1.1 Corporate information

People’s Leasing & Finance PLC (the “Company”), is a public limited liability Company incorporated on 2 August 1995 and domiciled in Sri Lanka. It is a licensed finance company under the Finance Business Act No. 42 of 2011. The Company has a primary listing on the Colombo Stock Exchange on 24 November 2011. The Company was re-registered under the Companies Act No. 07 of 2007.

Its registered office and the principal place of the business is at No. 1161, Maradana Road, Colombo 08.

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

Consolidated financial statements

The Consolidated Financial Statements of the Group for the year ended 31 March 2019 comprise People’s Leasing & Finance PLC (Parent Company), its subsidiaries (together referred to as the “Group”) and the Group’s interest in its associate company.

Parent entity and ultimate parent entity

The Company’s parent entity is People’s Bank which is a Government-owned entity.

Number of employees

The staff strength of the Company and Group as at 31 March 2019 is 2,329 and 3,232 respectively. (2,085 and 2,806 as at 31 March 2018).

1.2 Group information

Principal activities and nature of operations

Company

People’s Leasing & Finance PLC

The principal business activities are providing finance leases, hire purchase assets financing, term loans, Islamic finance, margin trading, share trading, issue of debt instruments, factoring, gold loans and mobilisation of public deposits.

Subsidiaries and associate

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

2.1 Statement of compliance

The Consolidated Financial Statements of the Group and Separate Financial Statements of the Company, as at 31 March 2019 and for the year then ended, have been prepared and presented in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs), laid down by The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), and in compliance with the requirements of the Companies Act No. 07 of 2007, the Finance Business Act No. 42 of 2011, Insurance Industry Act No. 43 of 2000 and the Listing Rules of the Colombo Stock Exchange. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting.

Sri Lanka Accounting Standards are available at www.casrilanka.com

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

Details of the Group’s General accounting policies followed during the year are given in Note 3 on pages 231 to 237.

2.2 Responsibility for financial statements

The Board of Directors is responsible for these Financial Statements of the Company and the Group as per the provision of the Companies Act No. 07 of 2007 and SLFRSs and LKASs.

The Board of Directors acknowledges their responsibility as set out in the “Annual Report of the Board of Directors on the Affairs of the Company”, “Directors’ Responsibility for Financial Reporting” and in the certification on the Statement of Financial Position on pages 213 and 223 respectively.

These Financial Statements include the following components:

• a Statement of Profit or Loss and Statement of Comprehensive Income providing the information on the financial performance of the Company and the Group for the year under review (Refer pages 221 and 222);
  a Statement of Financial Position providing the information on the financial position of the Company and the Group as at the year-end (Refer page 223);
• a Statement of Changes in Equity depicting all changes in shareholders’ equity during the year under review of the Company and the Group (Refer pages 224 to 225);
  a Statement of Cash Flows providing the information to the users, on the ability of the Company and the Group to generate cash and cash equivalents and the needs of entity to utilise those cash flows (Refer page 226); and
• Notes to the Financial Statements comprising accounting policies and other explanatory information (Refer pages 227 to 369).

2.3 Approval of financial statements by the Board of Directors

The Financial Statements of the Company and the Group for the year ended 31 March 2019 (including comparatives) were approved and authorised for issue on 13 June 2019 in accordance with the resolution of the Board of Directors on 13 June 2019.

2.4 Basis of measurement

The Financial Statements of the Company and the Group have been prepared on the historical cost basis except for the following items in the Statement of Financial Position:

2.5 Presentation of Financial Statements

The assets and liabilities of the Company and the Group in the Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non–current) is presented in Note 55 (Current/non-current analysis). No adjustments have been made for inflationary factors affecting the Financial Statements.

2.6 Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the Consolidated Statement of Financial Position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expenses are not offset in the Consolidated Statement of Profit or Loss unless required or permitted by any Accounting Standard or interpretation, and as specifically disclosed in the accounting policies of the Group.

2.7 Functional and presentation currency

The Financial Statements of the Group and the Company are presented in Sri Lankan Rupees (Rs.), which is the currency of primary economic environment, in which the Group operates (Group functional currency).

The information presented in US Dollars in the Section on “supplementary information” on pages 385 and 386 does not form part of the Financial Statements and is made available solely for the information of stakeholders.

2.8 Rounding

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

2.9 Materiality and aggregation

In compliance with the Sri Lanka Accounting Standard – LKAS 1 – “Presentation of Financial Statements”, each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or functions too are presented separately, unless they are immaterial.

2.10 Significant accounting judgements, estimates and assumptions

The preparation of the Financial Statements of the Company and the Group in conformity with SLFRSs and LKASs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Further, Management is also required to consider key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Actual results may differ from these estimates.

Accounting judgements, estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The key significant accounting judgements, estimates and assumptions involving uncertainty are discussed below, whereas the respective carrying amounts of such assets and liabilities are as given in related Notes.

Going concern

The Group’s Management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for a foreseeable future. Furthermore, Management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the Financial Statements continue to be prepared on the going concern basis.

Classification of financial assets and liabilities

Applicable from 1 April 2018

As per SLFRS 9, the Significant Accounting Policies of the Group provides scope for financial assets to be classified and subsequently measured into different categories, namely, at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) based on the following criteria;

• The entity’s business model for managing the financial assets as set out in Note 3.4 on page 233.
• The contractual cash flow characteristics of the financial assets as set out in Note 3.4 on page 233.

Applicable up to 31 March 2018

The Significant Accounting Policies of the Group provided scope for assets to be classified at inception into different financial asset categories under certain circumstances as per LKAS 39.

• In classifying financial assets or liabilities at “fair value through profit or loss” (FVTPL), the Group has determined that it has met the criteria for this designation set out in Note 24 on page 269.
• In classifying financial assets as “held to maturity” (HTM), the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by Note 28 on page 296.
• In classifying financial assets as “loans and receivables” (L&R), the Group has determined that it has met the criteria for this designation set out in Notes 22, 23, 25, and 35 on pages 268, 269, 273 and 310.
• In classifying financial assets as “available for sale” (AFS), the Group has determined that all non-derivative financial assets that are designated as AFS or those financial assets not classified as loans and receivables, FVTPL or HTM be classified as AFS as set out in Note 27 on page 294.

Impairment losses onfinancial assets

The measurement of impairment losses both under SLFRS 9 and LKAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses.

The Group/Company assesses at each reporting date, whether there is any objective evidence that a financial asset or a group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an “incurred loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Impairment losses on loans and receivables

Accordingly, the Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be provided in the Income Statement. In particular, the Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss.

