PLC. Swarnamahal Financial Services PLC Annual Report 2013/14

Transcription

1 PLC Swarnamahal Financial Services PLC Annual Report 2013/14

2 Contents Financial Highlights Board of Directors Senior Management Team Risk Management Corporate Governance Annual Report of the Board of Directors on the Affairs of the Company Directors Statement on Internal Control Statement of Directors Responsibilities in Relation to Financial Statements Chief Executive Officer s and Senior Finance Manager s Statement of Responsibility Board Audit Committee Report Board Integrated Risk Management Committee Report Board Remuneration Committee Report Independent Auditors Report Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flow Significant Accounting Policies Notes to the Financial Statements Eight Years at a Glance Share Information Our Network Notice of Meeting Form of Proxy About Us Swarnamahal Financial Services PLC is a Public Limited Liability Company incorporated in Sri Lanka on 14 th January 2004, under the Companies Act No.17 of 1982, and re-registered on 16 th September 2008 under the Companies Act No.7 of The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No.42 of 2011 and listed on the Colombo Stock Exchange. Vision To be the Premier Financial Services Provider in the LFC market. Mission To create superior long - term value to our shareholders, customers and employees above the industry standard. Values Highest standards of ethics and integrity Always do the right thing and keep commitments. Engage others to build trust and encourage strong communication Listen and share as a team Respect Respect all through trust, courtesy and open communication Innovation and continuous improvements Anticipate customer needs and work to exceed their expectations Service Excellence Commitment to achieve the highest standard of services quality with personalized services. Learning focused Search new knowledge for innovations.

3 Financial Highlights 2013/ /13 Financial Performance for the year (Rs. Mn) Gross Income 216 1,340 Net Profit before Tax (PBT) (1,228) 220 Income Tax Expense Net Profit after Tax (PAT) (1,245) 122 Financial Position at the year end (Rs. Mn) Total Assets 4,494 6,103 Pawning Advances 2,261 4,610 Other loans and advances 1, Deposits 5,133 5,400 Shareholders Funds (805) 432 Information per Ordinary Share (Rs.) Earnings Net Asset Value Key Indicators Return on Average Shareholders Funds (%) Return on Average Assets(%) Cost to Income Ratio (%) Capital Adequacy Ratios Core Capital Ratio-Tier I (%) Total Risk weighted Capital Ratio -Tier II (%) Statutory Ratios Shareholders Funds to Deposits (%) Liquid Assets Ratio (%)

4 Board of Directors 1. Mr. J.H. Edirisinghe - Chairman Managing Director of EAP Group of Companies. He counts over 25 years of extensive experience in the fields of Gold, Jewellery, Finance, Electronic Media and Management. 2. Mrs. A.D. Edirisinghe - Executive Director Director of EAP Group of Companies, she counts over 20 years of experience in the fields of Management and Finance. 3. Mr. N.P. Edirisinghe - Executive Director Director of EAP Group of Companies, he has an expert knowledge in Gold and other precious metals and stones and counts over 20 years of extensive experience in the fields of Gold, Information Technology, Finance and Management. 4. Mr. A.S. Edirisinghe - Executive Director Director of EAP Group of Companies, he is a Finalist of the Chartered Institute of Management Accountants (UK) and a Member of the Film Association. He counts over 20 years of experience in the fields of Film Industry, Gold, Information Technology and Finance. 5. Mr. S. Kariyawasam - Non- Executive Director Executive Director/CEO of EAP Holdings Limited and he holds Directorships with Swarna Mahal Jewellers (Pvt.) Ltd, EAP Broadcasting Company Ltd, EAP Films & Theaters (Pvt) Ltd and Swarna Solutions Limited. He counts over 32 years of experience in the Banking and Financial sector and holds the Bachelor of Arts Degree, University of Ceylon, Peradeniya, LLB Degree, Open University of Sri Lanka, Post Graduate Diploma in Management, University of Sri Jayawardanapura. He is a member of Association of Bankers of Sri Lanka (A.I.B.) and FBA (Sri Lanka) Professional Banker s Association of Sri Lanka. He is a professional banker, primarily served at People s Bank and retired as the Deputy General Manager-Branch Operations and was the CEO/General Manager-CFL-TAFE Sri Lanka from May 2007 to May Mr. S.D.Jayawardhana - Non - Executive Director Director Finance of EAP Holdings Limited and he holds directorships with Swarna Mahal Jewellers (Pvt.) Ltd, EAP Broadcasting Company Ltd, EAP Films & Theaters (Pvt) Ltd and Swarna Solutions Limited. He counts over 25 years of experience in finance & management (12 years overseas) in the fields of in manufacturing, constructions, trading and finance. He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka (ACA) and a Fellow Member of the Society of Certified Management Accountants of Sri Lanka (FSCMA). He has worked as a Management Consultant ( ), Finance Director / Head Finance to Hemas FMCG ( ), Rasasi Perfume Industry LLC, UAE ( ), The Blantyre Netting Co. Ltd. Malawi ( ) & CDE Group ( ) and trained at KPMG ( ). 7. Mr. B.G. Wimalarathna Banda - Independent Non-Executive Director He counts over 37 years of experience in the banking field and holds the Bachelor of Science (Business Administration) Sp. Degree, Vidyodaya University of Sri Lanka, Master of Arts (Buddhist Studies), University of Kelaniya and Diploma in Credit Management. He is an associate of the Institute of Bankers of Sri Lanka and a Fellow of the Institute of Credit Management of Sri Lanka. He is a professional banker, primarily served at People s Bank and retired as the Assistant General Manager- Operation Coordinator- Core Banking Project and was the Operation Manager from 2005 to May 2007, at PABC Bank. He was the Advisor-Banking from May 2007 to November 2012, at National Savings Bank. 8. Mr. S.M. Ganegoda - Non- Executive Director He is the Chief Executive Officer of ETI Finance Limited and was the Director/Chief Executive Officer of the Company from January 2009 to September He counts over 15 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya. He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Institute of Certified Management Accountants of Sri Lanka. 2

5 Senior Management Team 1. Mr. Sanjaya Fernando Chief Executive Officer He counts over 09 years of experience in the field of Banking of which over 5 years in UK banking sector. He holds a MBA from the University of Wales Institute, Cardiff, a Post Graduate Diploma in Business Management, from London School of Commerce, London and a Diploma in Information Technology from Australian College for Business and Technology. 2. Mr. George Samantha Senior Manager Corporate Relations He counts over 10 years of experience in the fields of Banking and Finance and holds the B.Sc Marketing Management (Special) Hons. Degree, from the University of Sri Jayawardenapura. He is a Member of the Chartered Institute of Marketing (MCIM) and Sri Lanka Institute of Marketing (MSLIM). 3. Mr. Dhanuka Perera Senior Manager - Pawning & Gold Sales 4. Mr. R.M.G. Ratnayake Senior Manager Finance He counts over 10 years of experience in Financial Sector and holds the Degree of B.Sc. Accountancy & Financial Management (Special), from the University of Sri Jayawardenapura. He holds a Diploma in Treasury Management, Institute of Bankers of Sri Lanka. 5. Mr. Newton Fernando Manager Credit He counts over 15 years of experience in the field of Credit and holds the B.Sc Business Administration (Special) Degree from the University of Sri Jayawardenapura. 6. Mrs. Subhani Edirisinghe Manager Kollupitiya Branch She counts over 13 years of experience in the field of deposit mobilization. She holds the B.Sc Business Administration (Marketing Special) Degree from the University of Sri Jayawardenapura. He counts over 13 years of experience in the fields of Pawning and Gold Sales and holds a Diploma in Business Management. 3

6 Risk Management Overview Risk is a possibility that the outcome of an action or event could either result in a direct loss of earnings and/or capital or create constraints on the Company s ability to meet its business objectives. Such constraints pose a risk as these could hinder a company s ability to conduct its ongoing business or to take benefit of opportunities to enhance its business. Our Risk Management policies and procedures are designed to analyze and address all types of risks, set appropriate risk limits, take apt measures on continuous basis in line with the evolving business requirements and regulatory guidelines to ensure risks are within the tolerance levels. Our risk management strategy is based on identification, measurement, monitoring and managing risks of the Company to ensure that; a) the individuals who take or manage risks clearly understand them. b) the organization s risk exposure is within the limits established by Board of Directors. c) risk taking decisions are in line with the business strategies and objectives set by the Board. d) risk taking decisions are explicit and clear. Risk Governance and Integrated Risk Management Framework The Board of Directors has the authority to determine the overall risk management framework for the Company and has the responsibility to oversee the effective implementation of risk management strategies. Accordingly, the Board approves the risk management policies and formulates goals and limits for risk appetite and strategy. The Board has established the following committees to effectively manage all types of risks faced by the Company. Integrated Risk Management Committee The Board Integrated Risk Management Committee (BIRMC) is responsible to provide directions on the risk management process and formulations of policies and procedures for the ratification by the Board of Directors and the implementation of such policies and procedures and ensuring that all operations are within the guidelines and policies set by the Board. The established policies, procedures and decision making process are integrated into the daily operations of SFS and the internal auditors conducts independent and regular inspections in order to ensure the effectiveness of the risk management strategies. More details are given in the BIRMC Report in page 19. Board Audit Committee The Committee monitors the effectiveness of Internal Audit Function by reviewing and examining the adequacy, efficiency, effectiveness of the system of internal controls and procedures that are in place to mitigate risks in financial reporting. It also reviews the accounting policies, procedures, financial reporting and compliance with other regulatory requirements. More details are given in the Board Audit Committee report in pages 17 to 18. Executive Credit Committee The Committee evaluates the Credit portfolio of the Company and directs appropriate actions to control and mitigate the Credit Risk. The Committee approves Credit Facilities which are above delegated authority levels of CEO. The Committee also counter recommends credit facilities recommended by the CEO for the approval of the Board as per the defined delegated levels of authority of the Company. Key Risks and its Mitigation Strategies Credit risk Credit risk is the likelihood that a debtor or financial instrument issuer is unwilling or unable to pay interest and/ or repay the principal according to the terms specified in a credit agreement resulting in financial loss to the Company. Credit risk means that payments of loan installments may be delayed or ultimately not paid at all, which can in turn cause cash flow problems and affect the company s liquidity. The objective of credit risk management is to minimize the risk and maximize Company s risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. 4

7 Credit Risk Mitigation Credit Origination The Company has established a sound credit evaluation process for approving credit in a safe and sound manner. The criteria laid down sets out the eligibility, quantum, types, terms and conditions for the granting of credit. Credit process The Credit Committee reviews the credit evaluation process periodically to avoid weaknesses in granting of credit and to ensure an effective monitoring process. Exposure Ceilings: The Credit Committee has clearly defined exposure limits for each category of customers and strictly adheres to the limits approved by the Board. The Credit exposure limit for Gold Loans was reduced from 75% to 50% with a view of mitigating the risk of declining gold prices. Delegation of Authority During the year, the delegation of authority structure of the Company was reviewed by the Board of Directors and these authority levels have been properly communicated to the relevant personnel in the senior management and the credit committee. The lending authority assigned to officers is commensurate with their experience, ability and personal character. Credit Manual and Policy The Credit Manual and the Credit Policy framework of the Company were reviewed and implemented by the Board. Our risk mitigation strategy is to strictly adhere to the approved credit manual and credit policy of the Company. Credit Administration A sound credit administration function is in place to maintain and ensure that the credit portfolio is properly maintained. This includes keeping the credit files up to date, obtaining current financial information, sending out notices etc. Asset and Liability Committee The Assets and Liability Committee (ALCO) is headed by the CEO and comprises of selected members of the senior management of the key business units. The committee is set up to analyze, review and mitigate the asset-liability mismatch risk. Asset-liability mismatch risk arises due to a mismatch in the maturity pattern of assets and liabilities of the Company. ALCO is responsible for managing the lending and the borrowing rates, statement of financial position items including assets and liabilities, capital structure, business operations and liquidity. Internal Controls The Internal Auditors conduct ongoing assessment of the credit risk management process. All facilities granted are subjected to individual risk review at least once a month. The results of such reviews were properly documented and reported directly to Board Audit Committee with recommendations to take corrective actions. The purpose of such reviews is to assess the credit administration process, the accuracy of credit rating including adequacy of provisions for losses and overall quality of credit portfolio. Liquidity Risk Liquidity risk is the potential for loss to the Company arising from either its inability to meet its obligations as they fall due or to fund increases in assets without incurring unacceptable costs or losses (funding liquidity risk). Liquidity risk management strategy involves not only analyzing the Company s on and off-financial positions to forecast future cash flows, but also how the funding requirement would be met. The latter involves identifying the funding market the Company can have access to, understanding the nature of those markets, evaluating institution s current and future use of such markets. Risk Mitigations Strategies Composition of Assets and Liabilities The strategy is outlined concentrating the mix of assets and liabilities to maintain the required liquid assets. Over 67% of the interest earning assets comprised of Gold Loan advances with short maturity periods enable the Company to maintain robust liquidity positions at all times. Diversification and Stability of Liabilities The deposits portfolio of the Company is diversified geographically and among large number of customers, with no dependence on one or few customers to ensure that there will be no significant risk in a sudden withdrawal of funds. The Board of Directors and the senior management provide guidance relating to funding sources and ensure that the Company has diversified sources of funding for day-to-day liquidity requirements. Interest Rate Risk Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to the vulnerability of 5

