1. Reporting Entity

1.1.Corporate Information

Commercial Bank of Ceylon PLC (the ‘Bank’) is a public limited liability company listed on the Colombo Stock Exchange (CSE), incorporated on June 25, 1969 under the Companies Ordinance No. 51 of 1938, 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 on January 23, 2008, under the Company Registration No. PQ 116. The registered office of the Bank is situated at ‘Commercial House’, No. 21, Sir Razik Fareed Mawatha, Colombo 01, Sri Lanka. The ordinary shares of the Bank have a primary listing on the CSE.

The staff strength of the Bank as at December 31, 2016 was 4,987 (4,951 as at December 31, 2015).

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

1.2 Consolidated Financial Statements

The Consolidated Financial Statements as at and for the year ended December 31, 2016, comprise the Bank (Parent Company) and its Subsidiaries (together referred to as the ‘Group’ and individually as ‘Group entities’) and the Group’s interest in its Associates.

The Bank does not have an identifiable parent of its own. The Bank is the Ultimate Parent of the Group.

1.3 Principal Business Activities, Nature of Operations of the Group and Ownership by the Bank in its Subsidiaries and Associates

 

Commercial Bank of Ceylon PLC

The principal business activities of the Bank are providing 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, hire purchase financing, rural credit, issuing of local and international debit and credit cards, tele-banking, internet banking, mobile 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, bancassurance and Islamic banking products and services, etc.

Commercial Development Company PLC (CDC)

Principal business activities of CDC are property development, related ancillary services and outsourcing of staff for non-critical functions of the Bank.

During 2015, the Board of Directors of the Bank resolved to reduce the shareholding of CDC, (in which the Bank had a stake of 94.55%) to comply with the requirements of the Listing Rule No. 7.13 of the CSE on Minimum Public Holding. Accordingly, the Bank disposed a part of shares through the CSE and reduced the shareholding in CDC to 93.85% by December 31, 2016 (94.28% by December 31, 2015) and is in the process of taking steps to dispose the required number of shares to adhere to the requirements of the Listing Rules.

CDC, holds a 20% stake of Commercial Insurance Brokers (Pvt) Ltd. The Bank has a significant influence over financial and operating activities of CIB though it effectively holds only 18.77% as at December 31, 2016 (18.86% as at December 31, 2015).

ONEzero Company Ltd.

The principal business activities being providing IT – related services.

Serendib Finance Ltd.

Principal business activities being providing financial services including leasing, hire purchase, loans, etc.

Commex Sri Lanka S.R.L.

Commex Sri Lanka S.R.L. inaugurated its money transfer operation during 2016 following the grant of a Money Transfer License from the Bank of Italy.

It operates as an agent to the Bank for opening of accounts, providing money transfer services, issuance and encashment of foreign currencies and travellers cheques, collecting applications for credit facilities and handling of ATM cards, etc.

Commercial Bank of Maldives Private Limited

Commercial Bank of Maldives Private Limited, a fully-fledged Tier-I Bank, inaugurated its banking operations in the Maldives on September 26, 2016. This is a Subsidiary of the Bank partnering with Treetop Investments Maldives.

The principal activities will include offering of an extensive range of banking and related financial services.

Equity Investments Lanka Ltd.

The principal activities include investment services, risk capital and venture capital management.

Commercial Insurance Brokers (Pvt) Ltd. (CIB)

CIB, a private limited liability company is an insurance broker registered with the Ministry of Finance in terms of legislation.

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

2. Basis of Accounting

2.1.Statement of Compliance

The consolidated Financial Statements of the Group and the separate Financial Statements of the Bank, have been prepared and presented in accordance with the 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 and the Banking Act and provide appropriate disclosures as required by the Listing Rules of the CSE. These Financial Statements, except for information on cash flows have been prepared following the accrual basis of accounting.

These SLFRSs and LKASs 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 Significant Accounting Policies followed during the year are given in Notes 6 to 10 on pages 200 to 211.

The formats used in the preparation of the Financial Statements and the disclosures made therein also comply with the specified formats prescribed by the CBSL for the preparation, presentation and publication of Annual Audited Financial Statements of Licensed Commercial Banks.

2.2 Responsibility for Financial Statements

The Board of Directors of the Bank is responsible for the preparation and presentation of the Financial Statements of the Group and the Bank as per the provisions of the Companies Act No. 07 of 2007 and Sri Lanka Accounting Standards (SLFRSs and LKASs).

The Board of Directors acknowledges their responsibility for Financial Statements as set out in the ‘Annual Report of the Board of Directors’, ‘Statement of Directors’ Responsibility’ and the certification on the Statement of Financial Position on pages 153, 164 and 185, respectively.

These Financial Statements include the following components:

an Income Statement and a Statement of Profit or Loss and Other Comprehensive Income providing the information on the financial performance of the Group and the Bank for the year under review. Refer pages 183 and 184; a Statement of Financial Position providing the information on the financial position of the Group and the Bank as at the year end. Refer page 185; a Statement of Changes in Equity depicting all changes in shareholders’ funds during the year under review of the Group and the Bank. Refer pages 186 to 189; a Statement of Cash Flows providing the information to the users, on the ability of the Group and the Bank to generate cash and cash equivalents and utilisation of those cash flows. Refer page 190; Notes to the Financial Statements comprising Significant Accounting Policies and other explanatory information. Refer pages 191 to 352.

2.3 Approval of Financial Statements by the Board of Directors

The Financial Statements of the Group and the Bank for the year ended December 31, 2016 (including comparatives for 2015), were approved and authorised for issue by the Board of Directors in accordance with Resolution of the Directors on February 22, 2017.

2.4 Basis of Measurement

The Financial Statements of the Group have been prepared on the historical cost basis except for the following material items stated in the Statement of Financial Position.

Items	Basis of Measurement	Note No./s	Page/s
Held-for-trading financial instruments including financial derivatives	Fair Value	&31	241 – 244
Financial investments – Available-for-sale	Fair Value	34	251
Land and buildings	Measured at cost at the time of acquisition and subsequently at revalued amounts which are the fair values at the date of revaluation	39	265
Defined benefit obligation	Net liability for defined benefit obligations are recognised as the present value of the defined benefit obligation, less net total of the plan assets, plus unrecognised actuarial gains, less unrecognised past service cost and unrecognised actuarial losses	50	286
Equity settled share-based payment arrangements	Fair Value on grant date	54	298

2.5 Going Concern Basis of Accounting

The 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 the foreseeable future.

Furthermore, the 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 of the Group continue to be prepared on a going concern basis.

2.6 Functional and Presentation Currency

Items included in these Financial Statements are measured using the currency of the primary economic environment in which the Bank operates (the Functional Currency).

Each entity in the Group determines its own functional currency and items included in the Financial Statements of these entities are measured using that Functional Currency. There was no change in the Group’s Presentation and Functional Currency during the year under review.

These Financial Statements are presented in Sri Lankan Rupees, the Group’s Functional and Presentation Currency.

The information presented in US Dollars in the Section on ‘Supplementary Information’ on pages 434 and 435 does not form part of the Financial Statements and is made available solely for the information of stakeholders.

2.7 Presentation of Financial Statements

The assets and liabilities of the Group presented in the Statement of Financial Position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern.

No adjustments have been made for inflationary factors affecting the Financial Statements.

An analysis on recovery or settlement within 12 months and after more than 12 months from the Reporting date is presented in Note 62 on pages 308 and 309.

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 on ‘Presentation of Financial Statements’.

2.9 Offsetting

Financial assets and financial liabilities are offset and the net amount reported in the 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 liabilities simultaneously. Income and expenses are not offset in the Income Statement, unless required or permitted by an Accounting Standard or Interpretation (issued by the International Financial Reporting Interpretations Committee and Standard Interpretations Committee) and as specifically disclosed in the Significant Accounting Policies of the Bank.

2.10 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 – LKAS 1 on ‘Presentation of Financial Statements’ and amendments to the LKAS 1 on ‘Disclosure Initiative’ which was effective from January 01, 2016.

Notes to the Financial Statements are presented in a systematic manner which ensures the understandability and comparability of Financial Statements of the Group and the Bank. Understandability of the Financial Statements is not compromised by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

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.

2.12 Use of Judgements and Estimates

In preparing the Financial Statements of the Group in conformity with SLFRSs and LKASs, the Management has made judgments, estimates and assumptions which affect the application of Accounting Policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively.

Significant areas of critical judgments, assumptions and estimation uncertainty, in applying Accounting Policies that have most significant effects on the amounts recognised in the Financial Statements of the Group are as follows:

A. Judgment

Information about judgments made in applying Accounting Policies that have the most significant effects on the amounts recognised in these Financial Statements is included in the following notes.

2.12.1 Determination of Control Over Investees

Management applies its judgment to determine whether the control indicators set out in Note 37 on page 260 indicates that the Group controls the investees.

2.12.2 Classification of Financial Assets and Liabilities

The Significant Accounting Policies of the Group provide scope for assets to be classified at inception into different accounting categories under certain circumstances.

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 Notes 30 and 31 on pages 240 to 241. 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 35 on page 257. In classifying financial assets as ‘Available-for-sale’ (AFS), the Group has determined that all non-derivative financial assets that are designated as available-for-sale or those financial assets not classified as loans and receivables, FVTPL or HTM be classified as AFS as set out in Note 34 on page 251.

B. Assumptions and Estimation Uncertainties

Information about assumptions and estimation uncertainties that have a significant risk of resulting in material adjustments for the year ended December 31, 2016 are included in the following Notes.

2.12.3 Fair Value of Financial Instruments

The determination of fair values of financial assets and financial liabilities recorded on the Statement of Financial Position, for which there is no observable market price are determined using a variety of valuation techniques that include the use of mathematical models. The Group measures fair value using the fair value hierarchy that reflects the significance of input used in making measurements. Methodologies used for valuation of financial instruments and fair value hierarchy are stated in Note 26 on pages 233 to 238.

2.12.4 Impairment Losses on Loans and Receivables

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 judgment 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 factors and hence actual results may differ, resulting in future changes to the provisions made.

The individual impairment provision applies to financial assets evaluated individually for impairment and is based on Management’s best estimate of the present value of the future cash flows that are expected to be received. In estimating these cash flows, Management makes judgments about a borrower’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable.

A collective impairment provision is established for:

groups of homogeneous loans and advances that are not considered individually significant; and groups of assets that are individually significant but that were not found to be individually impaired

The collective provision for groups of homogeneous loans is established using statistical methods (such as, net flow rate methodology, risk migration analysis) or, a formula approach based on historical loss rate experience, using the statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgment to ensure that the estimate of loss arrived at, on the basis of historical information is appropriately adjusted to reflect the economic conditions and portfolio factors as at the Reporting date. The loss rates are regularly reviewed against actual loss experience.

In assessing the need for collective impairment, Management considers factors such as credit quality (for example, loan to collateral ratio, level of restructured performing loans), portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions (including policy rates, inflation, growth in Gross Domestic Product, sovereign rating, etc).

The accuracy of the provision depends on the model assumptions and parameters used in determining the collective provision.

Refer Note 18 on page 220 for details.

2.12.5 Impairment of Financial Investments – Available-for-Sale

The Group reviews the debt securities classified as available-for-sale investments at each Reporting date to assess whether they are impaired. This requires similar judgments as applied on the individual assessment of loans and advances.

The Group also records impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost along with the historical share price movements, duration and extent up to which the fair value of an investment is less than its cost.

Refer Note 7.1.10.2 on page 206 for details.

2.12.6 Impairment of Non-Financial Assets

The Group assesses whether there are any indicators of impairment for an asset or a cash generating unit (CGU) 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 CGUs. Estimating ‘Value in use’ requires the Management to make an estimate of the expected future cash flows from the asset or the CGU and also to select a suitable discount rate in order to calculate the present value of the relevant cash flows. This valuation requires the Group to make estimates about expected future cash flows and discount rates and hence, they are subject to uncertainty.

Refer Note 7.5 on page 207 for details.

2.12.7 Revaluation of Property, Plant & Equipment

The Group measures land and buildings at revalued amounts with changes in fair value being recognised in Equity through Other Comprehensive Income (OCI). The Group engages independent professional valuers to assess fair value of land and buildings. The key assumptions used to determine the fair value of the land and building and sensitivity analyses are provided in Note 39.5 (b) and 39.5 (c) on pages 271 to 275.

2.12.8 Useful Life-time of the Property, Plant & Equipment

The Group reviews the residual values, useful lives and methods of depreciation of Property, Plant & Equipment at each Reporting date. Judgment of the Management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

ReferNote 20 on page 222.

2.12.9 Deferred Tax Assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profit will be available and can be utilised against such tax losses. Judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax-planning strategies.

Refer Note 48 on page 283 for details.

2.12.10 Defined Benefit Obligation

The cost of the defined benefit plans determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, future pension increases, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.

Refer Note 50 on pages 286 to 294 for the assumptions used.

2.12.11 Provisions for Liabilities, Commitments and Contingencies

The Group receives legal claims in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due processes in respective legal jurisdictions.

Information about significant areas of estimation uncertainty and critical judgments in applying Accounting Policies other than those stated above that have significant effects on the amounts recognised in the Consolidated Financial Statements are described in Notes 7.9 to 7.15 on pages 209 to 210.

2.13 Events After the Reporting Period

Events after the Reporting period are those events, favourable and unfavourable, that occur between the Reporting date and the date when the Financial Statements are authorised for issue.

In this regard, all material and important events that occurred after the Reporting period have been considered and appropriate disclosures are made in Note 70 on page 352 where necessary.

3. Financial Risk Management

3.1 Introduction and Overview

Risk is inherent in the Bank’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.

The Group has exposure mainly to the following risks from financial instruments:

• Credit Risk;
• Market Risk;
• Liquidity Risk; and
• Operational Risk.

3.2 Bank’s Risk Management Framework

The Board of Directors of the Bank has the overall responsibility for the establishment and oversight of the Bank’s Risk Management Framework.

The Risk Management Policy of the Bank translates overall risk appetite on business activities in a holistic approach to provide the guidance required for convergence of strategic and risk perspectives of the Bank.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Risk Management Policy Framework constitutes the Credit Policy, Lending Guidelines, ALM Policy including Liquidity Risk Policy, Foreign Exchange Policy, Operational Risk Policy, IT Risk Management Policy, Market Risk Management Policy, Stress Testing Policy, etc., which have been firmly established to provide control and guidance for decision making throughout the Bank in a uniform manner.

The Committee structure embedded to the system acts as a fact finding and decision making authority through meaningful discussions of multiple points of view. The Risk Management Committees effectively deliberate on matters at hand to provide guidance to the business lines with a view to managing risk in accordance with the strategic goals and risk appetite of the Bank.

The Board of Directors of the Bank has formed a mandatory Subcommittee namely, the Board Integrated Risk Management Committee (BIRMC) as per Banking Act Direction No. 11 of 2007 on Corporate Governance. The performance of the Committee and the duties and roles of members are reviewed by the Board annually.

The meetings of the Executive Integrated Risk Management Committee (EIRMC) are conducted on a monthly basis to discuss Credit and Operational risk matters of the Bank while priority is given for liquidity and market risks at the Assets and Liabilities Management Committee (ALCO) meetings that convene at least once a fortnight.

In addition, the Risk Management Department carries out semi-annual Bank-wide risk assessment function focusing on adherence to laws, regulations and regulatory guidelines as well as internal controls and approved policies. A dedicated Compliance Department is entrusted with the responsibility of monitoring these requirements on an ongoing basis.

Further, the Internal Audit function of the Bank independently monitors and evaluates the risk management function of the Bank and provides their views on adequacy of the Risk Management Framework to the Board Audit Committee.

Bank’s Financial Risk Management Framework

Credit Risk

The risk that the Bank will incur a loss because its customers or counterparties fail to discharge their contractual obligations.

The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations and by monitoring exposures in relation to such limits.

Management of Credit Risk

Lending Guidelines of the Bank formulated in consultation with lending units provide expected granularity of credit assessment, risk grading, their acceptability of collateral, etc., as well as limits on exposures and concentration levels to various sectors, counter parties, geographies and segments.

A robust risk grading system incorporating Basel requirements of facility rating and counterparty rating are adopted by the Bank for evaluation of credit proposals. This risk grading framework consists 10 grades of varying degrees of risk as indicators for the Lending Officers to evaluate and arrive at suitable risk-reward trade-offs in their propositions. These risk grades are reviewed by the Integrated Risk Management Department regularly.

Bank's Financial Risk Management Framework

 

Portfolio level credit risk analyses are taken up at monthly EIRMC as well as quarterly BIRMC meetings. Individual credit proposals evaluated by the Lending Officers are approved by the Authorising Officers within the hierarchy in Delegated Authority Levels whilst ensuring a minimum of four eyes principle when approving any lending proposals. Escalation of approving levels occurs based on exposure levels as well as final risk ratings of borrowers.

The Executive Credit Committee (ECC) and the Board Credit Committee (BCC) are entrusted with approval of high value facilities while the Board will be the ultimate authority for approving facilities beyond predetermined threshold levels.

Deliberations take place at BCC level on facilities taken up for approval within the specified threshold and recommendation for approval of the Board based on quantum of exposures proposed is exercised.

The Integrated Risk Management Department provides risk approval for individual proposals above predetermined threshold levels, consequent to a rigorous independent risk evaluation guided by Credit Policy, Lending Guidelines and circular instructions within a limit framework stemming from risk appetite of the Bank.

Market Risk

The risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices. The Bank classifies exposures to market risk into either trading or non-trading portfolios and manages each of those portfolios separately.

The market risk for the trading portfolio is monitored and managed closely.

Management of Market Risk

Market Risk Policy, ALCO Policy and Foreign Exchange Risk Policy are the three main policies that constitute the framework governing the Market Risk Management function of the Bank.

Due to the business model adopted by the Bank, exposure to equity and commodity risk was kept at bay throughout the year.

However, Interest Rate Risk arising from the Banking Book as well as Trading Book and Foreign Exchange Risk arising from dealing in currencies other than local currency, continued to expose the Bank to associated risk elements.

Volatile interest scenarios experienced by the country during the period impacted the financial market in Sri Lanka resulted in shrinking Net Interest Margin. Interest Rates of the Banking Book was subjected to varying degrees of rate shocks to identify impact on earnings perspective in such rate scenarios. The results reflected predictions which assisted the Bank in formulating strategies to manage the financial position in an effective manner with the limited choices available.

Trading Book too was subjected to Value at Risk (VaR) framework as described in the, Section on ‘Managing Risk: An Overview’ on pages 172 to 175. The Bank also carried out sensitivity analysis on a regular basis to ascertain the impact on portfolios maintained, mainly in Government Securities and marking to market such portfolios to reflect fair value for decision making process.

