Introduction
of Reporting Entity
Eg:
………….
Bank of Ceylon PLC (the ‘Bank’) is a public limited liability company listed on
the Colombo Stock Exchange, incorporated on June .., ….., (and domiciled) in
Sri Lanka. It is a Licensed Commercial Bank regulated under the Banking Act No.
30 of 1988 and amendments thereto. The Bank was re-registered under the
Companies Act No. 07 of 2007. The registered office of the Bank is situated at
‘……………..’, No. ........ Street, ……., Sri Lanka. The ordinary shares of the Bank
have a primary listing on the Colombo Stock Exchange.
The
staff strength of the Bank as at December 31, 2010 was 4,321 (4,071 as at
December 31, 2009).
Consolidated
Financial Statements
The
Consolidated Financial Statements of the Bank for the year ended December 31,
2010, comprise the Bank (Parent Company) and its Subsidiaries (together
referred to as the ‘Group’), and the Group’s interest in its Associates. The
Financial Statements of all companies in the Group have a common financial year
which ends on December 31.
Approval
of Financial Statements by Board of Directors
The
Financial Statements for the year ended December 31, 2010 were authorized for
issue on February 15, 2011.
Principal
Activities and Nature of Operations
Bank
The
Bank provides a comprehensive range of financial services encompassing
accepting deposits, personal banking, trade financing, off-shore banking,
resident and non-resident foreign currency operations, travel-related services,
corporate and retail credit, syndicated financing, project financing,
development banking, lease financing, rural credit, issuing of local and
international credit cards, issuing of debit cards, telebanking facilities,
internet banking, money remittance facilities, dealing in Government Securities
and treasury-related products, salary remittance package, bullion trading,
export and domestic factoring, pawning, margin trading, e-banking services and
Bank assurance etc
Responsibility
for Financial Statements
The
Board of Directors is responsible for the preparation and presentation of the
Financial Statements of the Bank and its Subsidiaries as per the provisions of
the Companies Act No. 07 of 2007 and the Sri Lanka Accounting Standards.
The
Board of Directors acknowledges this responsibility as set out in the ‘Annual
Report of the Board of Directors’, “Statement of Directors’ Responsibility” and
in the statement following the Balance Sheet respectively.
These
Financial Statements include the following components:
•an
Income Statement providing the information on the financial performance of the
Group and the Bank for the year under review;
•a
Balance Sheet providing the information on the financial position of the Group
and the Bank as at the year-end;
•a
Statement of Changes in Equity depicting all changes in shareholders’ equity
during the year under review of the Group and the Bank;
•a
Cash Flow Statement providing the information to the users, on the ability of
the Group and the Bank to generate cash and cash equivalents and the needs to utilization
of those cash flows; and
•Notes
to the Financial Statements comprising Accounting Policies used and other
Notes.
Statement
of Compliance
The
Consolidated Financial Statements of the Group and the Separate Financial
Statements of the Bank, which comprise the components mentioned above have been
prepared and presented in accordance with the Sri Lanka Accounting Standards
laid down by The Institute of Chartered Accountants of Sri Lanka and in
compliance with the requirements of the Companies Act No. 07 of 2007, and the
Banking Act No. 30 of 1988 and amendments thereto, provide appropriate
disclosures as required by the Listing Rules of the Colombo Stock Exchange.
The
Group and the Bank did not adopt any inappropriate accounting treatments which
are not complying with the requirements of the Sri Lanka Accounting Standards
and other laws and regulations governing the preparation and presentation of
Financial Statements.
Basis
of Preparation
Bases
of Measurement
The
balances reflected in the Financial Statements of the Group are measured under
the historical cost convention, except Government Treasury Bills, Bonds and
Other Securities, which are categorized under the Trading Portfolio, Dealing
Securities and Land & Buildings which are stated at valuations as explained
in Notes 17, 18 and 23 respectively, to the Financial Statements. Assets and
liabilities are grouped by nature and listed in an order that reflects their
relative liquidity and maturity pattern. Where appropriate, the Significant
Accounting Policies are disclosed in the succeeding Notes. No adjustments have
been made for inflationary factors affecting the Financial Statements.
These
Financial Statements are prepared in Sri Lankan Rupees which is the Group’s
Functional Currency unless otherwise stated.
The
information presented in US Dollars in the section on ‘Stewardship’ does not
form part of the Financial Statements and is solely for the convenience of
stakeholders.