8 Company s financial condition to the movement in interest rates. Changes in interest rates affect earnings, value of assets, liabilities off-financial position items and cash flows. Hence, the objective of interest rate risk management is to maintain earnings, improve the ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and risk return trade-off. Operational Risk The Company always lives with the risks arising out of human error, financial fraud and natural disasters. Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events. Risk Mitigation Key aspects of our operational risk management lie in the Company s ability to assess its process for vulnerability and establish controls to safeguard its assets. A well implemented sound internal control mechanism and internal audit systems of the Company are used as the primary means of Operational Risk Mitigation. Further, we extended our operational risk mitigation strategies to obtain comprehensive insurance covers for our all Branches and Pawning Centres on 24 hours basis. The Company is committed to secure its information by developing, implementing and monitoring comprehensive system procedures to ensure the integrity, confidentiality and availability of such information. Strategic Risk Strategic risk is the possibility of being unable to implement appropriate business plans, strategies, or take proper decisions or allocate adequate resources and its inability to adapt to changes in its business environment. The Risk Management unit of the Company reviews the emerging trends in risk and involves in the implementation of the company s strategic plan. Compliance Risk Compliance Risk is the risk of legal or regulatory sanctions, material financial loss or damage to reputation that an institution may suffer as a result of failure to comply with laws, regulations, rules, self-regulatory organization standards and codes of conduct applicable to its activities. In order to mitigate the Compliance Risk, a compliance officer has been appointed to maintain a better relationship with such regulatory authorities. The compliance officer maintains a pre-planned schedule of compliance activities to ensure the compliance with regulatory authorities is in a timely manner. Legal Risk Legal Risk is the risk that the Company will conduct activities or carry out transactions in which they are inadequately covered or are left exposed to potential litigation. The legal risk management framework provides an outline of the important issues that Directors and/or Senior Management of the Company may need to consider in ensuring due diligence in the operations of the Company as well as an overview of liability of exposure against this risk. Reputational Risk Reputational Risk is the potential for negative publicity regarding an institution s business practices, whether true or not, that will cause a decline in the customer base, costly litigation, or revenue reductions. This risk may result from an institution s failure to effectively manage any or all of the other risk types. 6

9 Corporate Governance The Board of Directors of the Company places the highest emphasis on good governance in every aspect of the Company s operations. The necessary policies and procedures have been formulated by the Board in order to implement an adequate internal control mechanism in a manner that would enhance stakeholders confidence. Accordingly, the Board is assisted by 04 Board Sub Committees to ensure that the business is carried on in compliance with the Corporate Governance Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka including amendments thereto and the Listing Rules of the Colombo Stock Exchange relating to the Corporate Governance. Corporate Governance Framework Board of Directors Board Audit Committee Board Integrated Risk Management Committee Board Credit Committe Board Remuneration Committee Minimum disclosures in terms of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka (CBSL). CBSL SECTION 10. DISCLOSURES DESCRIPTION COMPLIANCE STATUS 10 (1) The Board shall ensure that: a). Annual Audited Financial Statements and periodical Financial Statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that The Annual and Interim Financial Statements have been prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable Accounting Standards. b) Such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English. Further, arrangements are in place to publish financial statements in all three languages in the national newspapers of Sinhala, English and Tamil in the ensuing Financial Year. 10 (2) (a) A statement to the effect that the Annual Audited Financial Statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures. Complied with A statement to this effect has been included in the Statement of Directors Responsibility in page 15. (b) A report by the Board on the finance company s internal control mechanism that confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. Complied with This report is contained in the Directors statement on Internal Control over Financial Reporting in page 14. 7

10 CBSL SECTION DESCRIPTION COMPLIANCE STATUS 10 2 (c) The External Auditor s certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after 31 st March The Board will ensure to comply with these requirements in the ensuing financial year. (d) Details of Directors, including names, transactions with the Finance company. Complied with This has been included in the Annual Report of the Board of Directors on the affairs of the Company in pages 11 to 13 (e) Fees and remuneration paid by the finance company to the Directors in aggregate in the annual reports published after January 1, Complied with The fees & remuneration paid to the Directors has been disclosed in Note No. 11 to the Financial Statements as given in page 43. (f) Total net accommodation as defined in 9(4) outstanding in respect of each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage of the finance Company s capital funds. Complied with The total net accommodations granted to related parties are disclosed in Note No 34.4 to the Financial Statements in page 58 & 11. (g) The aggregate values of remuneration paid by the finance company to its key management personnel and the aggregate values of the transactions of the finance company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted, deposits or investment made in the finance Company. Complied with Disclosed in Note No to the Financial Statements in page 56. (h) (i) A report setting out details of compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliance. A statement of the regulatory and supervisory concerns on lapses in the finance company s risk management, or non-compliance with the Act, and the rules and directions that have been communicated by the Director of Supervision of Non Bank Financial Institutions, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the finance company to address such concerns. Complied with Status of compliance with prudential requirements, regulations and laws are set out in the Annual Report of the Board of Directors on the Affairs of the Company in page 13. There were a few supervisory concerns reported. The Company is now in a process of rectifying such concerns in line with financial consolidation process of the Central Bank of Sri Lanka. The details of such concerns are given in the Indipendent Auditors Report in page 22. (j) The External Auditor s certification of the compliance with the Act and rules and direction issued by the monetary board in the annual corporate governance report published after January 1, An arrangement is in place to comply with this requirement in the ensuing Financial Year. 8

11 Compliance with the section 7.10 of continuing listing requirements of the Colombo Stock Exchange. CSE SECTION DESCRIPTION COMPLIANCE STATUS Executive Directors (a) The Board of Directors of a Listed Entity shall include at least, two Non-Executive Directors, or such number of Non-Executive Directors equivalent to one third of the total number of directors whichever is higher. Complied with The Board comprised with 8 Directors of whom 5 Directors are Non-Executive Independent Directors (a) Where the constitution of the Board of Directors includes only two Non-Executive Directors in terms of Rule a above, both such Non-Executive Directors shall be independent. In all other instances two or 1/3 of Non- Executive Directors appointed to the Board, whichever is higher shall be Independent. The Board will ensure to comply with these requirements in the ensuing Financial Year (b) The Board shall require each Non-Executive Director to submit a signed and dated declaration annually of his/ her independence or non independence against the specified criteria. Complied with The Board has determined the independence of each Non- Executive Director based on the declarations submitted by them and will continue to evaluate them on annual basis Disclosures relating to Directors (a) The Board shall make a determination annually as to the independence or non-independence of each Non- Executive Director based on such declaration and other information available to the board and shall set out in the annual report the names of directors determined to be independent. Complied with (c) The Board shall publish in its Annual Report a brief resume of each director on its board which includes information on the nature of his/her expertise in relevant functional areas. Complied with The brief profile of each Director has been set out in page (d) Upon appointment of a new Director to its Board, the Entity shall forthwith provide to the Exchange a brief resume of such director for dissemination to the public. Complied with Remuneration Committee (a) The Remuneration Committee shall comprise of a minimum of two Independent Non-Executive Directors (in instances where an Entity has only two Directors on its Board) or Non-Executive Directors, a majority of whom shall be independent, whichever shall be higher. The Board will ensure to comply with these requirements in the ensuing Financial Year (b) The Remuneration Committee shall recommend the remuneration payable to the executive directors and Chief Executive Officer of the Listed Entity and/or equivalent position thereof, to the board of the Listed Entity which will make the final determination upon consideration of such recommendations. The Board remuneration committee was formed inorder to ensure formal and transparent procedures in developing an effective remuneration policy for all Executive Directors including the CEO and the Senior Management personnel. No Director was involved in deciding his or her remuneration in order to avoid potential conflict of interest. However, no meetings were held during the Financial Year and the Board will ensure to hold committee meetings during the ensuing Financial Year. 9

12 (c) The Annual Report should set out the names of directors comprising the remuneration committee, contain a statement of the remuneration policy and set out the aggregate remuneration paid to Executive and Non- Executive Directors. Complied with The names of directors of remuneration committee, Statement of remuneration policy and the aggregate of remuneration paid to the Executive and Non- Executive Directors are given in page Audit Committee (a) The Audit Committee shall comprise of a minimum of two Independent Non-Executive Directors (in Instances where an Entity has only two directors on its board) or Non-Executive Directors a majority of whom shall be independent, whichever shall be higher (b) Functions of the Committee shall include, (i) Overseeing of the preparation, presentation and adequacy of disclosures in the financial statements of a Listed Entity, in accordance with Sri Lanka Accounting Standards. (ii) (iii) Overseeing of the Entity s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements. Overseeing the processes to ensure that the Entity s internal controls and risk management are adequate, to meet the requirements of the Sri Lanka Auditing Standards. (iv) Assessment of the independence and performance of the Entity s external auditors. (v) To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remuneration and terms of engagement of the External Auditors (c) The names of the Directors comprising the Audit Committee should be disclosed in the annual report. The Board will ensure to comply with these requirements in the ensuing Financial Year. Complied with Functions of the Board Audit Committee are given in the Board Audit Committee Report in pages 17 to 18. Complied with Names of the Directors of the Board Audit Committee are given in the Board Audit Committee Report in page 17. DIRECTORS ATTENDANCE AT MEETINGS DURING THE FINANCIAL YEAR 2013/14 NAMES CLASSIFICATION OF DIRECTORSHIP BOARD AUDIT COMMITTEE INTEGRATED RISK MANAGEMENT COMMITTEE REMUNERATION COMMITTEE CREDIT COMMITTEE No. of Meetings held Mr. J.H. Edirisinghe* Non- Executive 11/12 N/A N/A N/A N/A Mr. N.P. Edirisinghe Executive 12/12 N/A N/A N/A N/A Mrs. A.D. Edirisinghe Executive 12/12 N/A N/A N/A N/A Mr. A.S. Edirisinghe Executive 11/12 N/A N/A N/A N/A Mr. S. Kariyawasam Non- Executive 9/12 0/1 0/4 0 0 Mr.S.D.Jayawardana Non- Executive 8/12 1/1 2/4 0 0 Mr. B.G. Wimalaratna Banda Independent-Non- Executive 12/12 1/1 4/4 0 0 Mr. S.M. Ganegoda Non-Executive 11/12 N/A 3/4 N/A 0 * Mr. J.H. Edirisinghe is the Chairman of the Board 10

13 Annual Report of the Board of Directors on the Affairs of the Company General The Directors have pleasure in presenting the Annual Report together with the Audited Financial Statements of the Company for the financial year ended 31 st March Swarnamahal Financial Services PLC ( SFS ) is a Public Limited Liability Company, incorporated on 14 th January 2004 in Colombo, under the Companies Act No. 17 of 1982 and re-registered under the Companies Act No.7 of 2007, on 16 th September The company is registered as a Finance Company under the Finance Business Act No. 42 of 2011, the Finance Leasing Act No. 56 of 2000 and has quoted its shares on the Colombo Stock Exchange since May The Annual Report together with the Audited Financial Statements was approved by the Board of Directors on 01 st September Registered Office and Business Office The registered office of the Company is situated at No. 676, Galle Road, Colombo 03 and the business office is at No.654, Galle Road, Colombo 03. Principal Activities During the Financial year 2013/14, the Company continued with Gold Loan services, Leasing, Hire Purchase, Personal Loans and mobilization of Fixed and Savings deposits as its main lines of business. There were no material changes in the nature of the principle business activities of the company. Directors Meetings The meetings of the Board of Directors were held once a month or more frequently when ever necessary. The Directors attendance at the Board Meetings is given in page 10. Directors Shareholdings The Directors interests in Ordinary Shares were as follows No Name of the Director No. of Shares held as at 31 st March st March Mr. S.M. Ganegoda 20, ,020 Stated Capital The stated capital of the company consists of 500,000,140 Ordinary Voting Shares amounting to Rs. 250,000,070/- as at 31 st March Information relating to earnings, net assets and market value per share is given in page 01 and 64. Shareholders There were 2,285 shareholders registered as at 31 st March 2014, the details are given in pages 64 to 65. Related Party Transactions In terms of the Sri Lanka Accounting Standards comprising the Sri Lanka Financial Reporting Standard (LKAS 24), Related Party Transactions, including write off balances and provisioning for doubtful receivables, have been disclosed in notes to the financial statements as given in page 58 forming the part of the Annual Report of the Board of Directors while details of the significant transactions are given below. Name of Related party Swarnamahal Jewellers (Pvt) Ltd EAP Holdings Ltd Lending/ Borrowings / Other transactions Outstanding amount as at 31st March Amount as a percentage of capital fund Term Loan 774,634,936 - Pre-paid Shared Services Directors Remuneration 26,378,565 - The aggregate sum of Directors fees and emoluments paid during the year was Rs. 10,831,238/- and is disclosed in Note No. 11 to the Financial Statements in page 43. Financial Statements Financial Statements of the Company are given in pages 23 to 61. Significant Accounting Policies The significant accounting policies adopted in preparation of the Financial Statements are given in pages 27 to 42. There have been no changes in the accounting policies adopted 11

