9,287 11,306 6,019 8,519
Actuarial gain due to changes in assumptions (298) (298)
Present value of defined benefit pension obligations 269,431 220,956 291,563 244,812

 

BANK/GROUP
As at 2017
LKR 000
2016
LKR 000

48.1.3 Funded Pension Liability/(Asset)

Present value of defined benefit pension obligations (Note 48.1.3.1) 2,372,248 2,280,943
Fair value of pension assets (Note 48.1.3.2) (2,554,068) (2,446,306)
Defined benefit liability/(asset) (181,820) (165,363)

 

As per LKAS 19 – “Employee Benefits” if a plan is in surplus, then the amount recognised as an asset in the Statement of Financial Position is limited to the “asset ceiling”. The asset ceiling is the present value of any economic benefit s available to the entity in the form of a refund or a reduction in future contributions. By analysing all the future economic benefits available to the DFCC Pension Fund, the independent actuary Mr Piyal S Goonetilleke of Priyal S Goonetilleke & Associate has estimated the asset ceiling as at 31 December 2017 to be LKR 287 million in his report dated 13 February 2017.

BANK/GROUP
As at 2017
LKR 000
2016
LKR 000
48.1.3.1 Movement in Defined Pension Obligation
Present value of defined benefit pension obligations at the beginning 2,280,943 2,296,454
Current service cost 60,496 71,746
Interest on obligation 228,094 206,681
Benefits paid (197,770) (155,931)
Actuarial experience loss 485 85,266
Actuarial gain due to changes in assumptions (223,273)
Present value of defined benefit pension obligations 2,372,248 2,280,943
48.1.3.2 Movement in Pension Assets
Pension assets at the beginning 2,446,306 2,237,646
Expected return on pension assets 233,917 193,785
Employer's contribution 28,823 164,000
Benefits paid (197,770) (155,931)
Actuarial experience gain 42,792 6,806
Pension assets 2,554,068 2,446,306
48.1.3.3 Plan Assets Consist of the following
Debentures 119,184 216,555
Government bonds 231,899 1,439,581
Fixed deposits 2,211,589 789,623
Others (190,424) 547
2,372,248 2,446,306

 

Unfunded
pension
liability*
Unfunded
end of
service gratuity*
Funded
pension
liability*
As at 31.12.2017
LKR 000
31.12.2017
LKR 000
31.12.2017
LKR 000
48.1.3.4. The Expected Benefit Payout in the Future Years
to the Defined Benefit Obligation – Bank
Within next 12 months 6,995 21,390 165,455
Between 2 and 5 years 27,982 143,510 784,418
Beyond 5 years 34,977 338,501 1,460,791

* Based on expected benefits payout in next 10 years

48.1.3.5 Unfunded Pension Liability

This relates to pension liability of an ex-employee, not funded through the DFCC Bank PLC Pension Fund. The liability covers the pension benefit to retiree and survivors.

48.1.3.6 Actuarial Valuation

Actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of the Society of Actuaries USA of Priyal S Goonetilleke & Associates, on 31 December 2017.

48.1.3.7 Actuarial Valuation Method

Projected unit credit method was used to allocate the actuarial present value of the projected benefits earned by employees to date of valuation.

31 December 2017 31 December 2016
Pension benefit

(%)
End of service
gratuity
(%)
Pension benefit

(%)
End of service
gratuity
(%)
48.1.3.8 Principal Actuarial Assumptions
Discount rate per annum
Pre-retirement 10 10 10 10
Post-retirement 10 Not applicable 10 Not applicable
Future salary increases per annum 10.5 10.5 10.5 10.5
Expected rate of return
on pension assets
10 10
Actual rate of return
on pension assets
11.8 11.8
Mortality UP 1984 mortality table RP-2000 mortality table UP 1984 mortality table RP-2000 mortality table
Retirement age 55 years 55 years 55 years 55 years
Normal form of payment: Lump sum commuted pension payment followed by reduced pension for 10 years (25% reduction) (for new entrants recovery period is 15 years) Lump sum Lump sum commuted pension payment followed by reduced pension for 10 years (25% reduction) (for new entrants recovery period is 15 years) Lump sum
Turnover rate –
Age
20 10.0 10.0 10.0 10.0
25 10.0 10.0 10.0 10.0
30 10.0 10.0 10.0 10.0
35 7.5 7.5 7.5 7.5
40 5.0 5.0 5.0 5.0
45 2.5 2.5 2.5 2.5
50/55 1.0 1.0 1.0 1.0

The principle actuarial assumptions in the previous year has not changed. The discount rate is the yield rate on 31 December 2017 with a term equalling the estimated period for which all benefit payments will continue. This period is approximately 22.4 years for pension and 10.6 years for end of service gratuity.

48.1.3.9 Principal Actuarial Assumptions – Group

The subsidiaries have used discount rate of 10.5% and the salary increment rate ranging 6.6% – 8%.

48.1.3.10 Sensitivity of Assumptions Used in the Actuarial Valuation

The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions used with all other variables held constant in the employment benefit liability measurement. The effect in the income statement and the statement of financial position with the assumed changes in the discount rates and salary increment rate is given below:

Effect on
income statement
increase/(decrease)
LKR 000
Effect on
defined benefit obligation
increase/(decrease)
LKR 000
Funded Pension Liability
Discount rate
1% 94,927 (94,927)
-1% (227,378) 227,378
Salary increment rate
1% (44,561) 44,561
-1% 42,054 (42,054)
Unfunded Pension Liability
Discount rate
1% 3,920 (3,920)
-1% (4,446) 4,446
Unfunded End of Service Gratuity *
Discount Rate
1% 27,870 (27,870)
-1% (32,816) 32,816
Salary increment rate
1%
-1% (31,626) 31,626
27,439 (27,439)

* Salary increment not applicable for ex-employee

 

As at 31.12.2016
LKR 000
31.12.2015
LKR 000
31.03.2015
LKR 000
31.03.2014
LKR 000
31.03.2013
LKR 000
48.1.3.11 Historical Information
Present value of the defined benefit obligation 2,280,943 2,296,454 2,141,648 1,866,434 1,750,987
Fair value of plan assets (2,446,306) (2,237,646) 2,139,052 2,027,664 1,821,009
(Surplus)/Deficit in the plan (165,363) 58,808 2,596 (161,230) (70,022)

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

48.2 Other Provisions

Balance as at the beginning 468,364 414,702 468,364 414,702
Provisions for the financial year 525,412 468,364 525,412 468,364
Provisions used during the year (452,256) (401,927) (452,256) (401,927)
Provisions reversed during the year (16,108) (12,775) (16,108) (12,775)
Balance as at 31 December 525,412 468,364 525,412 468,364

 

BANK GROUP
Face value
LKR 000
Interest rate
%
Repayment
terms
Issue
date
Maturity
date
31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

49. Subordinated Term Debt

Listed Debentures
Issued by Bank 6,043,140 12.75 7 years 9-Nov-16 9-Nov-23 6,129,480 6,131,261 6,129,480 6,131,261
956,860 12.15 5 years 9-Nov-16 9-Nov-21 970,023 970,094 970,023 970,094
Transferred on
amalgamation
2,000,000 9.4 5 years 10-Jun-15 10-Jun-20 2,103,367 2,104,282 2,103,367 2,104,282
9,000,000 9,202,870 9,205,637 9,202,870 9,205,637
Due after one year 9,202,870 9,205,637 9,202,870 9,205,637
9,202,870 9,205,637 9,202,870 9,205,637

 

49.1 Subordinated Term Debt – Listed Debentures

Debenture category Interest rate
frequency


%
Applicable
interest rate
Interest rate of
comparative
government securities
(Gross) p.a
%
Balance as at
31.12.2017


LKR 000
Market price Yield last
traded


%
Highest Lowest Last traded
Fixed Rate
2015-2020 Annually 9.4 9.62 2,103,367 N/T N/T N/T N/A
2016-2021 Annually 12.15 9.75 970,023 N/T N/T N/T N/A
2016-2023 Annually 12.75 10.01 6,129,480 100.5 100 100 12.71
9,202,870

N/T – Not traded

Debt equity ratio, interest cover and liquid asset ratio is given in note 47.1.