Foreign exchange positions were maintained within the regulatory framework in a market where much volatility was observed in the major currency that the Bank deals in, i.e. US Dollars. The positions were subjected to sensitivity analysis to provide insight to possible losses/gains arising from currency appreciation/depreciation, as the reporting currency of the Bank being Sri Lankan Rupees.

Liquidity Risk

The risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Bank might be unable to meet its payment obligations when they fall due under both normal and stress circumstances.

To limit this risk, Management has arranged for diversified funding sources in addition to its core deposit base and adopted a policy of managing assets with liquidity in mind and monitoring future cash flows and liquidity on a daily basis. The Bank has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding, if required.

Management of Liquidity Risk

Market Risk Management Policy and the ALCO Policy of the Bank approved by the Board of Directors set the tone for managing liquidity risk of the Bank. Liquidity risk of the Bank is given utmost priority when managing a wide range of other risks due to the fact that it is considered as the most critical risk for any financial institution.

The Bank’s Treasury Department is entrusted with managing liquidity of the Bank on real time basis to ensure smooth functioning of business activities of all other business units of the Bank.

Having access to a substantial stable Current Account and Savings Account (CASA) base due to its wide branch network and the top of the mind perception created in the depositors in general, for stability provides immense strength to the Bank in managing liquidity.

Having high quality liquid assets at the disposal of the Bank is another plus factor for the Bank. The strength of such was amply reflected in the new Basel III parallel computation the Bank carries out for arriving at Liquidity Coverage Ratio as per the CBSL Guidelines that recorded very healthy results as compared to regulatory minimum threshold levels.

Contingency funding plans available, constant monitoring of salient liquidity ratios and scenario based stress testing being carried out regularly, provide the sense of Bank with required indicators enabling the Bank to take proactive measures that could provide time to overcome any adverse liquidity position

on a future date.

Operational Risk

The risk that the Bank will incur a loss due to systems failure, human error, fraud or external events. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavours to manage these risks through a control framework and by monitoring and responding to potential risks.

Controls include effective segregation of duties, access, authorisation and reconciliation procedures, staff education and assessment processes, such as the use of internal audit.

Management of Operational Risk

Sound Operational Risk Management practices are embedded into the work process through the Bank’s culture, internal policy framework and as per regulatory requirements.

Circular instructions and Operational Risk Management Policy play a major part in bringing together business practices with accepted benchmarks to ensure minimum disruption to processes, personnel, technology and infrastructure.

Internal control framework and Audit function with firmly established ‘three lines of defences’ serve the Bank to manage Operational Risk at current acceptable levels.

Risk and Control Self-Assessment (RCSA) framework is adopted to identify risks involved in business activities of the Bank and to implement appropriate mitigatory measures after assessing criticality of such risks.

IT Risk of the Bank is managed through strict monitoring of Key IT Risk Indicators while Vulnerability Assessment and Penetration Tests are being carried out by both internal and external parties at regular intervals to identify the relevant risks.

Refer Note 69 on pages 321 to 352 for ‘Financial Risk Review’.

A detailed write-up on how the risk management is carried out within the Bank’s Risk Management Framework with due consideration given to factors such as governance, identification, assessment, monitoring, reporting and mitigation are discussed in detail in the section on ‘Managing Risk: An Overview’ on pages 172 to 175. The said write-up on ‘Managing Risk: An Overview’ does not form part of the Financial Statement.

4. Fair Value Measurement

‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk.

When one is available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted pricing in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The fair value of an asset or a liability is measured using the assumptions that market participants would use the fair value hierarchy when pricing the asset or liability, assuming that market participants act in their economic best interest.

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

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. External professional valuers are involved for valuation of significant assets such as land and building.

An analysis of fair value measurement of financial and non-financial assets and liabilities is provided in on pages 233 to 238.

5. Changes in Accounting Policies

The Group and the Bank has consistently applied the Accounting Policies as set out in Notes 6 to 10 on pages 200 to 211 to all periods presented in these Financial Statements.

Significant Accounting Policies

The Significant Accounting Policies set out below have been applied consistently to all periods presented in the Financial Statements of the Group, unless otherwise indicated.

These Accounting Policies have been applied consistently by Group entities.

Set out below is an index of Significant Accounting Policies, the details of which are available on the pages that follow:

Note	Description	Reference to the Note	Page No.
6.	Significant Accounting Policies – General		200
6.1	Basis of consolidation		200
6.2	Foreign currency		201
7.	Significant Accounting Policies – Recognition of Assets and Liabilities		202
7.1	Financial instruments – initial recognition, classification and subsequent measurement		202
7.2	Non-current assets held-for-sale and disposal groups		206
7.3	Property, plant & equipment	39	206
7.4	Intangible assets	40	207
7.5	Impairment of non-financial assets		207
7.6	Dividends payable		207
7.7	Employee benefits		207
7.8	Other liabilities	50	209
7.9	Provisions	49	209
7.10	Restructuring		209
7.11	Onerous contracts		209
7.12	Bank levies		209
7.13	Financial guarantees and loan commitments		210
7.14	Commitments		210
7.15	Contingent liabilities and commitments	59	210
7.16	Stated capital and reserves	53, 55, 56, & 57	210
7.17	Earnings per Share (EPS)	23	210
7.18	Operating segments	63	210
7.19	Fiduciary assets		210
8.	Significant Accounting Policies – Recognition of Income and Expense		210
8.1	Interest income and expense	13	210
8.2	Fee and commission income and expense	14	210
8.3	Net gains/(losses) from trading	15	210
8.4	Dividend income	15, 16, & 17	210
8.5	Leases		210
8.6	Rental income and expenses		211
9.	Significant Accounting Policies – Income Tax Expense		211
9.1	Current tax	47	211
9.2	Deferred tax	48	211
9.3	Tax exposures		211
9.4	Crop Insurance Levy (CIL)		211
9.5	Withholding tax on dividends distributed by the Bank, Subsidiaries and Associates		211
9.6	Economic Service Charge (ESC)		211
9.7	Value Added Tax on Financial Services		211
9.8	Nation Building Tax on Financial Services (NBT)		211
10.	Significant Accounting Policies – Statement of Cash Flows		211
10.1	Statement of Cash Flows		211

6. Significant Accounting Policies – General

6.1 Basis of Consolidation

The Group’s Financial Statements comprise, Consolidated Financial Statements of the Bank and its Subsidiaries in terms of the Sri Lanka Accounting Standard – SLFRS 10 on ‘Consolidated Financial Statements’ and the proportionate share of the profit or loss and net assets of its Associates in terms of the Sri Lanka Accounting Standard – LKAS 28 on ‘Investments in Associates and Joint Ventures’. The Bank’s Financial Statements comprise the amalgamation of the Financial Statements of the Domestic Banking Unit, the Off-Shore Banking Centre and the international operations of the Bank.

6.1.1 Business Combinations

Business combinations are accounted for using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition and identifiable net assets acquired are measured at fair value. Any goodwill that arises is tested annually for impairment (Refer Note 7.5 on page 207). Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

6.1.2 Non-Controlling Interests (NCI)

Details of NCI are given in Note 58 on page 304.

6.1.3 Subsidiaries

Details of the Bank’s Subsidiaries and their contingencies are set out in Notes 37 and 59.4 (a) on pages 260 to 262 and 306.

6.1.4 Loss of Control

When the Group loses control over a Subsidiary, it derecognises the assets and liabilities of the Subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

Subsequently, it is accounted for as an Associate or in accordance with the Group’s Accounting Policy for financial instruments depending on the level of influence retained.

6.1.5 Associates

Details of Associates together with their fair values and the Group’s share of contingent liabilities of such Associates are set out in Notes 38 and 59.4 (b) on pages 262 to 264 and 306.

6.1.6 Transactions Eliminated on Consolidation

Intra-group balances, transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) 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.

6.1.7 Material Gains or Losses, Provisional Values or Error Corrections

There were no material gains or losses, provisional values or error corrections recognised during the year in respect of business combinations that took place in previous periods.

6.2 Foreign Currency

6.2.1 Foreign Currency Transactions and Balances

Foreign currency transactions are translated into the Functional Currency, which is Sri Lankan Rupees, using the exchange rates prevailing at the dates of the transactions. In this regard, the Bank’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 as at the Reporting date are translated into the Functional Currency at the middle exchange rate of the Functional Currency ruling as at the Reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the Functional Currency as 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 as at the Reporting date.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the Functional Currency at the spot exchange rate at the date that the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the transaction.

Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of the following items are recognised in OCI:

Available-for-sale equity instruments; or A financial liability designated as a hedge of the net investment in a foreign operation to the extent that the hedge is effective; and Qualifying cash flow hedges to the extent that the hedge is effective.

6.2.2 Foreign Currency Translations

The Group’s Consolidated Financial Statements are presented in Sri Lankan Rupees, which is also the Bank’s Functional Currency. The Financial Statements of the Off-Shore Banking Centre of the Bank and the Financial Statements of the Foreign Operations of the Bank have been translated into the Group’s Presentation Currency as explained under Notes 6.2.3 and 6.2.4 below.

6.2.3 Transactions of the Off-Shore Banking Centre

These are recorded in accordance with Note 6.2.1 above, except the application of the annual weighted average exchange rate for translation of the Income Statement and the Statement of Profit or Loss and Other Comprehensive Income. Net gains and losses are dealt through the Profit or Loss.

6.2.4 Foreign Operations

The results and financial position of overseas operations that have a Functional Currency different from the Bank’s Presentation Currency are translated into the Bank’s Presentation Currency as follows:

Assets and liabilities, including goodwill and fair value adjustments arising on acquisition, are translated at the rates of exchange ruling as at the Reporting date. Income and expenses are translated at the average exchange rate for the period, unless this average rate is not a reasonable approximation of the rate prevailing at the transaction date, in which case income and expenses are translated at the exchange rates ruling at the transaction date. All resulting exchange differences are recognised in the OCI and accumulated in the Foreign Currency Translation Reserve (Translation Reserve), which is a separate component of Equity, except to the extent that the translation difference is allocated to the NCI.

When a Foreign Operation is disposed of such that the control is lost, the cumulative amount in the Translation Reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of only part of its interest in a subsidiary that includes a Foreign Operation while retaining control, then the relevant proportion of the cumulative amount of the Translation Reserve is reattributed to NCI.

7. Significant Accounting Policies – Recognition of Assets and Liabilities

7.1 Financial Instruments – Initial Recognition, Classification and Subsequent Measurement

7.1.1 Date of Recognition

The Group initially recognises loans and advances, deposits and subordinated liabilities, etc. on the date on which they are originated. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument.

7.1.2 Initial Measurement of Financial Instruments

The classification of financial instruments at initial recognition depends on their purpose and characteristics and the Management’s intention in acquiring them. (Please refer Notes 7.1.3 and 7.1.4 for further details on classification of financial instruments).

All financial instruments are measured initially at their fair value plus transaction costs that are directly attributable to acquisition or issue of such financial instrument, except in the case of financial assets and financial liabilities at fair value through profit or loss as per the Sri Lanka Accounting Standard – LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

Transaction cost in relation to financial assets and financial liabilities at fair value through profit or loss are dealt with through the Income Statement.

7.1.2.1 ‘Day 1’ Profit or Loss on Employee Below Market Loans

When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or based on a valuation technique whose variables include only data from observable markets, the Group recognises the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in ‘Interest Income and Personnel Expenses’. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the profit or loss when the inputs become observable, or when the instrument is derecognised. The ‘Day 1 loss’ arising in the case of loans granted to employees at concessionary rates under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) over the remaining service period of the employees or tenure of the loan whichever is shorter.

Refer Note 8.1 on page 210.

7.1.3 Classification and Subsequent Measurement of Financial Assets

Group classifies financial assets into one of the following categories:

Financial assets at fair value through profit or loss, and within this category as –

• held-for-trading; or

• designated at fair value through profit or loss;

Loans and receivables; Held-to-maturity; and Available-for-sale.

The subsequent measurement of financial assets depends on their classification.

Please refer Note 25 on pages 229 to 232 for details on different types of financial assets recognised on the Statement of Financial Position.

7.1.3.1 Financial Assets at Fair Value through Profit or Loss

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 which are discussed in Notes 7.1.3.1.1 and 7.1.3.1.2 below:

7.1.3.1.1 Financial Assets – Held-for-Trading

Details of ‘Financial assets – Held-for-trading’ are given in Note 31 on pages 241 to 244.

Derivatives Recorded at Fair Value through Profit or Loss

Details of ‘Derivative financial assets’ recorded at fair value through profit or loss are given in Note 30 on page 240.

7.1.3.1.2 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 on a fair value basis; or 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 which would otherwise have been required under the contract.

Financial assets designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in ‘Net gain or loss on financial assets and liabilities designated at fair value through profit or loss’. Interest earned is accrued in ‘Interest Income’, using the EIR, while dividend income is recorded in ‘other operating income’ when the right to receive the payment has been established.

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

7.1.3.1.3 Embedded Derivatives

Derivatives may be embedded in another contractual arrangement (a host contract). The Group accounts for an embedded derivative separately from the host contract when:

the host contract was not itself carried at Fair Value through Profit or Loss; the terms of the embedded derivative would have met the definition of a derivative if they were contained in a separate contract; and the economic characteristics and risks of the embedded derivative were not closely related to the economic characteristics and risks of the host contract.

Separated embedded derivatives are measured at fair value, with all changes in fair value recognised in profit or loss unless they formed part of a qualifying cash flow or net investment hedging relationship. Separated embedded derivatives are presented in the Statement of Financial Position together with the host contract.

7.1.3.2 Loans and Receivables to Banks and Other Customers

Loans and receivable to banks and other customers include amounts due from banks, loans & advances and lease receivable of the Group.

Details of ‘Loans and receivables to banks and other customers’ are given in Notes 32 and 33 on pages 244 to 251.

7.1.3.2.1 Securities Purchased Under Resale Agreements (Reverse Repos)

When the Group purchases a financial asset and simultaneously enters into an agreement to resale the asset (or a similar asset) at a fixed price on a future date (Reverse Repo), the arrangement is accounted for as a financial asset in the Statement of Financial Position reflecting the transaction’s economic substance as a loan granted by the Group. Subsequent to initial recognition, these securities issued are measured at amortised cost using the EIR with the corresponding interest receivable being recognised as interest income in profit or loss.

Details of ‘Securities purchased under resale agreements’ are given in the Statement of Financial Position on page 185.

7.1.3.3 Other Financial Investments Classified as Loans and Receivables

Details of ‘Financial investments - Loans and receivables’ are given in Note 36 on pages 258 to 260.

7.1.3.4 Financial Investments – Available-for-Sale

Details of ‘Financial investments – Available-for-sale’ are given in Note 34 on pages 251 to 257.

7.1.3.5 Financial Investments – Held-to-Maturity

Details of ‘Financial investments – Held-to-maturity’ are given in Note 35 on page 257.

7.1.3.6 Cash and Cash Equivalents

Details of ‘Cash and cash equivalents’ are given in Note 27 to the Financial Statements on page 238.

7.1.3.7 Balances with Central Banks

Details of ‘Balances with Central Banks’ are given in Note 28 to the Financial Statements on pages 238 and 239.

7.1.4 Classification and Subsequent Measurement of Financial Liabilities

Group classifies financial liabilities into one of the following categories:

Financial liabilities at fair value through profit or loss, and within this category as –

• Held-for-trading; or

• Designated at fair value through profit or loss;

Financial liabilities at amortised cost.

The subsequent measurement of financial liabilities depends on their classification.

Please refer Notes 7.1.4.1 and as detailed below:

7.1.4.1 Financial Liabilities at Fair Value through Profit or Loss

Financial liabilities at fair value through profit or loss include financial liabilities held-for-trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Refer Notes 7.1.4.1.1 and 7.1.4.1.2 below:

7.1.4.1.1 Financial Liabilities Held-for-Trading

Details of ‘Derivative financial liabilities’ are given in Note 44 on page 281.

7.1.4.1.2 Financial Liabilities Designated at Fair Value through Profit or Loss

Financial liabilities designated at fair value through profit or loss are recorded in the Statement of Financial Position at fair value. Changes in fair value are recorded in ‘Net gain or loss on financial assets and liabilities designated at fair value through profit or loss’. Interest paid/payable is accrued in ‘Interest expense’, using the EIR.

The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss.

7.1.4.2 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 Other Customers/Deposits from Customers’, ‘Securities sold under repurchase agreements’, or ‘Subordinated 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. The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instrument.

After initial recognition, such financial liabilities are subsequently measured at amortised cost using the EIR method. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR.

The EIR amortisation is included in ‘Interest expense’ in the Income Statement. Gains and losses too are recognised in the Income Statement when the liabilities are derecognised as well as through the EIR amortisation process.

7.1.4.2.1 Due to Banks

Details of the ‘Due to banks’ are given in Note 43 on page 280.

7.1.4.2.2 Due to Other Customers/Deposits from Customers

Details of ‘Due to other customers/deposits from customers’ are given in Note 45 on pages 281 and 282.

7.1.4.2.3 Subordinated Liabilities

Details of ‘Subordinated liabilities’ are given in Note 52 on pages 294 and 295.

7.1.4.2.4 Securities Sold Under Repurchase Agreements (Repos)

When the Group sells a financial asset and simultaneously enters into an agreement to repurchase the asset (or a similar asset) at a fixed price on a future date (Repos), the arrangement is accounted for as a financial liability in the Statement of Financial Position reflecting the transaction’s economic substance as a deposit. Subsequent to initial recognition, these securities are measured at amortised cost using the EIR with the corresponding interest payable being recognised as interest expense in profit or loss.

Details of ‘Securities sold under repurchase agreements (Repos)’ are given in the Statement of Financial Position on page 185.

7.1.5 Reclassification of Financial Assets and Liabilities

Financial assets are not re classified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. The Group reclassifies financial assets and liabilities into and out of the different categories of financial instruments as permitted by the Sri Lanka Accounting Standard – LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

7.1.5.1 Reclassification of Financial Instruments at ‘Fair value through profit or loss’

The Group does not reclassify financial instruments out of the fair value through profit or loss category while it is held or issued. Non-derivative financial assets and liabilities designated at fair value through profit or loss upon initial recognition are not reclassified subsequently out of fair value through profit or loss category.

The Group may in rare circumstances, reclassify financial instruments out fair value through profit or loss category, if such instruments are no longer held for the purpose of selling or repurchasing in the near term notwithstanding that such financial instruments may have been acquired for the purpose of selling or repurchasing in the near term.

Financial assets classified as fair value through profit or loss at the initial recognition which would have also met the definition of ‘loans and receivable’ as at that date is reclassified out of the fair value through profit or loss category only if the Group has the intention or ability to hold such asset for the foreseeable future or until maturity.

Fair value of financial instrument at the date of reclassification becomes the new cost or new amortised cost of the financial instrument. Any gain or loss already recognised in respect of the reclassified financial instrument until the date of reclassification is not reversed to the Income Statement.