Review
of Impairment Losses on Other Assets
The
Group assesses whether there are any indicators of impairment for an asset or a
cash-generating unit at each reporting date or more frequently, if events or
changes in circumstances necessitate to do so. This requires the estimation of
the ‘value in use’ of such individual assets or the cash-generating units.
Materiality
and Aggregation
Each
material class of similar items is presented separately in the Financial
Statements. Items of dissimilar nature or function are presented separately unless
they are immaterial as permitted by the Sri Lanka Accounting Standard No. 3 -
(Revised 2005) on ‘Presentation of Financial Statements’.
Offsetting
Assets
and liabilities and income and expenses are not set-off unless permitted by the
Sri Lanka Accounting Standards.
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 No. 3 - (Revised 2005) on ‘Presentation of Financial
Statements’.
Assets
and Bases of Their Valuation
Cash
and Short Term Funds (Cash and Cash Equivalents)
Cash
and short term funds include cash in hand, balances with banks, placements with
banks and loans at call and at short notice. They are brought to Financial
Statements at the face value or the gross value, where appropriate. There were
no cash and cash equivalent balances held by the Group companies that were not
available for use by the Group.
Details
of the cash and short term funds are given in Note 15 to the Financial
Statements.
Balances
with Central Banks
The
Monetary Law Act requires that all commercial banks operating in Sri Lanka to
maintain a statutory reserve equal to 7% on all deposit liabilities denominated
in Sri Lankan Rupees (7% in 2009). The Bank’s Bangladesh operation is required
to maintain the statutory liquidity requirement of 19% on time and demand
liabilities, inclusive of 6% Cash Reserve Requirement and the balance 13% by
way of foreign currency and/or in the form of unencumbered securities held with
the Bangladesh Bank.
Details
of the Balances with Central Banks are given in Note 16 to the Financial
Statements.
Government
Treasury Bills, Bonds and Other Securities
Investments in Government Treasury Bills and
Treasury Bonds Held for Trading
Investments
in Government Treasury Bills and Treasury Bonds in the trading portfolio are
those investments that the Group acquires principally for the purpose of
selling or holds as part of a portfolio that is managed for short term profit.
These investments are initially recognised at prices that prevail at the date
of acquisition and subsequently marked to market and carried at that market
value in the Balance Sheet. Gains and losses on marked to market valuation are
dealt through the Income Statement.
Investments
in Government Treasury Bills and Treasury Bonds Held to Maturity
Investments
in Government Treasury Bills and Bonds held to maturity are reflected at the
value of the Bills/Bonds purchased and the discount/premium accrued thereon and
carried at these values till their maturity in the Balance Sheet. Discount
received/premium paid is taken to the Income Statement based on a pattern
reflecting a constant periodic rate of return.
Investments
in Central Bank Securities Held to Maturity
These
Securities are purchased primarily with the intention of holding them to
maturity and are stated at cost and carried at these values till their maturity
in the Balance Sheet.
Securities
Purchased under Resale Agreements
These
are advances collateralised by purchase of Government Treasury Bills and
Treasury Bonds from the public, subject to an agreement to resell them at a
predetermined price. Such Securities remain on the Balance Sheet of the Bank
and the asset is recorded in respect of the consideration paid.
The
difference between the aforesaid predetermined price and the purchase price
represents interest income and is recognised in the Income Statement over the
period of the Resale Agreement based on a pattern reflecting a constant
periodic rate of return.
Value
of the Securities Purchased under Resale Agreements is given on the face of the
Balance Sheet.
Investments
Dealing
Securities
These
are marketable securities acquired and held with the intention of resale over a
short period of time. Such securities are initially measured at cost and
subsequently measured at the market value as at the Balance Sheet date.
Adjustment for changes in market values is accounted for in the Income
Statement.
Investments
Held for Sale
These
are investments classified as held for sale as at the Balance Sheet date. The
Bank intends to recover the value of these assets principally through a sale
transaction rather than continuing to hold. These assets are available for
immediate sale in its present condition subject only to terms that are usual
and customary for sale of such assets and its sale is highly probable.
Investment
Securities
These
are acquired and held for yield or capital growth in the medium to long term
with the positive intent and ability to hold until maturity. Such securities
are recorded at cost and any unpaid interest/dividend accrued thereon up to the
date of purchase is reported under Interest and Fees Receivable. Details of the
Investment Securities are given in Note 19 to the Financial Statements.
Loans
and Advances to Customers
Loans
and advances to customers which include Bills of Exchange, Lease Receivable and
Loans & Advances are stated in the Balance Sheet net of provisions for
possible loan losses and net of interest in suspense, which is not accrued to
revenue.