 

BANK/GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000

50. Stated Capital

Balance as at 31 December (Number of shares – 265,097,688) 4,715,814 4,715,814

 

51. Statutory Reserves

51.1 Reserve Fund

Five per cent of profit after tax is transferred to the reserve fund as per Direction issued by Central Bank of Sri Lanka under Section 76 (j) (1) of the Banking Act No. 30 of 1988 as amended by Banking (Amendment) Act No. 33 of 1995.

52 Retained Earnings

This represents cumulative net earnings, inclusive of final dividend approved amounting to LKR 1,325 million. The balance is retained and reinvested in the business of the bank.

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

53. Other Reserves

General reserve 13,779,839 13,779,839 13,779,839 13,779,839
Fair value reserve 13,298,686 14,549,487 11,032,483 12,085,454
Exchange equalisation reserve 13,061 33,428
27,078,525 28,329,326 24,825,383 25,898,721

 

54. Commitments and Contingencies

Accounting Policy

Commitments and Contingencies

Contingent liabilities, which include guarantees are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Bank; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.

Financial Guarantees

Liabilities under financial guarantee contracts are recorded initially at their fair value, which is generally the fee received or receivable. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the obligations.

As at BANK GROUP
31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000

54.1 Commitments and Contingencies

Guarantees issued to –
Banks in respect of indebtedness of customers of the Bank 135,464 34,403 135,464 34,403
Companies in respect of indebtedness of customers of the Bank 9,297,340 5,092,952 9,297,340 5,092,952
Principal collector of customs (duty guarantees) 276,587 313,295 276,587 313,295
Shipping guarantees 2,939,459 1,541,757 2,939,459 1,541,757
Documentary credit 15,098,107 9,763,476 15,098,107 9,763,476
Bills for collection 2,305,466 3,148,059 2,305,466 3,148,059
Performance bonds 3,922,424 2,461,709 3,922,424 2,461,709
Forward exchange contracts (net) 38,118,013 26,704,132 38,118,013 26,704,132
Commitments in ordinary course of business – Commitments for unutilised credit facilities 62,852,575 52,059,192 62,852,575 52,059,192
Capital expenditure approved by the Board of Directors
Contracted 288,635 202,692 288,635 202,692
Not contracted 337,254 130,434 337,254 130,434
135,571,324 101,452,101 135,571,324 101,452,101

 

54.2 Litigation Against the Bank

54.2.1

A client has filed action against five defendants including the Bank in the District Court of Kurun egala, claiming that a property mortgaged by him to the Bank had been unlawfully transferred to a third party under the parate process to be set aside, and also claiming LKR 6 million as damages from the Bank. The Bank is defending the case before the District Court.

54.2.2

There are four cases filed in the District Court of Kandy and one case filed in the District Court of Negombo and another case in the District Court of Moratuwa, where third parties are claiming ownership of properties acquired by the Bank under recovery action. The Bank is defending the cases before the respective District Courts.

54.2.3

There is one cases filed in the District Court of Bandarawela, where a third party is claiming ownership of a property mortgaged to the Bank. The Bank is defending the cases before the respective District Court.

54.2.4

There are two cases filed in the District Court of Anuradhapura, by a customer claiming damages due to a cancellation by the insurer of an insurance policy covering a mortgaged asset and claiming damages for not insuring a mortgaged asset. The Bank is defending the cases before the District Court.

54.2.5

There is one case filed in the District Court of Theldeniya, where a third party is claiming ownership of a property mortgaged to the Bank. The Bank is defending the case before the District Court of Theldeniya.

54.2.6

A client has filed a case in the District Court of Matara claiming damages from the Bank claiming that as the loan was not disbursed in lump sum but in instalments bases on the client's progress as such his business went into decline and he suffered losses. The Bank is defending the case before the District Court of Matara.

54.2.7

The Bank has appealed to the High Court to set aside an award made in favour of an ex-employee by the Labour Tribunal.

54.2.8

Case filed in the Labour Tribunal by one ex-employee of the Bank, claiming compensation from the Bank.

54.2.9

Case filed in the Labour Tribunal – Galle by an ex-employee of the Bank, claiming compensation and reinstatement from the Bank.

No material losses are anticipated as a result of the aforesaid actions.

54.3 Tax Assessments Against the Bank

The following assessments are outstanding, against which the Bank has duly appealed.

  • The income tax assessment received by the Bank for the Year of Assessment 2010/11, which was determined by the Commissioner General of Inland Revenue amounting to LKR 760 million has been appealed to the Tax Appeal Commission for their determination.
  • Tax assessments received by the Bank on Value Added Tax for quarters ending 31.03.2016, 30.06.2016 and 30.09.2016, charging a penalty of LKR 2.8 million, due to differences in records of the Department of Inland Revenue. The bank has paid all the taxes on due dates and accordingly has appealed against these assessments.

The Bank is of the view that the above assessments will not have any significant impact on the financial statements.

55. Related Party Transactions

55.1

The Group's related parties include associates, subsidiaries, Trust established by the Bank for post-employment retirement plan, joint venture, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced for which significant voting power is held by Key Management Personnel or their close family members.

55.2 Parent and Ultimate Controlling Party

The Bank does not have an identifiable parent of its own.

As at 31.12.2017
LKR 000
31.12.2016
LKR 000

55.3 Transactions with Subsidiaries

55.3.1 Statement of Financial Position – Bank

Liabilities
Due to other customers 380,431 290,777
Other borrowings 28,058 15,065
408,489 305,842

 

Year ended 31 December 2017
LKR 000
2016
LKR 000

55.3.2 Income Statement – Bank

Interest income 23 20
Interest expense 45,710 29,930
Fee and commission income 33 44
Other operating income (net) 413 317
Net gain from financial investments – dividend received 51,466 44,596
Other overhead expenses net of reimbursements 106,067 125,412

55.3.3 Other Transactions – Bank

Payments made for purchase of computer software 43,782 31,134

 

As at 31.12.2017
LKR 000
31.12.2016
LKR 000

55.4 Transactions with Joint Venture

55.4.1 Statement of Financial Position – Bank

Assets
Loans to and receivable from other customers 127,522 146,271
127,522 146,271
Liabilities

Due to other customers

442 1,506

Debt securities issued

103
442 1,609

 

Year ended 31 December 2017
LKR 000
2016
LKR 000

55.4.2 Income Statement – Bank

Interest income 18,258
Interest expenses 8
Fee and commission income 1
Net Gain from financial investments – dividend received 33,220 30,200

 

As at 31.12.2017
LKR 000
31.12.2016
LKR 000

55.5 Transactions with Associate

55.5.1 Statement of Financial Position-Bank

Liabilities
Due to other customers 306 135
306 135

 

Year ended 31 December 2017
LKR 000
2016
LKR 000

55.5.2 Income Statement – Bank

Fee and commission income 15
Net gain from financial investments – dividend received 6,777 9,463

 

As at 31.12.2017
LKR 000
31.12.2016
LKR 000

55.6 Transaction with Entities in which Directors of the Bank
have Significant Influence

55.6.1 Statement of Financial Position – Bank

Assets
Loans to and receivables from other customers 63,803
63,803
Liabilities
Due to other Customers 1,158
1,158

 

Year ended 31 December 2017
LKR 000
2016
LKR 000

55.6.2 Income Statement – Bank

Interest income 250
Interest expenses 11
Fee and commission income 973
Other overhead expense 30

55.7 Transactions with Key Management Personnel

55.7.1 Key Management Personnel

Key Management Personnel are the Board of Directors of the Bank including Chief Executive, Deputy Chief Executive, Executive Vice President Strategic Planning and Subsidiaries, Chief Risk Officer, Chief Financial Officer, Chief Operating Officer, and Senior Vice President Treasury and Resource Mobilisation for the purpose of Sri Lanka Accounting Standard – L KAS 24 on “Related Party Disclosures”.