If financial asset is reclassified and if the Group subsequently increases its estimate of future cash receipts as a result of increased recoverability of those cash receipts, the effect of such increase is recognised as an adjustments to the EIR from the date of the change in estimate rather than an adjustment to the carrying amount of the asset at the date of change in estimates.

The Group does not reclassify any financial instrument into the ‘Fair value through profit or loss’ category after initial recognition.

7.1.5.2 Reclassification of Financial investments – Available-for-Sale

The Group may reclassify financial investments out of available-for-sale category as a result of change in intention or ability or in rare circumstances that a reliable measure of fair value is no longer available.

For a financial asset with a fixed maturity 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 profit or loss over the remaining life of the asset using the 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. In the case of a financial asset that does not have a fixed maturity, the gain or loss is recognised in the profit or loss when such financial asset is sold or disposed of. If the financial asset is subsequently determined to be impaired, then the amount recorded in equity is recycled to profit or loss. 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.

7.1.5.3 Reclassification of Financial Investments – Held-to-Maturity

As a result of a change in intention or ability, if it is no longer appropriate to classify an investment as held-to-maturity, Group may reclassify such financial asset as available-for-sale and remeasured at fair value. Any difference between the carrying value of the financial asset before reclassification and fair value is recognised in equity through other comprehensive income (OCI).

However, if the Group were to sell or reclassify more than an insignificant amount of held-to-maturity financial investments before maturity (other than in certain specific circumstances permitted in the Sri Lanka Accounting Standard – LKAS 39 on ‘Financial Instruments: Recognition and Measurement’), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held-to-maturity during the following two years.

The above reclassifications at the election of the Management and is determined on an instrument-by-instrument basis.

7.1.6 Derecognition of Financial Assets and Financial Liabilities

7.1.6.1 Financial Assets

The Group derecognises a financial asset (or where applicable a part of thereof) when the contractual rights to the cash flows from the financial asset expire or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all risks and rewards of ownership and it does not retain control of the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability.

The Group enters into transactions whereby it transfers assets recognised on its Statement of Financial Position, but retains either all or substantially all risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. Examples of such transactions are securities lending and sale and repurchase transactions.

When assets are sold to a third party with a concurrent total rate of return swap on the transferred assets, the transaction is accounted for as a secured financing transaction similar to sale and repurchase transactions because the Group retains all or substantially all risks and rewards of ownership of such assets.

When the Group has transferred its right to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all 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 the basis that reflected the rights and obligations that the Group has retained.

In certain transactions, the Group retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised, if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, if the servicing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing.

7.1.6.2 Financial Liabilities

The Group derecognises a financial liability when its contractual obligations are 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 profit or loss.

7.1.7 Offsetting of 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 assets and settle the liabilities simultaneously.

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

7.1.8 Amortised Cost Measurement

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

7.1.9 Fair Value of Financial Instruments

Fair value measurement of financial instruments including the fair value hierarchy is explained in Notes 4 and 26 on pages 199 and 233.

7.1.10 Identification and Measurement of Impairment of Financial Assets

At each Reporting date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is ‘impaired’ when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include:

significant financial difficulty of the borrower or issuer; reschedulement of credit facilities; default or delinquency by a borrower; restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider; indications that a borrower or issuer will enter bankruptcy; the disappearance of an active market for a security; or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Group or economic conditions that correlate with defaults in the Group.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is considered as an objective evidence of impairment.

7.1.10.1 Impairment of Financial Assets Carried at Amortised Cost

Details of the individual and collective assessment of impairments are given in Note 18 on pages 220 to 222.

7.1.10.2 Impairment of Financial Investments – Available-for-Sale

For available-for-sale financial investments, the Group assesses at each Reporting date whether there is objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in profit or loss. Future interest income is based on the reduced carrying amount/impaired balance and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income on such assets is also recorded within ‘Interest income’.

In the case of equity investments classified as available-for-sale, objective evidence would also include a ‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. In general, the Group considers a decline of 20% to be ‘significant’ and a period of nine months to be ‘prolonged’. However, in specific circumstances a smaller decline or a shorter period may be appropriate. Where there is evidence of impairment, the cumulative impairment loss on that investment previously recognised in Equity through the OCI is removed from Equity and charged to profit or loss.

If, in a subsequent period, the fair value of an impaired available-for-sale debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, then such impairment loss is reversed through profit or loss; otherwise, any increase in fair value is recognised through OCI. Any subsequent recovery in the fair value of an available-for-sale equity instrument is always recognised in OCI.

The Group writes-off certain financial investments – available-for-sale, either partially or in full and any related provision for impairment losses, when the Group determines that there is no realistic prospect of recovery.

7.2 Non-Current Assets Held-for-Sale and Disposal Groups

The Group intends to recover the value of Non-current Assets and disposal groups classified as held-for-sale as at the Reporting date principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available-for-sale in its present condition, Management has committed to the sale and the sale is expected to have been completed within one year from the date of classification.

As per the Sri Lanka Accounting Standard – SLFRS 5 on ‘Non-current Assets Held-for-Sale and Discontinued Operations’, these assets are measured at the lower of the carrying amount and fair value, less costs to sell. Thereafter, the Group assesses at each Reporting date or more frequently if events or changes in circumstances indicate that the investment or a group of investment is impaired. The Group recognises an impairment loss for any initial or subsequent write down of the assets to fair value less costs to sell and also recognises a gain for any subsequent increase in fair value less costs to sell of an asset, only to the extent of the cumulative impairment losses that have been recognised previously. Impairment loss is first allocated to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to financial assets, deferred tax assets or employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. As a result, once classified, the Group neither amortises nor depreciates the assets classified as held-for-sale.

In the Income Statement of the Reporting period and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when the Group retains a NCI in a Subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the Income Statement.

7.3 Property, Plant & Equipment

Details of ‘Property, Plant & Equipment’ are given in Note 39 on pages 265 to 276.

7.3.1 Depreciation

Details of ‘Depreciation’ are given in Note 20 on pages 222 and 223.

7.3.2 Borrowing Costs

As per the Sri Lanka Accounting Standard – LKAS 23 on ‘Borrowing Costs’, the Group capitalises borrowing costs that are directly attributable to the acquisition, construction or production of a 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 profit or loss in the period in which they occur.

7.4 Intangible Assets

Details of ‘Intangible assets’ are given in Note 40 on pages 277 to 279.

Amortisation recognised during the year in respect of intangible assets is included under the item of ‘Amortisation of intangible assets’ under ‘Depreciation and amortisation’ in profit or loss.

Refer Note 20 on pages 222 and 223.

7.5 Impairment of Non-Financial Assets

At each Reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less costs to sell. ‘Value in use’ is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

The Group’s corporate assets do not generate separate cash inflows and are used by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGUs to which the corporate assets are allocated.

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

7.6 Dividends Payable

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are recommended and declared by the Board of Directors and approved by the shareholders. Interim dividends are deducted from Equity when they are declared and no longer at the discretion of the Bank.

Dividends for the year, that are approved after the Reporting date and not provided for, are disclosed as an event after the Reporting period in accordance with the

Sri Lanka Accounting Standard – LKAS 10 on ‘Events after the Reporting Period’ in Note 70.1 on page 352.

7.7 Employee Benefits

7.7.1 Defined Benefit Plans (DBPs)

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

7.7.1.1 Defined Benefit Pension Plans

7.7.1.1.1 Description of the Plans and Employee Groups Covered

The Bank operates three types of Defined Benefit Pension Plans for its employees as described below:

(a) The Bank has an approved Pension Fund, which was established in 1992. As per the Deed of Trust, only those employees who were less than 45 years of age as at January 01, 1992 were covered by the Pension Fund in order to leave a minimum contribution for a period of 10 years before they are eligible to draw pension from the Pension Fund. Further, only the employees who joined the Bank on or before December 31, 2001, were in pensionable service of the Bank;

During 2006, the Bank offered a restructured pension scheme to convert the Defined Benefit Plan (DBP) to a Defined Contribution Plan (DCP) for the pensionable employees of the Bank and over 99% of them accepted it. As a result, the above Pension Fund now covers only those employees who did not opt for the restructured pension scheme and those employees who were covered by the Pension Fund previously but retired before the restructured pension scheme came into effect;

(b) Provision for pensions has been made for those employees who retired on or before December 31, 2001, and on whose behalf the Bank could not make contributions to the Retirement Pension Fund for more than 10 years. This liability although not funded has been provided for in full in the Financial Statements;

(c) Provision has been made in the Financial Statements for Retirement Gratuity from the first year of service for all employees who joined the Bank on or after January 01, 2002, as they are not in pensionable service of the Bank under either the DBP or DCP. However, if any of these employees resign before retirement, the Bank is liable to pay gratuity to such employees. This liability although not funded has been provided for in full in the Financial Statements.

The Subsidiaries of the Bank do not operate Pension Funds.

The Bank’s net obligation in respect of Defined Benefit Pension Plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets, as per the Sri Lanka Accounting Standard – LKAS 19 on ‘Employee Benefits’ as detailed in Note 50 on pages 286 to 294.

The past service cost is recognised as an expense on a straight-line basis over the period until the benefits become vested. If the benefits are already vested following the introduction of, or changes to, a pension plan, past service cost is recognised immediately.

7.7.1.1.2 Recognition of Actuarial Gains or Losses

Actuarial gains or losses are recognised in the OCI in the period in which they arise.

7.7.1.1.3 Recognition of Retirement Benefit Obligation

The defined benefit asset or liability comprises the present value of the defined benefit obligation, less past service cost not yet recognised and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

The calculation of defined benefit obligations is performed annually by a qualified actuary using the Projected Unit Credit Method. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements.

Remeasurement of the net defined benefit liability, which comprises actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in OCI. The Group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then net-defined benefit liability (asset), taking into account any changes in the net-defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss.

When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs.

Amounts recognised in profit or loss as expenses on DBPs and provisions made on DBPs together with the details of valuation methods are given in Notes 19 and 50 on pages 222 and 286 to 294, respectively.

7.7.2 Defined Contribution Plans (DCPs)

A Defined Contribution Plan is a post-employment plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligations to pay a further amount. Obligations to DCPs are recognised in the profit or loss as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. The Group has three such plans as explained in Notes 7.7.2.1, 7.7.2.2 and 7.7.2.3.

Amounts recognised in profit or loss as expenses on DCPs are given in Note 19 on page 222.

7.7.2.1 Defined Contribution Pension Plan

As explained in Note 7.7.1.1.1(a), during 2006, the Bank restructured its pension scheme which was a DBP to a DCP. This restructured plan was offered on a voluntary basis to the eligible employees of the Bank. The scheme provides for lump sum payments instead of commuted/monthly pensions to the eligible employees at the point of their separation, in return for surrendering their pension rights. The lump sum offered consisted of a past service package and a future service package. The shortfall on account of the past service package in excess of the funds available in the Pension Fund was borne by the Bank in 2006.

The future service package includes monthly contributions to be made by the Bank for the employees who accepted the offer, to be made during their remaining period of service, at predetermined contribution rates to be applied on their salaries, which are estimated to increase for this purpose at 10% p.a. based on the salary levels that prevailed as at the date of implementation of this scheme. In addition, interest to be earned on the assets of the DCP is also allocated to the employees who opted for the restructured scheme.

The assets of this Fund are held separately from those of the Bank and are independently administered by the Trustees as per the provisions of the Trust Deed.

7.7.2.2 Employees’ Provident Fund

The Bank and employees contribute to an approved Private Provident Fund at 12% and 8% respectively, on the salaries of each employee. 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.

7.7.2.3 Employees’ Trust Fund

The Bank and other entities of the Group contribute at the rate of 3% of the salaries of each employee to the Employees’ Trust Fund managed by the Central Bank of Sri Lanka.

7.7.3 Other Long-Term Employee Benefits

The Group’s net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefits that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate used as the yield as at the Reporting date is the current market rate that has been extrapolated to reflect long-term rate of discount based on market rates of interest on short-term Corporate/Government Bonds and anticipated long-term rate of inflation. The calculation is performed using the Projected Unit Credit Method. Remeasurements are recognised in profit or loss in the period in which they arise.

The Group does not have any other long-term employee benefit plans.

7.7.4 Terminal Benefits

Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be wholly settled within 12 months of the Reporting date, then they are discounted.

7.7.5 Short-Term Employee Benefits

Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

7.7.6 Share-Based Payment Arrangements

Share-based payment arrangements in which the Group receives services as consideration for its own equity instruments are accounted for as equity-settled share-based payment transactions, regardless of how the equity instruments are obtained by the Group. Senior Executive Employees of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The Group does not operate any cash-settled share-based payment transactions.

The Group applies the requirements of the Sri Lanka Accounting Standard – SLFRS 2 on ‘Share-based Payment’ in accounting for equity-settled share-based payment transactions, if any, that were granted after January 01, 2012 and had not vested at the same date. As per the Sri Lanka Accounting Standard – SLFRS 2 on ‘Share-based Payment’, on the grant date fair value of equity-settled share-based payment awards (i.e., share options) granted to employees is recognised as personnel expense, with a corresponding increase in equity, over the period in which the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non-market performance vesting conditions are expected to be met, so that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.

The Employee Share Option Plan – 2015, which was granted is subjected to the above accounting treatment.

However, the Employee Share Option Plan – 2008 which was granted prior to January 01, 2012, the effective date of the SLFRS 2 was not subjected to the above accounting treatment and the proceeds received during the year by the Group in consideration for shares issued were accounted for as Stated Capital within equity.

The details of Employee Share Option Plans are given in Notes 53.2 and 54 on pages 297 to 300.

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted Earnings per Share as disclosed in Note 23.2 on page 227.

7.8 Other Liabilities

Details of ‘Other liabilities’ are given in Note 50 on page 286.

7.9 Provisions

Details of ‘Other provisions’ are given in Note 49 on page 285.

7.10 Restructuring

Provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses arising on such restructuring are not provided for.

The Group does not have any provision for restructuring as at the Reporting date.

7.11 Onerous Contracts

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.

The Group does not have any onerous contracts as at the Reporting date.

7.12 Bank Levies

A provision for bank levies is recognised when the condition that triggers the payment of the levy is met. If a levy obligation is subject to a minimum activity threshold so that the obligating event is reaching a minimum activity, then a provision is recognised when that minimum activity threshold is reached.

7.13 Financial Guarantees and Loan Commitments

‘Financial guarantees’ are contracts that require the Group to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. ‘Loan commitments’ are firm commitments to provide credit under pre-specified terms and conditions.

Liabilities arising from financial guarantees or commitments to provide a loan at a below-market interest rate are initially measured at fair value and the initial fair value is amortised over the life of the guarantee or the commitment. The liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment to settle the liability when a payment under the contract has become probable.

The Group has issued no loan commitment that are measured at FVTPL. The Group recognises a provision in accordance with the Sri Lanka Accounting Standard – LKAS 37 on ‘Provisions, Contingent Liabilities and Contingent Assets’, if the contract was considered to be onerous. Liabilities arising from financial guarantees and loan commitments are included within provisions.

7.14 Commitments

All discernible risks are accounted for in determining the amount of known liabilities as explained in Note 7.9 above.

Details of the Commitments are given in Notes 59.2 and 59.3 on pages 305 and 306.

7.15 Contingent Liabilities and Commitments

A detailed list of ‘Contingent liabilities and commitments’ and ‘Litigation against the Bank and the Group’ are given in Notes 59 and 61 on pages 304 to 307.

7.16 Stated Capital and Reserves

Details of the ‘Stated capital and reserves’ are given in Notes 53, 55, 56 and 57 to the Financial Statements on pages 296 to 298 and 300 to 303

7.17 Earnings Per Share (EPS)

Details of ‘Basic and Diluted EPS’ are given in Note 23 on pages 226 and 227.

7.18 Operating Segments

Details of ‘Operating segments’ are given in Note 63 on pages 310 to 312.

7.19 Fiduciary Assets

The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity are not reported in these Financial Statements as they do not belong to the Bank.

8. Significant Accounting Policies – Recognition of Income and Expense

Details of ‘Income and expense’ are given in Notes 12 to 21 on pages 214 to 224.

8.1 Interest Income and Expense

Details of ‘Interest income and expense’ are given in Note 13 on pages 214 to 217.

8.2 Fee and Commission Income and Expense

Details of ‘Commission income and expense’ are given in Note 14 on pages 217 and 218.

8.3 Net Gains/(Losses) from Trading

Details of ‘Net gains/(losses) from trading’ are given in Note 15 on page 218.

8.4 Dividend Income

Dividend income is recognised when the right to receive income is established. Usually, this is the ex-dividend date for quoted equity securities.

Dividends are presented in Net gains/losses from trading, Net gains/losses from financial investments or Other income (net) based on the underlying classification of the equity investment.

Details of ‘Dividend income’ are given in Notes 15, 16 and 17 on pages 218 and 219.

8.5 Leases

The determination of whether an arrangement is a lease or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

8.5.1 Finance Leases

8.5.1.1 Finance Leases – Group as a Lessee

Finance leases that transfer substantially all risks and rewards incidental to ownership of the leased item to the Group are classified as finance leases and capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

8.5.1.2 Finance Leases – Group as a Lessor

When the Group is the lessor under a lease agreement that transfers substantially all of the risks and rewards incidental to the ownership of the asset to the lessee, the net investment in lease (i.e. after deduction of unearned charges) are included in ‘loans and advances to banks’ or ‘loans and advances to other customers’, as appropriate. The finance income receivable is recognised in ‘interest income’ over the periods of the leases so as to achieve a constant rate of return on the net investment in the leases.

8.5.2 Operating Leases

8.5.2.1 Operating Leases – Group as a Lessee

Assets held under leases other than finance leases are classified as operating leases and are not recognised in the Group’s Statement of Financial Position. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Contingent rental payable is recognised as an expense in the period in which they are incurred.

8.5.2.2 Operating Leases – Group as a Lessor

Assets leased under leases other than finance leases are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income.

Contingent rents are recognised as revenue in the period in which they are earned.

Details of ‘Operating leases’ are given in Note 68 on page 320.

8.6 Rental Income and Expenses

Rental income and expense are recognised in profit or loss on an accrual basis.

9. Significant Accounting Policies – Income Tax Expense

9.1 Current Tax

Details of ‘Income tax expense’ are given in Note 22 on pages 224 to 226.

9.2 Deferred Tax

Details of ‘Deferred tax assets and liabilities’ are given in Note 48 on pages 283 to 285.

9.3 Tax Exposures

In determining the amount of current and deferred tax, the Group considers the impact of tax exposures, including whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities. Such changes to tax liabilities would impact tax expense in the period in which such a determination is made.