These estimates are based on assumptions about a number of actors and hence actual results may differ, resulting in future changes to the impairment allowance made.

Details of the “impairment losses on loans and receivables” are given in Note 25.7 to the Financial Statements.

Impairment charges on financial investments

Financial investments are categorised under amortised cost Subject to Impairment in according with SLFRS 9 – Financial Investment. The Company/Group does not have historical loss experience on debt instruments at amortised cost .Thus the Group considers PDs published by the external sources i.e. – Bloomberg for external credit rating. LGD for debt securities issued by the Government of Sri Lanka in rupees is considered as 0%, and for all other instruments, industry average is considered as LGD.

Credit risk has not increased significantly relating to financial Investments, since initial recognition. Therefore Group did not record Expected credit loss in the financial statements for those investments.

Impairment of FVOCI/available-for-sale assets

Details of the “impairment of available-for-sale assets” are given in Note 27 to the Financial Statements.

Useful life time of the property, plant and equipment

The Group reviews the residual values, useful lives and methods of depreciation of property, plant and equipment at each reporting date. Judgement of the Management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

Useful lifetime of the intangible assets

Details of the “useful lifetime of the intangible assets” are given in Note 33 to the Financial Statements.

Transfer pricing regulation

The Company is subject to income taxes and other taxes including transfer pricing regulations. Prevailing uncertainties with respect to the interpretation of respective transfer pricing regulations, necessitated using management judgement to determine the impact of transfer pricing regulations. Accordingly critical judgements and estimates were used in applying the regulations in aspects including but not limited to identifying associated undertakings, estimation of the respective arm’s length prices and selection of appropriate pricing mechanism. The current tax charge is subject to such judgements. Differences between estimated income tax charge and actual payable may arise as a result of Management’s interpretation and application of transfer pricing regulation.

Deferred tax

Details of the “deferred tax” are given in Note 42 to the Financial Statements.

Retirement benefit obligation

Details of the “retirement benefit obligation" are given in Note 43.1 to the Financial Statements.

Valuation of general insurance contract liabilities of subsidiary, People’s Insurance PLC

The estimates of general insurance contracts have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred, but not yet reported, at the reporting date (IBNR).

It can take a significant period of time before the ultimate claims cost can be established with certainty. The main assumption underlying estimating the amounts of outstanding claims is the past claims development experience.

Large claims are usually separately addressed, either by being reserved at the face value of loss adjusted estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims, inflation or loss ratios.

2.11 Comparative information

Comparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the Financial Statements in order to enhance the understanding of the current period’s Financial Statements and to enhance the inter period comparability. The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year. The details of which are given in Note 54 on pages 334 to the Financial Statements.

The Group/Company has not restated the comparative information for 2018 for financial instruments within the scope of Sri Lanka Accounting Standard – SLFRS 9 on “Financial Instruments” (SLFRS 9). Therefore, the comparative information for 2018 is reported under Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement” (LKAS 39) and is not comparable to the information presented for 2019. Differences arising from adoption of SLFRS 9 have been recognised directly in equity as of 1 April 2018 and are disclosed in Note 4 on pages 238 to 242.

3.1 Basis of consolidation

The Consolidated Financial Statements of the Group for the year ended 31 March 2019 include the Company, its subsidiaries and its associate company. The Financial Statements of the Company’s subsidiaries and associate are prepared for the same reporting year except for People’s Insurance PLC, a subsidiary of People’s Leasing & Finance PLC, whose financial year ends on 31 December. For consolidation purpose same reporting year has been used.

3.1.1 Business combination and goodwill

Business combinations are accounted for using the acquisition method as per the requirements of Sri Lanka Accounting Standard – SLFRS 3 – (Business Combinations).

The Group and the Company measure goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquire, less the net recognised amount of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognised immediately in Statement of Profit or Loss.

Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net amount of the identifiable assets, liabilities and contingent liabilities acquired.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units (CGUs) or group of CGUs, which are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a CGU (or group of CGUs) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained.

When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognised in the Statement of Profit or Loss.

3.1.2 Common control business combination

Common control business combinations are accounted using the guidelines issued under Statement of Recommended Practice (SoRP) – Merger Accounting for Common Control Business Combinations issued by The Institute of Chartered Accountants of Sri Lanka.

3.1.3 Loss of control

Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary any non-controlling interest and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in Statement of
Profit or Loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost.

3.1.4 Transactions eliminated on consolidation

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

3.2 Foreign currency transactions and balances

All foreign currency transactions are translated into the functional currency which is Sri Lankan Rupees (Rs.) at the spot exchange rate at the date of the transactions were effected. In this regard, the Group’s practice is to use the middle rate of exchange ruling at the date of the transaction.

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

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the spot exchange rates as at the date of recognition. Non-monetary items measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined.

3.3 Changes in accounting policies

The Group has consistently applied the accounting policies to all periods presented in these Financial Statements, except for the changes arising out of transition to SLFRS 9 – Financial Instruments and SLFRS 7 (revised) – “Financial Instruments: Disclosures” and Sri Lanka Accounting Standard SLFRS 15 – “Revenue from Contracts with Customers” as set out below:

New and amended standards and interpretations In these Financial Statements, the Group has applied SLFRS 9, SLFRS 7 and SLFRS 15, which are effective for the annual reporting periods beginning on or after 1 January 2018, for the first time. The Group has not early adopted any other standard, interpretation or amendment that has been issued but not effective.

3.3.1 SLFRS 9 – “Financial Instruments”

SLFRS 9 issued in December 2014 replaced LKAS 39 and is applicable for annual reporting periods beginning on or after 1 January 2018.

In accordance with the option given in SLFRS 9 not to restate the comparatives, the Group has not restated comparative information for 2018 for financial instruments within the scope of SLFRS 9.

Therefore, comparative information for 2017/18 is reported under LKAS 39 and is not comparable with the information presented for 2018/19. Differences arising from the adoption of SLFRS 9 have been recognised directly in equity as of 1 April 2018 and are disclosed in Note 4 on pages 238 to 242.

3.3.2 Changes to classification and measurement

To determine their classification and measurement category, SLFRS 9 requires all financial assets, except equity instruments and derivatives, to be assessed based on a combination of the entity’s business model for managing the assets and the instruments’ cash flow characteristics.