14 by the Company during the year except as disclosed in Note No. 2.5 in page 27 to Financial Statements. Remuneration Committee Mr. S. Kariyawasam Non-Executive Director Chairman Auditor s Report The Auditor s report on the Financial Statements is given in page 22. Mr.S.D.Jayawardhana Mr. B.G. Wimalarathna Banda Non-Executive Director Independent Non-Executive Director Statement of Compliance on the Contents of the Annual Report The Audited Financial Statements included in this Annual Report have been prepared and presented with the relevant disclosures in accordance with the Sri Lanka Accounting Standards and other applicable regulatory requirements. The report of the Board Remuneration Committee is given in page 20. Integrated Risk Management Committee Mr. S. Kariyawasam Non-Executive Director Chairman Mr.S.D.Jayawardhana Non-Executive Director Corporate Governance The report on Corporate Governance is given in pages 07 to 10. Mr. B.G. Wimalarathna Banda Mr. S.M. Ganegoda Independent Non-Executive Director Non-Executive Director Internal Controls The Board has formed an effective and comprehensive system of Internal Controls covering financial reporting, compliance with rules and regulations of relevant authorities and risk management to carry on the business in an orderly manner to safeguard its assets and to ensure as far as possible the accuracy and reliability of the financial records. Internal Control mechanism of the Company is reviewed and improved on a continuous basis, based on the recommendations of the Internal Auditor and on site observations of the Central Bank of Sri Lanka and the External Auditor during their inspections and audit. Directors Statement of Internal Control The Directors report on Internal Control is given in page 14. Board Sub Committees The Board of Directors of the Company has formed the following Board Sub Committees. Audit Committee Mr.S.D.Jayawardhana Mr. S. Kariyawasam Mr. B.G. Wimalarathna Banda Non-Executive Director - Chairman Non-Executive Director Independent Non-Executive Director The report of the Board Audit Committee is given in pages 17 to 18. The report of the Board Integrated Risk Management Committee is given in pages 19. Credit Committee Mr. S. Kariyawasam Mr.S.D.Jayawardhana Mr. B.G. Wimalarathna Banda Mr. S.M. Ganegoda Directorate Non-Executive Director Chairman Non-Executive Director Independent Non-Executive Director Non-Executive Director The Board of Swarnamahal Financial Services PLC consists of 8 directors with a wide array of experience in financial & commercial sectors as at 31 st March The brief profiles of the directors are given in page 02. The names of the Directors who are on the board are given below. Executive Directors 1. Mr. N.P. Edirisinghe 2. Mrs. A.D. Edirisinghe 3. Mr. A.S. Edirisinghe Non- Executive Directors 1. Mr. J.H. Edirisinghe 2. Mr. S. Kariyawasam 3. Mr. S.D.Jayawardhana 12

15 4. Mr. B.G. Wimalarathna Banda* 5. Mr. S.M. Ganegoda * Independent Non-Executive Directors as per the Listing Rules of Colombo Stock Exchange Re-designation of Directors The Board has re-designated Mr. S.M. Ganegoda, as Non Executive Director upon receiving of his resignation from the post of Chief Executive Officer with effect from 01 st September Secretary M/s SSP Corporate Services (Pvt) Ltd engaged as the Secretary and Registrar to the Company Directors Responsibility of Financial Reporting The statement of directors responsibility for financial statements is given in page 15 and forms an integral part of the annual report of the Board of Directors. Human Resources The Company recruits the best talented people and provides equal employment opportunities with no discrimination. The Human Resources Policies of the Company includes comprehensive training and developments programs to enhance skills of new recruits and the existing staff for greater efficiency. As at 31 st March 2014, 108 employees were in the company. Report on Compliance with Prudential Requirements, Regulations and Laws The Company has complied with the regulatory and prudential and internal control requirements arising from the provisions in the statutes applicable to the Company, such as the Finance Business Act No. 42 of 2011, Directions issued by the Central Bank of Sri Lanka, Companies Act No.7 of 2007, Inland Revenue Act No. 10 of 2006, Value Added Tax Act No. 14 of 2002, Financial Transaction reporting Act No. 06 of 2006, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Listing Rules of Colombo Stock Exchange etc. except as disclosed in the Independent Auditors Report in page 22. Statutory Payments The Board of Directors of the Company is satisfied, to the best of their knowledge and belief that all statutory dues to the Government and employees have been made in full, on time. Going Concern The Company incurred a net loss of Rs.1,245,183,376/ during the Financial Year ended 31st March 2014 and as of that date the Company s total liabilities exceeded its total assets by Rs.804,817,268/-. The Board of Directors of the Company has assessed its ability to continue as a going concern and is satisfied that it has adequate resources to continue in operations into the foreseeable future and continue to adopt a going concern in preparing Financial Statements on the basis as disclosed in Note No. 38 in page 59 to the Financial Statements. Events after the reporting date There have not been any material events that occurred subsequent to the date of statement of financial position that require adjustments to the Financial Statements. Auditor Messrs KPMG, Chartered Accountants served as the auditor during the year under review. During the Financial Year 2013/14, a sum of Rs. 875,000/- (2012/13 - Rs. 1,105,360) was provided as audit and audit related fees to the Auditor, Messrs KPMG, Chartered Accountants. The Board has accepted the recommendation of the Board Audit Committee and has recommended the reappointment of Messrs KPMG, Chartered Accountants as Auditors to the Company for the Financial Year 2014/15 as they have expressed their willingness to continue in office. A resolution to re-appoint the auditors and to authorize the Directors to determine their remuneration will be proposed at the Annual General Meeting to be held 30 th September Annual General Meeting The 09 th Annual General Meeting of the Company will be held at Hotel Sapphire, No. 371, Galle Road, Colombo 06, on 30 th September 2014 at a.m. J.H. Edirisinghe Chairman SSP Corporate Services (Pvt) Ltd Company Secretaries 01 st September

16 Directors Statement on Internal Control In line with the Finance Companies (Corporate Governance) Direction No.3 of 2008, the Board of Directors presents this report on Internal Control. The Board of Directors ( Board ) is responsible for the adequacy and effectiveness of Swarnamahal Financial Services PLC s ( the Company ) system of internal controls. Such a system is designed to manage the Company s key areas of risk within an acceptable risk profile by highlighting any deviation from the limits, rather than eliminate the risk of failure to achieve the policies and business objectives of the Company. Accordingly, the system of internal controls can only provide reasonable but not absolute assurance against material misstatements of management, financial information and records or against financial losses or fraud. The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Company and this process includes enhancing the system of internal controls as and when there are changes in business environment or regulatory guidelines. The Board is in the view that the system of internal controls in place is sound and adequate to provide a reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes, and is in accordance with relevant accounting principles and regulatory requirements. The management assists the Board in the implementation of the Board s policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with respect to financial reporting include the following: Sub Board Committees were established by the Board to assist the Board in ensuring the effectiveness of Company s daily operations and that the Company s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved. The Internal Audit checks for compliance with policies and procedures and the effectiveness of the internal control systems on an ongoing basis and highlights significant findings in respect of any non-compliance. Audits are carried out on all units, Branches and Pawning Centres, the frequency of which is determined by the level of risk assessed, to provide an independent and objective report. The Annual Audit plan is reviewed and approved by the Audit Committee. Findings of the Internal Audit are submitted to the Board Audit Committee for review at their meetings. The Audit Committee reviews internal control issues identified by the Internal Audit, regulatory authorities and management, and evaluates the adequacy and effectiveness of the risk management and internal control systems. It also reviews the Internal Audit functions with particular emphasis on the scope of audits and quality of Internal Audits. The minutes of the Audit Committee meetings are tabled to the Board of the Company. Confirmation Based on the above processes, the Board confirms that the financial reporting system of the Company has been designed to provide reasonable assurance regarding the reliability of financial reporting and that the preparation of Financial Statements for external purposes has been done in accordance with Sri Lanka Accounting Standards (SLAS) and regulatory requirements of the Central Bank of Sri Lanka. For and on behalf of the Board J.H. Edirisinghe Chairman S.D. Jayawardhana Chairman - Board Audit Committee 01 st September

17 Statement of Directors Responsibilities in Relation to Financial Statements The responsibility of the Directors of the Company, in relation to the preparation and presentation of the Financial Statements of the Company in accordance with the relevant provisions of the Companies Act No. 07 of 2007, Finance Business Act No. 42 of 2011 and other statutes which are applicable in the preparation of Financial Statements are set out in the following statement. The responsibilities of the External Auditors, in relation to the Financial Statements are set out in the report of the Auditors given in page 22. In accordance with the Companies Act No. 07 of 2007, the Directors of the Company are responsible for ensuring, the Company keeps proper books of account of all the transactions and prepare Financial Statements for each financial year. The Financial Statements of the Company are comprised of the Statement of Financial Position as at 31 st March 2014, the Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flow for the year ended 31 st March 2014 and notes thereto. Accordingly, the Directors confirm that the Financial Statements of the Company give a true and fair view of the state of affairs of the Company as at 31 st March The Directors are responsible to ensure that: i The appropriate accounting policies have been selected and applied in a consistent manner and material deviations, if any, have been disclosed, ii Judgments and estimates made are reasonable and prudent and all applicable Accounting Standards have been complied with. The Directors accept responsibility to ensure that the company has adequate resources to continue in operation to justify applying the going concern basis in preparing these Financial Statements. The Financial Statements of the Company for the year ended 31 st March 2014 are prepared and presented, consistent with the underlying books of accounts, in accordance with the requirements of the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, the Companies Act No. 07 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the Listing Rules of the Colombo Stock Exchange inclusive of specific disclosures. The Directors are responsible for ensuring that the Company keeps sufficient accounting records, which disclose the financial position of the Company with reasonable accuracy and enable them to ensure that the financial statements have been prepared and presented as aforementioned. The Directors of the Company have instituted an effective and comprehensive system of Internal Control for identifying, recording, evaluating and managing the significant risks faced by the company throughout the year and it is under regular review of the Board of Directors. This comprises internal reviews, internal audit and the whole system of financial and other controls required to carry on the business of the Company in an orderly manner, safeguard its assets, prevent and detect frauds and secure as far as practicable, the accuracy and the reliability of the records. The Directors of the Company are responsible for preparing and presenting the Financial Statements and have provided the Company s External Auditor, KPMG, Chartered Accountants with every opportunity to undertake the inspections they considered appropriate and necessary. KPMG, Chartered Accountants carried out sample checks on the effectiveness of the system of internal controls as they considered appropriate and necessary in expressing their independent audit opinion on the Financial Statements and maintenance of accounting records. KPMG, Chartered Accountants has examined the Financial Statements of the Company together with all other financial records and minutes of the meetings of the Board of Directors and expressed their opinion which appears on page 22. Compliance Report The Directors of the Company confirm that to the best of their knowledge and belief, all statutory payments in relation to all relevant regulatory and statutory dues, as were due and payable by the Company as at the reporting date, have been paid or where relevant, provided for. The Directors are of the view that they have discharged their responsibilities as set out in this above statement. By order of the Board J.H. Edirisinghe Chairman 01 st September

18 Chief Executive Officer s and Senior Finance Manager s Statement of Responsibility The Financial Statements of Swarnamahal Financial Services PLC for the financial year ended 31 st March 2014 have been prepared and presented, consistent with the underlying books of accounts, in accordance with the requirements of the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, the Companies Act No.07 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the Listing Rules of the Colombo Stock Exchange. The formats used in the presentation of the Financial Statements and the disclosures are complied with the formats prescribed by the Institute of Chartered Accountants of Sri Lanka. The significant accounting policies and estimates that involved a high degree of judgment and complexity were discussed with the Company s External Auditor and the Board Audit Committee. Comparative information has been reclassified whenever necessary to comply with the current presentation and material deviations, if any, have been disclosed and explained in the notes to the Financial Statements. We confirm, to the best of our knowledge and belief, that the Financial Statements of the Company give a true and fair view of the assets, liabilities, financial position and profit of the Company, its cash flows and liquidity position. We also confirm that the Company has adequate resources to continue in operation and have applied the going concern basis in preparing Financial Statements. The Board of Directors and the Management of the Company accept responsibility for the integrity and objectivity of these Financial Statements. The estimates and judgments relating to the Financial Statements were made on a prudent and reasonable basis, in order that the Financial Statements reflect in a true and fair manner, the form and substance of transactions and that the Company s state of affairs is well presented. To ensure this, the Company has taken proper and sufficient care in installing a system of Internal Controls and accounting records, for safeguarding assets and for preventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. Our Internal Auditors have conducted periodic audits to ensure that the policies and procedures of the Company were consistently followed. However, there are inherent limitations that should be recognized in weighing the assurances provided by any system of Internal Controls and Accounting. The Company s External Auditor, Messrs KPMG, Chartered Accountants, has audited the Financial Statements of the Company and their report is given in page 22. The Board Audit Committee reviewed all the Internal Audit inspections, audit plans, the efficiency of Internal Control Systems and procedures and also reviewed the quality of the significant Accounting Policies and their adhering to the Statutory and Regulatory requirements. To ensure complete independence, the Internal and External Auditors had full and free access to the members of the Board Audit Committee to discuss any matter of substance. We further confirm that the Company has complied with all the guidelines for the audit services. The Company has also complied with all applicable laws, regulations and prudential requirements except as disclosed in the Independent Auditors Report in page 22. There are/ were no litigations or proceedings against the Company in the recent past. W.M.D.S. Fernando Chief Executive Officer R.M.G. Ratnayake Senior Manager-Finance 01 st September