9.4 Crop Insurance Levy (CIL)

As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from April 01, 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

9.5 Withholding Tax on Dividends Distributed by the Bank, Subsidiaries and Associates

9.5.1 Withholding Tax on Dividends Distributed by the Bank

Withholding tax that arises from the distribution of dividends by the Bank is recognised at the time the liability to pay the related dividend is recognised.

9.5.2 Withholding Tax on Dividends Distributed by the Subsidiaries and Associates

Dividends received by the Bank from its Subsidiaries and Associates, have attracted a 10% deduction at source.

9.6 Economic Service Charge (ESC)

As per the provisions of the Finance Act No. 11 of 2004, and amendments thereto, the ESC was introduced with effect from April 01, 2004. Currently, the ESC is payable at 0.25% on ‘Exempt Turnover’ and is deductible from the income tax payments. Unclaimed ESC, if any, can be carried forward and set-off against the income tax payable in the five subsequent years.

9.7 Value Added Tax on Financial Services

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 benefits in money and not in money including contribution or provision relating to terminal benefits.

9.8 Nation Building Tax on Financial Services (NBT)

With effect from January 01, 2014, NBT of 2% was introduced on supply of financial services via an amendment to the NBT Act No. 09 of 2009. NBT is chargeable on the same base used for calculation of VAT on financial services as explained in Note 9.7 above.

The amount of Value Added Tax and NBT charged in determining the profit or loss for the period is given in the Income Statement on page 183.

10. Significant Accounting Policies – Statement of Cash Flows

10.1 Statement of Cash Flows

The Statement of Cash Flows is prepared using the ‘Indirect Method’ of preparing cash flows in accordance with the Sri Lanka Accounting Standard – LKAS 7 on ‘Statement of Cash Flows’. 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. Cash and cash equivalents as referred to in the Statement of Cash Flows are comprised of those items as explained in Note 27 on page 238.

The Statement of Cash Flows is given on page 190.

11. New Accounting Standards Issued But Not Yet Effective

A number of new standards and amendments to standards, which have been issued but not yet effective as at the Reporting date, have not been applied in preparing these Consolidated Financial Statements. Accordingly, the following Accounting Standards have not been applied in preparing these Financial Statements and the Group plans to apply these standards on the respective effective dates:

Accounting Standard	Summary of the Requirements	Possible Impact on Consolidated Financial Statements
SLFRS 9 – ‘Financial Instruments’	SLFRS 9, issued in 2014, replaces the existing guidance in LKAS 39 – Financial Instruments: Recognition and Measurement. SLFRS 9 contains three principal classification categories for financial assets – i.e. measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The existing LKAS 39 categories of Held-to-maturity, Loans and receivables and Available-for-sale are removed. SLFRS 9 replaces the ‘incurred loss’ model in LKAS 39 with an ‘expected credit loss’ model. The new model applies to financial assets that are not measured at FVTPL. The model uses a dual measurement approach, under which the loss allowance is measured as either: 12 month expected credit loss; or Lifetime expected credit losses. The measurement basis will generally depend on whether there has been a significant increase in credit risk since initial recognition. A simplified approach is available for trade receivables, contract assets and lease receivables, allowing or requiring the recognition of lifetime expected credit losses at all times. Special rules apply to assets that are credit impaired at initial recognition. The new standard carried guidance on new general hedge accounting requirements. SLFRS 9 introduces new presentation requirements and extensive new disclosure requirements. Effective date of SLFRS 9 has been deferred till January 01, 2018.	The Group has completed the initial high level assessment of the potential impact on its Consolidated Financial Statements resulting from the application of SLFRS 9 with the assistance of an external consultant. The next phase being the implementation phase, will commence from end February 2017. During this Phase the Group will implement a business model approach and solely payment of principal and interest criteria to ensure that financial assets are classified into the appropriate categories Need to build a model with appropriate methodologies and controls to ensure that judgment exercised to assess recoverability of loans and make robust estimates of expected credit losses and point at which there is significant increase in credit risk. Judgment will need to be applied to ensure that the measurement of expected credit losses reflects reasonable and supportable information. Given the nature of the Group’s operations, this standard is expected to have a pervasive impact on the Group’s Financial Statements. In particular, calculation of impairment of financial instruments on an expected credit loss model is expected to result in an increase in the overall level of impairment allowances.
SLFRS 15 – ‘Revenue from Contracts with Customers’	SLFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. New qualitative and quantitative disclosure requirements aim to enable Financial Statements users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities will apply five-step model to determine when to recognise revenue and at what amount. The model specified that revenue is recognised when or as an entity transfers control of goods and services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognised. It replaces existing revenue recognition guidance, including LKAS 18 on ‘Revenue’ and LKAS 11 on ‘Construction Contracts’ and IFRIC 13 on ‘Customer Loyalty Programmes’. SLFRS 15 is effective for annual reporting periods beginning on or after January 01, 2018, with early adoption permitted.	The Group does not expect significant impact on its Financial Statements resulting from the application of SLFRS 15.
SLFRS 16 – ‘Leases’	SLFRS 16 eliminates the current dual accounting model for lessees which distinguishes between On-Balance Sheet fiancé leases and Off-Balance Sheet operating leases. Instead there will be a single On-Balance Sheet accounting model that is similar to current finance lease accounting. SLFRS 16 is effective for annual Reporting periods beginning on or after January 01, 2019.	The Group is assessing the potential impact on its Financial Statements resulting from the application of SLFRS 16.

12. Gross Income

Revenue 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.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest income [Refer Note 13.1]	81,314,607	66,339,317	80,738,176	66,030,456
Fee and commission income [Refer Note 14.1]	8,230,131	6,329,900	8,143,041	6,275,276
Net gains/(losses) from trading [Refer Note 15]	(1,466,711)	813,376	(1,466,711)	813,376
Net gains/(losses) from financial investments [Refer Note 16]	110,759	693,987	110,701	693,933
Other income (net) [Refer Note 17]	5,536,749	4,048,817	5,617,403	4,054,911
Total	93,725,535	78,225,397	93,142,610	77,867,952

13. Net Interest Income

Interest income and expense are recognised in profit or loss using the effective interest rate (EIR) method.

Interest income and expense presented in the Income Statement include:

• Interest on Held-for-trading financial instruments calculated using EIR method;
• Interest on Loans and receivables calculated using EIR method;
• Interest on Available-for-sale investments calculated using EIR method;
• Interest on Held-to-maturity investments calculated using EIR method;
• Interest on financial liabilities measured at amortised cost calculated using EIR method.

Effective Interest Rate (EIR)

The ‘effective interest rate’ is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability.

The calculation of the EIR includes transaction costs and fees and points paid or received that forms an integral part of the EIR. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability.

When calculating the effective interest rate for financial instruments other than credit impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. For credit impaired financial assets, a credit adjusted effective interest rate is calculated using estimated future cash flows.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest income [Refer Note 13.1]	81,314,607	66,339,317	80,738,176	66,030,456
Less: Interest expense [Refer Note 13.2]	(48,186,331)	(35,771,967)	(47,914,573)	(35,685,172)
Net interest income	33,128,276	30,567,350	32,823,603	30,345,284

13.1 Interest Income

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents	219,048	88,573	218,337	88,270
Balances with Central Banks	40,575	336,040	40,504	336,040
Placements with banks	145,504	158,645	145,504	158,645
Securities purchased under resale agreements	352,695	665,897	352,695	665,897
Financial instruments – Held-for-trading	457,308	681,464	457,308	681,464
Derivative financial instruments	–	–	–	–
Other financial instruments	457,308	681,464	457,308	681,464
Loans and receivables to other customers	58,135,238	43,540,371	57,587,445	43,231,339
Financial investments – Available-for-sale	14,311,753	17,549,260	14,307,559	17,548,160
Financial investments – Held-to-maturity	3,757,168	–	3,731,930	–
Financial investments – Loans and receivables	3,360,048	3,052,231	3,360,048	3,052,231
Interest income from impaired loans and receivables to other customers	533,528	265,344	533,528	265,344
Other interest income	1,742	1,492	3,318	3,066
Total interest income	81,314,607	66,339,317	80,738,176	66,030,456

13.2 Interest Expense

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Due to banks	1,278,205	593,651	990,560	527,983
Securities sold under repurchase agreements	7,756,308	7,876,715	7,775,316	7,886,186
Due to other customers/deposits from customers	37,176,139	26,034,412	37,174,433	26,040,128
Refinance borrowings	270,977	253,502	270,977	253,502
Foreign currency borrowings	169,353	190,420	169,353	190,420
Subordinated liabilities	1,535,349	823,267	1,533,934	786,953
Total interest expense	48,186,331	35,771,967	47,914,573	35,685,172

13.3 Net Interest Income from Government Securities

Interest income and interest expense on Government Securities given in the Notes 13.3 (a), 13.3 (b) and 13.3 (c) below have been extracted from interest incomes and interest expenses given in Notes 13.1 and 13.2 respectively and disclosed separately, as required by the Guidelines issued by the Central Bank of Sri Lanka.

13.3 (a) Net Interest Income from Sri Lanka Government Securities

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest income	19,870,503	19,303,078	19,866,309	19,301,978
Securities purchased under resale agreements	290,627	600,681	290,627	600,681
Financial instruments – Held-for-trading	351,293	320,011	351,293	320,011
Financial investments – Available-for-sale	13,412,354	16,560,676	13,408,160	16,559,576
Financial investments – Held-to-maturity	3,678,099	–	3,678,099	–
Financial investments – Loans and receivables	2,138,130	1,821,710	2,138,130	1,821,710
Less: Interest expense	(7,755,075)	(7,883,079)	(7,774,082)	(7,892,551)
Securities sold under repurchase agreements	(7,755,075)	(7,883,079)	(7,774,082)	(7,892,551)
Net interest income	12,115,428	11,419,999	12,092,227	11,409,427

Notional Tax Credit on Secondary Market Transactions

As per the Section 137 of the Inland Revenue Act No. 10 of 2006 and amendments thereto, net interest income of the Group derived from secondary market transactions in Government Securities, Treasury Bills and Treasury Bonds (Interest income accrued or received on outright or reverse repurchase transactions on Government Securities, Treasury Bills and Treasury Bonds less interest expense accrued or paid on repurchase transactions with such Government Securities, Treasury Bills and Treasury Bonds from which such interest income was earned) for the period January 01, 2016 to December 31, 2016 has been grossed up by Rs. 918.062 Mn. (2015 – Rs. 900.495 Mn.) and Rs. 916.767 Mn. (2015 – Rs. 899.563 Mn.) by the Group and the Bank respectively as the notional tax credit, consequent to the interest income on above instruments being subjected to withholding tax.

13.3 (b) Net Interest Income from Bangladesh Government Securities

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest income	1,121,313	1,415,253	1,121,313	1,415,253
Securities purchased under resale agreements	62,068	65,216	62,068	65,216
Financial instruments – Held-for-trading	106,015	361,453	106,015	361,453
Financial investments – Available-for-sale	899,399	988,584	899,399	988,584
Financial investments – Held-to-maturity	53,831	–	53,831	–
Less: Interest expense	(1,252)	(14,786)	(1,252)	(14,786)
Securities sold under repurchase agreements	(1,252)	(14,786)	(1,252)	(14,786)
Net interest income	1,120,061	1,400,467	1,120,061	1,400,467

13.3 (c) Net Interest Income from Maldivian Government Securities

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest income	25,238	–	–	–
Financial investments – Held-to-maturity	25,238	–	–	–
Net interest income	25,238	–	–	–

14. Net Fee and Commission Income

Fee and commission income and expense that are integral to the EIR of a financial asset or financial liability are capitalised and included in the measurement of the EIR and recognised in the Income Statement over the expected life of the instrument.

Other fee and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are performed. If a loan commitment is not expected to result in the drawdown of a loan, then the related loan commitment fees are recognised on a straight-line basis over the commitment period.

Other fee and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Fee and commission income [Refer Note 14.1]	8,230,131	6,329,900	8,143,041	6,275,276
Less: Fee and commission expense [Refer Note 14.2]	1,140,954	919,590	1,127,536	901,190
Net fee and commission income	7,089,177	5,410,310	7,015,505	5,374,086

14.1 Fee and Commission Income

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and advances related services	778,517	715,502	715,086	664,269
Credit and debit cards related services	2,671,294	1,849,571	2,671,116	1,849,571
Trade and remittances related services	2,619,429	2,212,916	2,619,194	2,212,916
Deposits related services	1,110,216	562,797	1,109,285	562,860
Guarantees related services	669,497	505,109	669,409	505,109
Other financial services	381,178	484,005	358,951	480,551
Total fee and commission income	8,230,131	6,329,900	8,143,041	6,275,276

14.2 Fee and Commission Expense

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and advances related services	53,289	52,149	39,871	33,749
Credit and debit cards related services	980,927	768,406	980,927	768,406
Trade and remittances related services	32,851	31,826	32,851	31,826
Other financial services	73,887	67,209	73,887	67,209
Total fee and commission expense	1,140,954	919,590	1,127,536	901,190

15. Net Gains/(Losses) from Trading

‘Net gains/(losses) from trading’ comprise gains less losses related to trading assets and trading liabilities and include all realised and unrealised fair value changes, dividends and foreign exchange differences.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Derivative Financial Instruments	(1,429,188)	891,825	(1,429,188)	891,825
Foreign exchange gains/(losses) from banks and other customers	(1,429,188)	891,825	(1,429,188)	891,825
Other Financial Instruments – Held-for-Trading
Government Securities	(9,042)	(72,319)	(9,042)	(72,319)
Net mark-to-market losses	(79,981)	(92,831)	(79,981)	(92,831)
Net capital gains	70,939	20,512	70,939	20,512
Equities	(28,481)	(6,130)	(28,481)	(6,130)
Net mark-to-market losses	(49,581)	(26,452)	(49,581)	(26,452)
Net capital gains	13,299	11,294	13,299	11,294
Dividend income	7,801	9,028	7,801	9,028
Total	(1,466,711)	813,376	(1,466,711)	813,376

16. Net Gains/(Losses) from Financial Investments

Net gains/(losses) from financial investments comprise gains less losses related to Available-for-sale investments, Held-to-maturity investments and Loans and receivables and include all realised and unrealised fair value changes and dividends.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial investments – Available-for-sale [Refer Note 16.1]	75,555	560,715	75,497	560,661
Financial investments – Loans and receivables [Refer Note 16.2]	35,204	133,272	35,204	133,272
Total	110,759	693,987	110,701	693,933

16.1 Financial Investments – Available-for-Sale

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Government Securities	38,091	514,289	38,091	514,289
Net capital gains	38,091	514,289	38,091	514,289
Equities	37,464	46,426	37,406	46,372
Net capital gains	–	–	–	–
Dividend income	37,464	46,426	37,406	46,372
Total	75,555	560,715	75,497	560,661

16.2 Financial Investments – Loans and Receivables

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Government securities	35,204	133,272	35,204	133,272
Net capital gains	35,204	133,272	35,204	133,272
Total	35,204	133,272	35,204	133,272

17. Other Income (Net)

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Gains/(losses) on sale of property, plant & equipment [Refer Note 17.1]	10,395	(1,334)	1,705	(6,505)
Gains on revaluation of foreign exchange	3,755,346	1,985,444	3,755,047	1,985,444
Recoveries of loans written off and provision reversals	1,589,763	1,874,575	1,589,763	1,874,575
Dividend income from subsidiaries	–	–	81,468	81,664
Dividend income from associates	5,808	6,733	4,111	6,166
Profit due to change in ownership	3,047	2,344	3,047	2,344
Rental and other income [Refer Note 17.2]	181,245	190,132	182,262	111,223
Less: Dividends received from associates transferred to investment account	(5,808)	(6,733)	–	–
Less: Profit due to change in ownership	(3,047)	(2,344)	–	–
Total	5,536,749	4,048,817	5,617,403	4,054,911

17.1 Gains/(losses) on sale of Property, Plant & Equipment

The gains or losses on disposal of property, plant & equipment is determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds from disposal, net of incremental disposal costs. This is recognised as an item of ‘Other Income’ in the year in which significant risks and rewards of ownership are transferred to the buyer.

17.2 Rental Income

Rental income is recognised in the profit or loss on an accrual basis.

18. Impairment Charges for Loans and Other Losses

For financial assets carried at amortised cost (such as amounts due from banks, loans and advances to customers as well as held to maturity investments), the Group first assesses whether objective evidence of impairment exists for individually significant financial assets or collectively for financial assets that are not individually significant. Assets that are individually assessed for impairment and for which an impairment loss is not recognised are included in a collective assessment of impairment together with the financial assets that are not individually significant.

Individual Assessment of Impairment

For financial assets above a pre-determined threshold (i.e., for individually significant financial assets), if there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of a provision account and the amount of impairment loss is recognised in profit or loss. Interest income continues to be accrued and recorded in ‘Interest Income’ on the reduced carrying amount/impaired balance and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

The present value of the estimated future cash flows is discounted at the financial asset’s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. If the Bank has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new EIR determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Collective Assessment of Impairment

Those financial assets for which, the Group determines that no provision is required under individual impairment, such financial assets are then collectively assessed for any impairments that have been incurred but not yet identified. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar risk characteristics such as internal credit ratings, asset type, industry, geographical location, collateral type, past-due status, etc.

Future cash flows on a group of financial assets that are collectively evaluated for impairment, are estimated based on the historical loss experiences of assets with similar credit risk characteristics to those in the group.

The key inputs into the measurement of provision for collective impairment are the term structure of the following variables:

• Probability of default (PD)
• Loss given default (LGD)
• Exposure at default (EAD)

These parameters are generally derived from internally developed statistical models and other historical data.

PD values are estimates at a certain date, which are calculated based on statistical rating models, and assessed using rating tools tailored to the various categories of counter parties and exposures. These statistical models are based on internally compiled data comprising both quantitative and qualitative factors. If a counterparty or exposure migrates between rating classes, then this will lead to a change in the estimate of the associated PD. PDs are estimated considering the contractual maturities of exposures.

LGD is the magnitude of the likely loss in case of default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. They are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor.

EAD represents the expected exposure in the event of a default or the financial asset’s gross carrying amount.

Historical loss experiences are adjusted based on the current observable data to reflect the effects of current conditions on the historical losses experienced, further removing the effects of conditions that do not exist at the Reporting date. Estimates of changes in future cash flows reflect, and are directionally consistent with the changes in related observable data year-on-year such as changes in;

• - Interest rates,
• - Inflation rates,
• - Growth in Gross Domestic Product (GDP),
• - Global GDP growth rates,
• - Countries’ Sovereign ratings, ease of doing business Indices,
• - Exchange rates,
• - Political stability, and
• - Portfolio factors including percentage of restructured performing loans.

The methodology and assumptions used for estimating provision for impairment including assumptions for projecting future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experiences.