Classification and measurement categories

As specified in LKAS 39 for financial assets (FVTPL, HTM, L&R and AFS) have been replaced by –

• Financial assets measured at amortised cost
• Financial assets measured at fair value through other comprehensive income
• Financial assets measured at fair value through profit or loss (FVTPL)

FVOCI includes equity instruments measured at fair value through other comprehensive income. Cumulative gains or losses on derecognition of equity instruments measured at FVOCI are not reclassified to profit or loss and transferred directly to retained earnings. SLFRS 9 largely retains the existing requirements in LKAS 39 for the classification of financial liabilities. However, under LKAS 39, all fair value changes of liabilities designated under the fair value option were recognised in profit or loss. Under SLFRS 9 fair value changes are generally presented as follows:

• The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in other comprehensive income (OCI); and
• The remaining amount of change in the fair value is presented in profit or loss.

The following assessments have been made on the basis of the facts and circumstances that existed at the transition date; i.e. 1 April 2018.

• The determination of the business model within which a financial asset is held.
• The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL.
• The designation of certain investments in equity instruments not held for trading as at FVOCI.
• For financial liabilities designated at FVTPL, the determination of whether presenting the effects of changes in the financial liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss.

The Group’s classification of its financial assets and liabilities is given in Note 20 on pages 258 and 261. The quantitative impact of applying SLFRS 9 as at 1 April 2018 is disclosed in Note 4 on pages 238 to 242.

Changes to the impairment calculation the adoption of SLFRS 9 has fundamentally changed the Group’s accounting for loan loss impairments by replacing the incurred loss approach under LKAS 39 with a forwardlooking expected credit loss (ECL) approach. SLFRS 9 requires the Group to record an allowance for ECLs for all loans and other debt financial assets not held at FVTPL, together with loan commitments and financial guarantee contracts but not to equity investments. Under SLFRS 9, credit losses are recognised earlier than under LKAS 39.

The allowance is based on the ECLs associated with the Probability of Default (PD) in the next twelve months unless there has been a significant increase in credit risk since origination. Lifetime expected credit loss is provided for financial assets for which the credit risk has increased significantly from initial recognition and the credit impaired assets subsequent to initial recognition. If the financial asset meets the definition of purchased or originated credit
impaired (POCI), the allowance is based on the change in the ECLs over the life of the asset.

If a debt security had low credit risk at the date of initial application of SLFRS 9, then the Group has assumed that credit risk on the asset had not increased significantly since its initial recognition.

Details of the Group’s impairment method are disclosed in Note 25.7 on pages 284 to 288.

3.3.3 SLFRS 7 (Revised) – “Financial Instruments: Disclosures”

The Group adopted SLFRS 7 together with SLFRS 9, effective from 1 January 2018. Changes including transition disclosures as shown in Note 4 on pages 238 to 242 together with detailed qualitative and quantitative information about the ECL calculations such as the assumptions and inputs used are disclosed as per the requirements of the Standards in Note 25.7 on pages 284 to 288.

Movements during the year in the ECL allowances are presented in Note 25.9 on page 291.

3.3.4 SLFRS 15 – “Revenue from contracts with customers”

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

SLFRS 15 provides a comprehensive framework for determining whether, how much, and when revenue is recognised. SLFRS 15 requires new qualitative and quantitative disclosure aimed at enabling users of Financial Statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

Entities are required to apply five-step model to determine when to recognise revenue and at what amount. The model specifies that revenue is recognised when or as an entity transfers control of goods and services to a customer at the amount at which the entity expects to be entitled.

There is no significant impact on the Financial Statement of the Group and the Company resulting from the application of SLFRS 15.

3.4 Financial instruments – Initial recognition and subsequent measurement

3.4.1 Date of recognition

All financial assets and liabilities except “regular way trades” are initially recognised on the trade date, i.e., the date that the Group becomes a party to the contractual provisions of the instrument. “regular way trades” means purchases or sales of financial assets that requires delivery of assets within the time frame generally established by regulation or convention in the market place. Those trades are initially recognised on the settlement date.

3.4.2 Classification and subsequent measurement of financial assets

3.4.2.1 After 1 April 2018

From 1 April 2018 as per SLFRS 9, the Group classifies all of its financial assets based on the business model for managing the assets and the assets’ contractual terms measured at either –

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

The subsequent measurement of financial assets depends on their classification.

Up to 31 March 2018 as per LKAS 39, the Group classified its financial assets into one of the following categories:

• Financial assets at fair value through profit or loss (FVTPL), and within this category
  • Held for trading
  • Designated at fair value through profit or loss
• Loans and receivables
• Held to maturity
• Available for sale

Details of the impact on reclassification and measurement from LKAS 39 to SLFRS 9 are disclosed in transition disclosures given in Note 4 on pages 238 to 242.

Business model assessment

With effect from 1 April 2018, the Group makes an assessment of the objective of a business model in which an asset is
held at a portfolio level and not assessed on instrument-by-instrument basis because this best reflects the way the business is managed and information is provided to management. The information considered includes –

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

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

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

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

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

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

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

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

• Contingent events that would change the amount and timing of cash flows;
• Leverage features;
• Prepayment and extension terms;
• Terms that limit the Group’s claim to cash flows from specified assets; and
• Features that modify consideration of the time value of money.
  

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

Details on different types of financial assets recognised on the SOFP.

Financial assets measured at amortised cost

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

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

Financial assets measured at amortised cost are given in Notes 22,23,25,26, and 35.

Financial assets measured at FVOCI

Financial assets at FVOCI include debt and equity instruments measured at fair value through other comprehensive income. Financial assets measured at FVOCI are given in Note 27.

Financial assets measured at FVTPL

As per SLFRS 9, all financial assets other than those classified at amortised cost or FVOCI are classified as measured at FVTPL. Financial assets at fair value through profit or loss include financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis as they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets and financial assets designated upon initial recognition at fair value through profit or loss which are discussed in Note 24 below.

Financial assets designated at fair value through profit or loss

As per SLFRS 9 – “Initial Recognition”, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL when such designation eliminates or significantly reduces an accounting mismatch that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis.

The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss as at the end of the reporting period.

3.4.2.2 Before 1 April 2018

At inception a financial asset is classified under one of the following categories:

1. Financial Assets at fair value through profit or loss (FVTPL); – Financial assets – Held for trading or – Financial assets – Designated at fair value through profit or loss
2. Financial assets – Loans and receivables (L&R);
3. Financial assets – Held to maturity (HTM); or
4. Financial assets – Available-for-sale (AFS).

The Group determine the classification of its financial assets at initial recognition. The classification depends on the purpose for which the investments were acquired or originated (i.e. intention) and based on the Group’s ability to hold.