BANK GROUP
Year ended
31.12.2017
LKR 000
Year ended
31.12.2016
LKR 000
Year ended
31.12.2017
LKR 000
Year ended
31.12.2016
LKR 000

55.7.2 Compensation of Directors and Other Key Management Personnel

Number of persons 14 16 16 18
Short-term employment benefits 139,434 124,920 155,950 139,575
Post-employment benefits – Pension 1,931 2,494 1,931 2,494
– Others 17,528 15,115 17,983 15,524
158,893 142,529 175,864 157,593

 

As at 31.12.2017 31.12.2016
Number of
KMPs
LKR 000 Number of
KMPs
LKR 000

55.7.3 Other Transactions with Key Management Personnel and their Close Family Members

55.7.3.1 Statement of Financial Position – Bank
Assets
Loans to and receivables from other customers 4 22,994 6 17,289
Liabilities
Due to other customers 18 270,569 21 285,106
Other borrowings 1 32,489 1 16,400
Debt securities issued 1 2,168 1 2,168
305,226 303,674

 

Year ended
31.12.2017
LKR 000
Year ended
31.12.2016
LKR 000
55.7.3.2 Income Statement – Bank
Interest income 1,265 877
Interest expense 30,575 20,405
Fee and commission income 5 5

 

55.7.4 Accommodation Granted to Directors of the Bank

Disclosure under Section 47 (11A) of the Banking Act, No. 30 of 1988 as amended by Amendment Act No. 2 of 2005

Name of Director Limit
LKR 000
Type of
Facility
Balance as at
31.12.2017
LKR 000
C R Jansz 500 Credit Card
L H A L Silva 500 Credit Card
S R Thambiayah 500 Credit Card

55.7.5 Transactions with DFCC Bank Pension Fund – Trust

DFCC Bank Pension Fund constituted as a Trust was established by the DFCC Bank to discharge defined benefit pension liability of eligible employees of the Bank.

31.12.2017
LKR 000
31.12.2016
LKR 000
Contribution prepaid/(payable) as at beginning 165,363 (58,808)
Contribution due for the financial year recognised as expense in income statement (54,673) (84,642)
Recognition of actuarial gains in the other comprehensive income 42,307 144,813
Contribution paid by the Bank 28,823 164,000
Contribution prepaid (Note 48.1.3) 181,820 165,363

55.8 Transactions with Government of Sri Lanka (GOSL) and its Related Entities

Entities related to the Government of Sri Lanka (GOSL) by virtue of their aggregate shareholdings has the power to participate in the financial and operating policy decision of the Bank and by extension to participate in the financial and operating policy decisions of the Bank. However, in fact this power was not exercised.

Paragraph 25 of Sri Lanka Accounting Standard Related Party Disclosure – LKAS 24 has exempted DFCC Bank from the normally applicable disclosure requirements on transactions with GOSL – related entities. In making use of this exemption the Board has determined that the limited disclosure required under paragraph 26 of LKAS 24 is only required to be made for transaction that are individually significant because of their size although these transactions were undertaken on normal market terms in the ordinary course of business and there was no requirement to disclose the transactions to regulatory or supervisory authorities or require shareholder approval.

55.8.1 Individually Significant Transactions Included in the Statement of Financial Position

As at 31.12.2017
LKR 000
31.12.2016
LKR 000
55.8.1.1 Statement of Financial Position – Bank
Assets
Balances with Central Bank of Sri Lanka 10,557,688 8,062,567
Placements with banks 100,060
Loans to and receivables from banks 10,956,289 12,213,311
Loans to and receivables from other customers 7,130,529 5,859,992
Other financial assets held for trading 279,094
Financial investments – held to maturity 18,376,228 17,239,338
Financial investments available for sale 37,746,039 29,365,255
Government grant receivable 642,582 861,914
85,788,509 73,602,377
Liabilities
Due to Banks 7,315,012 7,672,071
Due to other customers 3,952,692 5,796,290
Other borrowing 8,388,916
Other borrowing – credit lines 23,351,882 23,761,357
Debt securities issued 2,138,927 2,393,335
Government grant deferred income 654,582 701,664
Subordinated term debt 3,528,506 3,004,003
40,941,601 51,717,636
Commitments
Undrawn credit facilities 8,740,754 3,494,485

 

Year ended
31.12.2017
LKR 000
Year ended
31.12.2016
LKR 000
55.8.1.2 Income Statement – Bank
Interest income 6,418,084 3,454,367
Net gain/(loss) from trading 2,231 (9,880)
Interest expense 3,156,669 3,050,930

There are no other transactions that are collectively significant with Government-related entities.

55.9 Disclosure Requirement under Section 9.3.2 (a) and 9.3.2 (b) of the CSE Listing Rules

As per rule No. 9.3.2 (a) the Bank does not have any non-recurrent related party transactions carried out during the financial year under review with a value exceeding 10% of the equity or 5% of the total assets whichever is lower, as per the audited financial statements of the Bank.

As per rule No. 9.3.2 (b) the Bank has following recurrent related party transactions carried out during the financial year under review with value exceeding 10% of the gross revenue/income as per the latest audited financial statements of the bank.

Name of the
related party
Relationship Nature of the
transaction
Aggregate value of related party
transactions entered into
during the financial year
Aggregate value of related
party transactions as a % of
net revenue/income
Terms and conditions of the
related party transactions
Entities related to the Government of Sri Lanka Related party On Balance Sheet and off Balance Sheet credit facility Facilities approved during the year
LKR 6,691.5 million
0.83%* Terms and conditions under normal commercial terms similar to other non-related customers

*Actual income on the facilities disbursed and the projected annual income on the facilities offered not disbursed as a percentage of the total annual consolidated income of the Bank.

55.10 Pricing Policy and Terms for Transactions with Related Parties

Bank enters into transactions with related parties in the ordinary course of business on terms similar to comparable transactions with an unrelated comparable counterparty with the exception of accommodation granted to Key Management Personnel under approved schemes uniformly applicable to all or specific categories of employees. The terms include pricing for loans, deposits and services, collateral obtained for loans where appropriate.

56. Business Segment Information

Business segment results include items directly attributable to a business segment as well as those that can be allocated on a reasonable basis. Unallocated items include corporate assets, head office expenses and tax assets and liabilities.

For the period ended 31 December 2017 Banking

LKR 000
Finance
leasing
LKR 000
Investing in
equity
LKR 000
Other

LKR 000
Unallocated

LKR 000
Eliminations

LKR 000
Total

LKR 000
Group
Revenue
Interest income 30,912,425 2,074,165 54,654 (46,608) 32,994,636
Net fee and commission income 1,591,336 607 1,591,943
Net gain from trading 361,647 361,647
Net loss from financial instruments
at fair value through profit or loss
(404,586) (404,586)
Net gain from financial investments 197,915 2,040,251 (293,048) 1,945,118
Other operating (loss)/income – net (831,541) 497,772 (167,898) (501,667)
Total income 31,827,196 2,074,165 2,040,251 553,033 (507,554) 35,987,091
Percentage* 88 6 5 2 (1) 100
Expenses
Segment losses 1,121,003 32,598 22,811 3,850 (9,896) 1,170,366
Depreciation 41,836 41,836
Other operating and interest expense 24,782,926 1,591,944 326,677 (231,054) 26,470,493
25,903,929 1,624,542 22,811 372,363 (240,950) 27,682,695
Result 5,923,267 449,623 2,017,440 180,670 (266,604) 8,304,396
Unallocated expenses 1,139,267
Value added tax and nation building tax on financial services 1,458,749
Operating profit after value added tax and nation building tax on financial services 5,706,380
Share of profits of associate and joint venture 185,030
Profit before income tax 5,891,410
Income tax expense 1,457,653
Profit for the year 4,433,757
Other comprehensive expenses net of tax (1,032,435)
Total comprehensive income 3,401,322
Total comprehensive income – non-controlling interests 71,572
Profit attributable to equity holders of the Bank 3,329,750
Assets 269,505,984 16,493,374 19,201,495 915,651 27,271,249 (603,868) 332,783,885
Percentage* 81 5 6 8 100
Investments in associate and
joint venture company
1,683,977
Liabilities 242,555,385 14,844,037 258,360 27,845,355 (437,132) 285,066,005
Capital expenditure – additions 10,015 605,297 615,312

* Net of eliminations.