Impairment of Rescheduled Loans and Advances

Where possible, the Bank seeks to reschedule loans and advances rather than to take possession of collateral. If the terms of a financial asset are renegotiated, modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made to whether the financial asset should be derecognised. If the cash flows of the renegotiated asset is substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and new financial asset is recognised at fair value. The impairment loss before an expected restructuring is measured as follows:

• If the expected restructuring will not result in derecognition of the existing asset, then the estimated cash flows arising from the modified financial asset are included in the measurement of the existing asset based on their expected timing and amounts discounted at the original EIR of the existing financial asset.
• If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is discounted from the expected date of derecognition to the Reporting date using the original EIR of the existing financial asset.

Collateral Valuation

The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, gold, Government Securities, Letters of Credit/Guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements, etc. The fair value of collateral is generally assessed, at a minimum, at inception and based on the Bank’s annual reporting schedule.

Collateral Repossessed

The Bank’s policy is to carry collaterals repossessed at fair value at the repossession date and such assets will be disposed at the earliest possible opportunity. These assets are recorded under assets held for sale as per the Sri Lanka Accounting Standard – SLFRS 5 on ‘Non-Current Assets Held for Sale and Discontinued Operations’.

Write Off

Financial assets (and the related impairment allowances) are normally written off either partially or in full, when there is no realistic prospect of recovery. Where financial assets are secured, this is generally after receipt of any proceeds from the realisation of securities.

Impairment losses are recognised in profit or loss and reflected in a provision account against the relevant category of financial assets. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the provision account. If a write-off is later recovered, the recovery is credited to ‘Other Income’.

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and receivables to banks [Refer Note 32]	–	–	–	–
Loans and receivables to other customers	1,583,326	4,099,738	1,511,158	3,904,948
Charge to the Income Statement – Individual impairment [Refer Note 33.2]	3,439,879	1,386,477	3,439,879	1,386,477
Charge/(write-back) to the Income Statement – Collective impairment [Refer Note 33.2]	(1,859,806)	2,710,834	(1,931,932)	2,516,044
Direct write–offs	3,253	2,427	3,211	2,427
Investments in subsidiaries [Refer Note 37.1]	–	–	15,350	36,223
Due from subsidiaries	–	–	3,306	2,025
Total	1,583,326	4,099,738	1,529,814	3,943,196

19. Personnel Expenses

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Salary and bonus [Refer Note 19.1]	8,261,068	7,740,991	8,161,579	7,675,955
Pension costs [Refer Note 19.1]	1,595,795	1,281,017	1,582,798	1,268,889
Contributions to defined contribution/benefit plans – Funded schemes	1,361,533	1,083,341	1,354,982	1,078,109
Contributions to defined benefit plans – Unfunded schemes [Refer Notes 50.1 (c) and 50.2 (c)]	234,262	197,676	227,816	190,780
Equity-settled share-based payments [Refer Notes 19.2 and 57.5]	206,174	223,330	206,174	223,330
Others [Refer Note 19.3]	850,051	1,015,412	843,756	1,012,363
Total	10,913,088	10,260,750	10,794,307	10,180,537

19.1 Salary, Bonus and Pension Costs

Salary, bonus and contributions to defined contribution/benefit plans, reported above also include amounts paid to and contribution made on behalf of Executive Directors.

19.2 Share Based Payment

The Bank has an equity-settled share based compensation plan, the details of which are given in Note 54 on page 298.

19.3 Others

This includes expenses such as overtime payments, medical and hospitalisation charges, expenses incurred on staff training/recruitment and staff welfare activities, etc.

20. Depreciation and Amortisation

Depreciation

Depreciation is calculated to write-off the cost of items of Property, Plant & Equipment less their estimated residual values using the straight-line method over their estimated useful lives and is recognised in profit or loss. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Freehold land is not depreciated.

The estimated useful lives of the Property, Plant & Equipment of the Bank as at December 31, 2016 are as follows:

Class of Asset	Depreciation % Per Annum	Period (years)
Freehold and leasehold buildings	2.5	40
Motor vehicles	20	5
Computer equipment	20	5
Office equipment	20	5
Office interior work	20	5
Furniture & fittings	10	10
Machinery & equipment	10	10

The above rates are compatible with the rates used by all Group entities.

The depreciation rates are determined separately for each significant part of an item of Property, Plant & Equipment and depreciation commences 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.

All classes of Property, Plant & 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 39 on pages 265 to 276.

Depreciation methods, useful lives and residual values are reassessed at each Reporting date and adjusted, if required.

Amortisation of Intangible Assets

Intangible assets are amortised using the straight-line method to write down the cost over its estimated useful economic lives, at the rate specified below:

Class of Asset	Amortisation % Per Annum	Period (years)
Computer software	20	5

The above rate is compatible with the rates used by all Group entities.

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

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Depreciation of property, plant & equipment [Refer Note 39]	1,093,088	1,024,162	1,022,648	961,492
Amortisation of intangible assets [Refer Note 40]	173,790	180,558	165,903	179,370
Amortisation of leasehold property [Refer Note 41]	1,452	1,452	942	942
Total	1,268,330	1,206,172	1,189,493	1,141,804

21. Other Operating Expenses

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Directors’ fees [Refer Note 21.1]	38,872	31,947	32,133	26,886
Auditors’ remuneration	31,218	26,787	25,124	21,399
Audit fees and expenses	14,304	14,195	9,766	9,736
Audit related fees and expenses	8,677	6,461	8,392	5,871
Non-audit fees and expenses	8,237	6,131	6,966	5,792
Professional and legal expenses	262,522	290,184	329,237	353,256
Deposit insurance premium paid to the Central Banks	590,544	497,850	590,236	497,850
Donations, including contribution made to the CSR Trust Fund	61,681	62,533	61,681	62,533
Establishment expenses	2,439,490	2,036,083	2,488,984	2,112,577
Maintenance of property, plant & equipment	890,002	731,213	1,035,238	870,500
Office administration expenses	2,495,106	2,277,886	2,269,712	2,038,087
Total	6,809,435	5,954,483	6,832,345	5,983,088

21.1 Directors’ Fees

Directors’ fees represent the fees paid to both Executive and Non-Executive Directors of the Group.

22. Income Tax Expense

Income tax expense comprises current and deferred tax. Income tax expense is recognised in the Income Statement, except to the extent it relates to items recognised directly in Equity or in OCI.

Current Taxation

‘Current tax’ comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax receivable or payable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted, as at the Reporting date. Current tax also includes any tax arising from dividends.

Accordingly, provision for taxation is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and amendments thereto, at the rates specified in Note 22.1 on page 225. 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 on ‘Income Taxes’.

Provision for taxation on the overseas operations is made on the basis of the accounting profit for the year, as adjusted for taxation purposes, in accordance with the provisions of the relevant statutes in those countries, using the tax rates enacted or substantively enacted as at the Reporting date.

Deferred Taxation

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:

• temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
• temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and
• taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available, against which they can be used. Deferred tax assets are reviewed at each Reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Unrecognised deferred tax assets are reassessed at each Reporting date and recognised to the extent that it has become probable that future taxable profits will be available, against which they can be used.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted as at the Reporting date.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects as at the Reporting date to recover or settle the carrying amount of its assets and liabilities.

Additional taxes that arise from the distribution of dividends by the Group, are recognised at the same time as the liability to pay the related dividend is recognised. These amounts are generally recognised in profit or loss as they generally relate to income arising from transactions that were originally recognised in profit or loss.

22.1 Entity wise breakup of Income Tax Expense in the Income Statement is as follows:

	GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Current Year Tax Expense	5,606,143	5,185,218	5,554,989	5,094,780
Current year income tax expense of Domestic Banking Unit	4,086,795	3,536,032	4,086,795	3,536,032
Current year income tax expense of Off-shore Banking Centre	291,831	277,207	291,831	277,207
Current year income tax expense of Bangladesh Operation	1,167,596	1,185,736	1,167,596	1,185,736
Current year Income tax expense of Commercial Development Company PLC	40,063	37,882	–	–
Current year Income tax expense of ONEzero Company Ltd.	13,169	10,914	–	–
Current year Income tax expense of Serendib Finance Ltd.	(2,258)	41,582	–	–
Profit remittance tax of Bangladesh Operation	–	86,551	–	86,551
Withholding tax on dividends received	8,947	9,314	8,767	9,254
Prior years
Under/(Over) Provision of taxes in respect of prior years [Refer Note 47]	–	1,700	–	1,701
Deferred Tax Expense	42,017	89,933	(16,317)	143,905
Effect of change in tax rates	–	–	–	–
Origination and reversal of temporary differences [Refer Note 48.1]	42,017	89,933	(16,317)	143,905
Total	5,648,160	5,276,851	5,538,672	5,240,386
Effective tax rate (including deferred tax) (%)			27.62	30.57
Effective tax rate (excluding deferred tax) (%)			27.70	29.73

The income tax for 2016 and 2015 of the Bank and its subsidiaries have been provided on the taxable income at rates shown below:

	2016	2015
	%	%
Domestic operations of the Bank	28.0	28.0
Off-shore banking operation of the Bank	28.0	28.0
Bangladesh operation of the Bank	42.5	42.5
Commercial Development Company PLC	28.0	28.0
ONEzero Company Ltd.	28.0	28.0
Serendib Finance Ltd.	28.0	28.0
Commercial Bank of Maldives Private Limited	25.0	–

22.2 Reconciliation of the Accounting Profit to Income Tax Expense

A reconciliation between taxable income and the accounting profit multiplied by the statutory tax rates is given below:

class="hRight"

	Tax Rate		GROUP		BANK
For the year ended December 31,	2016	2015	2016	2015	2016	2015
	%	%	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Accounting profit before tax from operations			20,114,584	17,136,111	20,051,183	17,143,610
Tax effect at the statutory income tax rate			5,988,705	5,186,846	5,907,894	5,160,768
Domestic operations of the Bank	28	28	4,497,651	3,888,621	4,497,651	3,888,621
Off-shore banking operation of the Bank	28	28	273,192	118,712	273,192	118,712
Bangladesh operation of the Bank	42.5	42.5	1,137,051	1,153,435	1,137,051	1,153,435
Subsidiaries	28 & 25	28	80,811	26,078	–	–
Tax effect of exempt income			(1,313,810)	(1,099,101)	(1,313,424)	(1,099,080)
Tax effect of non-deductible expenses			6,766,163	6,864,719	6,722,770	6,626,069
Tax effect of deductible expenses			(5,841,357)	(5,859,214)	(5,768,513)	(5,684,885)
Qualifying payments			(2,505)	(3,897)	(2,505)	(3,897)
Profit remittance tax of Bangladesh operation			–	86,551	–	86,551
Under/(Over) provision of taxes in respect of prior years [Refer Notes 22.1 and 47]			–	1,700	–	1,701
Withholding tax on dividends received			8,947	9,314	8,767	9,254
Deferred tax expense [Refer Notes 22.1 and 48.1]			42,017	89,933	(16,317)	143,905
Income tax expense reported in the Income Statement at the effective income tax rate			5,648,160	5,276,851	5,538,672	5,240,386

23. Earnings Per Share (EPS)

The Group computes basic and diluted EPS for its ordinary shares. Basic EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by dividing the profit or loss that is attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding, adjusted for the effects of all dilutive potentially ordinary shares, which comprise share options granted to employees.Details of Basic and Diluted EPS are given below:

23.1 Basic Earnings per Ordinary Share

	GROUP		BANK
	2016	2015	2016	2015
Amounts used as the numerator:
Profit for the year attributable to equity holders of the Bank (Rs. ’000)	14,510,333	11,855,172	14,512,511	11,903,224
Number of ordinary shares used as the denominator:
Weighted average number of ordinary shares [Refer Note 23.3]	890,037,763	888,693,776	890,037,763	888,693,776
Basic earnings per ordinary share (Rs.)	16.30	13.34	16.31	13.39

23.2 Diluted Earnings per Ordinary Share

	GROUP		BANK
	2016	2015	2016	2015
Amounts used as the numerator:
Profit for the year attributable to equity holders of the Bank (Rs. ’000)	14,510,333	11,855,172	14,512,511	11,903,224
Number of ordinary shares used as the denominator:
Weighted average number of ordinary shares [Refer Note 23.3]	892,043,791	890,103,365	892,043,791	890,103,365
Diluted earnings per ordinary share (Rs.)	16.27	13.32	16.27	13.37

23.3 Weighted Average Number of Ordinary Shares for Basic and Diluted Earnings per Share

	Outstanding No. of Shares		Weighted average No. of Shares
	2016	2015	2016	2015
Number of shares in issue as at January 01,	876,866,801	865,857,675	876,866,801	865,857,675
Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2014 [Refer Note 53.1]	–	8,838,513	–	8,838,513
Add: Number of shares satisfied in the form of issue and allotment of new shares from final dividend for 2015 [Refer Note 53.1]	12,731,007	–	12,731,007	12,731,007
	889,597,808	874,696,188	889,597,808	887,427,195
Add: Number of shares issued under Employee Share Option Plan (ESOP) 2008	894,487	2,170,613	268,784	1,266,581
Add: Number of shares issued under Employee Share Option Plan (ESOP) 2015	242,245	–	171,171	–
Weighted average number of ordinary shares for basic earnings per ordinary share calculation	890,734,540	876,866,801	890,037,763	888,693,776
Add: Bonus element on number of outstanding options under ESOP 2008 as at the year end	–	–	1,404,951	1,409,589
Add: Bonus element on number of outstanding options under ESOP 2015 as at the year end	–	–	601,077	–
Weighted average number of ordinary shares for diluted earnings per ordinary share calculation(*)	890,734,540	876,866,801	892,043,791	890,103,365

(*) The market value of the Bank’s shares for the purpose of calculating the dilutive effect of share options has been based on the excess of quoted market price as of December 31, 2016 and December 31, 2015 over the offer price.

24. Dividends

	GROUP		BANK
	2016	2015 Second Interim Rs. 1.00 Per share for 2014 (Paid on February 05, 2015)	2016	2015 Second Interim Rs. 1.00 Per share for 2014 (Paid on February 05, 2015)
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
On Ordinary Shares
Net dividend paid to the ordinary shareholders out of normal profits	–	783,258	–	783,258
Withholding tax deducted at source	–	82,685	–	82,685
Gross ordinary dividend paid	–	865,943	–	865,943

	First Interim Rs. 1.50 Per share for 2016 (Paid on November 18, 2016)	First Interim Rs. 1.50 Per share for 2015 (Paid on December 18, 2015)	First Interim Rs. 1.50 Per share for 2016 (Paid on November 18, 2016)	First Interim Rs. 1.50 Per share for 2015 (Paid on December 18, 2015)
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
On Ordinary Shares
Net dividend paid to the ordinary shareholders out of normal profits	1,208,039	1,189,367	1,208,039	1,189,367
Withholding tax deducted at source	127,889	125,884	127,889	125,884
Gross ordinary dividend paid	1,335,928	1,315,251	1,335,928	1,315,251
Total gross ordinary dividend paid	1,335,928	2,181,194	1,335,928	2,181,194

The Board of Directors of the Bank has approved the payment of a second interim dividend of Rs.3.00 per share for both the voting and non-voting ordinary shareholders of the Bank for the year ended December 31, 2016 and this dividend was paid on February 17, 2017.

The Board of Directors of the Bank has recommended the payment of a final dividend of Rs.2.00 per share which is to be satisfied in the form of issue and allotment of new shares for both voting and non-voting ordinary shares of the Bank for the year ended December 31, 2016 (Bank declared a final dividend of Rs. 5.00 per share for 2015 in 2016 and this was satisfied by way of Rs. 3.00 per share in the form of cash and Rs. 2.00 per share in the form of shares). The total dividend recommended by the Board is to be approved at the forthcoming Annual General Meeting to be held on March 30, 2017. In accordance with provisions of the Sri Lanka Accounting Standard No.10 on ‘Events after the Reporting Period’, the second interim dividend referred to above and the proposed final dividend for the year ended December 31, 2016 has not been recognised as a liability as at the year end. Final dividend payable for the year 2016 has been estimated at Rs.1,783.199 Mn. (Actual final dividend for 2015 amounted to Rs. 4,384.985 Mn.)

Accordingly, the dividend per ordinary share ( for both voting and non-voting ) for the year 2016 would be Rs. 6.50 (2015 – Rs. 6.50).

25. Classification of Financial Assets and Financial Liabilities

The tables below provide a reconciliation between line items in the Statement of Financial Position and categories of financial assets and financial liabilities of the Group and the Bank.

25.1 Classification of Financial Assets and Financial Liabilities – Group

25.1 (a) Group

As at December 31, 2016		Held-for-Trading (HFT)	Held-to-Maturity (HTM)	Loans and Receivables	Available- for-Sale (AFS)	Other Amortised Cost	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial Assets
Cash and cash equivalents	27	–	–	32,924,227	–	–	32,924,227
Balances with Central Banks	28	–	–	43,935,258	–	–	43,935,258
Placements with banks	29	–	–	11,718,499	–	–	11,718,499
Securities purchased under resale agreements		–	–	–	–	–	–
Derivative financial assets	30	1,052,829	–	–	–	–	1,052,829
Other financial instruments – Held-for-trading	31	4,987,798	–	–	–	–	4,987,798
Loans and receivables to banks	32	–	–	624,458	–	–	624,458
Loans and receivables to other customers	33	–	–	620,129,488	–	–	620,129,488
Financial investments – Available-for-sale	34	–	–	–	160,092,522	–	160,092,522
Financial investments – Held-to-maturity	35	–	63,626,598	–	–	–	63,626,598
Financial investments – Loans and receivables	36	–	–	51,824,026	–	–	51,824,026
Total Financial Assets		6,040,627	63,626,598	761,155,956	160,092,522	–	990,915,703
Financial Liabilities
Due to banks	43	–	–	–	–	71,098,391	71,098,391
Derivative financial liabilities	44	1,515,035	–	–	–	–	1,515,035
Securities sold under repurchase agreements		–	–	–	–	69,628,961	69,628,961
Due to other customers/ deposits from customers	45	–	–	–	–	743,310,613	743,310,613
Other borrowings	46	–	–	–	–	9,270,154	9,270,154
Subordinated liabilities	52	–	–	–	–	24,849,539	24,849,539
Total Financial Liabilities		1,515,035	–	–	–	918,157,658	919,672,693

25.1 (b) Group

As at December 31, 2015		Held-for-trading (HFT)	Held-to-maturity (HTM)	Loans and Receivables	Available- for-Sale (AFS)	Other Amortised Cost	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial Assets
Cash and cash equivalents	27	–	–	20,107,076	–	–	20,107,076
Balances with Central Banks	28	–	–	28,221,017	–	–	28,221,017
Placements with banks	29	–	–	17,193,539	–	–	17,193,539
Securities purchased under resale agreements		–	–	8,002,100	–	–	8,002,100
Derivative financial assets	30	4,118,169	–	–	–	–	4,118,169
Other financial instruments – Held-for-trading	31	7,656,349	–	–	–	–	7,656,349
Loans and receivables to Banks	32	–	–	601,106	–	–	601,106
Loans and receivables to other customers	33	–	–	509,923,128	–	–	509,923,128
Financial investments – Available-for-sale	34	–	–	–	204,261,934	–	204,261,934
Financial investments – Loans and receivables	36	–	–	57,724,369	–	–	57,724,369
Total Financial Assets		11,774,518	–	641,772,335	204,261,934	–	857,808,787
Financial Liabilities
Due to banks	43	–	–	–	–	31,789,396	31,789,396
Derivative financial liabilities	44	1,890,770	–	–	–	–	1,890,770
Securities sold under repurchase agreements		–	–	–	–	112,249,703	112,249,703
Due to other customers/ deposits from customers	45	–	–	–	–	624,021,217	624,021,217
Other borrowings	46	–	–	–	–	9,985,637	9,985,637
Subordinated liabilities	52	–	–	–	–	11,988,272	11,988,272
Total Financial Liabilities		1,890,770	–	–	–	790,034,225	791,924,995

25.2 Classification of Financial Assets and Financial Liabilities – Bank

The tables below provide a reconciliation between line items in the Statement of Financial Position and categories of financial assets and financial liabilities of the Bank.