19 Board Audit Committee Report The Composition The Board Audit Committee consisted of three Non- Executive Directors as detailed below. Mr. S.D. Jayawardhana Non - Executive Director - Committee Chairman Mr. S. Kariyawasam Non-Executive Director. Mr. B.G. Wimalarathna Independent Non-Executive Banda Director. The Chairman of the Committee, Mr. S.D. Jayawardhana counts over 25 years of experience in the fields of Finance & Management and is an associate Member of Chartered Accountants of Sri Lanka (ACA) and fellow member of Society of Certified Management Accountants of Sri Lanka (FSCMA). The CEO and the Senior Manager-Finance were present at all the meetings on invitation. Secretary to the Board Audit Committee SSP Corporate Services (Pvt) Ltd Meetings of the Committee The No. of meeting held and the members attendance at meetings are given in page 10. Role of the Audit Committee The Audit Committee assists the Board of Directors in fulfilling effectively its oversight responsibilities in the financial reporting process and other related affairs of the Company. The Committee has been empowered to: Analyze and review risks and examine the adequacy, efficiency, effectiveness of the system of internal controls and procedures that are in force to mitigate risks. Monitor and evaluate the External Auditor s independence, objectivity and effectiveness of the Audit Process. Meet External Auditor during the year to discuss and finalize the Audit approach, procedures, nature and the scope, including the matters relating to the company s compliance with directions, internal control over financial reporting and auditor s independence. Review the Audited Financial Statements with the External Auditors in order to monitor the integrity of the Financial Statements and its conformity with the Sri Lankan Accounting Standards, prior to submission to the Board. Review Accounting Policies, emerging accounting issues and disclosures according to LKAS/SLFRS Review the External Auditor s Management Letter together with the management response thereto. Discuss with the External Auditor regarding the issues, problems and reservations arising from the Interim and Final Audits of the Company. Ensure that a sound reporting system is in place to provide timely information to the Board of Directors, Regulatory Authorities, Management and Stakeholders. Review the performance of the Internal Audit Function, adequacy of the scope, resources and the authority of the Internal Auditors. Review internal audit programs and its results and ensure that appropriate actions are taken on the recommendations of Board Audit Committee. Ensure that the internal audit function is independent of the Company s other activities and that it is performed with impartially, proficiency and due professional care. Evaluate and discuss the major findings and observations of Internal Auditor and the management responses thereon, periodically. Financial Reporting The Committee assists the Board of Directors in discharging their responsibilities for the preparation of financial statements that indicates a true and fair view of the affairs of the Company in accordance with the Company s Accounting Records and in conformity with the Sri Lanka Accounting Standards, the Company s Act No. 07 of 2007 and the Directions issued by the Central Bank of Sri Lanka. The Committee liaised with the other Board members, reviewed the Company s annual and interim financial statements and recommended the issue of such financial statements to the shareholders. The Committee analyzed and examined the adequacy, efficiency, effectiveness of 17

20 the system of internal controls and procedures in place to ensure the reliability of information provided to the Board and other stakeholders. Internal Audit During the financial year 2013/14, E&Y, Chartered Accountants engaged as the Internal Auditor of the Company who is responsible for reviewing and reporting on the efficiency of the system of internal controls mechanism, procedures and compliance with other regulatory requirements. The weaknesses highlighted by the Internal Auditors in relation to such control procedures were critically analyzed and recommendations suggested for implementation; such implementations were followed up and reviewed. The internal audit personnel were invited to the committee discussion as and when required, for further clarification. External Audit The Committee actively monitored the implementation of the recommendations of the External Auditor. Prior to commencement of the audit of the financial year 2013/14, the Auditor s approach, procedures, nature and the scope of the Audit, including the matters relating to the company s compliance with directions were discussed and finalized. The Committee is also empowered to recommend the re-appointment and fees of the External Auditor. Accordingly, the Committee has recommended the reappointment of Messrs KPMG, Chartered Accountants as auditors to the Company for the ensuing financial year 2014/15, subject to the approval of the shareholders at the Annual General Meeting. Committee Evaluation The evaluation of the Committee was carried out by the other members of the Board in order to assess the effectiveness of the Committee and its performance, which was found to be satisfactory. S.D. Jayawardana Chairman-Board Audit Committee 01 st September

21 Board Integrated Risk Management Committee Report The Composition of the Committee is given below Mr. S. Kariyawasam Non-Executive Director - Chairman Mr. S.D. Jayawardhana Non-Executive Director Mr. B.G. Wimalarathna Independent Non-Executive Banda Director Mr. S.M. Ganegoda Non-Executive Director Management Representatives who attended the meetings were, Mr. Sanjaya Fernando Chief Executive Officer Taking appropriate actions reported against officers responsible for any failure in risk management to improve the overall effectiveness of risk management at SFS. Taking prompt corrective actions to mitigate the effects of specific risks in the event such risks are beyond the prudent levels on the basis of the company s policies, procedures and regulatory criteria. Compliance with laws, regulations, regulatory guidelines, internal controls and approved policies in all areas of business operations. Reviewing and updating the business continuity plan, for approval of the Board. Mr. Dhanuka Tharanga Mr. R.M.G. Ratnayake Mr. George Samantha Mr. Newton Fernando Ms.Nishani Nissanka Mr. R.Harendran Senior Manager- Pawning & Gold Sales Senior Manager-Finance Senior Manager-Corporate Relations Manager-Credit Group Compliance Officer Group Risk Officer Review specific quantitative and qualitative risk limits for all management level committees viz Credit, Asset Liability and report any risk indicators periodically to the Board. The Committee shall meet at least quarterly The Committee shall submit a risk management report to the first Board Meeting which will be held soon after each BIRMC meeting, seeking the board s view, concurrence and /or specific directions. Brief profiles of the Directors and management representatives of the Company are given in pages 02 to 03 other than Group Compliance Officer and Group Risk Officer. Terms of Reference The committee gives directions to ensure that the Company fulfills its statutory, fiduciary and regulatory responsibilities on risk management. The main functions of the committee include Assessing all risks, including credit, market, liquidity, operational and strategic risks on a regular basis using appropriate risk indicators and MIS reports. Meetings During the Financial Year 2013/14, four meetings were held and the proceedings of the committee meetings were recorded and circulated to the Board of Directors for information and advice. The members attendance at the committee meeting is given on page 10. S. Kariyawasam Chairman - Board Integrated Risk Management Committee 01 st September 2014 Ensuring the risks of the Company is within the prudent levels decided by the committee, based on the Company s risk appetite and the regulatory and supervisory requirements. 19

22 Board Remuneration Committee Report The Composition The Composition of the Board Remuneration Committee is given below, Mr. S. Kariyawasam Non-Executive Director Chairman Mr. S.D. Jayawardhana Non-Executive Director Mr. B.G. Wimalarathna Independent Non-Executive Banda Director The Functions of the Committee Determining and formulating a set of remuneration policies and criteria pertaining to the compensation and benefits of the Executive Directors including the Chief Executive Officer while ensuring that no director is involved in setting his/her own remuneration and salaries and the Committee also determines the salaries and benefits of the corporate management and senior management. Recommending the objectives and targets to be set for Chief Executive Officer and key managerial personnel and evaluating the performance of the Chief Executive Officer and key managerial personnel against the established goals and objectives in order to suggest suitable recommendations to the Board. Implementing a framework for regular performance appraisal of the staff under various performance parameters in order to obtain feedback of their work performance. Making independent judgments on the level of payments to the individuals according to their performance. Policy The set of remuneration policies of the Company is formulated to ensure that the Executive Directors including the Chief Executive Officer and senior management are adequately rewarded for their individual contribution to the success of the Company. The primary objective of the remuneration policy aims to ensure that the remuneration levels are sufficient to attract, motivate, and retain talent with the appropriate professional, managerial and operational expertise necessary to achieve the objectives of the Company to enhance the long term value for all stakeholders of the Company. Committee Meetings The Committee meets when necessary and makes recommendation on bonuses, annual increments and performance incentives to ensure that all level of employees are sufficiently rewarded on their performance and commitments. The Chief Executive Officer who is responsible for the overall management of the Company attends meetings by invitation. The total remuneration paid to the Directors during the period under review is set out in the Note No. 11 of page 43. S. Kariyawasam Chairman - Board Remuneration Committee 01 st September

23 Financial Report Independent Auditor s Report Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flow Significant Accounting Policies Notes to the Financial Statements Eight Years at a Glance Share Information Our Network Notice of Meeting Form of Proxy... 69

24 Independent Auditors Report TO THE SHAREHOLDERS OF SWARNAMAHAL FINAN- CIAL SERVICES PLC Report on the Financial Statements We have audited the accompanying financial statements of Swarnamahal Financial Services PLC (The Company ), which comprise the statement of financial position as at 31 March 2014, and the statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes, set out on pages 23 to 61. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that out audit provides a reasonable basis for our opinion Opinion In our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31 March, 2014 and the financial statements give a true and fair view of the financial position of the Company as at 31 March 2014, and of its financial performance and its cash flow for the year then ended in accordance with Sri Lanka Accounting Standards. Without qualifying our opinion, we draw attention to Note 38 of the financial statements which describes that the Company incurred a net loss of Rs 1,245,183,376/-. During the year ended 31 March 2014 and as of that date has a net liability position of Rs 804,817,268/-. Due to the above it does not meet the regulatory requirements for capital. These conditions may cast significant doubt on the Company s ability to continue as a going concern and therefore its abilities to realise assets and discharge liabilities in the normal course of business. However, as disclosed in the said note the Company is under the Central Bank of Sri Lanka s Financial Consolidation Restructuring program and the directors plan to divest/merge it with an adequate capital injection to regain compliance and therefore continue as a going concern. Report on Other Legal and Regulatory Requirements These financial statements also comply with the requirements of Section 151(2) of the Companies Act No. 07 of However, the Company s net assets are less than half of its stated capital and face a serious loss of capital situation in terms of Section 220 of the same Act for which the actions prescribed by the said Act are pending. Other matters The Company also does not fulfil the requirements of the Directions issued by the Central Bank of Sri Lanka to finance companies for risk weighted capital adequacy ratio (Note 6.6) and Single borrower Limit (Note 34.5) CHARTERED ACCOUNTANTS Colombo. 1 September

25 Statement of Comprehensive Income For the year ended 31 March All amounts in Sri Lanka Rupees Note Interest income 1,057,979,109 1,330,745,688 Interest expense (813,740,984) (794,578,117) Net interest income 8 244,238, ,167,571 Net loss from financial instruments at fair value through profit or loss 9 (179,455) (103,223) Other income/(loss) 10 (842,216,123) 9,432,267 Total operating income / (Loss) (598,157,453) 545,496,615 Operating expenses Personnel expenses 11 (69,372,318) (81,457,272) Other expenses 12 (207,478,523) (243,209,509) Impairment charges for loans and other advances 13 (353,468,031) (805,099) Operating profit/ (Loss) before value added tax and income tax expenses (1,228,476,325) 220,024,735 Value added tax on financial services (14,148,786) (22,102,759) Profit/(Loss) before income tax (1,242,625,111) 197,921,976 Income tax expense 14 (2,558,265) (76,162,987) Profit/(Loss) for the year (1,245,183,376) 121,758,989 Profit/(Loss) for the year (1,245,183,376) 121,758,989 Other comprehensive income, net of income tax Actuarial gain (Loss) on employee benefits ,963 (1,280,794) Deferred tax on actuarial gain/(loss) on Employee Benefits (250,310) 358,622 Net change in fair value on available-for-sale financial assets 8,749,075 7,431,194 Net change in fair value on available-for-sale financial assets reclassified to profit or loss (1,519,337) (4,784,023) Other comprehensive income for the year, net of tax 7,873,391 1,724,999 Total comprehensive income for the year (1,237,309,985) 123,483,988 Earnings/ (Loss) per share Basic earnings/ (Loss) per share 15 (2.49) 0.24 The notes to the financial statements form an integral part of these financial statements. 23

26 Statement of Financial Position As at 31 March All amounts in Sri Lanka Rupees Note Assets Cash and cash equivalents ,384, ,075,371 Deposits with financial institutions 17-2,598,498 Financial assets held at fair value through profit or loss 18 3,813,915 3,993,370 Financial assets available-for-sale ,810, ,530,265 Loans and advances to customers 20 2,709,308,049 5,107,171,119 Loan to Swarna Mahal Jewellers (Private) Limited ,147,416 1,063,358 Investment property 22 35,675,000 73,000,000 Property, plant and equipment 23 53,202,231 72,266,717 Other assets ,779, ,996,624 Total assets 4,494,120,237 6,102,695,322 Liabilities Deposits from customers 25 5,132,740,669 5,399,512,653 Bank overdrafts 16 23,845,768 43,306,040 Interest bearing borrowings ,000, ,788,587 Current tax liabilities 27 (2,633,537) 34,804,703 Deferred tax liabilities 28 3,863,677 1,250,395 Employee benefits 29 5,401,681 5,259,000 Other liabilities 30 33,718,520 24,281,227 Total liabilities 5,298,937,505 5,670,202,605 Equity Stated capital ,000, ,000,070 Reserves 32 (1,054,817,338) 182,492,647 Total equity (804,817,268) 432,492,717 Total liabilities and equity 4,494,120,237 6,102,695,322 The notes to the financial statements form an integral part of these financial statements. It is certified that the financial statements comply with the requirements of the Companies Act No. 07 of R.M.G. Ratnayake Senior Manager - Finance The Board of Directors is responsible for the preparation and presentation of these financial statements. These financial statements were approved by the Board of Directors and signed on their behalf Chairman Director J. H. Edirisinghe N.P.Edirisinghe Colombo,Sri Lanka 01 September