 

For the period ended 31 December 2016 Banking

LKR 000
Finance
leasing
LKR 000
Investing in
equity
LKR 000
Other

LKR 000
Unallocated

LKR 000
Eliminations

LKR 000
Total

LKR 000
Group
Revenue
Interest income 22,360,944 1,833,214 42,070 (30,116) 24,206,112
Net fee and commission income 1,309,049 1,309,049
Net gain from trading 340,456 340,456
Net loss from financial instruments
at fair value through profit or loss
(179,727) (179,727)
Net gain from financial investments 152,695 1,012,694 (84,260) 1,081,129
Other operating (loss)/Income – net (125,553) 469,396 50,123 (170,902) 223,064
Total income 23,857,864 1,833,214 1,012,694 511,466 50,123 (285,278) 26,980,083
Percentage* 88 7 4 2 (1) 100
Expenses
Segment losses 882,415 54,852 (20,923) 916,344
Depreciation 38,254 38,254
Other operating and interest expense 18,399,506 1,300,127 310,902 (201,532) 19,809,003
19,281,921 1,300,127 54,852 349,156 (222,455) 20,763,601
Result 4,575,943 533,087 957,842 162,310 50,123 (62,823) 6,216,482
Unallocated expenses 717,355
Value added tax and nation building tax on financial services 986,110
Operating profit after value added tax and nation building tax on financial services 4,513,017
Share of profits of associate and joint venture 161,151
Profit before income tax 4,674,168
Income tax expense 1,205,094
Profit for the year 3,469,074
Other comprehensive expenses net of tax 382,670
Total comprehensive income 3,851,744
Total comprehensive income – non-controlling interests 54,270
Profit attributable to equity holders of the Bank 3,797,474
Assets 236,081,685 15,909,152 20,018,918 790,936 17,416,817 (446,216) 289,771,292
Percentage* 81 5 7 1 6 100
Investments in associate and joint venture company 1,443,127
Liabilities 212,473,516 14,318,237 228,080 17,470,595 (334,584) 244,155,844
Capital expenditure – additions 39,942 218,550 258,492

* Net of eliminations.

56.1

Revenue and expenses attributable to the incorporated business segments of industrial estate management, information technology services and consultancy services are included in the column for other.

56.2

Property and equipment and depreciation attributable to an incorporated business segment is included in the relevant segment and the balance is unallocated.

56.3

Eliminations are the consolidation adjustments for inter-company transactions, dividend and dividend payable attributable to minority shareholders.

57. Comparative Figures

57.1 Reclassification of Comparative figures

Current presentation As disclosed previously
Bank
LKR 000
Group
LKR 000
Bank
LKR 000
Group
LKR 000
Prepayments 53,803 53,803
Other assets 2,730,999 2,777,676 2,728,340 2,775,017
Other borrowing 40,751,346 40,756,300 40,802,490 40,807,444

 

58. Events after the Reporting Period

58.1 First and Final Dividend

The Directors have approved the payment of a first and final dividend of LKR 5.00 per share for the year ended 31 December 2017. The Board of Directors confirms that the Bank has satisfied the solvency test in accordance with Section 57 of the Companies Act, No. 07 of 2007 and has obtained the certificate from the Auditors.

58.2 Proposed Debenture Issue

The Bank will issue fifty million (50,000,000) Basel III compliant, subordinated,listed, rated, unsecured, redeemable debentures with a non-viability conversion option, each at an issue price (par value) of LKR 100.00 with a term up to 7 years (“Debentures”), with an option to issue a further twenty million (20,000,000) of said Debentures in the ev ent of an over subscription. After regulatory approvals, the resolution was taken up at the Extraordinary General Meeting held on 19 February 2018, and was approved by the shareholders.

No other circumstances have arisen which would require disclosure or adjustment to the financial statements.

59. Fair Value Measurement

59.1 Determining Fair Value

The determination of fair value for financial assets and financial liabilities, for which there is no observable market price, requires the use of valuation techniques as described in Note 5.3.5. For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Group’s accounting policy on fair value measurements is discussed in Note 5.3.5. The Group measures fair values, using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.

Level 2: Valuation techniques based on observable inputs, either directly (i.e., prices) or indirectly (i.e., derived from prices)

.

This category includes instruments valued using quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where 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 for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like government securities, interest rate and currency swaps that use mostly observable market data and require little Management judgement and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, government securities and simple over the counter derivatives like forward exchange contracts and interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

Management judgements and estimations are usually required for selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of probability of counterparty default and prepayments and selection of appropriate discount rates.

59.2 Valuation Framework

The established control framework with respect to the measurement of fair values, includes an oversight which is independent of front office management. Treasury Middle Office has overall responsibility for independently verifying the results of trading and investment operation.

Specific controls include:

  • Verification of observable pricing
  • Review and approval process for new models and changes to models involving both product control and group market risk
  • Calibration and back testing of models
  • Stress Testing

When third party information, such as broker quotes or pricing services is used to measure fair value, the evidence so obtained to support the conclusion that such valuations meet the requirements of SLFRSs/LKASs is documented.

This includes:

  • Verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument
  • Several quotes obtained from randomly selected brokers for the same financial instrument and the fair value determined on this basis

Any changes to the fair value methodology is reported to the Bank’s Audit Committee.

59.3 Fair Value by Level of the Fair Value Hierarchy – Bank

As at 31 December 2017 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Total
LKR 000
Financial Assets
Derivative assets held-for-risk management 27
  Forward foreign exchange contracts 66,440 66,440
Other financial assets held for trading 28
  Government of Sri Lanka Treasury Bills and Bonds 279,098 279,098
  Equity securities 31,828 31,828
Financial investments – Available for sale 31
  Government of Sri Lanka Treasury Bills and Bonds 37,746,039 37,746,039
  Quoted ordinary shares 18,195,008 18,195,008
  Units in Unit Trusts – Quoted 194,590 194,590
  Units in Unit Trusts – Unquoted 644,862 644,862
  Unquoted shares 85,555 85,555
Government grant receivable 41 642,583 642,583
56,446,563 1,353,885 85,555 57,886,003
Financial Liabilities
Derivative liabilities held-for-risk management 28
  Forward foreign exchange contracts 367,435 367,435
367,435 367,435

 

As at 31 December 2016 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Total
LKR 000
Financial Assets
Derivative assets held-for-risk management 27
  Forward foreign exchange contracts 122,977 122,977
Financial investments – Available for sale 31
  Government of Sri Lanka Treasury Bills and Bonds 29,365,255 29,365,255
  Quoted ordinary shares 18,797,640 18,797,639
  Units in Unit Trusts – Quoted 190,153 190,153
  Units in Unit Trusts – Unquoted 806,211 806,211
  Unquoted shares 112,984 112,984
Government grant receivable 41 861,915 861,915
48,353,048 1,791,103 112,984 50,257,135
Financial Liabilities
Derivative liabilities held-for-risk management 28
  Forward foreign exchange contracts 105,741 105,741
105,741 105,741

 

As Treasury Bills/Bonds are valued using Central Bank published rates, investments in Treasury Bills/Bonds are classified under Level 1.

59.4 Fair Value by Level of the Fair Value Hierarchy – Group

As at 31 December 2017 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Total
LKR 000
Financial Assets
Derivative assets held-for-risk management 27
  Forward foreign exchange contracts 66,440 66,440
Other financial assets held-for-trading 28
  Government of Sri Lanka Treasury Bonds 279,098 279,098
  Equity securities – Quoted 31,828 31,828
Financial investments – Available for sale 31
  Government of Sri Lanka Treasury Bills and Bonds 37,746,039 37,746,039
  Quoted ordinary shares 18,195,008 18,195,008
  Units in Unit Trusts – Quoted 194,590 194,590
  Units in Unit Trusts – Unquoted 644,862 644,862
  Unquoted shares 85,555 85,555
Government grant receivable 41 642,583 642,583
56,446,563 1,353,885 85,555 57,886,003
Financial Liabilities
Derivative liabilities held-for-risk management 28
  Forward foreign exchange contracts 367,435 367,435
367,435 367,435

 

As at 31 December 2016 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Total
LKR 000
Financial Assets
Derivative assets held-for-risk management 27
 Forward foreign exchange contracts 122,977 122,977
Financial investments – Available for sale 31
 Government of Sri Lanka Treasury Bills and Bonds 29,365,255 29,365,255
  ;Quoted ordinary shares 18,797,640 18,797,640
  Units in Unit Trusts – Quoted 190,153 190,153
  Units in Unit Trusts – Unquoted 806,211 806,211
  Unquoted shares 112,984 112,984
Government grant receivable 41 861,915 861,915
48,353,048 1,791,103 112,984 50,257,135
Financial Liabilities
Derivative liabilities held-for-risk management 28
  Forward foreign exchange contracts 105,741 105,741
105,741 105,741

59.5 Fair Value of Financial Instruments Carried at Amortised Cost – Bank

The following table summarises the carrying amounts and the Bank’s estimate of fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at fair value. The fair values in the table below may be different from the actual amounts that will be received/paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions which are not observable in the market.