The subsequent measurement of financial assets depends on their classification.

Financial assets at fair value through profit or loss (FVTPL)

Financial assets at fair value through profit or loss include financial assets Held for trading and financial assets designated upon initial recognition at fair value through profit or loss.

Financial assets – Designated at fair value through profit or loss

The Group designates financial assets at fair value through profit or loss in the following circumstances:

• The assets are managed, evaluated and reported internally at fair value;
• The designation eliminates or significantly reduces an accounting mismatch, which would otherwise have arisen; or
• The asset contains an embedded derivative that significantly modifies the cash flows that would otherwise have been required under the contract.

Financial assets designated at fair value through profit or loss is recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in “net trading income”. Interest earned is accrued in ‘interest income’ using EIR while dividend income is recorded in “other operating income” when the right to receive the payment has been established.

Financial assets – Loans and receivables (L&R)

Details of “financial assets – loans and receivables” are given in Note 25 on pages 273 to 292.

Financial assets – Held to maturity (HTM)

Details of “financial assets – held to maturity” are given in Note 28 on pages 296 and 297.

Financial assets – Available for sale (afs)

Details of “financial assets – available for sale” are given in Note 27 on pages 294 to 296.

3.4.3 Classification and subsequent measurement of financial liabilities

At the inception the Group and Company determines the classification of its financial liabilities. Accordingly financial liabilities are classified as:

1. Financial liabilities at fair value through profit or loss (FVTPL);
   • Financial liabilities held for trading; or
   • Financial liabilities designated at fair value through profit or loss.
2. Financial liabilities at amortised cost.

The subsequent measurement of financial liabilities depends on their classification.

3.4.3.1 Financial liabilities at fair value through profit or loss

Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Subsequent to initial recognition, financial liabilities at FVTPL are measured at fair value, and changes therein recognised in Statement of Profit or Loss.

Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term profit or position taking. This category includes derivative financial instruments entered into by the Company and the Group that are not designated as hedging instruments in hedge relationships as defined by the Sri Lanka
Accounting Standard – LKAS 39 – “Financial Instruments: Recognition and Measurement”. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

Gains or losses on liabilities held for trading are recognised in the Statement of Profit or Loss.

3.4.3.2 Financial liabilities at amortised cost

Financial instruments issued by the Group that are not designated at fair value through profit or loss, are classified as liabilities under ‘due to banks’, ‘due to customers’, “debt securities issued” and ‘other financial liabilities” as appropriate, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares at amortised cost using the EIR method.

After initial recognition, such financial liabilities are substantially measured at amortised cost using the EIR method. Amortised cost is calculated by taking
into account any discount or premium on the issue and costs that are an integral part of the EIR. The EIR amortisation is included in “interest expenses” in the Statement of Profit or Loss. Gains and losses are recognised in the Statement of Profit or Loss when the liabilities are derecognise as well as through the EIR amortisation process.

The details of the Group’s financial liabilities at amortised cost are shown in Note 36 (pages 311), Note 37 (page 314), Note 38 (page 315), Note 39 (page 318) and Note 40 (page 318) to the Financial Statements.

3.4.4 Reclassification of financial instruments

The Group does not reclassify any financial instrument into the “fair value through profit or loss” category after initial recognition. Also the Group does not reclassify any financial instrument out of the “fair value through profit or loss” category if upon initial recognition it was designated as at fair value through profit or loss.

The Group reclassifies non-derivative financial assets out of the “held for trading” category and into the “available for sale”, “loans and receivables”, or “held to maturity” categories as permitted by the Sri Lanka Accounting Standard –
LKAS 39 – “Financial Instruments: Recognition and Measurement”. In certain circumstances the Group is also permitted to reclassify financial assets out of the “available for sale” category and into the “loans and receivables”, “held for trading” or “held to maturity” category.

Reclassifications are recorded at fair value at the date of reclassification, which becomes the new amortised cost.

For a financial asset reclassified out of the “available for sale” category, any previous gain or loss on that asset that has been recognised in equity is amortised to Statement of Profit or Loss over the remaining life of the investment using the effective interest rate (EIR). Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the EIR. If the asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to the Statement of Profit or Loss.

The Group may reclassify a non-derivative trading asset out of the “held for trading” category and into the “loans and receivables” category if it meets the definition of loans and receivables and the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Reclassification is at the election of Management, and is determined on an instrument-by-instrument basis.

3.4.5 Derecognition of financial assets and financial liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when-

• The rights to receive cash flows from the asset which have expired;
• The Group and Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass–through” arrangement; and either:
  • The Group and Company has transferred substantially all the risks and rewards of the asset; or
  • The Group and Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset and consideration received and any cumulative gain or loss that has been recognised in Statement of Comprehensive Income is recognised in Statement of Profit or Loss.

When the Group and Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in Statement of Profit or Loss.

3.4.6 Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the Statement of Financial Position.

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

3.4.7 Determination of fair value

The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 21.

3.5 Impairment of non-financial assets

The carrying amounts of the Group’s non-financial assets, other than deferred tax assets are reviewed at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing of an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and risks specific to the asset.
In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share price for publicly traded subsidiaries or other available fair value indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may have decreased. If such indication exists the Group estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised, the reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation/amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in Statement of Profit or Loss.

3.6 Provisions

Provisions are recognised in the Statement of Financial Position when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation in accordance with the Sri Lanka Accounting Standard – LKAS 37 – “Provision, Contingent Liabilities and Contingent Assets”. The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation at that date. The expense relating to any provision is presented in the Statement of Profit or Loss net of any reimbursement.

3.7 Borrowing costs

As per Sri Lanka Accounting Standard – LKAS 23 – “Borrowing Costs”, the Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of the asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognised in the Statement of Profit or Loss in the period in which they occur.

3.8 Current tax

Details of the “income tax expense” are given in Note 17 to the Financial Statements.

3.9 Deferred tax

Details of the “deferred tax” are given in Note 42 to the Financial Statements.

3.10 Crop insurance levy (CIL)

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

3.11 Tax on financial services

Details of the 'VAT, NBT and debt repayment levy on financial services are given in Note 16 to the Financial Statements.

3.12 Standards issued but not yet effective

The following Sri Lanka Accounting Standards were issued by The Institute of Chartered Accountants of Sri Lanka but not yet effective as at 31 March 2019. Accordingly these accounting standards have not been applied in the preparation of the Financial Statements for the year ended 31 March 2019.