25.2 (a) Bank

As at December 31, 2016		Held-for-Trading (HFT)	Held-to-Maturity (HTM)	Loans and Receivables	Available- for-Sale (AFS)	Other Amortised Cost	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial Assets
Cash and cash equivalents	27	–	–	30,193,589	–	–	30,193,589
Balances with Central Banks	28	–	–	43,873,205	–	–	43,873,205
Placements with banks	29	–	–	11,718,499	–	–	11,718,499
Securities purchased under resale agreements		–	–	–	–	–	–
Derivative financial assets	30	1,052,829	–	–	–	–	1,052,829
Other financial instruments – Held-for-trading	31	4,987,798	–	–	–	–	4,987,798
Loans and receivables to banks	32	–	–	624,458	–	–	624,458
Loans and receivables to other customers	33	–	–	616,018,228	–	–	616,018,228
Financial investments – Available-for-sale	34	–	–	–	160,023,471	–	160,023,471
Financial investments – Held-to-maturity	35	–	60,981,298	–	–	–	60,981,298
Financial investments – Loans and receivables	36	–	–	51,824,026	–	–	51,824,026
Total Financial Assets		6,040,627	60,981,298	754,252,005	160,023,471	–	981,297,401
Financial Liabilities
Due to banks	43	–	–	–	–	67,608,811	67,608,811
Derivative financial liabilities	44	1,515,035	–	–	–	–	1,515,035
Securities sold under repurchase agreements		–	–	–	–	69,867,469	69,867,469
Due to other customers/ deposits from customers	45	–	–	–	–	739,563,494	739,563,494
Other borrowings	46	–	–	–	–	9,270,154	9,270,154
Subordinated liabilities	52	–	–	–	–	24,849,539	24,849,539
Total Financial Liabilities		1,515,035	–	––	–	911,159,467	912,674,502

25.2 (b) Bank

As at December 31, 2015		Held-for-Trading (HFT)	Held-to-Maturity (HTM)	Loans and Receivables	Available- for-Sale (AFS)	Other Amortised Cost	Total
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial Assets
Cash and cash equivalents	27	–	–	20,043,512	–	–	20,043,512
Balances with Central Banks	28	–	–	28,221,017	–	–	28,221,017
Placements with banks	29	–	–	17,193,539	–	–	17,193,539
Securities purchased under resale agreements		–	–	8,002,100	–	–	8,002,100
Derivative financial assets	30	4,118,169	–	–	–	–	4,118,169
Other financial instruments – Held-for-trading	31	7,656,349	–	–	–	–	7,656,349
Loans and receivables to banks	32	–	–	601,106	–	–	601,106
Loans and receivables to other customers	33	–	–	508,115,127	–	–	508,115,127
Financial investments – Available-for-sale	34	–	–	–	204,244,289	–	204,244,289
Financial investments – Loans and receivables	36	–	–	57,724,369	–	–	57,724,369
Total Financial Assets		11,774,518	–	639,900,770	204,244,289	–	855,919,577
Financial Liabilities
Due to banks	43	–	–	–	–	30,319,119	30,319,119
Derivative financial liabilities	44	1,890,770	–	–	–	–	1,890,770
Securities sold under repurchase agreements		–	–	–	–	112,384,812	112,384,812
Due to other customers/ deposits from customers	45	–	–	–	–	624,101,810	624,101,810
Other borrowings	46	–	–	–	–	9,985,637	9,985,637
Subordinated liabilities	52	–	–	–	–	11,973,272	11,973,272
Total Financial Liabilities		1,890,770	–	–	–	788,764,650	790,655,420

26. Fair Value Measurement

The Group measures the fair value using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurement. An analysis of fair value measurement of financial and non-financial assets and liabilities is provided below.

Level 1

Inputs that are quoted market prices (unadjusted) in an active market for identical instruments.

When available, the Group measures the fair value of an instrument using active quoted prices or dealer price quotations (assets and long positions are measured at a bid price; liabilities and short positions are measured at an ask price), without any deduction for transaction costs. A market is regarded as active if transactions for asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

Inputs other than quoted prices included within level that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices).

This category includes instruments valued using;

1. (a) quoted prices in active markets for similar instruments,
2. (b) quoted prices for identical or similar instruments in markets that are considered to be less active, or
3. (c) other valuation techniques in which almost all significant inputs are directly or indirectly observable from market data.

Level 3

Inputs that are unobservable.

This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation.

This category includes instruments that are valued based on quoted prices of similar instruments for which significant unobservable adjustments or assumptions are required to reflect difference between the instruments.

Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, risk premiums in estimating discount rates, bond and equity prices, foreign exchange rates, expected price volatilities and corrections.

Observable prices or model inputs such as market interest rates are usually available in the market for listed equity securities and Government Securities such as Treasury Bills and Treasury Bonds. Availability of observable prices and model inputs reduces the need for management judgment and estimation while reducing uncertainty associated in determining the fair values.

Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded (‘Day 1’ profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument.

26.1 Assets and Liabilities Measured at Fair Value and Fair Value Hierarchy

The following table provides an analysis of assets and liabilities measured at fair value as at the Reporting date, by the level in the fair value hierarchy into which the fair value measurement is categorised. These amounts were based on the values recognised in the Statement of Financial Position.

		GROUP				BANK
		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
As at December 31, 2016	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Non-Financial Assets
Property, plant & equipment
Land and buildings	26.2	–	–	7,743,071	7,743,071	–	–	7,528,891	7,528,891
Total non-financial assets at fair value		–	–	7,743,071	7,743,071	–	–	7,528,891	7,528,891
Financial Assets
Derivative financial assets	30
Currency swaps		–	261,664	–	261,664	–	261,664	–	261,664
Forward contracts		–	788,808	–	788,808	–	788,808	–	788,808
Spot contracts		–	2,357	–	2,357	–	2,357	–	2,357
Other financial instruments – Held-for-trading	31
Government securities		4,693,989	–	–	4,693,989	4,693,989	–	–	4,693,989
Equity shares		293,809	–	–	293,809	293,809	–	–	293,809
Financial investments – Available-for-sale	34
Government securities		159,642,243	–	–	159,642,243	159,573,316	–	–	159,573,316
Equity securities		246,548	–	47,271	293,819	246,548	–	47,147	293,695
Investment in unit trust		–	156,460	–	156,460	–	156,460	–	156,460
Total financial assets at fair value		164,876,589	1,209,289	47,271	166,133,149	164,807,662	1,209,289	47,147	166,064,098
Total assets at fair value		164,876,589	1,209,289	7,790,342	173,876,220	164,807,662	1,209,289	7,576,038	173,592,989
Financial Liabilities
Derivative financial liabilities	44
Currency swaps		–	663,714	–	663,714	–	663,714	–	663,714
Forward contracts		–	849,011	–	849,011	–	849,011	–	849,011
Spot contracts		–	2,310	–	2,310	–	2,310	–	2,310
Total liabilities at fair value		–	1,515,035	–	1,515,035	–	1,515,035	–	1,515,035

		GROUP				BANK
		Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
As at December 31, 2015	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Non-Financial Assets
Property, plant & equipment
Land and buildings	26.2	–	–	7,469,355	7,469,355	–	–	7,242,924	7,242,924
Total non-financial assets at fair value		–	–	7,469,355	7,469,355	–	–	7,242,924	7,242,924
Financial Assets
Derivative financial assets	30
Currency swaps		–	3,328,679	–	3,328,679	–	3,328,679	–	3,328,679
Forward contracts		–	786,794	–	786,794	–	786,794	–	786,794
Spot contracts		–	2,696	–	2,696	–	2,696	–	2,696
Other financial instruments – Held-for-trading	31
Government securities		7,330,086	–	–	7,330,086	7,330,086	–	–	7,330,086
Equity shares		326,263	–	–	326,263	326,263	–	–	326,263
Financial investments – Available-for-sale	34
Government securities		203,774,930	–	–	203,774,930	203,757,409	–	–	203,757,409
Equity securities		234,839	–	46,611	281,450	234,839	–	46,487	281,326
Investment in unit trust		–	205,554	–	205,554	–	205,554	–	205,554
Total financial assets at fair value		211,666,118	4,323,723	46,611	216,036,452	211,648,597	4,323,723	46,487	216,018,807
Total assets at fair value		211,666,118	4,323,723	7,515,966	223,505,807	211,648,597	4,323,723	7,289,411	223,261,731
Financial Liabilities
Derivative financial liabilities	44
Currency swaps		–	791,199	–	791,199	–	791,199	–	791,199
Forward contracts		–	1,098,002	–	1,098,002	–	1,098,002	–	1,098,002
Spot contracts		–	1,569	–	1,569	–	1,569	–	1,569
Total liabilities at fair value		–	1,890,770	–	1,890,770	–	1,890,770	–	1,890,770

26.2 Level 3 Fair Value Measurement

Property, Plant & Equipment (PPE)

Reconciliation from the opening balance to the ending balance for the land and buildings in the Level 3 of the fair value hierarchy is available in Note 39.1 to 39.4 on pages 266 to 269.

Reconciliation of Revaluation Reserve pertaining to land and buildings categorised as Level 3 in the fair value hierarchy is given in the Statement of Changes in Equity on pages 186 to 189.

Note 39.5 (b) on page 271 provides information on significant unobservable inputs used as at December 31, 2016 in measuring fair value of land and buildings categorised as Level 3 in the fair value hierarchy.

Note 39.5 (c) on page 275 provides details of valuation techniques used and sensitivity of fair value measurement to changes in significant unobservable inputs.

Equity Securities

Value of unquoted shares of Rs. 47.271 Mn. in Group and Rs. 47.147 Mn. in Bank as at end of the year 2016 (Rs. 46.611 Mn. in Group and Rs. 46.487 Mn. in Bank as at end 2015) categorised under Financial investments – Available-for-sale whose fair value cannot be reliably measured is stated at cost in the Statement of Financial Position as permitted by the LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

26.3 Financial Instruments not Measured at Fair Value and Fair Value Hierarchy

Methodologies and assumptions used to determine fair value of financial instruments which are not already recorded at fair value in the Statement of Financial Position are as follows:

Fixed Rate Financial Instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost (eg. fixed rate loans and receivables, due to other customers, subordinated liabilities) 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.

Sensitivity of Significant Unobservable Inputs used to Measure Fair Value of Fixed Rate Financial Instruments

A significant increase/(decrease) in the market interest rate would result in lower/(higher) fair value being disclosed.

Assets for which Fair Value Approximates Carrying Value

For financial assets and liabilities with short-term maturities or with short-term re-pricing intervals, it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and savings deposits which do not have a specific maturity.

The following table sets out the estimated fair values of financial assets and liabilities not measured at fair value and hence reflected at the carrying amounts in Financial Statements and the fair value hierarchy used:

		GROUP					BANK
As at December 31, 2016		Level 1	Level 2	Level 3	Total Fair Value	Total Carrying Amount	Level 1	Level 2	Level 3	Total Fair Value	Total Carrying Amount
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash and cash equivalents	27	–	32,924,227	–	32,924,227	32,924,227	–	30,193,589	–	30,193,589	30,193,589
Balance with Central Banks	28	–	43,935,258	–	43,935,258	43,935,258	–	43,873,205	–	43,873,205	43,873,205
Placements with banks	29	–	11,718,499	–	11,718,499	11,718,499	–	11,718,499	–	11,718,499	11,718,499
Loans and receivables to banks	32	–	624,458	–	624,458	624,458	–	624,458	–	624,458	624,458
Loans and receivables to other customers	33	–	–	625,821,184	625,821,184	620,129,488	–	–	621,709,924	621,709,924	616,018,228
Financial investments – Held-to-maturity	35	62,777,800	–		62,777,800	63,626,598	60,132,500	–	–	60,132,500	60,981,298
Financial investments – Loans and recievables	36	–	–	51,824,026	51,824,026	51,824,026	–	–	51,824,026	51,824,026	51,824,026
Total financial assets not at fair value		62,777,800	89,202,442	677,645,210	829,625,452	824,782,554	60,132,500	86,409,751	673,533,950	820,076,201	815,233,303
Financial Liabilities
Due to banks	43	–	71,098,391	–	71,098,391	71,098,391	–	67,608,811	–	67,608,811	67,608,811
Securities sold under repurchase agreements		–	69,628,961	–	69,628,961	69,628,961	–	69,867,469	–	69,867,469	69,867,469
Due to other customers/ deposits from customers	45	–	–	743,145,668	743,145,668	743,310,613	–	–	739,728,439	739,728,439	739,563,494
Other borrowings	46	–	–	9,270,154	9,270,154	9,270,154	–	–	9,270,154	9,270,154	9,270,154
Subordinated liabilities	52	–	–	24,175,367	24,175,367	24,849,539	–	–	24,175,367	24,175,367	24,849,539
Total financial liabilities not at fair value		–	140,727,352	776,591,189	917,318,541	918,157,658	–	137,476,280	773,173,960	910,650,240	911,159,467

		GROUP					BANK
As at December 31, 2015		Level 1	Level 2	Level 3	Total Fair Value	Total Carrying Amount	Level 1	Level 2	Level 3	Total Fair Value	Total Carrying Amount
	Note	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Financial Assets
Cash and cash equivalents	27	–	20,107,076	–	20,107,076	20,107,076	–	20,043,512	–	20,043,512	20,043,512
Balances with Central Banks	28	–	28,221,017	–	28,221,017	28,221,017	–	28,221,017	–	28,221,017	28,221,017
Placements with banks	29	–	17,193,539	–	17,193,539	17,193,539	–	17,193,539	–	17,193,539	17,193,539
Securities purchased under resale agreements		–	8,002,100	–	8,002,100	8,002,100	–	8,002,100	–	8,002,100	8,002,100
Loans and receivables to banks	32	–	601,106	–	601,106	601,106	–	601,106	–	601,106	601,106
Loans and receivables to other customers	33	–	–	511,056,767	511,056,767	509,923,128	–	–	509,248,766	509,248,766	508,115,127
Financial investments – Loans and receivables	36	–	–	57,724,369	57,724,369	57,724,369	–	–	57,724,369	57,724,369	57,724,369
Total financial assets not at fair value		–	74,124,838	568,781,136	642,905,974	641,772,335	–	74,061,274	566,973,135	641,034,409	639,900,770
Financial Liabilities
Due to banks	43	–	31,789,396	–	31,789,396	31,789,396	–	30,319,119	–	30,319,119	30,319,119
Securities sold under repurchase agreements		–	112,249,703	–	112,249,703	112,249,703	–	112,384,812	–	112,384,812	112,384,812
Due to other customers/deposits from customers	45	–	–	624,570,898	624,570,898	624,021,217	–	–	624,651,491	624,651,491	624,101,810
Other borrowings	46	–	–	9,985,637	9,985,637	9,985,637	–	–	9,985,637	9,985,637	9,985,637
Subordinated liabilities	52	–	–	12,019,342	12,019,342	11,988,272	–	–	12,004,342	12,004,342	11,973,272
Total financial liabilities not at fair value		–	144,039,099	646,575,877	790,614,976	790,034,225	–	142,703,931	646,641,470	789,345,401	788,764,650

26.4 Valuation Techniques and Inputs in Measuring Fair Values

The table below provides information on the valuation techniques and inputs used in measuring the fair values of Derivative financial assets and liabilities in the Level 2 of the fair value hierarchy, as given in Note 26.1 on page 234.

Type of Financial Instruments	Fair Value as at December 31, 2016 (Rs. ’000)	Valuation Technique	Significant Valuation inputs
Derivative Financial Assets	1,052,829	Adjusted Forward Rate Approach This approach considers the present value of projected forward exchange rate as at the Reporting date as the fair value. The said forward rate is projected, based on the spot exchange rate and the forward premium/discount calculated using extrapolated interest rates of the currency pairs under consideration. In computing the present value, interest rate differential between two currencies under consideration is used as the discount rate.	Spot exchange rate
Derivative Financial Liabilities	1,515,035		Interest rate differentials between currencies under consideration

27. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand, placements with banks and loans at call/short notice and highly liquid financial assets with original maturities within three months or less from the date of acquisition that are subject to an insignificant risk of changes in fair value and are used by the Group in the management of its short-term commitments. These items are brought to Financial Statements at 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.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Cash in hand	17,599,901	15,931,941	17,406,776	15,873,479
Coins and notes held in local currency	15,497,697	14,035,800	15,488,867	14,031,376
Coins and notes held in foreign currency	2,102,204	1,896,141	1,917,909	1,842,103
Balances with banks	6,122,355	2,705,999	5,794,927	2,700,897
Local banks	–	5,102	–	–
Foreign banks	6,122,355	2,700,897	5,794,927	2,700,897
Money at call and at short notice	9,201,971	1,469,136	6,991,886	1,469,136
Total	32,924,227	20,107,076	30,193,589	20,043,512

The maturity analysis of Cash and Cash Equivalents is given in Note 62 on pages 308 and 309.