As at 31 December 2017 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Fair value
LKR 000
Carrying amount
LKR 000
Assets
Cash and cash equivalents 25 4,106,225 4,106,225 4,106,225
Balances with Central Bank of Sri Lanka 26 10,557,688 10,557,688 10,557,688
Placements with banks 27 6,691,381 6,691,381 6,691,381
Loans to and receivables from banks 29 10,984,266 10,984,266 10,984,266
Loans to and receivables from other customers 30 208,781,978 208,781,978 213,675,866
Financial investments – Held-to-maturity 27 22,518,347 1,498,338 24,016,685 23,507,632
Due from subsidiaries 12,083 12,083 12,083
Other assets 2,775,741 2,775,741 2,775,741
Total 22,518,347 33,837,898 211,569,802 267,926,047 272,310,882
Liabilities
Due to banks 44 9,640,735 9,640,735 9,640,735
Due to other customers 45 193,185,964 193,185,964 193,307,534
Other borrowing 46 41,319,591 41,319,591 41,319,591
Debt securities issued 47 24,435,795 24,435,795 24,443,767
Subordinated term debt 49 8,938,245 8,938,245 9,202,870
Other liabilities 48 4,078,984 4,078,984 4,078,984
Total 84,334,366 197,264,948 281,599,314 281,993,481

 

As at 31 December 2016 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Fair value
LKR 000
Carrying
amount
LKR 000
Assets
Cash and cash equivalents 25 4,330,934 4,330,934 4,330,934
Balances with Central Bank of Sri Lanka 26 8,062,567 8,062,567 8,062,567
Placements with banks 27 1,351,117 1,351,117 1,351,117
Loans to and receivables from banks 29 12,300,398 12,300,398 12,300,398
Loans to and receivables from other
customers
30 183,514,729 183,514,729 185,784,979
Financial investments – Held to maturity 32 13,757,420 2,372,636 16,130,056 23,189,085
Other assets 2,562,978 2,562,978 2,562,978
Total 13,757,420 28,417,652 186,077,707 228,252,779 237,582,058
Liabilities
Due to banks 44 18,103,587 18,103,587 18,103,587
Due to other customers 45 139,995,435 139,995,435 140,514,373
Other borrowing 46 40,751,346 40,751,346 40,751,346
Debt securities issued 47 28,077,060 28,077,060 29,179,185
Subordinated term debt 49 8,796,976 8,796,976 9,205,637
Other liabilities 48 3,850,826 3,850,826 3,850,826
Total 54,977,623 184,597,607 239,530,230 241,559,554

 

59.6 Fair Value of Financial Instruments Carried at Amortised Cost – Group

The following table summarises the carrying amounts and the Group’s estimate of fair values of those financial assets and liabilities not presented on the Group’s Statement of Financial Position at fair value. The fair values in the table below may be different from the actual amounts that will be received/paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions which are not observable in the market.

 

As at 31 December 2017 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Fair value
LKR 000
Carrying amount
LKR 000
Assets
Cash and cash equivalents 25 4,120,230 4,120,230 4,120,230
Balances with Central Bank of Sri Lanka 26 10,557,688 10,557,688 10,557,688
Placements with banks 27 6,712,131 6,712,131 6,712,131
Loans to and receivables from banks 29 10,984,266 10,984,266 10,984,266
Loans to and receivables from other customers 30 208,781,978 208,781,978 213,675,866
Financial investments – Held to maturity 32 22,518,347 1,498,338 24,016,685 23,507,632
Other assets 2,804,798 2,804,798 2,804,798
Total 22,518,347 33,872,653 211,586,776 267,977,776 272,362,611
Liabilities
Due to banks 44 9,640,735 9,640,735 9,640,735
Due to other customers 45 192,798,577 192,798,577 192,920,147
Other borrowing 46 41,290,874 41,290,874 41,290,874
Debt securities issued 47 24,435,795 24,435,795 24,443,767
Subordinated term debt 49 8,938,245 8,938,245 9,202,870
Other liabilities 48 4,195,940 4,195,940 4,195,940
43,014,775 238,285,391 281,300,166 281,694,333

 

As at 31 December 2016 Notes Level 1
LKR 000
Level 2
LKR 000
Level 3
LKR 000
Fair value
LKR 000
Carrying
amount
LKR 000
Assets
Cash and cash equivalents 25 4,344,260 4,344,260 4,344,260
Balances with Central Bank of Sri Lanka 26 8,062,567 8,062,567 8,062,567
Placements with banks 27 1,415,985 1,415,985 1,415,985
Loans to and receivables from banks 29 12,300,398 12,300,398 12,300,398
Loans to and receivables from other customers 30 183,514,729 183,514,729 185,784,979
Financial investments – Held to maturity 32 13,757,420 2,372,636 16,130,056 23,189,085
Other assets 2,609,655 2,609,655 2,609,655
Total 13,757,420 28,495,846 189,124,384 228,377,650 237,706,929
Liabilities
Due to banks 44 18,103,587 18,103,587 18,103,587
Due to other customers 45 139,364,164 139,364,164 140,219,872
Other borrowing 46 40,736,300 40,736,300 40,736,300
Debt securities issued 47 28,077,060 28,077,060 29,179,185
Subordinated term debt 49 8,796,976 8,796,976 9,205,637
Other liabilities 48 3,961,249 3,961,249 3,961,249
54,977,623 184,061,717 239,039,341 241,405,830

Given below is the basis adopted by the Bank/Group in order to establish the fair values of the financial instruments.

59.7 Cash and Cash Equivalents and Placements with Banks

Carrying amounts of cash and cash equivalents and placements with banks approximates their fair value as these balances have a remaining maturity of less than three months from the reporting date.

59.8 Loans to and Receivables from Banks and Other Customers

59.8.1 Lease Rentals Receivable – Bank

The estimated fair value of lease rentals receivable is the present value of future cash flows expected to be received from such finance lease facilities calculated based on current interest rates for similar type of facilities. The finance lease portfolio is at fixed interest rates and the fair value calculated on this basis as at 31 December 2017 was LKR 15,531 million as against a carrying value of LKR 16,493 million. (As at 31 December 2016 – fair value calculated on this basis was LKR 14,412 million as against a carrying value of LKR 15,909 million).

59.8.2 Other Loans

Composition:

%
Floating rate loan portfolio 56
Fixed rate loans
  – With remaining maturity less than one year 7
  – Others 37
Total 100

Since the floating rate loans can be repriced monthly, quarterly and semi-annually in tandem with market rates fair value of these loans is approximately same as the carrying value. Carrying amount of fixed rate loans with a remaining maturity of less than one year approximates the fair value.

Based on the results of the fair value computed on the lease rentals receivable, it is estimated that the fair value of the other loans at fixed interest rates with maturity of more than one year is not materially different to its carrying value as at the reporting date.

59.9 Financial Investments – Held to Maturity

Fair value of the fixed rate debentures are based on prices quoted in the Colombo Stock Exchange, where there is an active market for quoted debentures.

Where there is no active market, fair value of the fixed rate debentures has been determined by discounting the future cash flows by the interest rates derived with reference to Government Treasury Bond rates with adjustments to risk premiums at the time of investment.