27 Statement of Changes in Equity All amounts in Sri Lanka Rupees Stated Capital Statutory Reserve Investment Fund Retained Earnings Available for sale reserve Total Balance as at 31 March ,000,070 45,093,956 22,882,378 (1,756,275) (7,211,400) 309,008,729 Profit for the Period ,758, ,758,989 Other comprehensive income, net of tax Net change in fair value ,431,194 7,431,194 - Net amount reclassified to profit and loss (4,784,023) (4,784,023) - Actuarial Gain or( loss) (922,172) - (922,172) Total comprehensive income for the Period ,836,817 2,647, ,483,988 Transfers from/to retained earnings - 60,878,100 27,822,599 (88,700,699) - - Balance as at 31 March ,000, ,972,056 50,704,977 30,379,843 (4,564,229) 432,492,717 Balance as at 31 March ,000, ,972,056 50,704,977 30,379,843 (4,564,229) 432,492,717 Profit/(Loss) for the Period (1,245,183,376) - (1,245,183,376) Other comprehensive income, net of tax Net change in fair value ,749,075 8,749,075 - Net amount reclassified to profit and loss (1,519,337) (1,519,337) - Actuarial gain/(loss) , ,653 Total comprehensive income for the Period (1,244,539,723) 7,229,738 (1,237,309,985) Transfers from/to retained earnings Balance as at 31 March ,000, ,972,056 50,704,977 (1,214,159,880) 2,665,509 (804,817,268) The notes to the financial statements form an integral part of these financial statements. 25

28 Statement of Cash Flow For the year ended 31 March All amounts in Sri Lanka Rupees Profit/(Loss) before taxation (1,242,625,111) 197,921,976 Adjustment for; Depreciation 20,005,200 26,611,309 Impairment for loan losses 348,273,648 (1,400,358) Impairment for gold stock 5,194,383 2,205,457 Impairment / (reversal) of real estate stock - (19,293,981) Profit from disposal of property, plant and equipment - (12,026) Other provisions 17,800,000 6,063,161 Fair value gain/ (Loss) on investment property 46,900,000 (11,000,000) Provision for gratuity 1,450,894 1,433,184 Loss on change in carrying value of Loans & Receivable 101,487,520 - Fair value Change in AFS 7,229,738 2,647,171 Fair value (gain) / loss on investments 179, ,223 (694,104,273) 205,279,116 Changes in; - loans and advances to customers 1,276,017,844 (962,662,002) - other assets (1,426,797) 71,261,433 - deposit from customers (266,771,984) 893,127,966 - other liabilities 3,053,846 4,869,547 Cash generated from operating activities 316,768, ,876,060 Tax paid (37,633,533) (83,302,239) Employee benefit paid (414,250) (236,250) Net Cash from operating activities 278,720, ,337,571 Cash flows from investment activities Investment in government securities 7,720,110 (109,951,915) Proceeds from disposal of property, plant and equipment - 62,074 Investment securities - - Additions to property, plant and equipment (940,714) (12,448,212) Additions to investment Property (9,575,000) - Withdrawal of Fixed Deposit 8,661,658 - Net cash used in investment activities 5,866,054 (122,338,053) Cash flow from financing activities Net proceeds/(repayments) of borrowings (59,787,860) (53,180,463) Net Proceeds/(Repayment) of Lease Rentals (1,029,713) Net cash used in financing activities (60,817,573) (53,180,463) Net increase in cash and cash equivalents 223,769,334 (47,180,945) Cash and cash equivalents at the beginning of the year 60,769, ,950,276 Cash and cash equivalent at the end of the year 284,538,665 60,769,331 Reconciliation of cash and cash equivalents Cash in hand and bank balances 308,384, ,075,371 Bank overdrafts (23,845,768) (43,306,040) 284,538,665 60,769,331 The notes to the financial statements form an integral part of these financial statements. 26

29 Significant Accounting Policies 1. Reporting entity Swarnamahal Financial Services PLC (the Company ) is a public limited company incorporated and domiciled in Sri Lanka and listed on the Colombo Stock Exchange. The address of the Company s registered office is No.676, Galle Road Colombo 03 and the principal place of business is situated at No 654, Galle Road, Colombo 03. The principal activities of the Company are pawn brokering, granting leases, hire purchases & loan facilities and accepting fixed & savings deposits. The Company is a registered finance company under the Finance Business Act No. 42 of The staff strength of the Company as at 31st March 2014 is 108 ( ). 2. Basis of preparation 2.1 Statement of compliance The Financial Statements of the Company which comprise the Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Cash Flows and Notes thereto have been prepared in accordance with Sri Lanka Accounting Standards (SLAS) laid down by the Institute of Chartered Accountants of Sri Lanka, and comply with the requirements of Companies Act No 7 of 2007 and Finance Business Act No 42 of The financial statements for the year ended 31 March 2014 were authorized for issue by the Directors on 01 September Basis of measurement The financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position and no adjustments have been made for inflationary effects. non derivative financial instruments at fair value through profit or loss are measured at fair value available for sale financial assets are measured at fair value investment property is measured at fair value The liability for defined benefit obligations is recognised at the present value of the defined benefit obligation The financial statements have been prepared on a going concern basis. 2.3 Functional and presentation currency The financial statements are presented in Sri Lankan Rupees, which is the functional currency of the Company. All financial information presented in Sri Lankan Rupees has been rounded to the nearest rupee. 2.4 Use of estimates and judgement The preparation of financial statements in conformity with Sri Lanka Accounting Standards requires management to make judgments, estimates and assumptions that 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 in the period in which the estimates are revised and in any future periods affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: Note 29 Measurement of retirement benefit obligation Note 28 Deferred tax liabilities Note 20 Impairment allowance on loans and receivables Note-22- Investment property Note 18 & 19- Recognition and measurement of financial instruments 2.5 Change in accounting policy Defined Benefit plans The Company adopted LKAS 19 Employee Benefits (2013) with effect from 1 April 2013 as part of its mandatory application and changed its basis for determining the income or expense related to defined benefit plan. 27

30 Significant Accounting Policies (Contd.) As a result of the change, the Company now recognises actuarial gains or losses in other comprehensive income as and when they arise as opposed to following the corridor method. The impact of change in accounting policy is fully described in note Materiality and aggregation Each material class of similar item is presented separately in the financial statements. Items of dissimilar nature or function are presented separately, unless they are immaterial. 4. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements except for change in accounting policy as explained in note Financial assets and financial liabilities Recognition The Company initially recognises loans and receivables and deposits on the date that they are originated. All other financial instruments (including regular way purchases and sales of financial assets) are recognised on the trade date, at which is the date on which the Company becomes a party to the contractual provisions of the instrument. For financial assets and liabilities held at fair value through profit and loss any changes in fair value from the trade date to settlement date is accounted in the statement of comprehensive income while for available for sale financial assets any changes in fair value from the trade date to settlement date is accounted in the statement of other comprehensive income. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue Classification Financial assets The Company classifies its financial assets in one of the following categories Loans and receivables Available for sale or At fair value through profit or loss and within the category as Held for trading Designated at fair value through profit or loss Financial assets at fair value through profit or loss A financial asset is classified as at fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition. Financial assets are designated as at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company s documented risk management or investment strategy. Attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, which takes into account any dividend income, are recognised in profit or loss Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and other receivables comprise total loans and advances Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not classified in any of the categories of financial assets. Available-for-sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses are recognised in other comprehensive income and presented in the fair value reserve in equity. When an investment is 28

31 Significant Accounting Policies (Contd.) derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. All other available for sale investments are carried at fair value. Financial liabilities The Company classifies its financial liabilities, other than guarantees and loan commitments as measured at amortised cost or fair value through profit or loss Derecognition Financial assets The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or which the company neither transfers nor retains substantially all of the 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 transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. Any interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability. Financial liabilities The Company derecognises a financial liability when its contractual obligations are discharged, cancelled or expire Offsetting Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under Sri Lanka Accounting Standards, or for gains and losses arising from a group of similar transactions such as in the company trading activity Amortised cost measurement The 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 effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, then the Company establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the company and incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the 29

32 Significant Accounting Policies (Contd.) same instrument, i.e. without modification or repackaging, or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Any difference between the fair value at initial recognition and the amount that would be determined at that date using a valuation technique in a situation in which the valuation is dependent on unobservable parameters is not recognised in profit or loss immediately but is recognised over the life of the instrument on an appropriate basis or when the instrument is redeemed, transferred or sold, or the fair value becomes observable Identification and measurement of impairment At each reporting date the company 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 are 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 are impaired includes, Default or delinquency by a debtor Indications that a debtor or issuer will enter bankruptcy Adverse changes in the payment status of borrowers or issuers The disappearance of an active market for a security or Observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Company considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually significant loans and advances are assessed for specific impairment. All individually significant loans and advances found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances that are not individually significant are collectively assessed for impairment by grouping together loans and advances with similar risk characteristics. In assessing collective impairment the Company uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset s original effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-forsale equity security is recognised in other comprehensive income. 4.2 Cash and cash equivalents Cash and cash equivalents comprise cash balances and deposits with maturities of three months or less from the 30

33 Significant Accounting Policies (Contd.) acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. 4.3 Stated capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. 4.4 Property plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self constructed assets includes the following: the cost of materials and direct labour; any other costs directly attributable to bringing the assets to a working condition for their intended use; Purchased software that is integral to the functionality of the related equipment is capitalised as part of the equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognised net within other income in profit or loss Subsequent costs The cost of replacing a part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company, and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a straightline basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. The estimated useful lives for the current and comparative years of significant items of property, plant and equipment are as follows: Years of Category depreciation Buildings improvements (Includes 10 years partitions and other permanent fixtures) Computer and software 04 years Office equipment 03 years Motor vehicles 04 years Furniture and fittings 03 years Leased assets 04 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate. 4.5 Investment property Investment property is property held either to earn rental income or for capital appreciation or both but not for sale in the ordinary course of business, used in the production or supply of goods or services or for administrative purposes Basis of recognition Investment property is recognised if it is probable that future economic benefits that are associated with the investment property will flow to the Company and cost of the investment property can be reliably measured. 31

34 Significant Accounting Policies (Contd.) Measurement An investment property is measured initially at its cost. The cost of a purchased investment property comprises of its purchase price and any directly attributable expenditure. The cost of a self-constructed investment property is its cost at the date when the construction or development is complete. The Company applies the fair value model for subsequent measurement of investment properties in accordance with Sri Lanka Accounting Standard (LKAS 40) Investment Property. Accordingly, investment properties are stated at fair value and an external independent valuer having an appropriate recognized professional qualification values the properties every year. Any gain or loss arising from a change in fair value is recognized in income statement Derecognition Investment properties are derecognized when disposed of or permanently withdrawn from use because no future economic benefits are expected. Transfers are made to and from investment properties only when there is change in use. 4.6 Inventory Inventory mainly consists of real estate stock and gold. The Company s policy for the accounting of inventory is as follows Real estate Investments in real estate are carried at cost or net realisable value whichever is lower. Cost of purchase, costs of conversion and other costs including selling and distribution expenses that are necessary to bring the asset to the saleable condition are included in the carrying value of the property. Net realisable value is the price at which inventories can be sold in the ordinary course of business, less the estimated cost of completion and the estimated cost necessary to make the sale. Net Realisable Value is determined based on independent, external valuations made by a qualified valuer Gold stock Cost or Market value whichever is lower at the year-end. Market value is determined in relation to the gold prices quoted in the international market as at 31 March Impairment of non-financial assets The carrying amounts of the Company s non-financial assets, other than deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or group of assets (the cashgenerating unit, or CGU ). An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. 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. 4.8 Employee benefits Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. The Company contributes 12% and 3% of gross emoluments of employees as provident fund (EPF), and trust fund (ETF) contribution respectively. 32