SLFRS 16 – Leases

SLFRS 16 will replace Sri Lanka Accounting Standard (LKAS 17) – Leases, IFRIC 4 – Determining whether an arrangement contains a lease, SIC 15 – Operating Leases Incentives and SIC 27 – Evaluating the Substance of Transactions Involving the Legal Form of a Lease. SLFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under LKAS 17. The standard includes two recognition exemptions for lessees – leases of low-value assets and short-term leases.

At the commencement date of a lease, a lessee will recognise a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term. Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-ofuse asset. Lessor accounting under SLFRS 16 is substantially unchanged from today’s accounting under LKAS 17.

Lessors will continue to classify all leases using the same classification principle as in LKAS 17 and distinguish between two types of leases: operating and finance leases. SLFRS 16 also requires lessees and lessors to make more extensive disclosures than under LKAS 17. SLFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted. Lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs. Pending a detailed impact analysis, possible impact from SLFRS 16 is not reasonably estimable as of the reporting date.

Operating lease commitments (payables)

The Group has taken on leased a number of branches under operating leases. These leases have an average life of between five to ten years. Lease agreements include clauses to enable upward revision of the rental payments on a periodic basis to reflect market conditions. These leases have an average life of between one to five years. Future minimum rentals receivables under operating leases are as follows:

IFRIC interpretation 23 (Uncertainty over income tax treatment)

The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under Sri Lanka Accounting Standards – LKAS 12 – Income Tax. IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted.

IFRS 17–Insurance contracts

After a very long journey, the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 17 on Insurance Contracts (IFRS 17). This standard will be mandatorily. effective for annual reporting periods beginning on or after 1 January 2022. IFRS 17 is a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure, and will give user of financial statements a whole new persepective .for the first time,insurers will be on a level footing internationally.

4.1 Reconciliation between the carrying amounts under LKAS 39 to the balances reported under SLFRS 9 as at 1 April 2018

The following pages set out the impact of adopting SLFRS 9 on the Statement of Financial Position, and retained earnings including the effect of replacing LKAS 39’s incurred credit loss calculations with SLFRS 9’s ECLs.

A reconciliation between the carrying amounts under LKAS 39 to the balances reported under SLFRS 9 as of 1 April 2018 is, as follows:

A.As at 1 April 2018, the Company has classified loans and receivables under into amortised cost since these assets are managed within a business model of collecting contractual cash flows.

B.The Company has elected the option to irrevocably designate all its previous AFS equity instruments as equity instruments at FVOCI.

C.As of 1 April 2018, all debt instruments meet the SPPI criterion within its held-to-maturity portfolio. Therefore, it elected to classify all of these instruments as debt instruments measured at amortised cost.

D.Revenue can be recognised only when it is probable that the economic benefit associate with the transaction will flow to the entity. However when uncertainty arises about the recoverability, revenue recognition should be ceased. With the adoption of SLFRS 9 – “Financial Instrument” replacing LKAS 39 “Financial Instrument” during the financial year, Customer default point (Uncertainty about the recoverability) has been change to 90 days past due rather than 6 months past due applied in previous Standards (LKAS 39). Accordingly interest income can be recognised only up to 90 days past due in accordance with SLFRS 9, instead of recognising up to 6 months past due as per the LKAS 39.

A.As at 1 April 2018, the Group has classified loans and receivables under into amortised cost since these assets are managed within a business model of collecting contractual cash flows.

B.The Group has elected the option to irrevocably designate all its previous AFS equity instruments as equity instruments at FVOCI.

C.As of 1 April 2018, all debt instruments meet the SPPI criterion within its held-to-maturity portfolio and available for sale. Therefore, it elected to classify all of these instruments as debt instruments measured at amortised cost.

D.Revenue can be recognised only when it is probable that the economic benefit associate with the transaction will flow to the entity. However when uncertainty arise about the recoverability, revenue recognition should be ceased. With the adoption of SLFRS 9 – “Financial Instrument” replacing LKAS 39 – “Financial Instrument” during the financial year, Customer default point (Uncertainty about the recoverability) has been change to 90 days past due rather than 6 months past due applied in previous Standards (LKAS 39). Accordingly interest income can be recognised only up to 90 days past due in accordance with SLFRS 9, instead of recognising up to 6 months past due as per the LKAS 39.

4.2 Impact of transition to SLFRS 9 on reserves and retained earnings

The impact of transition to SLFRS 9 – “Reserves and Retained Earnings” is, as follows:

4.3 Impact of transition to SLFRS 9 – “Impairment”

The following note reconciles the aggregate opening impairment provision allowances under LKAS 39 to the ECL allowances under SLFRS 9.

Accounting policy

Income is recognised to the extent that it is probable that the economic benefits will flow to the Company/Group and revenue can be reliably measured. The specific recognition criteria, for each type of income, given under the respective income notes.

Accounting policy

Recognition of income and expenses

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

Interest income and expenses

For all financial instruments measured at amortised cost, interest income or expense is recorded using the effective interest rate (EIR). EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as “interest income” for financial assets and “interest expense” for financial liabilities. However, for a reclassified financial asset for which the Company subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognised as an adjustment to the EIR from the date of the change in estimate.

Under both SLFRS 9 and LKAS 39, interest income and interest expense are recorded using the effective interest rate method for all financial assets measured at amortised cost and all financial liabilities measured at amortised cost respectively.

Revenue can be recognised only when it is probable that the economic benefit associate with the transaction will flow to the entity. However when uncertainty arise about the recoverability, revenue recognition should be ceased. With the adoption of SLFRS 9 –“Financial instrument” replacing LKAS 39 “financial instrument” during the financial year, Customer default point (uncertainty about the recoverability) has been change to 90 days past due rather than 6 months past due applied in previous standards(LKAS 39). Accordingly interest income can be recognised only up to 90 days past due in accordance with SLFRS 9, instead of recognising up to 6 months past due as per the LKAS 39.

Interest on overdue rentals

Interests from overdue rentals have been accounted for on a cash received basis.

6.1 Interest income

6.1.1 Interest income – Loans and receivables

6.2 Interest expenses

6.2.1 Interest expenses – Product-wise

Accounting policy

Product classification of insurance and investment contracts

SLFRS 4 – “Insurance Contracts”, requires contracts written by insurer to be classified as either “insurance contracts” or “investment contracts” depending in the level of insurance risk transferred.

Insurance contracts are those contracts when the Company (the insurer) has accepted significant insurance risk from another party (the policyholders) by agreeing to compensate the policyholders, if a specified uncertain future event (the insured event) adversely affects the policyholders. As a general guideline, the Company determines whether it has significant insurance risk by comparing benefits paid with benefits payable, if the insured event did not occur. Insurance contracts can also transfer financial risk.