59.10 Due to Banks

Carrying value of amounts due to banks approximates their fair value as these balances have a remaining maturity of less than one year from the reporting date.

59.11 Due to Other Customers

The carrying value of deposits with a remaining maturity of less than one year approximates the fair value.

Fair values of deposits with a remaining maturity of more than one year is estimated using discounted cash flows applying current interest rates offered for deposits of similar remaining maturities.

The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the reporting date and the savings account balances are repriced frequently to match with the current market rates, therefore the demand and saving deposits carrying amounts are reasonable approximation to the fair values as at the reporting date.

59.12 Other Borrowings

This consists of borrowings sourced from multilateral and bilateral institutions. Seventy per cent of these borrowing are repriced either monthly, quarterly or semi-annually and rates are revised in line with changes in market rates. Hence the carrying value of these borrowings approximates the fair value.

The others at fixed rates which relates to borrowings on credit lines are based on interest rates which are specific to each refinancing arrangement and as such there are no comparable market rates. Hence, the fair value approximates the carrying value.

59.13 Debt Securities Issued

Debts issued comprise the USD notes issue and LKR debentures. Fair value of the USD notes are determined by reference to the bid and ask price quoted in the Singapore Stock Exchange. The LKR debentures are fair valued by reference to current Government Treasury Bond rates with a risk premium.

60. Financial Risk Management

60.1 Introduction and Overview

Bank has exposure to the following key risks from financial instruments:

  • Credit risk
  • Liquidity risk
  • Operational risk
  • Market risk

This note presents information about the Bank’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing such risks.

DFCC Bank PLC Annual Report 2017 235

The Board of Directors has the overall responsibility for the establishment and oversight of the Bank’s risk management framework. It has set up a Board Integrated Risk Management Committee (BIRMC) with three Non-Executive Directors including the Chairman, one Executive Director and Chief Risk Officer (CRO) as members. CRO represents at the BIRMC the supervision and the management of the broad risk categories including credit, liquidity market risk, and strategic risk. As per the Board approved Charter, BIRMC assists the Board to manage these risks prudently. Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and to monitor adherence to limits. Risk management policies and systems are reviewed at least annually to reflect changes in market conditions, business strategy, products and services offered.

60.2 Credit Risk

60.2.1 Qualitative Disclosures

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Bank’s loans and advances to customers and other banks and investment in debt securities. Management of credit risk includes the following elements:

  • Formulating credit policies in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements.
  • Establishing the authorisation structure for the approval and renewal of credit facilities.
  • Limiting concentration of exposures to counterparties and industries.
  • Developing and maintaining Bank’s risk grading models in order to categorise exposures according to the degree of risk of financial loss and to focus management on the attendant risks.
  • Independent risk assessment, monitoring, recommending and reporting by the IRMD.
  • Reviewing compliance through regular audits by internal audit.

60.2.2 Quantitative Disclosures

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
60.2.2.1 Loans to and Receivables
from Other Customers
Individually Impaired
Gross amount 6,762,473 6,010,399 6,762,473 6,010,399
Allowance for impairment (5,388,754) (4,778,752) (5,388,754) (4,778,752)
Carrying amount 1,373,719 1,231,647 1,373,719 1,231,647
Collectively Impaired
Gross amount 3,013,772 2,628,487 3,013,772 2,628,487
Allowance for impairment (2,244,951) (1,890,798) (2,244,951) (1,890,798)
Carrying amount 768,821 737,689 768,821 737,689
Past Due But Not Impaired
Gross amount 77,509,049 60,879,323 77,509,049 60,879,323
Allowance for impairment
Carrying amount 77,509,049 60,879,323 77,509,049 60,879,323
Neither Past Due Nor Impaired
Gross amount 134,024,277 122,936,320 134,024,277 122,936,320
Allowance for impairment
Carrying amount* 134,024,277 122,936,320 134,024,277 122,936,320
Carrying amount – amortised cost 213,675,866 185,784,979 213,675,866 185,784,979

 

BANK GROUP
As at 31.12.2017
LKR 000
31.12.2016
LKR 000
31.12.2017
LKR 000
31.12.2016
LKR 000
60.2.2.2 Loans to and Receivables from Banks
Neither Past Due Nor Impaired
Gross amount 10,984,266 12,300,398 10,984,266 12,300,398
Allowance for impairment
Carrying amount 10,984,266 12,300,398 10,984,266 12,300,398

 

60.2.2.3 Analysis of Security Values of Loans to and Receivables from Other Customers
BANK GROUP
As at Gross loan
balance
31.12.2017
LKR 000
Security
value
31.12.2017
LKR 000
Gross loan
balance
31.12.2016
LKR 000
Security
value
31.12.2016
LKR 000
Gross loan
balance
31.12.2017
LKR 000
Security
value
31.12.2017
LKR 000
Gross loan
balance
31.12.2016
LKR 000
Security
value
31.12.2016
LKR 000
Against Individually Impaired
Mortgages over property,
plant and machinery
1,436,747 1,380,943 1,612,896 1,449,450 1,436,747 1,380,943 1,612,896 1,449,450
Others 1,099,530 630 596,865 510,898 1,099,530 630 596,865 510,898
Unsecured 4,217,884 3,714,601 4,217,884 3,714,601
Against Collectively Impaired
Mortgages over property,
plant and machinery
1,099,966 2,468,887 1,060,924 2,319,203 1,099,966 2,468,887 1,060,924 2,319,203
Others 246,882 32,013 218,186 14,665 246,882 32,013 218,186 14,665
Unsecured 1,550,494 1,239,662 1,550,494 1,239,662
Against Past Due But Not Impaired
Mortgages over property,
plant and machinery
36,423,748 85,688,766 30,660,982 70,102,950 36,423,748 85,688,766 30,660,982 70,102,950
Others 23,163,025 7,414,791 17,520,717 5,618,646 23,163,025 7,414,791 17,520,717 5,618,646
Unsecured 9,919,502 6,965,357 9,919,502 6,965,357
Mortgages over property, plant and machinery 43,732,774 117,966,759 41,775,571 100,725,378 43,732,774 117,966,759 41,775,571 100,725,378
Treasury guarantee 5,594,370 6,166,733 5,874,580 7,180,759 5,594,370 6,166,733 5,874,580 7,180,759
Debt securities 187,500 187,500 517,500 517,500 187,500 187,500 517,500 517,500
Equity 1,616,546 1,748,988 1,767,950 1,937,591 1,616,546 1,748,988 1,767,950 1,937,591
Others 42,412,026 11,484,079 37,513,754 9,480,430 42,412,026 11,484,079 37,513,754 9,480,430
Unsecured 32,115,203 25,505,832 32,115,203 25,505,832
Total 204,816,197 234,540,089 176,545,377 199,857,470 204,816,197 234,540,089 176,545,377 199,857,470

 

The above analysis does not include balances relating to lease rentals receivable.

60.3 Liquidity Risk

60.3.1 Qualitative Disclosures

Liquidity risk is the risk that the Bank will not have sufficient financial resources to meet Bank’s obligations as they fall due. This risk arises from mismatches in the timing of cash flows.

Management of liquidity risk includes the following elements:

  • Taking steps to ensure, as far as possible, that the Bank will always have sufficient financial resources to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.
  • The Asset and Liability Committee (ALCO) is mandated to execute liquidity management policies, procedures and practices approved by the Board of Directors, effectively.
  • Monitoring of potential liquidity requirements and availability using the maturity analysis and cash flow forecast under normal and stressed conditions using a flow approach.
  • Monitoring the Group's liquidity through the Liquid Assets Ratio (statutory minimum is currently 20%) and Liquidity Coverage Ratios using a stock approach.
  • Effecting threshold limits relevant for liquidity management as part of the overall risk limits system of the Bank.