28. Balances with Central Banks

Balances with Central Banks are carried at amortised cost in the Statement of Financial Position.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Statutory balances with Central Banks [Refer Note 28.1]	43,935,258	22,820,127	43,873,205	22,820,127
Non-statutory balances with Central Banks [Refer Note 28.2]	–	5,400,890	–	5,400,890
Total	43,935,258	28,221,017	43,873,205	28,221,017

28.1 Statutory Balances with Central Banks

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Balances with the Central Bank of Sri Lanka	40,469,986	20,075,130	40,469,986	20,075,130
Balances with the Bangladesh Bank	3,403,219	2,744,997	3,403,219	2,744,997
Balances with the Maldives Monetary Authority	62,053	–	–	–
Total	43,935,258	22,820,127	43,873,205	22,820,127

Balances with Central Bank of Sri Lanka

The Monetary Law Act requires that all commercial banks operating in Sri Lanka to maintain a statutory reserve on all deposit liabilities denominated in Sri Lankan Rupees. As required by the provisions of Section 93 of the Monetary Law Act, a cash balance is maintained with the Central Bank of Sri Lanka. As at December 31, 2016, the minimum cash reserve requirement was 7.50% of the rupee deposit liabilities (7.50% in 2015). There is no reserve requirement for foreign currency deposits liabilities of the Domestic Banking Unit (DBU) and the deposit liabilities of the Off-shore Banking Centre (OBC) in Sri Lanka.

Balances with Bangladesh Bank

The Bank’s Bangladesh operation is required to maintain the statutory liquidity requirement on time and demand liabilities (both local and foreign currencies), partly in the form of a Cash Reserve Requirement and the balance by way of foreign currency and/or in the form of unencumbered securities held with the Bangladesh Bank. As per the Bangladesh Bank regulations, the Statutory Liquidity Requirement as at December 31, 2016 was 19.50% (19.50% in 2015) on time and demand liabilities (both local and foreign currencies), which includes a 6.50% ( 6.50% in 2015) cash reserve requirement and the balance 13.00% (13.00% in 2015) is permitted to be maintained in foreign currency and/or also in unencumbered securities held with the Bangladesh Bank.

Balances with Maldives Monetary Authority

The Maldives Banking Act No. 24 of 2010 section 25 requires the Bank to maintain a statutory reserve on all deposits liabilities denominated in both foreign currency and local currency deposits excluding interbank deposits of other banks in Maldives and Letter of Credit margin deposits. According to the Bank regulations of Maldives Monetary Authority, the Minimum Reserve Requirement (MRR) as at December 31, 2016 was 10%.The reserve requirement for local currency is to be met in the form of Rufiyaa deposits, while reserve requirement for foreign currency is to be met in the form of US dollar deposits.

28.2 Non-Statutory Balances with Central Banks

As per the circulars 35/01/005/006/33 and 34/01/005/006/07, issued by the Domestic Operations Department of the Central Bank of Sri Lanka, the ‘Standing Repurchase (Repo)’ facility was replaced by the ‘Standing Deposit Facility (SDF)’ for open market operations. This facility is available on an overnight basis and interest component on the deposit has been computed at the Standing Deposit Facility Rate (SDFR) of the Central Bank of Sri Lanka for the duration of the respective deposit held.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Central Bank of Sri Lanka (*)	–	5,400,890	–	5,400,890
Bangladesh Bank	–	–	–	–
Total	–	5,400,890	–	5,400,890

(*) The Group had the above balance on a Standing Deposit Facility as at December 31, 2015.

The maturity analysis of Balances with Central Banks is given in Note 62 on pages 308 and 309.

29. Placements with Banks

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Placements – within Sri Lanka	1,094,821	5,516,273	1,094,821	5,516,273
Placements – outside Sri Lanka	10,623,678	11,677,266	10,623,678	11,677,266
Total	11,718,499	17,193,539	11,718,499	17,193,539

The maturity analysis of Placements with Banks is given in Note 62 on pages 308 and 309.

30. Derivative Financial Assets

The Bank uses derivatives such as interest rate swaps, foreign currency swaps and forward foreign exchange contracts, etc. Derivative financial assets are recorded at fair value. Changes in the fair value of derivatives are included in ‘Net Gains/(Losses) from Trading’ in the Income Statement.

Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract and the host contract is not itself held-for-trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the profit or loss.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Foreign currency derivatives
Currency swaps	261,664	3,328,679	261,664	3,328,679
Forward contracts	788,808	786,794	788,808	786,794
Spot contracts	2,357	2,696	2,357	2,696
Total	1,052,829	4,118,169	1,052,829	4,118,169

The maturity analysis of Derivative Financial Assets is given in Note 62 on pages 308 and 309.

31. Other Financial Instruments – Held-for-Trading

Financial assets are classified as Held-for-trading if;

• they are acquired principally for the purpose of selling or repurchasing in the near term; or
• they hold as a part of a portfolio that is managed together for short-term profit or position taking; or
• they form part of derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as per the Sri Lanka Accounting Standard – LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

Financial assets Held-for-trading are recorded in the Statement of Financial Position at fair value. Changes in fair value are recognised in profit or loss. Interest and dividend income are recorded in ‘Interest Income’ and ‘Net Gains/(Losses) from Trading’ respectively in the Income Statement, according to the terms of the contract, or when the right to receive the payment has been established.

The Group evaluates its financial assets Held-for-trading, other than derivatives, to determine whether the intention to sell them in the near term is still appropriate. When the Group is unable to trade these financial assets, due to inactive markets and Management’s intention to sell them in the foreseeable future significantly changes, the Group may elect to reclassify these financial assets in rare circumstances.

Financial assets held-for-trading include instruments such as Government and other debt securities and equity instruments that have been acquired principally for the purpose of selling or repurchasing in the near term and derivatives, including separated embedded derivatives explained below, unless they are designated as effective hedging instruments.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Government securities [Refer Note 31.1]	4,693,989	7,330,086	4,693,989	7,330,086
Equity securities [Refer Note 31.2]	293,809	326,263	293,809	326,263
Total	4,987,798	7,656,349	4,987,798	7,656,349

31.1 Government Securities

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Treasury bills	2,467,221	1,552,531	2,467,221	1,552,531
Treasury bonds	2,226,768	5,777,555	2,226,768	5,777,555
Total Government securities	4,693,989	7,330,086	4,693,989	7,330,086

The maturity analysis of Other Financial Instruments Held-for-trading is given in Note 62 on pages .

31.2 Equity Securities – Group and Bank

	As at December 31, 2016	As at December 31, 2015
Sector/Name of the Company	No. of Shares	Market Price	Market Value	Cost of the Investment	No. of Shares	Market Price	Market Value	Cost of the Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Bank, Finance and Insurance
Central Finance Company PLC	196,189	100.00	19,619	18,937	94,930	253.00	24,017	18,937
Citizens Development Business Finance PLC (Non-voting)	101,965	62.10	6,332	3,398	101,965	80.00	8,157	3,398
Hatton National Bank PLC	83	225.00	19	12	82	210.60	17	12
Lanka Ventures PLC	100,000	42.50	4,250	3,033	100,000	43.50	4,350	3,033
National Development Bank PLC	200,000	156.00	31,200	34,381	–	–	–	–
People’s Insurance Ltd.	126,500	19.00	2,404	1,898	–	–	–	–
Sampath Bank PLC	26,350	260.40	6,862	4,298	25,655	248.00	6,362	4,298
Subtotal			70,686	65,957			42,903	29,678
Beverage, Food and Tobacco
Lanka Milk Foods (CWE) PLC	250,000	119.00	29,750	27,866	250,000	135.00	33,750	27,866
Melstacorp Ltd.	245,960	59.30	14,585	9,814	–	–	–	–
Renuka Foods PLC (Non-voting)	1,000	19.50	20	15	–	–	–	–
COCO Lanka PLC (Non-voting)	–	–	–	–	1,000	23.90	24	15
Distilleries Company of Sri Lanka PLC	–	–	–	–	181,490	246.00	44,647	28,968
Subtotal			44,355	37,695			78,421	56,849
Chemicals and Pharmaceuticals
Chemical Industries Colombo Holding PLC (Non-voting)	161,400	68.00	10,975	11,692	161,400	81.20	13,106	11,692
Haycarb PLC	107,100	150.00	16,065	15,914	107,100	164.90	17,661	15,914
Subtotal			27,040	27,606			30,767	27,606
Construction and Engineering
Colombo Dockyard PLC	75,000	78.60	5,895	16,685	75,000	150.10	11,258	16,685
Subtotal			5,895	16,685			11,258	16,685
Diversified Holdings
Hemas Holdings PLC	60	98.00	6	2	60	92.90	6	2
John Keells Holdings PLC	130,611	145.00	18,939	20,527	114,285	178.10	20,354	20,527
Subtotal			18,945	20,529			20,360	20,529
Healthcare
Ceylon Hospitals PLC	121,900	87.40	10,654	12,868	121,900	101.20	12,336	12,868
Ceylon Hospitals PLC (Non-voting)	61,100	69.50	4,246	4,423	61,100	75.00	4,583	4,423
Subtotal			14,900	17,291			16,919	17,291
Hotels and Travels
John Keells Hotels PLC	267,608	10.90	2,917	3,473	267,608	15.40	4,121	3,473
Taj Lanka Hotels PLC	212,390	25.20	5,352	6,625	212,390	25.30	5,373	6,625
Subtotal			8,269	10,098			9,494	10,098

	As at December 31, 2016				As at December 31, 2015
Sector/Name of the Company	No. of Shares	Market Price	Market Value	Cost of the Investment	No. of Shares	Market Price	Market Value	Cost of the Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Investment Trusts
Renuka Holdings PLC	117,158	21.10	2,472	3,180	117,158	26.90	3,152	3,180
Renuka Holdings PLC (Non-voting)	265,368	18.00	4,777	4,958	265,368	22.80	6,050	4,958
Subtotal			7,249	8,138			9,202	8,138
Land and Property
Overseas Reality Ceylon PLC	183,320	20.00	3,666	2,716	183,320	23.20	4,253	2,716
CT Land Development PLC	15,000	53.10	797	531	15,000	50.00	750	531
Subtotal			4,463	3,247			5,003	3,247
Manufacturing
ACL Cables PLC	343,032	60.50	20,753	14,096	171,516	120.90	20,736	14,096
Dipped Products PLC	200,000	86.80	17,360	24,239	200,000	110.00	22,000	24,239
Lanka Walltile PLC	60	99.70	6	5	60	109.80	7	5
Pelwatte Sugar Industries PLC	12,300	0.10	1	351	12,300	0.10	1	351
Royal Ceramics Lanka PLC	155,927	115.50	18,010	18,057	155,927	111.20	17,339	18,057
Subtotal			56,130	56,748			60,083	56,748
Plantations
Kotagala Plantations PLC	201,750	8.90	1,796	9,172	201,750	17.80	3,591	9,172
Subtotal			1,796	9,172			3,591	9,172
Power and Energy
Hemas Power PLC	106,249	22.30	2,369	2,053	106,249	25.00	2,656	2,053
Lanka IOC PLC	685,984	31.70	21,746	15,013	685,984	37.10	25,450	15,013
Subtotal			24,115	17,066			28,106	17,066
Telecommunications
Dialog Axiata PLC	949,172	10.50	9,966	6,300	949,172	10.70	10,156	6,300
Subtotal			9,966	6,300			10,156	6,300
Total			293,809	296,532			326,263	279,407
Mark to market gains/(losses)				(2,723)				46,856
Market value of equity securities				293,809				326,263

31.3 Industry/Sector Composition of Equity Securities – Group and Bank

	As at December 31, 2016			As at December 31, 2015
Industry/Sector	Market Value	Cost of the Investment		Market Value	Cost of the Investment
	Rs. ’000	Rs. ’000	%	Rs. ’000	Rs. ’000	%
Banking, Finance and Insurance	70,686	65,957	24.06	42,903	29,678	13.15
Beverage, Food and Tobacco	44,355	37,695	15.10	78,421	56,849	24.04
Chemicals and Pharmaceuticals	27,040	27,606	9.20	30,767	27,606	9.43
Construction and Engineering	5,895	16,685	2.01	11,258	16,685	3.45
Diversified Holdings	18,945	20,529	6.45	20,360	20,529	6.24
Healthcare	14,900	17,291	5.07	16,919	17,291	5.19
Hotels and Travels	8,269	10,098	2.81	9,494	10,098	2.91
Investment Trusts	7,249	8,138	2.47	9,202	8,138	2.82
Land and Property	4,463	3,247	1.52	5,003	3,247	1.53
Manufacturing	56,130	56,748	19.10	60,083	56,748	18.42
Plantations	1,796	9,172	0.61	3,591	9,172	1.10
Power and Energy	24,115	17,066	8.21	28,106	17,066	8.61
Telecommunications	9,966	6,300	3.39	10,156	6,300	3.11
Subtotal	293,809	296,532	100.00	326,263	279,407	100.00
Mark to market gains/(losses)		(2,723)			46,856
Market value of equity securities	293,809	293,809	100.00	326,263	326,263	100.00

32. Loans and Receivables to Banks

‘Loans and receivables to banks’ comprises of non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

• those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss.
• those that the Group, upon initial recognition, designates as available-for-sale.
• those that the Group, upon initial recognition, designates as held-to-maturity.
• those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration.
• finance lease receivables

‘Loans and receivables to banks’ include amounts due from banks. After initial measurement, Loans and receivables to banks are subsequently measured at amortised cost using the EIR, less provision for impairment, except when the Group designates loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest Income’ while the losses arising from impairment are recognised in ‘Impairment charges for loans and other losses’ in the Income Statement.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Gross loans and receivables	624,458	601,106	624,458	601,106
Less: Provision for impairment	–	–	–	–
Net loans and receivables	624,458	601,106	624,458	601,106

The maturity analysis of Loans and Receivables to Banks is given in Note 62 on pages 308 and 309.

The Bank did not make any payments to counter party banks for the oil hedging transactions with effect from June 02, 2009 in response to a Directive received from the Exchange Controller of the Central Bank of Sri Lanka. Consequently, one of the counterparty banks appropriated US$ 4.170 Mn. (Rs. 624.458 Mn.) which has been kept as a deposit with them. This action has been contested by the Bank. In view of the stance taken by the Bank in this regard, both the deposit (made by the Bank) and the amount due to the said counterparty bank, have been recorded in the Statement of Financial Position.

32. 1 (a) By Currency

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
United States Dollar	624,458	601,106	624,458	601,106
Subtotal	624,458	601,106	624,458	601,106

33. Loans and Receivables to Other Customers

‘Loans and receivables to other customers’ comprises of non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

• those that the Group intends to sell immediately or in the near term and those that the Group, upon initial recognition, designates as at fair value through profit or loss
• those that the Group, upon initial recognition, designates as available-for-sale
• those that the Group, upon initial recognition, designates as held-to-maturity.
• those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration.

‘Loans and receivables to other customers’ include, Loans & Advances and Lease Receivables of the Group.

When the Group is the lessor in a lease agreement that transfers substantially all risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease. Amounts receivable under finance leases, net of initial rentals received, unearned lease income and provision for impairment, are classified as lease receivable and are presented within ‘Loans and receivables to customers’ in the Statement of Financial Position.

After initial measurement, ‘Loans and receivables to other customers’ are subsequently measured at amortised cost using the EIR, less provision for impairment, except when the Group designates loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest Income’, while the losses arising from impairment are recognised in ‘Impairment charges for loans and other losses’ in the Income Statement.

The Bank may enter into certain lending commitments where the loan, on drawdown, is expected to be classified as Held-for-trading because the intent is to sell the loans in the short term. These commitments to lend, if any, are recorded as derivatives and measured at fair value through profit or loss. Where the loan, on drawdown, is expected to be retained by the Bank and not sold in the short term, the commitment is recorded only when it is an onerous contract that is likely to give rise to a loss.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Gross loans and receivables	637,982,536	528,382,921	633,390,907	526,166,681
Less: Provision for individual impairment [Refer Note 33.2]	8,453,457	5,369,960	8,453,457	5,369,960
Provision for collective impairment [Refer Note 33.2]	9,399,591	13,089,833	8,919,222	12,681,594
Net loans and receivables	620,129,488	509,923,128	616,018,228	508,115,127

The maturity analysis of Loans and Receivables to Other Customers is given in Note 62 on pages 308 and 309.

33.1 Analysis

33.1 (a) By Product

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and receivables
Overdrafts	100,985,232	81,493,071	100,903,024	81,966,028
Trade finance	43,088,097	45,805,983	43,088,097	45,805,983
Lease/hire purchase receivable [Refer Note 33.3]	39,040,966	37,292,636	35,993,964	34,472,653
Credit cards	6,679,059	4,830,429	6,679,059	4,830,429
Pawning	1,239,785	1,870,881	1,239,785	1,870,881
Staff loans	7,276,285	6,117,701	7,274,154	6,115,662
Housing loans	47,275,462	40,327,887	47,275,462	40,327,887
Personal loans	25,996,196	26,290,382	25,906,055	26,270,744
Term loans
Short-term	72,590,084	44,044,255	71,219,300	44,044,255
Long-term	277,354,045	224,519,934	277,354,682	224,672,397
Loans granted from Investment Fund Account (IFA) [Refer Note 33.4]	3,974,359	4,435,479	3,974,359	4,435,479
Bills of exchange	12,482,966	11,354,283	12,482,966	11,354,283
Subtotal	637,982,536	528,382,921	633,390,907	526,166,681

33.1 (b) By currency

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Sri Lankan Rupee	506,118,547	425,498,965	501,609,126	423,282,725
United States Dollar	94,727,986	68,414,361	94,645,778	68,414,361
Great Britain Pound	695,403	731,487	695,403	731,487
Euro	1,545,852	1,017,634	1,545,852	1,017,634
Australian Dollar	514,017	149,680	514,017	149,680
Japanese Yen	71,144	112,514	71,144	112,514
Singapore Dollar	127	–	127	–
Bangladesh Taka	34,174,199	32,449,851	34,174,199	32,449,851
Others	135,261	8,429	135,261	8,429
Subtotal	637,982,536	528,382,921	633,390,907	526,166,681

33.1 (c) By Industry

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Agriculture and fishing	63,529,644	45,842,559	63,332,661	45,667,263
Manufacturing	92,030,456	73,304,224	91,982,499	73,282,037
Tourism	46,086,461	33,696,456	45,919,393	33,644,481
Transport	14,892,683	16,684,942	14,800,244	16,592,979
Construction	81,259,365	61,665,875	81,187,168	61,602,932
Trading	94,987,320	78,254,327	93,538,474	77,628,493
New economy (e-commerce, IT, etc.)	15,111,861	14,226,759	15,111,861	14,226,759
Financial and business services	49,066,227	43,466,286	49,740,977	44,264,897
Infrastructure	17,894,260	19,128,131	17,894,260	19,128,131
Other services (Education, Health, Media, etc.)	57,961,305	51,057,181	56,923,320	50,305,657
Other customers	105,162,954	91,056,181	102,960,050	89,823,052
Subtotal	637,982,536	528,382,921	633,390,907	526,166,681

 