Investment contracts are those contracts that transfer significant financial risk, and no significant insurance risk. Financial risk is the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of price or rates, credit rating or credit index or other variables, provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire. Investment contracts can, however, be reclassified as insurance contracts after inception if insurance risk becomes significant.

All the products sold by the Company are insurance contracts and therefore classified as insurance contracts under SLFRS 4 – “Insurance Contracts”. Thus, the Company does not have any investment contracts within its product portfolio as at the reporting date.

Revenue recognition of gross written premium

Gross written premium (GWP) represents the premium charged by the Company to underwrite risks. GWP is accounted on accrual basis.

Gross written premium comprises the total premiums received/receivable for the whole period of cover provided by contracts entered into during the accounting period and are recognised on the date on which the policy commences.

Rebates that form part of the premium rate, such as no claim rebates are deducted from GWP.

Insurance – Revenue recognition gross written premium

Non-life insurance gross written premium comprises the total premiums receivable for the whole period of cover provided by contracts entered into during the accounting period and are recognised on the date on which the policy commences.

Reinsurance premium

Non-life gross reinsurance premium written comprises the total premium payable for the whole cover provided by contracts entered into the period and are recognised on the date on which the policy incepts. Premium includes any adjustments arising in the accounting period in respect of reinsurance contracts incepting in prior accounting periods.

Unearned premium reserve

Unearned premium reserve represents the portion of the premium written in the year but relating to the unexpired term of coverage. Unearned premiums are calculated on the 365 basis.

Unearned reinsurance premium reserve

Unearned reinsurance premium is the proportion of premium written in a year that relate to periods of risk after the reporting date. Unearned reinsurance premiums are deferred over the term of the underlying direct insurance policies.

Accounting policy

Fee and commission income

The Group earns fee and commission income from a diverse range of services it provides to its customers. Commission income is recognised on accrual basis. Fee income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period.

Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the documents and inspection of vehicle are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

Accounting policy

This comprise all gains and losses from changes in fair value including realised and unrealised fair value changes for financial assets “held for trading”.

Accounting policy

Other operating income includes income earned on other sources, which are not directly related to the normal operations of the Group is recognised on accrual basis.

Dividend income

Dividend income is recognised when the right to receive the payment is established.

Net trading income from sale of vehicles

Revenue from the sale of imported vehicles is recognised when the significant risks and rewards of ownership of the vehicles have transferred to the buyer, usually on dispatch of the vehicles.

Operating lease income

Income arising on operating leases is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in the Statement of Profit or Loss in other operating income.

Bad debts recovered

Recovery of amounts written off as bad and doubtful debts is recognised on a cash basis.

Gain or losses on disposal of property, plant and equipment

Gains or losses resulting from the disposal of property, plant and equipment are accounted for on cash basis in the Statement of Profit or Loss, in the period in which the sale occurs.

Hiring income

Hiring income from vehicle on hire is recognised in the Statement of Profit or Loss based on the agreement entered between the owner and hirer for the year.

Other income

Other income is recognised on an accrual basis.

Accounting Policy

The Company and the Group recognise the changes in the impairment provisions for loans and receivables which are assessed as per the Sri Lanka Accounting Standard LKAS 39 – “Financial Instruments: Recognition and Measurement” and SLFRS 9 “Financial Instruments” for the year 2018 and 2019 respectively. The methodology adopted by the Company and the Group is explained in Note 25.8 to these Financial Statements.

Loss on disposal of collaterals including write-offs

Loans and receivables (and the related impairment allowance accounts) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans and receivables are secured, this is generally after receipt of any proceeds from the realisation of security.

11.1 Impairment charge/(reversal) for loans and other losses (detailed breakdown) – Company

11.2 Impairment charge/(reversal) for loans and other losses (detailed breakdown) – Group

11.3 Impairment charge to the income statement – Company

11.4 Impairment charge to the income statement – Group

Accounting policy

Personnel expenses include salaries and bonus, terminal benefit charges and other related expenses. The provision for bonus is recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made on the amount of the obligation.

Employees are eligible for Employees’ Provident Fund (EPF) contribution and Employees’ Trust Fund (ETF) contributions in accordance with the respective statutes and regulations.

Retirement benefit obligation is recognised in the Statement of Profit or Loss based on an actuarial valuation carried out for the gratuity liability in accordance with Sri Lanka Accounting Standard – LKAS 19 – “Employee Benefits”.

Depreciation

Depreciation is recognised in Statement of Profit or Loss on a straight–line basis over the estimated useful lives of each part of an item of property, plant and equipment since this method most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Land is not depreciated.

The estimated useful lives are as follows:

The above rates are consistently used by all the Group entities. The depreciation rates are determined separately for each significant part of an item of property, plant and equipment and commence to depreciate when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by the Management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale or the date that the asset is derecognised. Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate.

All classes of property, plant and equipment together with the reconciliation of carrying amounts and accumulated depreciation at the beginning and at the end of the year are given in Note 32 on pages 303 to 308.

Amortisation of intangible assets

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful economic lives at the rates as specified below:

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

All classes of intangible assets together with the reconciliation of carrying amounts and accumulated amortisation at the beginning and at the end of the year are given in Note 33 on pages 308 and 309.

Accounting Policy

Recognition of gross claims

Gross claims for non-life insurance include all claims occurring during the year, whether reported or not, related external claims handling costs that are directly related to the processing and settlement of claims, a reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years. Claims outstanding are assessed by review of individual claim files and estimating changes in the ultimate cost of settling claims.

Claims expenses and liabilities for outstanding claims are recognised in respect of direct insurance business. The liability covers claims reported but not yet paid, incurred but not reported claims (IBNR) and the anticipated direct and indirect costs of settling those claims. The provision in respect of IBNR is actuarially valued on a quarterly basis to ensure a more realistic estimation of the future liability based on past experience and trends.

While the Directors consider that the provision for claims is fairly stated on the basis of information currently available, the ultimate liability will vary as a result of subsequent information and events. This may result in adjustment to the amounts provided. Such amounts are reflected in the Financial Statements for that period. The methods used and the estimates made are reviewed regularly.

Recognition of reinsurance claims

Reinsurance claims are recognised when the related gross insurance claim is recognised according to the terms of the relevant contract.

Claims on assumed reinsurance are recognised as revenue or expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business.