60.3.2 Quantitative Disclosures

Regulatory Liquidity (Bank) 31.12.2017 31.12.2016
Statutory liquid assets
(LKR’000)
71,672,283 59,259,909
Statutory liquid assets ratio (mininum requirement 20%)
  Domestic banking unit (%) 24.34 24.56
  Off-shore banking unit (%) 67.7 73.2
Liquidity Coverage Ratio (minimum requirement 80% in 2017 and 70% in 2016)
  All currencies (%) 108.5 168.8
  Rupee only (%) 127.8 197.3

 

63.3.2.1 Maturity Profile of Financial Liabilities of the Bank
As at 31 December 2017 Carrying
Amount
Total Up to
3 months
3 to
12 months
1 to
3 years
3 to
5 years
>5 years
LKR 000 LKR 000 LKR 000 % LKR 000 % LKR 000 % LKR 000 % LKR 000 %
Liabilities with
contractual maturity
(Interest bearing
liabilities)
Due to banks 9,636,351 9,642,565 110,083 1 7,530,736 78 2,001,746 21
Due to other customers 188,838,665 189,024,016 78,004,690 41 59,135,540 31 10,401,732 6 9,459,778 5 32,022,276 17
Other Borrowings 41,319,591 41,322,672 1,591,024 4 3,402,175 8 11,548,027 28 11,678,491 28 13,102,955 32
Subordinated
term debts
9,202,870 9,211,816 2,103,367 23 7,108,449 77
Debt securities issued 24,443,767 24,467,481 15,559,280 64 8,908,201 36
273,441,244 273,668,550 79,705,797 85,627,731 34,963,073 28,246,718 45,125,231
Other liabilities
(Non-interest
bearing liabilities)
Due to banks 4,384 4,384 4,384 100
Derivative
financial instruments
367,435 367,435 367,435 100
Due to other
customers
4,468,869 4,468,869 1,874,658 42 1,539,215 34 1,054,996 24
Current tax payable 633,636 485,418 485,418 100
Deferred tax liability 1,194,027 1,003,444 1,003,444 100
Government Grant -deferred Income 654,583 654,583 654,583 100
Other liabilities 4,466,398 3,933,488 2,087,933 53 1,459,171 37 38,984 1 38,984 1 308,416 8
Total equity 47,876,766 34,526,467 34,526,467
59,666,098 45,444,088 5,823,272 3,652,969 38,984 38,984 35,889,879
Total Equity and
Liabilities
333,107,342 319,112,638 85,529,069 89,280,700 35,002,057 28,285,702 81,015,110

 

63.3.2.2 Maturity Profile of Financial Liabilities of the Group
As at 31 December 2017 Carrying
Amount
Total Up to
3 months
3 to
12 months
1 to
3 years
3 to
5 years
>5 years
LKR 000 LKR 000 LKR 000 % LKR 000 % LKR 000 % LKR 000 % LKR 000 %
Liabilities with
contractual maturity
(Interest bearing
liabilities)
Due to banks 9,636,351 9,642,565 110,083 1 7,530,736 78 2,001,746 21
Due to other customers 188,451,278 188,636,629 77,617,303 41 59,135,540 31 10,401,732 6 9,459,778 5 32,022,276 17
Other Borrowings 41,290,874 41,293,955 1,562,307 4 3,402,175 8 11,548,027 28 11,678,491 28 13,102,955 32
Subordinated
term debts
9,202,870 9,211,816 2,103,367 23 7,108,449 77
Debt securities issued 24,443,767 24,467,481 15,559,280 64 8,908,201 36
273,025,140 273,252,446 79,289,693 85,627,731 34,963,073 28,246,718 45,125,231
Other liabilities
(Non-interest
bearing liabilities)
Due to banks 4,384 4,384 4,384 100
Derivative
financial instruments
367,435 367,435 367,435 100
Due to other
customers
4,468,869 4,468,869 1,874,658 42 1,539,215 34 1,054,996 24
Current tax payable 655,488 507,270 507,270 100
Deferred tax liability 1,232,478 1,041,895 1,041,895 100
Government Grant -deferred Income 654,583 654,583 654,583 100
Other liabilities 4,657,628 4,124,718 2,126,179 52 1,497,417 36 77,230 2 77,230 2 346,662 8
Total equity 49,401,857 36,051,558 36,051,558
61,442,722 47,220,712 5,921,821 3,691,215 77,230 77,230 37,453,216
Total Equity and
Liabilities
334,467,862 320,473,158 85,211,514 89,318,946 35,040,303 28,323,948 82,578,447

 

60.4 Market Risk

60.4.1 Qualitative Disclosures

Market risk is the possibility of losses arising from changes in the value of a financial instrument as a result of changes in market variables, such as interest rates, equity prices, foreign exchange rates and commodity prices which will affect the Bank’s income or the value of its holdings of financial instruments. The objective of the Bank’ s market risk management is to manage and control market risk exposures within acceptable parameters, in order to ensure the Bank’ s solvency and the income growth, while optimising the return on risk.

60.4.1.1 Management of Market Risks

The following policy frameworks stipulate the policies and practices for management, monitoring and reporting of market risk:

  • Market risk management framework
  • ALCO charter
  • Treasury trading guidelines and limits system
  • Treasury manual
  • Overall risk limits for market risk management
  • New product development policy

Overall authority for managing market risk is vested with the Board of Directors through the Board Integrated Risk Management Committee (BIRMC). The operational authority for managing market risk is vested with ALCO. Foreign exchange risk is managed within approved limits and segregation of reporting responsibilities of Treasury Front Office, Middle Office and Back Office.

Exposure to market risk arises from two sources viz trading portfolios from positions arising from market-making activities, and non-trading portfolios from positions arising from financial investments designated as available for sale (AFS) and held to maturity and from derivatives held-for-risk management purposes.

60.4.2 Quantitative Disclosures

In the case of interest rate and foreign exchange risk the following analysis is in respect of DFCC Bank PLC.

60.4.2.1 Interest Rate Risk – DFCC
60.4.2.1.1 Duration Analysis as at 31 December 2017
Portfolio Face value
LKR 000
Mark-to-
market value
LKR 000
Duration Interpretation of duration
Government securities trading portfolio 250,000.00 271,381.20 5.49% Portfolio value will decline approximately by 5.49% as a result of 1% increase in the interest rates.
Treasury Securities AFS portfolio 37,564,690 37,222,299 1.60% Portfolio value will decline approximately by 1.60% as a result of 1% increase in the interest rates.

Market risk exposure for interest rate risk in the Trading portfolio as at 31 December 2017 is depicted by duration of 5.49%.

This level of interest rate risk exposure can be interpreted as a possible potential loss in the marked-to-market value amounting to LKR 14.9 million. in case, the market interest rates mark a parallel upward shift of 1%.

Therefore maximum holding period is restricted to 91 days for the Trading Portfolio.

Market risk exposure for interest rate risk in the AFS portfolio as at 31 December 2017 is depicted by duration of 1.60%. This level of interest rate risk exposure in the AFS portfolio can be interpreted as a possible potential loss in the marked-to-market value amounting to LKR 596.3 million, as at 31 December 2017

60.4.2.1.2 Potential Impact to NII Due to Change in Market Interest Rates

Overall up to the 12-month time bucket, DFCC carried a net liability sensitive position. This liability sensitivity will vary for each time bucket up to the 12-month period. The interest rate risk exposure as at 31 December 2017 is quantified based on the assumed change in the interest rates for each time period and is given in table below:

0 to 1 month

LKR 000
Over 1 –
up to 3 months
LKR 000
Over 3 –
up to 6 months
LKR 000
Over 6 –
up to 12 months
LKR 000

Total interest-bearing assets

128,103,811 9,954,432 19,845,446 30,972,667

Total interest-bearing liabilities

73,289,039 53,465,749 53,659,162 30,460,078

Net rate sensitive assets (liabilities)

54,814,772 (43,511,317) (33,813,716) 512,589

Assumed change in interest rates (%)

0.50% 1.00% 1.50% 2.00%

Impact

274,074 (398,854) (380,404) 5,126

Total net impact if interest rates increase

(500,058)

Total net impact if interest rates decline

500,058

We have assumed that the assets and liabilities are re-priced at the beginning of each time bucket and have also taken into account the remaining time from the repricing date up to one year.