35 Significant Accounting Policies (Contd.) Defined benefit plan A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The defined benefit is calculated by an independent actuary using Projected Unit Credit method as recommended by LKAS 19 Employee Benefits The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the yield on government bonds at the reporting date and have maturity dates approximating to the terms of the Company s obligations. The Company recognises actuarial gains and losses that arise in calculating the Company s obligation in respect of a plan in other comprehensive income. The present value of the defined benefit obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Key assumptions used in determining the defined retirement benefit obligations are given in Note 27. Any changes in these assumptions will impact the carrying amount of defined benefit obligations. Provision has been made for retirement gratuities from the first year of service for all employees, in conformity with LKAS 19 Employee Benefits. However, under the Payment of Gratuity Act No.12 of 1983, the liability to an employee arises only on completion of 5 years of continued service. The gratuity liability is not externally funded. 4.9 Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation Revenue Interest Interest income and expense are recognized in profit or loss using the effective interest method. 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 liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Company estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the effective interest rate includes all transaction costs and fees that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense presented in the income statement include interest on financial assets and liabilities measured at amortised cost calculated on an effective interest basis and interest income on available for sale investment securities calculated on an effective interest basis Finance lease income Assets leased to customers who transfer substantially all the risk and rewards associated with ownership other than the legal title are classified as finance leases. Amounts receivable under finance leases are included under Lease rental receivable. Leasing balances are stated in the statement of financial position after deduction of initial rental received. The excess of aggregate rentals receivable over the cost of the leased assets constitutes the total unearned income. The unearned income is taken into revenue over the term of the lease, commencing from the month in which the lease is executed in proportion to the remaining receivable balance of the lease Dividend income Dividend income is recognised in the statement of comprehensive income on an accrual basis when the Company s right to receive the dividend is established Overdue interest Overdue interest income from leasing and other loans have been accounted for on a cash basis Real estate income Revenue is recognized when properties are sold and the buyer has taken possession of such properties. However, when there is insufficient assurance as to the receipt of the total consideration, income is accounted for on a cash basis. 33

36 Significant Accounting Policies (Contd.) Gains or losses on disposal of property, plant & equipment Profit/loss from sale of property plant and equipment is recognized in the period in which the sale occurs Profit from gold sale Profit/loss from gold sale is recognized in the period on a cash basis Other income Other income is recognized on an accrual basis Expenses Expenses are recognized in profit or loss as they are incurred, in the period to which they relate Operating leases Leases where the Lessor effectively retains substantially all the risks and rewards of ownership over the lease term are classified as operating leases. Payments made under operating leases are recognised in profit and loss on a straight-line basis over the term of the lease Operating expenses All expenses incurred in day to day operations of the business and in maintaining the property, plant and equipment in a state of efficiency has been charged to the Income Statements in arriving at the profit for the year. Provision has also been made for bad and doubtful debts, all known liabilities and depreciation on property, plant and equipment Finance expense Finance costs comprise interest expense on short and long term borrowing and bank charges Income tax expenses Income tax expenses comprise current and deferred tax. Current tax and deferred tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates 34 enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. The provision for income tax is based on the elements of income and expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland Revenue Act No 10 of 2006 and subsequent amendments thereon Deferred tax Deferred tax is recognized 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 measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which they can be utilised. 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 Value added tax on financial services The value base for value added tax for the Company is the adjusted accounting profit before tax and emoluments of employees. The adjustment to the accounting profit before tax is for economic depreciation computed on prescribed rates instead of the rates adopted in the financial statements Economic Service Charges (ESC) ESC is payable on the liable turnover at specified rates. As per the provision of the Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, ESC is

37 Significant Accounting Policies (Contd.) deductible from the income tax liability. Any unclaimed payment can be carried forward and set off against the income tax payable as per the relevant provision in the Act Earnings per share The Company presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year Commitments and contingencies Contingencies are possible assets or obligations that arise from a past event and would be confirmed only on the occurrence or non-occurrence of uncertain future events, which are beyond the Company s control Events occurring after the reporting date All material events occurring after the reporting date have been considered and where necessary, adjustments to or disclosure have been made in the financial statements Comparative information The comparative information is re-classified wherever necessary to conform with the current year s presentation in order to provide a better presentation Directors responsibility statement The Board of Directors of the Company is responsible for the preparation and presentation of these financial statements Cash flow statement The cash flow statement has been prepared using the indirect method in accordance with Sri Lanka Accounting Standard 7 - Statement of Cash Flows New Accounting Standards issued but not effective as at reporting date The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standards which will become applicable for financial periods beginning on or after 1st January 2014/ The extent of the impact of these Standards to the Financial Statements has not been determined as at 31 March None of these are expected to have a significant impact on the company s financial statements SLFRS 9 - Financial Instruments: Classification and Measurement SLFRS 9, as issued, reflects the first phase of work on replacement of LKAS 39 and applies to classification and measurement of financial assets and liabilities. The effective date for SLFRS 9 is yet to be announced by the Institute of Chartered Accountants of Sri Lanka. SLFRS 13 - Fair Value Measurement SLFRS 13 establishes a single source of guidance under SLFRS for all fair value measurements. SLFRS 13 provides guidance on all fair value measurements under SLFRS. SLFRS 13 will be effective for financial periods beginning on or after 1 January Regulatory provisions 5.1 Deposit insurance scheme In terms of the Finance Companies (Insurance of deposit liabilities) Direction No. 2 of 2010, Sri Lanka Deposit Insurance Scheme Regulations, issued on 27th September 2010 and subsequent amendments thereto all Registered Finance Companies are required to insure their deposit liabilities in the Deposit Insurance Scheme operated by the Monetary Board in terms of Sri Lanka Deposit Insurance Scheme Regulations No. 1 of 2010 issued under Sections 32A to 32E of the Monetary Law Act with effect from 1st October Deposits to be insured include time and savings deposit liabilities and exclude the following: Deposit liabilities to member institutions. Deposit liabilities to the Government of Sri Lanka inclusive of Ministries, Departments and Local Governments. Deposit liabilities to shareholders, directors, key management personnel and other related parties Deposit liabilities held as collateral against any accommodation granted. Deposits falling within the meaning of dormant deposits in terms of the Finance Companies Act, funds 35

38 Significant Accounting Policies (Contd.) of which have been transferred to the Central Bank of Sri Lanka in terms of the relevant Directions issued by the Monetary Board. A premium of 0.15 per centum per annum is payable monthly, calculated on total amount of all eligible deposits as at end of the month. 5.2 Investment Fund Account (IFA) As proposed in the budget proposals of 2011 every person or partnership who is in the business of banking or financial services is required to establish and operate an Investment Fund Account. As and when taxes are paid after 1st January 2011, Registered Finance Companies are required to transfer the following funds to the Investment Fund Account and build a permanent fund in the Company. 8% of the profits calculated for the payment of Value Added Tax (VAT) on financial services on dates as specified in the VAT Act for payment of VAT. 5% of the profit before tax calculated for payment of income tax purposes on dates specified in Section 113 of the Inland Revenue Act and amendments thereto for the self-assessment payments of tax. RFCs shall commence utilization of funds in the IFA in the following manner within three months from the date of transfer to the IFA; (i.) Invest in long-term Government securities and/or bonds with maturities not less than seven years. (ii.) Lend on maturities not less than five years at interest rates not exceeding 5-year Treasury bond rates plus 2 per cent. (iii.) Facilities granted only for the following purposes a. Long-term loans for cultivation of plantation crops/ agriculture crops including, fruits, vegetables, cocoa and spices and for livestock and fisheries. b. Factory / mills modernization / establishment/ expansion. c. Small and medium enterprises: i. loans up to Rs. 30 million or; ii. loans over Rs. 10 million to enterprises with annual turnover less than Rs. 300 million and employees less than 400. d. Information Technology related activities and Business Process Outsourcing. e. Infrastructure development. f. Education - vocational training and tertiary education. g. Restructuring of loans extended for the above purposes. 5.3 Statutory reserve Reserve fund is a capital reserve which contains profit transferred as required by Section 3(b)(ii) of Central Bank Direction No. 1 of As per the said Direction, every Licensed Finance Company shall maintain a Reserve Fund and transfer to such reserve fund out of the net profits of each year after due provisions have been made for taxation and bad and doubtful debts on the following basis: % of transfer to Capital funds to Deposit Liabilities Reserve Fund Not less than 25% 5% Less than 25% and not less than 10% 20% Less than 10% 50% 6. Financial risk management 6.1 Introduction and overview The Company has exposure to the following risks from financial instruments: a) credit risk b) liquidity risk c) market risks d) operational risks. This note presents information about the Company s exposure to each of the above risks (except market risk), the Company s objectives, policies and processes for measuring and managing risk, and the Company s management of capital 36

39 Significant Accounting Policies (Contd.) Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework. In discharging its governance responsibility it operates through two key committees the Board Integrated Risk Management Committee and the Audit Committee. The BIRMC provides the Board the assurance that risk management strategies, policies and processes are in place to manage events / outcomes that have the potential to impact significantly on earnings performance, reputation and capital. The approach entails active monitoring of the level of risk exposure against the parameters set in the risk appetite. The BIRMC also assists the Board by assessing and approving significant credit and other transactions beyond the discretion of executive management. The following Executive Management Sub - Committees, each with specialized focus, support the BIRMC and are responsible for the co-ordination of risk matters for each of the areas of risk management: Asset and Liability Committee (ALCO) Credit Committee Remuneration Committee Internal audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Audit Committee provides its assessment on the effectiveness of internal audit and external disclosure of accounting policies and financial reporting to the Board. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. 6.2 Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company s loans and advances to customers, and investment in debt/equity securities. For risk management reporting purposes the Company considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, industry risk etc.) Management of credit risk The Company has developed a policy which defines the principles encompassing client selection, due diligence, early alert reporting, tolerable levels of concentration risk and portfolio monitoring in line with Company s risk appetite. The policy is reviewed at least annually ensuring consistency with the Company s business strategy. A monthly Credit Policy Meeting chaired by the Chief Executive Officer, drives policy decisions and implementation plans. Allowances for impairment The Company established an allowance for impairment losses on assets carried at amortised cost/available for sale that represents its estimate of incurred losses in its loan and investment debt/equity security portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and, for assets measured at amortised cost, a collective loan loss allowance established for groups of homogeneous assets as well as for individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired. Assets carried at fair value through profit or loss are not subject to impairment testing as the measure of fair value reflects the credit quality of each asset. Collateral held and other credit enhancement and the financial effect The Company holds collateral and other credit enhancements against certain of its credit exposure. The table below sets out principal types of collateral and their approximate collateral percentages that are held against different types of financial assets. 37

40 Significant Accounting Policies (Contd.) Type of credit exposure Principal type of collateral held for secured lending Percentage of exposure that is subject to an arrangement that requires collateralization 31-Mar Mar-13 Loans and advances to retail customers Finance leases Property and equipment 100% 100% Hire purchase Property and equipment 100% 100% Loans against FD Fixed Deposit 100% 100% Personal loans None - - Loans and advances to corporate customers Finance leases Property and equipment 100% 100% Hire Purchase Property and equipment 100% 100% Loans against FD Fixed Deposit 100% 100% Loan to Swarna Mahal Jewellers (Pvt.) Ltd. None - N/A Fair value of collateral held An estimate made at the time of borrowing of the fair value of collateral and other security enhancements held against loans and receivables to customers is not available in the Company. 6.3 Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Management of liquidity risk The Company s approach to managing liquidity is to ensure, that funds available are adequate to meet credit demands of its customers and to enable deposits to be repaid on demand or upon maturity as appropriate. The main sources of the Company s funding are capital, core deposits from customers and access to borrowed funds from the market. The Company also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. The treasury and liquidity policies and compliance there under are reviewed and approved by the ALCO. A summary report, including any exceptions and remedial action taken, is submitted quarterly to ALCO. Exposure to liquidity risk Liquid assets include cash and short term funds, bills purchased and short term investments. Short term liabilities include savings deposits, repo borrowings and current taxation. The Company also monitors the maturity profile of its assets and liabilities. Maturity analysis of assets and liabilities which is based on the remaining period as at the date of the statement of financial position to the respective contractual maturity date is given in Note 39 to the financial statements. The maturity analysis of company liabilities for 2014 are depicted below; 2013/14 Less than 3 Months (Rs.000) 3 Months to 1 Year (Rs.000) 1-5 Years (Rs.000) More than 5 Years (Rs.000) Total (Rs.000) Non Derivative Liabilities Deposits 1,987,574 2,128,058 1,017,109-5,132,741 Bank over draft 23, ,846 Interest bearing borrowings - 102, ,001 Other liabilities ,418 37,803 40,350 38

41 Significant Accounting Policies (Contd.) 2012/13 Less than 3 Months (Rs.000) 3 Months to 1 Year (Rs.000) 1-5 Years (Rs.000) More than 5 Years (Rs.000) Total (Rs.000) Non Derivative Liabilities Deposits 1,879,622 2,398,410 1,105,078 16,403 5,399,513 Bank over draft 43,306 43,306 Interest bearing borrowings 39,099 20, , ,789 Other liabilities 37,332 24,281 3,982 65, Market Risk Market risk is the risk that changes in market prices such as interest rates, equity prices, foreign exchange rates that will affect the Company s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return on risk. The following assets of the Company are subject to market risk. Assets subject to market risk Carrying Amount as at 31 Trading portfolio(rs) Non trading portfolio (Rs) March 2014 (Rs.) FVTPL Assets 3,813,915 3,813,915 - Financial assets through AFS 440,810, ,810,155 Loans and receivables 3,382,455,465-3,382,455,465 Liabilities subject to market risk Amount as at 31 March 2014(Rs.) Trading portfolio(rs) Non trading portfolio (Rs) Deposits 5,132,740,669-5,132,740,669 Bank over draft 23,845,768-23,845,768 Interest bearing borrowings 102,000, ,000,727 Assets subject to market risk Carrying Amount as at 31 Trading portfolio(rs) Non trading portfolio (Rs) March 2013 (Rs.) FVTPL Assets 3,933,370 3,933,370 - Financial assets through AFS 448,530, ,530,265 Loans and receivables 5,108,234,477-5,108,234,477 Liabilities subject to market risk Amount as at 31 March 2013(Rs.) Trading portfolio(rs) Non trading portfolio (Rs) Deposits 5,399,512,653-5,399,512,653 Bank over draft 43,306,040-43,306,040 Interest bearing borrowings 161,788, ,788,587 39