Accounting Policy

Other operating expenses are recognised in the Statement of Profit or Loss on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant and equipment in a state of efficiency has been charged to the Statement of Profit or Loss in arriving at the profit for the year.

Crop insurance levy (CIL)

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

Directors’ emoluments

Directors’ emoluments include fees paid to Non-Executive Directors.

Accounting Policy

VAT on financial services

VAT on financial services is calculated in accordance with Value Added Tax (VAT) Act No. 14 of 2002 and subsequent amendments thereto. The value base for the computation of value added tax on financial services is calculated by adjusting the economic depreciation computed on rates prescribed by the Department of Inland Revenue to the accounting profit before income tax and emoluments payable. Emoluments payable include cash benefits, non-cash benefits including terminal benefits. VAT rate applied for the current financial year is 15% (2018 – 15%).

NBT on financial services

NBT on financial services is calculated in accordance with nation building tax (NBT) Act No. 9 of 2009 and subsequent amendments thereto with effect from 1 January 2014. NBT on financial services is calculated as 2% of the value addition used for the purpose of VAT on financial services.

Debt repayment levy (DRL) on financial services

As per the Finance Act No. 35 of 2018, with effect from 1 October 2018, DRL of 7% was introduced on the value addition attributable to the supply of financial services by each financial institution. DRL is chargeable on the same base used for calculation of VAT on financial services as explained in Note 14 above. The amount of DRL charged in determining the profit or loss for the period is given below:

Accounting Policy

This Note also includes the major components of tax expense, the effective tax rates and a reconciliation between the profit before tax and tax expense, as required by the Sri Lanka Accounting Standard – LKAS 12 – “Income Taxes”. As per Sri Lanka Accounting Standard – LKAS 12 – “Income Taxes”, tat expense is the aggregate amount included in determination of profit or loss for the period in respect of current and deferred taxation.

Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.

Accordingly, provision for taxation is based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto, and the Inland Revenue Act No. 24 of 2017, effective from 1 April 2018 at the rates specified below.

Deferred taxation

Detailed disclosure of accounting policies and estimate of deferred tax is available in Note 42 to the Financial Statements.

17.1 People’s Insurance PLC

According to the Inland Revenue Act No. 10 of 2006 and subsequent amendments thereto, any company which is liable to pay income tax at the rate of 28%, lists its shares on the Colombo Stock Exchange (CSE) by way of a minimum initial public offering (IPO) through which not less than 20% of its shares is issued to the general public on or before 1 April 2017, the income tax rate will be reduced by 50% for the year of assessment in which the such shares are listed and for another two years of assessment, provided that such company after listing continues to maintain a minimum public float of 20%.

Accordingly, 25% of the shares of the Company was offered and issued to the general public by way of an IPO in December 2015 and shares of the Company were listed on the CSE in January 2016. As at 31 December 2016, the public float of the Company’s shares was 24.94% while the Company was liable for income tax at 28% (before the tax reduction). Hence, the Company was considered eligible for the 50% tax reduction as per the said Act, during the reporting period and income tax was calculated at 14% for nine months ended 31 December 2018 and balance three months 28%. (2018 – 14%).

17.2 People’s Leasing Property Development Limited

Pursuant to the agreement dated 3 December 2008 entered into by People’s Leasing Property Development Limited with the Board of Investment under Section 17 of the Board of Investment Law, for the business of setting up and operating a mixed development project, the Inland Revenue Act relating to the imposition, payment and recovery of income tax shall not apply for a period of five years reckoned from the year in which the Company makes profit or any year of assessment not later than two years reckoned from the date of commencement of its commercial operations whichever is earliest. The Company is eligible for a 10% concessionary tax rate for a period of two years immediately succeeding the last date of tax exemption period and a 20% concessionary tax rate after the expiration of the 10% concessionary tax period. Non-BOI income is liable for normal rate of 28%.

17.3 People’s Leasing Havelock Properties Limited

Pursuant to the agreement dated 16 December 2010 entered into by People’s Leasing Havelock Properties Limited with the Board of Investment under Section 17 of the Board of Investment Law, for the business of setting up and operating a mixed development project, the Inland Revenue Act relating to the imposition, payment and recovery of income tax shall not apply for a period of five years reckoned from the year in which the Company makes profit or any year of assessment not later than two years reckoned from the date of commencement of its commercial operations whichever is the earliest. The Company is eligible for a 10% concessionary tax rate for a period of 2 years immediately succeeding the last date of tax exemption period and a 20% concessionary tax rate after the expiration of the 10% concessionary tax period.

17.4 Lankan Alliance Finance Limited

According to Bangladesh income tax ordinance, 1984 and amendments made thereto, tax rate applicable for Lankan Alliance Finance Limited is 42.5%.

17.5 Reconciliation of accounting profit and taxable income

17.6 Tax losses brought forward and utilised during the year

17.7 Income tax expense at the statutory income

17.8 Summary of the taxes paid during the year

Accounting policy

Basic earning per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

Basic earnings per share is calculated by dividing the net profit for the year attributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the year, as per Sri Lanka Accounting Standard – LKAS 33 – “Earnings per Share”.

A final dividend of Rs. 0.50 per share was paid for the year 2017/18 in July 2018. An interim dividend of Rs. 0.75 per share was paid in December 2018 to the ordinary shareholders of the Company for the year 2018/19 (interim dividend 2017/18 – Rs. 0.75) A final dividend of Rs. 0.50 per share has been proposed by the Board of Directors for the year 2018/19 to be approved at the Annual General Meeting. However, no provision is made for this proposed dividend in these Financial Statements in accordance with LKAS 10 – “Events after reporting period”.

Accounting Policy

Financial instruments are measured on an ongoing basis either at fair value or at amortised cost. The summary of significant accounting policies describes how each category of financial instruments is measured and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial instruments by category as defined in Sri Lanka Accounting Standard – LKAS 39 – “Financial Instruments: Recognition and Measurement” under the heading of the Statement of Financial Position.

20.1 Company

20.2 Company

20.3 Group

20.4 Group

FVTPL: Fair value through profit or loss HTM: Held to maturity L & R: Loans and receivables AFS: Available for sale

Accounting policy

The following is a description of how fair values are determined for financial and non-financial assets and liabilities that are recorded at fair value using valuation techniques. These incorporate the Group’s/Company’s estimate of assumptions that a market participant would make when valuing the instruments.

21.1 Financial assets at fair value through other comprehensive income/Available for sale

Available-for-sale financial assets valued using valuation techniques or pricing models primarily consist of quoted investment securities. These quoted investment securities are valued using quoted market price in an active market of each securities.