60.4.2.2 Forex Risk in Net Open Position (NOP)/Unhedged Position of DFCC

The following table indicates the DFCC’s exchange rate risk exposure based on its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31 December 2017, DFCC carried a USD equivalent net open/unhedged “Oversold” position of L KR 65.6 million. The impact of exchange rate risk is given below:

Amount
Net exposure – USD equivalent (427,000)
Value of position in LKR 000 (65,587)
Exchange rate (USD/LKR) as at 31 December 2017 153.60
Possible potential loss to DFCC – LKR 000
If Exchange rate (USD/LKR) depreciates by 1% (656)
If exchange rate depreciates by 10% (6,559)
If exchange rate depreciates by 15% (9,838)

The estimated potential exchange loss is off set by the interest gain due to interest differential between LKR and the respective foreign currencies.

60.4.2.3 Equity Price Risk

Equity prices risk is part of market risk which is defined as the risk of possible losses arising from the equity market investments due to changes in the market prices of the invested shares. The Bank is exposed to equity prices risk through its investments in the equity market which has been shown in the trading and AFS portfolio.

Parameter Position as at
31 December 2017
LKR 000
Position as at
31 December 2016
LKR 000
Marked-to-market value of the total quoted equity portfolio 18,226,836 18,797,640
Value-at-risk (under 99% probability for a quarterly time horizon) 7.68% 10.03%
Maximum possible loss of value in the marked-to-market value of the portfolio as
indicated by the VAR over a quarterly period
1,399,821 1,885,403
Unrealised gains in the AFS equity portfolio reported in the fair value reserve 12,668,565 14,580,102

Equity price risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss Method. Historical two-year portfolio returns is adopted to compute VAR as a measure of the equity prices risk exposure by DFCC Bank. This VAR computation for the equity AFS portfolio considers a quarterly time horizon.

60.4.2.4 Market Risk Exposures of DFCC Group for Regulatory Capital Assessment as at 31 December 2017

Under the Standardised Approach of Basel III with effect from July 2017, market risk exposures are quantified for regulatory capital purposes. The computation results as at 31 December 2017 are as follows:

Risk-weighted
assets
LKR 000
Quantified
possible exposure
LKR 000
Interest rate risk 7,872,233 885,626
Equity prices risk 111,709 12,567
Foreign exchange and gold risk 125,971 14,172
Total 8,109,913 912,365

60.5 Operational Risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank relating to processes, personnel, technology and infrastructure and from external factors.

DFCC Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness whilst avoiding control procedures that restrict initiative and creativity.

60.5.1 Qualitative Disclosures

The following are included in the process of the operational risk management in DFCC Bank.

  • Monitoring of the Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits using a traffic light system. Develop Risk and Control Self-Assessments to identify the risk exposure of all processes.
  • Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognise necessary improvements in the systems, processes and procedures.
  • Analyse downtime of the critical systems, attrition information, exit interview comments and complaints to identify operational risks and recommend mitigating controls. The key findings of the analysis are evaluated at the ORMC and the BIRMC meetings in an operational risk perspective.

The primary responsibility for the development and implementation of controls to address operational risk lies with IRMD whilst implementation is assigned to Senior Management within each business unit. This responsibility is supported by the development of overall standards for management of operational risk in the following areas:

  • Requirements for appropriate segregation of duties, including independent authorisation of transactions
  • Requirements for reconciliation and monitoring of transactions
  • Compliance with regulatory and other legal requirements
  • Documentation of controls and procedures
  • Requirements for periodic assessment of operational risks faced and the adequacy of controls and procedures to address the identified risks
  • Requirements for reporting of operational losses and propose remedial action
  • Development of contingency plans
  • Training and professional development to establish ethics and business standards
  • Insurance covering risk due to threats arising from external and other events

Compliance with the Bank’s standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the business unit to which they relate, with summaries submitted to the Audit Committee and Senior Management.

60.6 Capital Management

60.6.1 Qualitative Disclosures

DFCC Bank PLC manages its capital at Bank and Group level considering both regulatory requirement and risk exposures. Its regulatory capital position is analysed by the BIRMC on a quarterly basis and recommendations and decisions are made accordingly. The Group capital management goals are as follows:

  • Ensure regulatory minimum capital adequacy requirements are not compromised.
  • Bank to maintain its international and local credit rating and to ensure that no downgrading occurs as a result of deterioration of risk capital of the Bank.
  • Ensure above industry average Capital Adequacy Ratio is maintained.
  • Ensure maintaining of quality capital.
  • Ensure capital impact of business decisions are properly assessed and taken into consideration during product planning and approval process.
  • Ensure capital consumption by business actions are adequately priced.

Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis. The Bank is required to comply with the provisions of the Basel II and commencing from July 2017 the Basel III requirements in respect of regulatory capital. The Bank currently uses the standardised approach for credit risk and market risk and basic indicator approach for operational risk.

The Basel III capital regulations, which are planned to be implemented on a phased in basis by 2019 starting from mid 2017, will continue to be based on the three-mutually reinforcing Pillars introduced under Basel II, i.e., minimum capital requirement, supervisory review process and market discipline. Basel III focuses on increasing the quality and quantity of capital especially the Core Capital, through redefining the common equity capital and introducing new capital buffers such as the Capital Conservation Buffer and a Capital Surcharge on Domestic Systematically Important Banks. DFCC Bank started reporting capital computations under the Basel III requirements from mid 2017 as per the regulatory requirements.

Regulatory capital comprises Tier I capital and Tier II capital. The Bank’s policy is to maintain a strong capital base so as to ensure investor, creditor and market confidence to sustain future development of the business.

DFCC Bank and its Group have complied with the minimum capital requirements imposed by the Central Bank of Sri Lanka throughout the year.

60.6.2 Key Regulatory Ratios – Capital

As at 31.12.2017 31.12.2016
Bank Group Bank Group
Regulatory capital (LKR 000)
Common equity Tier 1 33,017,170 34,211,431 N/A N/A
Tier 1 capital 33,017,170 34,211,431 N/A N/A
Total capital 41,993,352 43,187,613 N/A N/A
Regulatory capital ratios (%)
Common equity Tier 1 capital ratio
(minimum requirement – 5.75%)
12.68% 13.09% N/A N/A
Tier 1 capital ratio (minimum requirement – 7.25%) 12.68% 13.09% N/A N/A
Total capital ratio (minimum requirement – 11.25%) 16.13% 16.53% N/A N/A
Basel III Computation of Capital Ratios
As at 31.12.2017
Bank
LKR 000
Group
LKR 000
Common equity Tier 1 (cet 1) capital after adjustments 33,017,170 34,211,431
Common equity Tier 1 (cet 1) capital 38,035,888 41,884,674
Equity capital (stated capital)/assigned capital 4,715,814 4,715,814
Reserve fund 2,224,275 2,224,275
Published retained earnings/ (accumulated retained losses) 9,607,311 17,357,048
Published accumulated Other Comprehensive Income (oci) 3,457,808 3,807,698
General and other disclosed reserves 13,779,839 13,779,839
Unpublished current year’s profit/loss and gains reflected in oci
Ordinary shares issued by consolidated banking and financial subsidiaries of
the Bank and held by third parties
Total adjustments to cet 1 capital 5,018,718 7,673,243
Goodwill (net) 156,226
Intangible assets (net) 498,084 502,411
Others (investment in capital of banks and financial institutions) 4,520,634 7,014,606
Additional Tier 1 (AT1) capital after adjustments
Additional Tier 1 (AT1) capital
Qualifying Additional Tier 1 capital instruments
Instruments issued by consolidated banking and financial subsidiaries of
the Bank and held by third parties
Total Adjustments to AT1 capital
Investment in own shares
Others (specify)
Tier 2 capital after adjustments 8,976,182 8,976,182
Tier 2 capital 8,976,182 8,976,182
Qualifying Tier 2 capital instruments 8,008,628 8,008,628
Revaluation gains
Loan Loss Provisions 967,554 967,554
Instruments issued by consolidated banking and financial subsidiaries of
the Bank and held by third parties
Total Adjustments to Tier 2
Investment in own shares
Others (specify)
CET1 capital 33,017,170 34,211,431
Total Tier 1 capital 33,017,170 34,211,431
Total capital 41,993,352 43,187,613
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