42 Significant Accounting Policies (Contd.) Management of market risk The Company separates its exposure to market risk between trading and non-trading portfolios. Overall authority of market risk is vested with the ALCO. The head of the risk management committee is responsible for the development of detailed risk management policy overseen by the ALCO and for the day to day review of their implementation Equity Price Risk A sensitivity analysis of the share trading portfolio is shown below at shock level of 10% 15% and 20% 2013/14 At shock levels of Impact on income statement(rs) Effect on portfolio (Rs) 10% 381,392 3,432,524 15% 572,087 3,241,828 20% 762,783 3,051, /13 At shock levels of Impact on income statement(rs) Effect on portfolio (Rs) 10% 399,337 3,594,033 15% 599,006 3,394,365 20% 798,674 3,194,696 Exposure to interest rate risk-non trading portfolio principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for re pricing bands. ALCO is the monitoring body for compliance with these limits. 6.5 Operational risks Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. The Company s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. Compliance with Company s standards is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company. 6.6 Capital management risk Capital Adequacy is a measure of a finance company s ability to withstand the associated risks of its business. Regulators find it necessary that every finance company to hold adequate capital to absorb unexpected losses as a going concern, while they price their products and services to take care of expected risks. For the purpose of computing the capital adequacy ratio of finance companies, the constituent of capital shall be:- I. Tier 1 Core capital: representing permanent shareholder s equity (paid-up shares/common stock) and reserves created or increased by appropriation of retained earnings or other surpluses, i.e. share premia, retained profits and other reserves; and II. Tier 2 Supplementary capital: representing revaluation reserves, general provisions and other capital instruments which combine certain characteristics of equity and debt, such as, hybrid capital instruments and unsecured subordinated term debts. Every finance company shall, subject to the provisions of the Finance Companies (Minimum Core Capital) Direction No. 1 of 2006, at all times, maintain its capital (adjusted for the items that may be specified by the Director) at a level not less than 10 per cent of its risk weighted assets with the core capital constituting not less than 5 per cent of its risk weighted assets, computed as per instructions issued by the CBSL. 40

43 Significant Accounting Policies (Contd.) Description Total tier 1 capital (808,126) 433,412 Total tier 2 capital 40,000 60,000 Total risk weighted assets 1,879,810 1,963,680 Off balance sheet exposure - - Capital adequacy ratio -Tier 1 (%)- Stipulated limit 5% (42.99%) 22.07% -Tier 1 &2 (%)Stipulated limit 10% (40.86%) 25.13% The Company is not compliant with these directions, as at 31 March Use of estimates and judgement Management discusses with the Company s Audit Committee the development, selection and disclosure of the Company s critical accounting policies and their application, and assumptions made relating to major estimation uncertainties. Key sources of estimation uncertainty Allowance for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 4.17 The specific counterparty component of the total allowances for impairment applies to financial assets evaluated individually for impairment and is based upon management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a counterparty 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 are independently approved by ALCO Collectively assessed impairment allowances cover credit losses inherent in portfolios of loans and advances and investment securities measured at amortised cost with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired financial assets, but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentrations and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on the estimates of future cash flows for specific counterparty allowances and the model assumptions and parameters used in determining collective allowances. Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in accounting policy Note for financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Level 1 fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and Level 3 fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs). The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised: 41

44 Significant Accounting Policies (Contd.) All Amounts in Sri Lanka Rupees Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Trading & AFS assets Financial Assets held for trading 3, , Financial Investments - Available-for-Sale 440, , The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy: All Amounts in Sri Lanka Rupees Financial Investments - Available-for-Sale Balance as at 1 April Total gain in other comprehensive income - - Balance as at 31 March Fair value of financial instruments carried at amortised cost The below table shows a comparison of the carrying amounts, as reported on the statement of financial position, and fair values of financial assets and liabilities carried at amortised cost. Carrying Fair value(rs) value(rs) Financial Asset Loans and receivables 3,382,455,465 3,382,455,465 Financial Liabilities Deposits 5,132,740,669 5,132,740,669 Debentures 102,000, ,000,727 There are various limitations inherent in this fair value disclosure particularly where prices may not represent the underlying value due to dislocation in the market. Not all of the Company s financial instruments can be exchanged in an active market. Given below are the methodologies and assumptions used in fair value estimation Loans and receivable Approximately 83.21% of the total portfolio of loans and receivables to customers have a remaining contractual maturity of less than one year. Therefore it s assumed that fair value equals the carrying value. Deposits More than 80.18% of the customer deposits are either repayable on demand or have a remaining contractual maturity of less than one year. Customer deposits with a contractual maturity of more than one year are subject to pre-mature upliftment. Amounts paid to the customer in the event of premature upliftment would not be materially different to its carrying value as at the date. Therefore fair value of customer deposits approximate to their carrying value as at the reporting Debentures Debentures include fixed rate debentures. The Company s fixed rate debentures mature with in a period of one year (31 March 2015). Therefore it is assumed that fair value will equal market value 7. Segment Reporting An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company s other components, whose operating results are reviewed regularly by the Company s Management to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. For each of the strategic divisions, the Company s management monitors the operating results separately for the purpose of making decisions about resource allocation and performance assessment. The company has two reportable segments, as described in the Note No

45 Notes to the Financial Statements For the year ended 31st March All Amounts in Sri Lanka Rupees Net interest income Interest income Placements with financial institutions 964, ,000 Financial investments - loans and receivables 1,003,710,066 1,281,641,632 Financial investments - available for sale 53,304,702 48,900,056 Total interest income 1,057,979,109 1,330,745,688 Interest expense Interest on deposits from customers 783,981, ,377,106 Interest on interest bearing borrowings 29,458,043 31,794,570 Other interest expenses 301, ,441 Total interest expense 813,740, ,578,117 Net interest income 244,238, ,167, Net loss from financial instruments at fair value through profit or loss Equity shares (179,455) (103,223) (179,455) (103,223) 10. Other income/(loss) Service income 1,241,909 1,506,744 Sundry income 939,763 3,023,809 (Loss)/Profit on gold sales (694,151,214) (15,394,120) Gain on sale of property, plant & equipment - 12,026 Change in fair value of investment property (46,900,000) 11,000,000 Rent income from Lavinia Breeze Sea Food Restaurent (Pvt.) Ltd. 600, ,000 Loss on change in carrying value of Loans & Receivable (101,487,520) - Other income (2,459,061) 8,683,808 (842,216,123) 9,432, Personnel expenses Salaries and wages 31,354,148 45,408,343 Directors emoluments 10,831,238 10,100,000 Contributions to defined contribution plans 4,812,822 6,882,272 Contributions to defined benefit plans 1,450,894 1,433,184 Over time payment 3,285,177 5,295,727 Fuel expense 5,340,026 5,374,820 Staff welfare 2,058,067 2,815,601 Others 10,239,946 4,147,325 69,372,318 81,457, Other expenses Audit fee and expenses 875, ,360 Audit related fee and expenses - 555,000 Professional and legal expenses 2,711,229 3,126,505 Depreciation of property, plant & equipment 20,005,200 26,611,309 Office administration and establishment expenses 183,887, ,366, ,478, ,209,509 43

46 Notes to the Financial Statements (Contd.) For the year ended 31st March All Amounts in Sri Lanka Rupees Impairment charges/(reversals) for loans and other losses Impairment on collective impairment (Note 13.1) 348,273,648 (1,400,358) Impairment of gold stock (Note 24.1) 5,194,383 2,205, ,468, , Impairment charge/(reversal) on collective impairment Impairment charge on gold loans 336,047,665 20,766,577 Impairment charge on lease rentals receivables 5,084, ,991 Impairment charge/(reversal) on hire purchase receivables 4,473,109 (23,681,540) Impairment charge/(reversal) on other term loans 2,668,674 1,335, ,273,648 (1,400,358) 14. Income tax expense Current income tax 2,722,035 72,083,993 Deemed dividend tax for undistributed profit - 5,864,330 Over provision (2,526,742) (424,168) Deferred tax expense (Note 28) 2,362,972 (1,361,168) Total income tax expense 2,558,265 76,162,987 Reconciliation of the Total Tax charge Leasing Other Leasing Business Other Business 14.1 Net profit before tax (11,317,832) (1,231,307,279) 1,908, ,009,365 Adjustments: Non-taxable income - - (83,747) (19,612,087) Disallowable expenses 40,696, ,718,507 27,484,704 99,856,571 Allowable expenses (19,656,787) (25,506,037) (19,751,496) (28,369,218) Total statutory income 9,721,555 (813,094,809) 9,558, ,884,631 Less : Qualifying payments Taxable income/(loss) 9,721,555 (813,094,809) 9,558, ,884,631 Income tax rate 28% 28% 28% 28% Income tax 2,722,035-2,676,296 69,407,697 Deemed Dividend Tax for undistributed profit ,864,330 Over provision - (2,526,742) - (424,168) Deferred tax expense (Note 28) - 2,362,972 - (1,361,168) Income tax on profit for the year 2,722,035 (163,770) 2,676,296 73,486,691 Tax losses carry forward 813,094, Basic earnings/ (Loss) per share (EPS) Basic earnings per share has been calculated by dividing the profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year, as per the requirements of the Sri Lanka Accounting Standard (LKAS 33) - Earnings per share. 44

47 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Profit/ (Loss) (for the year attributable to equity holders of the Company (1,245,183,376) 121,758,989 Weighted average number of ordinary shares 500,000, ,000,140 Basic earnings/ (Loss) per share (Rs.) (2.49) Cash and cash equivalents Cash in hand 61,608,682 67,673,709 Cash at bank 245,973,008 36,203,987 Stamps on hand 802, , ,384, ,075,371 Bank overdrafts (23,845,768) (43,306,040) 284,538,665 60,769, Deposits with financial institutions Fixed deposits with financial institutions 2,598,498 8,661,659 Interest on settlement 913,341 - Provision-(Charge)/Reversal 6,063,161 (6,063,161) Settlement (* Note) (9,575,000) - - 2,598,498 (* Note) Standard Credit Finance Limited was unable to pay the deposit, therefore as a settlement three commercial parcels in Reality Plaza Ja-Ela, were transferred to the Company as settlement of the deposit. The transferred commercial parcels are reflected under investment property in Note Financial assets held at fair value through profit or loss Equity shares (Note 18.1) 3,813,915 3,993,370 3,813,915 3,993, Equity shares Quoted shares: No. of shares Cost/Market value at the beginning of the year Market value Cost/Market value at the beginning of the year Market value Commercial Bank of Ceylon PLC-Voting 2, , , , ,696 Commercial Bank of Ceylon PLC-Non Voting 4, , , , ,395 John Keels Holdings PLC 1, , , , ,251 Seylan Bank PLC 1,015 65,200 64,656 66,900 65,200 LB Finance PLC 2, , , , ,400 Pan Asia Bank PLC 4,000 76,000 64,800 94,000 76,000 Sampath Bank PLC 1, , , , ,245 Distilleries Lanka PLC 1, , , , ,500 Lanka Century Investment PLC 500 7,800 6,150 8,400 7,800 45

48 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Hatton National Bank PLC 3, , , , ,603 Aitken Spence PLC 1, ,600 97, , ,600 Cargills PLC 1, , , , ,800 Ceylon Theatres PLC 1, , , , ,200 Laughs Lanka PLC 1,600 28,480 42,080 24,960 28,480 Vallible One PLC 51, , , , ,200 Renuka Shaw Wallace PLC 4,000 72,000 64, ,600 72,000 Sierra Cables PLC 200, , , , ,000 3,993,370 3,813,915 4,096,593 3,993,370 Mark to market losses (179,455) - (103,223) - 3,813,915 3,813,915 3,993,370 3,993, Financial assets available-for-sale Treasury bills (Note 19.1) 386,343, ,959,313 Treasury bonds (Note 19.2) 54,464,251 48,568,452 Share investment - unquoted company (Note 19.3) 2,500 2, ,810, ,530, Treasury bills Face value Year of Maturity Carrying value Cost of investment Market value Cost of investment Market value Rs Mn ,914,099 36,049,943 39,914, Rs Mn ,558,561 72,549,187 79,558, Rs Mn ,959,524 19,124,998 20,959, Rs Mn ,043,731 35,000,000 38,043, Rs Mn ,401,450 75,010,387 77,401, Rs Mn ,107,780 13,915,942 14,107, Rs Mn ,435,000 46,890,300 47,435, Rs Mn ,322,462 45,186,064 45,322, Rs Mn ,600,797 23,615,785 23,600, Rs Mn ,781, ,838,489 35,781,156 Rs Mn ,836, ,836,341 18,836,214 Rs Mn ,453, ,136,522 71,453,708 Rs Mn ,191, ,984,290 34,191,644 Rs Mn ,293, ,809,715 55,293,083 Rs Mn ,035, ,319,401 42,035,544 46