Non-Performing
Loans and Advances
Loans
and advances which are in arrears of due capital and/or interest are classified
as non-performing as per the Direction No. 3 of 2008 on ‘Classification of
Loans and Advances, Income Recognition and Provisioning’, as amended by the
Direction No. 9 of 2008 on ‘Amendments to Directions on Classification of Loans
and Advances, Income Recognition and Provisioning for Licensed Commercial Banks
in Sri Lanka’ of the Central Bank of Sri Lanka.
Provision
for Loan Losses
Provision
for possible loan losses is made on the basis of a continuous review of all
loans and advances to customers in accordance with the Sri Lanka Accounting
Standard No. 23 on ‘Revenue Recognition and Disclosures in the Financial
Statements of the Banks’ and the Directions issued by the Central Bank of Sri
Lanka as detailed below.
Specific
Provisions
Specific
provisions for possible loan losses are made in accordance with the aforesaid
Directions issued by the Central Bank of Sri Lanka and disclosures are made as
required by the Sri Lanka Accounting Standard No. 23 on ‘Revenue Recognition
and Disclosures in the Financial Statements of Banks’. As per the above
Directions, the Banks are required to make specific provisions as shown in the
table below. However, the Bank’s provisioning policy is more stringent than the
minimum specific provisions required by the Central Bank of Sri Lanka, since
the Bank makes a full provision, based on the net exposure upon classification
of loans and advances as substandard.
Finance
Leases (Bank as a Lessor)
Assets
leased to customers which transfer substantially all the risks and rewards
incidental to the ownership other than legal title are classified as finance
leases in accordance with the Sri Lanka Accounting Standard No. 19 (Revised
2005) on ‘Leases’.
Credit
Card Receivable
Amounts
receivable on Credit Cards are included in loans and advances at the amounts
expected to be recovered.
Pawning
Receivable
The
Bank provides pawning facilities with two different maturity periods, namely, 6
months and 12 months. Amounts receivable on pawning are included in Loans and
Advances at the amounts expected to be recovered.
Provision
for Pawning Receivable
A
100% specific provision is made on Pawning Receivable after discounting the
value of the security, where no payment is received within one month from the
contractual maturity date.
Property,
Plant & Equipment
The
Group applies the requirements of the Sri Lanka Accounting Standard No. 18
(Revised 2005) on ‘Property, Plant & Equipment’ in accounting for its owned
assets which are held for and use in the provision of services, for rental to
others or for administrative purposes and are expected to be used during more
than one year.
Liabilities
and Provisions
Deposits
from Customers
Deposits
from customers include non-interest bearing deposits, savings deposits, term
deposits, deposits payable at call and certificates of deposit. They are stated
in the Balance Sheet at amounts payable. Interest paid/payable on these
deposits is charged to the Income Statement.
Dividends
Payable
Provision
for dividends payable is recognised at the time the dividend is recommended and
declared by the Board of Directors and approved by the shareholders.
Borrowings
Borrowings
include refinance borrowings, call money borrowings, credit balances in Nostro
Accounts and borrowings from financial institutions and are shown at the gross
value of the outstanding balance. They too are stated in the Balance Sheet at
amounts payable. Interest paid/payable on these borrowings is charged to the
Income Statement.
Securities
Sold under Repurchase Agreements
These
are borrowings collateralised by sale of Treasury Bills and Treasury Bonds held
by the Bank to the counterparty from whom the Bank borrowed, subject to an
agreement to repurchase them at a predetermined price. Such securities remain
on the Balance Sheet of the Bank and the liability is recorded in respect of
the consideration received.
Debentures
These
represent the funds borrowed by the Bank for long term funding requirements.
These are recorded in the Balance Sheet at amounts expected to be payable at
the Balance Sheet date.
Derivative
Instruments
The
Bank in its ordinary course of business enters into transactions such as
interest rate and foreign exchange contracts and uses derivative instruments to
manage exposure to interest rates, foreign currencies, commodity price
volatility, including exposure arising from forecast transactions. In order to
account for such transactions, the Bank applies hedge accounting principles
based on best accounting practices which are discussed below.
Accounting
for Hedging Transactions
At
inception of hedging transactions, the Bank formally documents the relationship
between the underlying hedged item and the hedging instrument including the
nature of the risk, the objective and the strategy for undertaking the hedge
and the method used to assess the effectiveness of the hedging relationship.
In
addition, at the inception and on an ongoing basis, formal assessments are
undertaken to ensure that the hedging instrument is expected to be highly
effective in offsetting the designated risk in the hedged item. In situations
where the hedged item is a forecast transaction, the Bank assesses whether the
transaction is a highly probable one and evaluates the exposure to variations
in cash flows that could ultimately affect the profit or loss for the period.