21.2 Financial assets at fair value through profit or loss/Held for trading

Held-for-trading financial assets valued using valuation techniques primarily consist of quoted investments. These quoted assets are valued using quoted market price in an active market of each securities.

21.3 Financial assets and liabilities carried at amortised cost

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated based on the Discounted Cash Flow approach. This approach employs the current market interest rates of similar financial instruments as a significant unobservable input in measuring the fair value and hence it is categorised under level 3 in the fair value hierarchy.

21.4 Property, plant and equipment disclosed at fair value

Freehold land and buildings are disclosed at revalued amount, being their fair value at the revaluation date less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

21.5 Valuation model

For all financial instruments where fair values are determined by referring to externally quoted prices or observable pricing inputs to models, independent price determination or validation is obtained. In an inactive market, direct observation of a traded price may not be possible. In these circumstances, the Company uses alternative market information to validate the financial instrument’s fair value, with greater weight given to information that is considered to be more relevant and reliable.

Valuation framework

The Company has an established control framework with respect to the measurement of fair values of trading and investment operations and all other significant assets and liabilities. Specific controls include;

• Periodic (daily, monthly or quarterly) reviewing of fair value measurements against observable market data.
• Periodic (at least annually) reviewing of fair value measurement models against changes in market conditions, significant judgements and assumptions.

21.6 Determination of fair value and fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1
quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2
other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly

Level 3
techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data

The following table shows an analysis of assets and liabilities recorded/disclosed at fair value by level of the fair value hierarchy:

The following table shows an analysis of assets and liabilities recorded/disclosed at fair value by level of the fair value hierarchy:

There were no material transfers between level 1 and level 2 during the 2018 and 2019. Valuation was carried out for lands and buildings by professionally qualified independent valuer in compliance with Sri Lanka Accounting Standard – SLFRS 13 – Fair Value Measurement.

The following table show total fair value gains/losses recognised in Statement of Profit or Loss during the year relating to assets and liabilities held at the respective year ended.

Level 3 fair value measurement

Reconciliation

The following note shows a reconciliation from the beginning balances to the ending balances of fair value measurements in level 3 of the fair value hierarchy:

Unobservable inputs used in measuring fair value

The table below sets out information about significant unobservable inputs used at 31 March 2019 and 31 March 2018 in measuring non-financial instruments categorised as level 3 in the fair value hierarchy:

MCM: Market comparable method.

* Significant increases/(decreases) in any of these inputs in isolation would result in a significantly higher/(lower) fair value.

21.7 Fair value of assets and liabilities not carried at fair value

Set out below is a comparison, by class, of the caring amount and fair values of the Group’s/Company’s financial instruments that are not carried at fair value in the Financial Statements. This table does not include the fair value of non-financial assets and non-financial liabilities.

Fair value of financial assets and liabilities not carried at fair value

The valuation techniques used to establish the Group’s fair values are consistent with those used to calculate the fair values of financial instruments carried at fair value. The fair values calculated are for disclosure purposes only and do not have any impact on the Group’s reported financial performance or position. The fair values calculated by the Group may be different from the actual amount that will be received/paid on the settlement or maturity of the financial instrument. As certain categories of financial instruments are not traded there is a significant level of management judgement involved in calculating the fair values.

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the Financial Statements:

Balances with banks and financial institutions

For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate their fair value. This assumption is also applied to demand deposits, and savings accounts without a specific maturity.

Loans and receivables

The fair value of loans and advances to customers with a maturity of less than one year generally approximates the carrying value, subject to any significant movement in credit spreads. The estimated fair value of loans and advances with maturity of more than one year represents the discounted amount of future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.

Due to customers

The estimated fair value of deposits with no maturity period (savings deposits) is the amount repayable on demand. The estimated fair value of fixed interest bearing deposits (fixed deposits) without quoted market prices is based on discounting cash flows using the prevailing market rates for debts with a similar risk and remaining maturity.

Due to banks and debt securities issued

Variable rate is a fair measure which reflects market movements. Hence the carrying value represents the fair value of the variable rate instruments.

The fair value of fixed rate borrowings with a maturity of less than one year generally approximates the carrying value, subject to any significant movement in credit spreads. The estimated fair value of fixed rates borrowing with maturity of more than one year represents the discounted amount of future cash flows expected to be paid. Expected cash flows are discounted at current market rates to determine fair value.

Accounting Policy

Cash and cash equivalents include cash in hand, placements with banks and loans at call and at short notice that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments.
They are brought to Financial Statements at their face values or the gross values, where appropriate. There were no cash and cash equivalents held by the Group companies that were not available for use by the Group.

Cash and cash equivalents are carried at amortised cost in the Statement of Financial Position.

Securities purchased under reverse repurchase agreements

Securities purchased under agreements to re-sell at a specified future date are recognised in the Statement of Financial Position.

The consideration paid, including accrued interest, is recorded in the Statement of Financial Position, within “cash and cash equivalents”, reflecting the transaction’s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in “interest income” and is accrued over the life of the agreement using the EIR.

22.1 Balance with banks

Accounting Policy

Balances with banks and financial institutions include fixed deposits and deposits in foreign currency. Balances with banks and financial institutions are carried at amortised cost in the Statement of Financial Position.

Accounting Policy

After 1 April 2018

The Group classifies financial assets as financial assets recognised through profit or loss (FVTPL) when they have been purchased primarily for short-term profit making through trading activities. FVTPL are recorded and measured at fair value and changes in fair value are recognised in the net gains/(losses) on financial assets – FVTPL/held-for-trading in the Statement of Profit or Loss.

SLFRS 9 requires financial instruments to be classified based on a combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow characteristics. FVTPL include quoted equity securities that have been acquired principally for short-term profit making and are recorded at fair value using the market prices published by the Colombo Stock Exchange.

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

Before 1 April 2018

Financial assets are classified as FVTPL held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together for short-term profit or position taking. Financial assets held for trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in “net trading income”.

Dividend income or expense is recorded in “net trading income” according to the terms of the contract, or when the right to receive the payment has been established.

The Group evaluates its portfolio of assets held for trading, to determine if the intention to sell them in the near future is still appropriate. When the Group can not sell these financial assets due to inactive markets and the management intention to sell them in the foreseeable future significant changes, the Group may choose to reclassify these financial assets. Financial assets held for trading measure the fair value using the prices obtained from Colombo Stock Exchanges.

24.1 Quoted equity securities