33.2 Movement in Provision for Individual and Collective Impairment during the Year

	GROUP		BANK
	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Movement in Provision for Individual Impairment
Balance as at January 01,	5,369,960	4,334,587	5,369,960	4,334,587
Charge/(write-back) to the Income Statement [Refer Note 18]	3,439,879	1,386,477	3,439,879	1,386,477
Net write-off/(recoveries) during the year	(287,226)	(490,046)	(287,226)	(490,046)
Exchange rate variance on foreign currency provisions	51,080	90,680	51,080	90,680
Interest accrued/(reversals) on impaired loans and advances	(533,528)	(265,344)	(533,528)	(265,344)
Other movements	413,292	313,606	413,292	313,606
Balance as at December 31,	8,453,457	5,369,960	8,453,457	5,369,960
Movement in Provision for Collective Impairment
Balance as at January 01,	13,089,833	12,835,436	12,681,594	12,621,987
Charge/(write-back) to the Income Statement [Refer Note 18]	(1,859,806)	2,710,834	(1,931,932)	2,516,044
Net write-off/(recoveries) during the year	(1,835,798)	(2,465,797)	(1,835,798)	(2,465,797)
Exchange rate variance on foreign currency provisions	5,362	9,360	5,358	9,360
Balance as at December 31,	9,399,591	13,089,833	8,919,222	12,681,594
Total of Individual and Collective Impairment	17,853,048	18,459,793	17,372,679	18,051,554

33.3 Lease/Hire Purchase Receivable

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Gross Lease/Hire Purchase Receivable	39,040,966	37,292,636	35,993,964	34,472,653
Within one year [Refer Note 33.3 (a)]	13,440,584	12,781,980	12,631,092	11,619,035
From one to five years [Refer Note 33.3 (b)]	25,250,003	24,424,152	23,358,999	22,851,419
After five years [Refer Note 33.3 (c)]	350,379	86,504	3,873	2,199
Less: Provision for individual impairment [Refer Note 33.3 (d)]	241,185	93,710	241,185	93,710
Provision for collective impairment [Refer Note 33.3 (e)]	681,035	953,696	262,381	556,776
Net lease receivable	38,118,746	36,245,230	35,490,398	33,822,167

33.3 (a) Lease/Hire Purchase Receivable within One Year

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Total Lease/Hire purchase receivable within one year	17,390,714	16,412,304	16,232,578	14,926,248
Less: Unearned lease/hire purchase income	3,950,130	3,630,324	3,601,486	3,307,213
Gross Lease/Hire purchase receivable within one year	13,440,584	12,781,980	12,631,092	11,619,035
Less: Provision for individual impairment	228,553	72,660	228,553	72,660
Provision for collective impairment	364,252	642,514	228,060	488,019
Subtotal	12,847,779	12,066,806	12,174,479	11,058,356

33.3 (b) Lease/Hire Purchase Receivable from One to Five Years

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Total Lease/Hire purchase receivable from one to five years	29,185,428	28,211,137	26,793,674	26,138,901
Less: Unearned lease/hire purchase income	3,935,425	3,786,985	3,434,675	3,287,482
Gross Lease/Hire purchase receivable from one to five years	25,250,003	24,424,152	23,358,999	22,851,419
Less: Provision for individual impairment	12,632	21,050	12,632	21,050
Provision for collective impairment	268,364	307,592	34,319	68,755
Subtotal	24,969,007	24,095,510	23,312,048	22,761,614

33.3 (c) Lease/Hire Purchase Receivable after Five Years

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Total Lease/Hire purchase receivable after five years	354,646	94,062	4,480	2,254
Less: Unearned lease/hire purchase income	4,267	7,558	607	55
Gross Lease/Hire purchase receivable after five years	350,379	86,504	3,873	2,199
Less: Provision for individual impairment	–	–	–	–
Provision for collective impairment	48,419	3,590	2	2
Subtotal	301,960	82,914	3,871	2,197

33.3 (d) Movement in Provision for Individual Impairment on Lease/Hire Purchase Receivable

	GROUP		BANK
	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Balance as at January 01,	93,710	60,961	93,710	60,961
Charge/(write-back) to the Income Statement	209,134	55,159	209,134	55,159
Net write-off/(recoveries) during the year	(31,648)	(21,673)	(31,648)	(21,673)
Interest accrued on impaired lease/hire purchase receivable	(32,268)	(4,516)	(32,268)	(4,516)
Other movements	2,257	3,779	2,257	3,779
Balance as at December 31,	241,185	93,710	241,185	93,710

33.3 (e) Movement in Provision for Collective Impairment on Lease/Hire Purchase Receivable

	GROUP		BANK
	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Balance as at January 01,	953,696	1,064,533	556,776	856,170
Charge/(write-back) to the Income Statement	1,154,843	620,604	1,133,109	432,047
Net write-off/(recoveries) during the year	(1,427,504)	(731,441)	(1,427,504)	(731,441)
Balance as at December 31,	681,035	953,696	262,381	556,776

33.4 Loans Granted from Investment Fund Account (IFA) – Bank

As per the guidelines issued by the Central Bank of Sri Lanka, Investment Fund Account was established effective from January 01, 2011, by transferring tax savings as explained below:

(a) 5% of the Profits Before Tax (PBT) calculated for Income Tax (IT) purposes, on the dates of making Self-Assessment payments on IT.

(b) 8% of the profits calculated for the payment of Value Added Tax (VAT) on financial services at the time of making payments on VAT.

The Sectoral Distribution of Loans Disbursed under IFA is given below:

As at December 31,			2016			2015
Sector	Range of Interest Rates	Tenure	Amount Outstanding (A)	Pending Disbursement (B)	Total (A) + (B)	Amount Outstanding (A)	Pending Disbursement (B)	Total (A) + (B)
	(%)	(Years)	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
(a) Cultivation of plantation crops/ agriculture crops	7.91 – 12.12	5.5	38,636	–	38,636	65,909	–	65,909
(b) Factory/mills modernisation/ establishment/expansion	7.91 – 13.12	5.5	192,040	–	192,040	295,591	51,800	347,391
(c) Infrastructure development	6.80 – 11.00	14.5	3,559,585	98,627	3,658,212	3,886,732	132,414	4,019,146
(d) Construction of hotels and for related purposes	8.41 – 12.62	7	8,236	–	8,236	10,372	–	10,372
Capital Outstanding of the Loans granted			3,798,497	98,627	3,897,124	4,258,604	184,214	4,442,818
(e) Interest receivable			175,862	–	175,862	176,875	–	176,875
Carrying amount of the Loans granted			3,974,359	98,627	4,072,986	4,435,479	184,214	4,619,693

The requirement to maintain the Investment Fund Account was ceased effective from October 1, 2014 as per the instructions issued by the Central Bank of Sri Lanka.

 

33.5 Summary of Individually Impaired Loans and Receivables – Bank

As at December 31,	2016		2015
	Individually Impaired Loans and Receivables	Provision for Individual Impairment	Individually Impaired Loans and Receivables	Provision for Individual Impairment
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Loans and Advances
Overdrafts	2,311,257	1,554,417	1,336,117	1,007,622
Trade finance	749,241	507,360	548,552	303,921
Lease/hire purchase receivable	444,882	241,185	533,359	93,710
Credit cards	–	–	–	–
Pawning	–	–	4,566	67
Staff loans	–	–	–	–
Housing loans	480,970	169,831	12,445	6,194
Personal loans	6,586	4,338	2,588	1,753
Term loans	18,109,141	5,976,326	9,309,002	3,956,693
Bills of exchange	–	–	–	–
Total	22,102,077	8,453,457	11,746,629	5,369,960

The net exposure of Rs. 13,648.620 Mn. (Rs. 6,376.669 Mn. As at December 31, 2015) is covered by collateral valued over Rs. 13,648.620 Mn. (Over Rs. 6,376.669 Mn. as at December 31, 2015) excluding machinery and stocks.

34. Financial Investments – Available-for-Sale

Available-for-sale financial investments include equity and debt securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in the market conditions.

The Group has not designated any loans or receivables as available-for-sale. After initial measurement, available-for-sale financial investments are subsequently measured at fair value.

Unrealised gains and losses are recognised in Equity through OCI in the ‘Available-for-sale reserve’. When these financial investments are disposed of, the cumulative gain or loss previously recognised in Equity is recycled to profit or loss through ‘Operating income’. Interest earned while holding available-for-sale financial investments is reported as ‘Interest income’ using the EIR. Dividend earned while holding available-for-sale financial investments are recognised in the Income Statement as ‘Operating income’ when the right to receive the payment has been established. The losses arising from impairment of such investments are recognised in the Income Statement in ‘Impairment charges for loans and other losses’ and removed from the ‘Available-for-sale reserve’.

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Government securities	159,642,243	203,774,930	159,573,316	203,757,409
Government securities – Sri Lanka [Refer Note 34.1 (a)]	159,642,243	193,956,070	159,573,316	193,938,549
Government securities – Bangladesh [Refer Note 34.1 (b)]	–	9,818,860	–	9,818,860
Equity securities	293,819	281,450	293,695	281,326
Quoted shares [Refer Notes 34.2.(a) and 34.3.(a)]	246,548	234,839	246,548	234,839
Unquoted shares [Refer Notes 34.2 (b) and 34.3 (b)]	47,271	46,611	47,147	46,487
Investment in Unit Trust [Refer Notes 34.4 and 34.5]	156,460	205,554	156,460	205,554
Total	160,092,522	204,261,934	160,023,471	204,244,289

There were no impairment losses on Financial Investments – Available-for-Sale as at December 31, 2016 (2015 – Nil).

The maturity analysis of Financial Investments – Available-for-Sale is given in Note 62 on pages 308 and 309.

34.1 Government Securities

34.1 (a) Government Securities – Sri Lanka

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Treasury bills	17,827,210	8,961,530	17,758,283	8,944,009
Treasury bonds	138,993,358	172,727,815	138,993,358	172,727,815
Sri Lanka sovereign bonds	2,821,675	12,266,725	2,821,675	12,266,725
Subtotal	159,642,243	193,956,070	159,573,316	193,938,549

During 2016, the Sri Lankan operation of the Bank reclassified part of the Treasury Bonds and Sovereign Bonds portfolio amounting Rs. 34,646.318 Mn. (Face value Rs. 35,094.126 Mn.) classified as Available-for-sale (AFS) investments to the Held-to-maturity (HTM) category based on a detailed assessment of the actual intention and ability to hold to maturity. The said re-classification was effected after obtaining written approval from the Board of Directors and the Central Bank of Sri Lanka and this transfer also meets the requirement set out for reclassification under Sri Lanka Accounting Standard – LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

34.1 (b) Government Securities – Bangladesh

	GROUP		BANK
As at December 31,	2016	2015	2016	2015
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Treasury bills	–	817,545	–	817,545
Treasury bonds	–	9,001,315	–	9,001,315
Subtotal	–	9,818,860	–	9,818,860

Bangladesh operation of the Bank reclassified its total Available-for-sale (AFS) portfolio amounting to Rs. 9,556.057Mn. (Face Value Rs. 8,521.690 Mn.) to Held-to-maturity (HTM) category during the year, based on a detailed assessment and the actual intention and ability to hold to maturity.

34.1 (c) Reclassification out of Available-for-sale Investment Securities

During the year Group reclassified part of Available-for-sale investment securities to Held-to-maturity category. The Group identified financial assets that would have met the definition of Held-to-maturity (if they had not been designated as Available-for-sale) for which at the date of reclassification it had the intention and ability to hold them until maturity.

The fair value of the reclassified Available-for-sale investment securities was Rs. 44,202.375 Mn. which was considered to be the new amortised cost of the Held-to-maturity portfolio at the date of reclassification.

The table below sets out the amounts actually recognised in profit or loss and OCI in respect of the financial assets reclassified out of Available-for-sale investment securities.

	2016		2015
	Profit or loss Rs. ’000	OCI Rs. ’000	Profit or loss Rs. ’000	OCI Rs. ’000
Available-for-sale investment securities reclassified to Held-to-maturity
Interest income	2,830,744	–	–	–
Net impairment loss on financial assets	–	–	–	–
Net change in fair value	–	–	–	–
Amount transferred from AFS Reserve to profit of loss	–	243,331	–	–
Total	2,830,744	243,331	–	–

The table below sets out the amounts that would have been recognised, if the reclassification had not been made.

	2016		2015
	Profit or loss Rs. ’000	OCI Rs. ’000	Profit or loss Rs. ’000	OCI Rs. ’000
Available-for-sale investment securities reclassified to Held-to-maturity
Interest income	2,830,744	–	–	–
Net impairment loss on financial assets	–	–	–	–
Net change in fair value	–	(844,209)	–	–
Total	2,830,744	(844,209)

The Effective Interest Rates on reclassified Available-for-sale investment securities that were held as at the Reporting date ranged from 5.25% to 10.74%, with expected recoverable cash flows of Rs. 65,838.057 Mn.

34.2 (a) Equity Securities – As at December 31, 2016

	GROUP				BANK
	No. of Shares	Market Price	Market Value	Cost of Investment	No. of Shares	Market Price	Market Value	Cost of Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Sector/Type of Securities
Quoted Shares:
Bank, Finance and Insurance
DFCC Bank PLC	3,496	122.50	428	155	3,496	122.50	428	155
Hatton National Bank PLC	11,950	225.00	2,689	315	11,950	225.00	2,689	315
Nations Trust Bank PLC	1,333	80.90	108	22	1,333	80.90	108	22
National Development Bank PLC	5,424	156.00	846	215	5,424	156.00	846	215
Sampath Bank PLC	3,914	260.40	1,019	72	3,914	260.40	1,019	72
Seylan Bank PLC	1,015	90.00	91	24	1,015	90.00	91	24
VISA Inc.	19,424	US $ 78.02	226,940	–	19,424	US $ 78.02	226,940	–
Subtotal			232,121	803			232,121	803
Manufacturing
Alumex PLC	714,200	20.20	14,427	9,999	714,200	20.20	14,427	9,999
Subtotal			14,427	9,999			14,427	9,999
Total			246,548	10,802			246,548	10,802

34.2 (b) Equity Securities – As at December 31, 2016

	GROUP				BANK
	No. of Shares	Market Price	Market Value	Cost of Investment	No. of Shares	Market Price	Market Value	Cost of Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Sector/Type of Securities
Unquoted Shares:
Bank, Finance and Insurance
Central Depository of Bangladesh Ltd.	3,427,083	BDT 2.75	17,953	17,953	3,427,083	BDT 2.75	17,953	17,953
Credit Information Bureau of Sri Lanka	5,637	100.00	564	564	4,400	100.00	440	440
Fitch Ratings Lanka Ltd.	62,500	10.00	625	625	62,500	10.00	625	625
LankaClear (Pvt) Ltd.	1,000,000	10.00	10,000	10,000	1,000,000	10.00	10,000	10,000
Lanka Financial Services Bureau Ltd.	225,000	10.00	2,250	2,250	225,000	10.00	2,250	2,250
Lanka Ratings Agency Ltd.	689,590	12.50	8,620	8,620	689,590	12.50	8,620	8,620
Society for Worldwide Interbank Financial Telecommunication (SWIFT)	47	EUR 978.01	7,259	7,259	47	EUR 978.01	7,259	7,259
Total			47,271	47,271			47,147	47,147

34.2 (c) Sector/Industry Composition of the Equity Securities – As at December 31, 2016

	GROUP		Bank
	Market Value	Cost of Investment	Market Value	Cost of Investment
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Sector/Industry
Bank, Finance and Insurance	279,392	48,074	279,268	47,950
Manufacturing	14,427	9,999	14,427	9,999
Total	293,819	58,073	293,695	57,949

34.3 (a) Equity Securities – As at December 31, 2015

	GROUP				BANK
	No. of Shares	Market Price	Market Value	Cost of Investment	No. of Shares	Market Price	Market Value	Cost of Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Sector/Type of Securities
Quoted Shares:
Bank, Finance and Insurance
DFCC Bank PLC	3,496	168.10	588	155	3,496	168.10	588	155
Hatton National Bank PLC	11,760	210.60	2,477	315	11,760	210.60	2,477	315
Nations Trust Bank PLC	1,333	86.30	115	22	1,333	86.30	115	22
National Development Bank PLC	5,424	194.10	1,053	215	5,424	194.10	1,053	215
Sampath Bank PLC	3,811	248.00	945	72	3,811	248.00	945	72
Seylan Bank PLC	1,015	95.00	96	24	1,015	95.00	96	24
VISA Inc.	19,424	US $ 77.55	217,138	–	19,424	US $ 77.55	217,138	–
Subtotal			222,412	803			222,412	803
Manufacturing
Alumex PLC	714,200	17.40	12,427	9,999	714,200	17.40	12,427	9,999
Subtotal			12,427	9,999			12,427	9,999
Total			234,839	10,802			234,839	10,802

34.3 (b) Equity Securities – As at December 31, 2015

	GROUP				BANK
	No. of Shares	Market Price	Market Value	Cost of Investment	No. of Shares	Market Price	Market Value	Cost of Investment
		Rs.	Rs. ’000	Rs. ’000		Rs.	Rs. ’000	Rs. ’000
Sector/Type of Securities
Unquoted Shares:
Bank, Finance and Insurance
Central Depository of Bangladesh Ltd.	3,427,083	BDT 2.75	17,293	17,293	3,427,083	BDT 2.75	17,293	17,293
Credit Information Bureau of Sri Lanka	5,637	100.00	564	564	4,400	100.00	440	440
Fitch Ratings Lanka Ltd.	62,500	10.00	625	625	62,500	10.00	625	625
LankaClear (Pvt) Ltd.	1,000,000	10.00	10,000	10,000	1,000,000	10.00	10,000	10,000
Lanka Financial Services Bureau Ltd.	225,000	10.00	2,250	2,250	225,000	10.00	2,250	2,250
Lanka Ratings Agency Ltd.	689,590	12.50	8,620	8,620	689,590	12.50	8,620	8,620
Society for Worldwide Interbank Financial Telecommunication (SWIFT)	47	EUR 912.77	7,259	7,259	47	EUR 912.77	7,259	7,259
Total			46,611	46,611			46,487	46,487

34.3 (c) Sector/Industry Composition of the Equity Securities – As at December 31, 2015

	GROUP		Bank
	Market Value	Cost of Investment	Market Value	Cost of Investment
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Sector/Industry
Bank, Finance and Insurance	269,023	47,414	268,899	47,290
Manufacturing	12,427	9,999	12,427	9,999
Total	281,450	57,413	281,326	57,289

34.4 Investment in Unit Trust – As at December 31, 2016

	GROUP		Bank
	Market Value	Cost of Investment	Market Value	Cost of Investment
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Sector/Industry
Bank, Finance and Insurance
Capital Alliance Investment Ltd.	156,460	153,849	156,460	153,849
Total	156,460	153,849	156,460	153,849

34.5 Investment in Unit Trust – As at December 31, 2015

	GROUP		Bank
	Market Value	Cost of Investment	Market Value	Cost of Investment
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Sector/Industry
Bank, Finance and Insurance
Capital Alliance Investment Ltd.	205,554	201,402	205,554	201,402
Total	205,554	201,402	205,554	201,402