The ineffective portion of the profit or loss of the hedging instrument is
recognised immediately in the Income Statement.
Employees’
Provident Fund
The
Bank and employees contribute to the approved private Provident Fund at 12% and
8% on the salaries of each employee, respectively. Other entities of the Group
and their employees contribute at the same percentages as above to the
Employees’ Provident Fund managed by the Central Bank of Sri Lanka.
Employees’
Trust Fund
The
Bank and other entities of the Group contribute at the rate of 3.0% of the
salaries of each employee to the Employees Trust Fund managed by the Central
Bank of Sri Lanka.
Commitments
and Contingencies
All
discernible risks are accounted for in determining the amount of other
liabilities as explained in Note M 6. The Bank’s share of any Contingencies and
Capital Commitments of a Subsidiary or an Associate for which the Bank is also
liable severally or otherwise is included with appropriate disclosures.
Income Statement
Revenue Recognition
Interest
Income on Loans and Advances
In
terms of the provisions of the Sri Lanka Accounting Standard No. 23 on ‘Revenue
Recognition and Disclosures in the Financial Statements of Banks’, the interest
receivable on loans and advances is recognised on accrual basis.
Lease
Income
In
terms of the provisions of the Sri Lanka Accounting Standard No. 19 (Revised
2005) on ‘Leases’, the recognition of finance income on leasing is accounted,
based on a pattern reflecting a constant periodic rate of return on capital
outstanding.
Revenue
Recognition on Non-Performing Loans
When
loans and advances are classified as non-performing based on criteria as set
out in Note L 6.1, interest ceases to be recognised on such Loans and Advances.
Thereafter, interest income on these Loans and advances is recognised on a cash
basis, until the facility is reclassied as performing as is settled in full.
Interest falling due on non-performing loans and advances is credited to
interest in suspense account which is netted in the Balance Sheet against the
relevant loans and advances.
Income
from Government Securities and Securities Purchased under Resale Agreements
Discounts/premiums
on Treasury Bills and Treasury Bonds are amortised over the period to reflect a
constant periodic rate of return. The coupon interest on Treasury Bonds is
recognised on an accrual basis. The interest income on Securities Purchased
under Resale Agreements are recognised in the Income Statement on an accrual
basis over the period of the Agreement.
Income
on Discounting of Bills of Exchange
Income
on discounting of Bills of Exchange is recognised on a cash basis.
Fees
and Commission Income
The
Bank recognises Fees and Commission Income from a diverse range of services it
provides to its customers on a cash basis. This includes fees and commission
income arising on financial services provided by the Bank including Trade
Finance, Travel, Investment Banking, e-banking, Legal Services, Derivative
Transactions, etc.
Dividend
Income on Shares
Dividend
Income on Shares is recognised on an accrual basis only when the Bank’s right
to receive the dividend is established.
Interest
Income on Investments in Debentures and Trust Certificates
Interest
Income on Investments in Debentures and Trust Certificates is recognised on an
accrual basis.
Interest
and Fees Receivable on Credit Cards
Interest
and Fees Receivable on Credit Cards are recognised on an accrual basis.
Interest and fees cease to be taken into revenue when the recovery of minimum
payment is in arrears for over three months. Thereafter, interest and fees are
accounted for on a cash basis.
Interest
on Deposits, Borrowings, Securities Sold under Repurchase Agreements and Other
Fund-Based Operations
In
terms of the provisions of the Sri Lanka Accounting Standard No. 23 on ‘Revenue
Recognition and Disclosures in the Financial Statements of Banks’, the Interest
on Deposits and Borrowings and other fund-based expenses payable are recognised
on an accrual basis in the Income Statement. The interest expenses on
Securities Sold under Repurchase Agreements are recognised in the Income
Statement on an accrual basis over the period of the agreement.
Fees
and Commission Expenses
The
Bank recognises Fees and Commission Expenses on an accrual basis.
Cash
Flow Statement
The
Cash Flow Statement has been prepared by using the ‘Direct Method’ of preparing
cash flows in accordance with the Sri Lanka Accounting Standard No. 9 on ‘Cash
Flow Statements’, whereby gross cash receipts and gross cash payments on
operating activities, investing activities and financing activities are
recognised. Cash and Cash Equivalents comprise of short term, highly liquid
investments that are readily convertible to known amounts of cash and are
subject to an insignificant risk of changes in value.