49 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Rs Mn ,601, ,129,942 40,601,168 Rs Mn ,780, ,350,776 43,780,595 Rs Mn ,248, ,251,181 36,248,305 Rs Mn ,737, ,821,991 21,737, ,342, ,343, ,478, ,959, Treasury bonds Face value Year of Maturity Carrying value Cost of investment Market value Cost of investment Market value Rs Mn ,441,070 27,768,346 30,441,070 28,519,440 27,040,941 Rs Mn ,802,000 5,027,598 5,802,000 5,332,548 5,210,928 Rs Mn ,727,000 9,148,260 9,727,000 9,462,011 8,710,270 Rs Mn ,494,181 8,014,954 8,494,181 8,299,347 7,606, Loans and advances to customers Gross Amount Impairment allowance Carrying amount Gross Amount Impairment allowance Carrying amount Gold loans (Note 20.2) 2,680,920,954 (420,310,807) 2,260,610,147 4,694,362,855 (84,263,142) 4,610,099,713 Finance lease receivable (Note 20.3) 37,856,908 (6,710,443) 31,146,465 55,320,831 (1,626,243) 53,694,588 Hire purchase receivables (Note 20.4) 151,599,833 (11,519,276) 140,080, ,405,746 (7,046,166) 227,359,580 Other term loans (Note 20.5) 290,646,655 (13,175,775) 277,470, ,524,340 (10,507,102) 216,017,238 3,161,024,350 (451,716,301) 2,709,308,049 5,210,613,772 (103,442,653) 5,107,171,119 49,959,158 54,464,251 51,613,346 48,568, Share investment - unquoted company No of shares Cost of investment Market value Cost of Investment Market value Credit Information Bureau of Sri Lanka Ltd 25 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2, Allowance for impairment Collective Allowance for impairment Balance as at 1 April 103,442, ,843,011 Impairment loss for the year -Charge/(Reversal) for the year 348,273,648 (1,400,358) Balance as at 31 March 451,716, ,442,653 Total Allowance for impairment 451,716, ,442,653 47

50 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Gold loans Gold loans - 1 month 373,922,747 - Gold loans - 3 months 105,867, ,866,596 Gold loans - 6 months 72,907, ,394,455 Gold loans - 12 months 894,121,397 3,675,938,551 Gold stock for auction (Note*) 1,234,101, ,163,253 Gross gold loans 2,680,920,954 4,694,362, * Note This relates to gold held against non-performing gold loans which are to be auctioned. Further, Rs. 724,458,384/- has been recovered from auctions up to 31 August 2014 with a loss of Rs. 438,635,802/-. Whereas, impairment provisions made for total gold loans as at 31 March 2014 was Rs 420,310,807/ Finance lease receivable Gross investment in finance leases, receivable - less than one year 4,996,644 40,717,331 - between one and five years 42,544,386 35,223,209 47,541,030 75,940,540 unearned finance income (9,684,122) (20,619,709) Net investment in finance lease 37,856,908 55,320,831 Net investment in finance leases, receivable -less than one year 3,978,826 29,814,781 -between one and five years 33,878,082 25,506,050 37,856,908 55,320,831 There were no lease receivables beyond five years Hire purchase receivables Gross investment in hire purchase, receivable - less than one year 29,094, ,323,613 - between one and five years 168,721, ,885, ,816, ,208,963 unearned finance income (46,216,427) (80,803,217) Net investment in hire purchase 151,599, ,405,746 Net investment in hire purchase, receivable - less than one year 22,499, ,122,354 - between one and five years 129,100,015 95,283, ,599, ,405, Other term loans Medium term loans 78,453,784 68,700,916 Wedaduru loans 9,999,808 16,486,031 Revolving loans 1,767,645 14,445,487 Wisdom loans 132, ,410 Staff loans 3,675,279 2,425,174 On-time loans 196,617, ,334, ,646, ,524,340

51 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Loan to Swarna Mahal Jewellers (Private) Limited Medium term loan to Swarna Mahal Jewellers (Pvt) Ltd 1,063,358 1,063,358 Gold loan to Swarna Mahal Jewellers (Pvt) Ltd 773,571,578 - Loss on change in carrying value of Loans & Receivable (101,487,520) - 673,147,416 1,063,358 The gold loan granted to Swarna Mahal Jewellers (Private) Limited is unsecured and was rescheduled in March 2014 effective from 1 April 2014 by the Board. Its stated at amortised cost based on the original EIR in accordance with LKAS Investment property Opening balance 73,000,000 62,000,000 Additions during the year 9,575,000 - Change in fair value (46,900,000) 11,000,000 Closing balance 35,675,000 73,000, Valuation of investment properties Location Extent Date of valuation Market value No 10, De Alwis Avenue, Mount Lavinia - Land &Building 0A - 0R ,100, commercial parcels in Reality Plaza - Unit A/F1/U Sq. Ft 4,000,000 - Unit A/F1/U Sq. Ft ,150,000 - Unit A/F3/U Sq. Ft 3,425,000 Rental Income from the Mount Lavinia Property is depicted in Note 10, the Company is yet to rent out commercial parcels in reality plaza as such property was received close to the year end. No direct operating expenses were incurred by the Company for the above investment properties Fair value of the Company s investment property as at 31 March 2014 has been arrived on the basis of a valuation carried out by Mr. G.J. Sumanasena incorporated valuer and having recent experience in the location and the category of the investment property being valued. He has used the investment method in arriving at the valuations for both properties 49

52 Notes to the Financial Statements (Contd.) 23. Property, plant & equipment In Rupees Building Improvements Office Equipment Furniture & Fittings Motor Vehicles Leased Assets Computers & Software Rs. Rs. Rs. Rs. Rs. Rs. Rs. Total Cost Balance as at 1April ,273,584 40,993,380 17,300,602 19,324,387 1,707,005 28,331, ,930,040 Additions 6,387,422 1,328, ,548-2,950,982 1,490,185 12,448,212 Disposals (69,000) (69,000) Transfers (1,707,005) 1,707,005 - Balance as at 31 March ,661,006 42,321,455 17,592,150 19,324,387 2,950,982 31,459, ,309,252 Balance as at 1 April ,661,006 42,321,455 17,592,150 19,324,387 2,950,982 31,459, ,309,252 Additions 568, , , ,714 Disposals Write-off during the year (1,446,091) (1,446,091) Transfers Balance as at 31 March ,229,010 42,674,005 17,592,150 19,324,387 2,950,982 30,033, ,803,875 Accumulated depreciation Balance as at 1April ,528,772 29,564,313 11,414,440 3,424, ,751 19,091,211 83,450,178 Depreciation for the year 6,647,406 7,128,572 3,487,108 4,731,648 1,892,684 2,723,891 26,611,309 Disposals (18,952) (18,952) Transfers (1,707,005) 1,707,005 - Balance as at 31 March ,176,178 36,692,885 14,901,548 8,156, ,430 23,503, ,042,535 Balance as at 1st April ,176,178 36,692,885 14,901,548 8,156, ,430 23,503, ,042,535 Charge for the year 6,892,015 2,001,866 1,807,730 4,649, ,745 3,916,567 20,005,200 Write-off during the year (1,446,091) (1,446,091) Disposals during the year Balance as at 31 March ,068,193 38,694,751 16,709,278 12,805,616 1,350,175 25,973, ,601,644 Balance as at 31 March ,160,818 3,979, ,872 6,518,771 1,600,807 4,059,710 53,202,231 Balance as at 31 March ,484,828 5,628,570 2,690,602 11,168,048 2,338,552 7,956,117 72,266,717 Lease Commitments on buildings improvements are disclosed in Note 33 50

53 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Fully depreciated property, plant & equipment The cost of fully-depreciated property, plant & equipment of the Company which are still in use as at the statement of financial position date is as follows: Office equipment 36,184,797 25,119,088 Furniture and fittings 9,076,237 9,076,237 Computer equipment 12,624,761 15,628,595 Motor Vehicles 490, ,340 58,376,135 50,314, Leased assets Leased assets for the year 2013/14 consists solely of 15 units of Motorbikes leased under a 3 year agreement. All leases are classified as finance leases and corresponding liability to the asset is accounted for in accordance with the accounting policy applicable to that leased asset as disclosed in note Other assets Deposits & prepayments 66,914,933 70,211,008 Gold stock (Note 24.1) 48,635,177 53,829,560 Real estate stock (Note 24.2) 154,228, ,956,056 Rent receivable from Lavinia Breeze Sea Food Restaurant (Pvt) Ltd (Note 24.3) ,779, ,996, Gold Stock Gold stock 56,035,017 56,035,017 Impairment for gold stock (7,399,840) (2,205,457) 48,635,177 53,829,560 The Gold stock was pledged for the overdraft facility obtained by the Sampath Bank PLC amounting to Rs. 28 Mn. An impairment test was carried out as at year end and Rs. 7.4 Mn was made to compensate for the decline in prevailing market prices for gold Real estate stock As at 31st March 2013 Thalawathugoda Nawala Boralesgamuwa Kandy Total Balance at the beginning of the year 55,525, ,000,000 4,725,000 38,276, ,526,056 Additions/Transfers during the year Disposals during the year (31,348,014) - (4,725,000) - (36,073,014) Impairment during the year (2,896,986) (12,600,000) - - (15,496,986) Balance at the end of the year 21,280, ,400,000-38,276, ,956,056 As at 31 March 2014 Balance at the beginning of the year 21,280, ,400,000-38,276, ,956,056 Additions/Transfers during the year Disposals during the year (9,473,972) - - (2,253,156) (11,727,128) Impairment during the year Balance at the end of the year 11,806, ,400,000-36,022, ,228,928 51

54 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees In order to ascertain the Net Realizable Value of the real estate stock, the company valued them as at 31 March 2014 by a professionally qualified independent valuer. The valuation was carried out by taking into account the observable prices in active market or recent market transactions on arm s length term. The Net Realizable Value was compared with the Net book value and have been accounted for in accordance with LKAS Rent receivable from Lavinia Breeze Rent receivable from Lavinia Breeze 6,800,000 6,350,000 Provision for rent receivable from Lavinia Breeze (6,800,000) (6,350,000) Deposits from customers Fixed deposits (Note 25.1) 5,068,260,986 5,344,855,081 Other deposits (Note 25.2) 64,479,683 54,657,572 5,132,740,669 5,399,512, Fixed deposits Fixed deposits - General 1,101,929,265 1,345,449,782 SFS - Abhimana 3,945,433,754 3,999,191,899 Staff fixed deposits 198, ,400 Ranwasi Deposits 20,699,454-5,068,260,986 5,344,855, Other deposits Savings - General 30,120,193 32,255,621 SFS Kumara Kumari 16,550,829 16,403,595 Staff savings 615, ,640 Dhanajaya savings 415, ,041 SFS saver 4,425,591 3,245,572 Dhana Pragathi 3,820 3,597 Miscellaneous savings 12,349,073 1,944,506 64,479,683 54,657, Interest bearing borrowings Debentures (Note 26.1) 102,000, ,301,798 Borrowings from securitization - 20,388,397 Temporary borrowings from banks & financial institutions - 39,098, ,000, ,788, Debentures Number of debentures 1,000,000 1,000,000 Value of debentures 102,000, ,301,798 The Rs. 100,000,000/- Unsecured redeemable subordinated debentures issued in 2010 at following rates will mature on 31 March

55 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Category Amount Interest rate Value as at 2014 Value as at 2013 Type A 11,565, % 11,712,878 11,767,166 Type B 500, % 506, ,450 Type C 72,275, % 73,413,396 73,524,212 Type D 15,660, % 16,368,007 16,503, ,000, ,000, ,301, Current tax liabilities Balance at the beginning of the year 34,804,703 40,582,784 Current tax charge for the year 2,722,035 77,524,155 Current tax payment (34,830,569) (63,158,619) VAT receivable - (11,882,327) Economic Service Charge receivable - (3,366,761) WHT receivable on Treasury Bill and Treasury Bonds interest (4,950,292) (4,638,066) WHT receivable on FD interest income (379,414) (256,463) (2,633,537) 34,804, Deferred tax liabilities Deferred tax asset Deferred tax liability Net deferred tax asset/ liability Recognised deferred tax asset and liabilities Leased property plant and equipment (250,262) (423,429) - - (250,262) (423,429) Provision for gratuity (1,512,471) (1,472,520) - - (1,512,471) (1,472,520) Property plant and equipment - - 4,430,803 2,492,525 4,430,803 2,492,525 Lease rentals - - 1,195, ,819 1,195, ,819 Total (1,762,733) (1,895,949) 5,626,410 3,146,344 3,863,677 1,250,395 Movement in deferred tax during the year Balance as at 1 April 2012 Recognised in profit or loss Recognised in OCI Balance as at 31 March 2013 Recognised in profit or loss Recognised in OCI Balance as at 31 March 2014 Leased property plant and - (423,429) - (423,429) 173,167 - (250,262) equipment Provision for gratuity (778,756) (335,142) (358,622) (1,472,520) (290,261) 250,310 (1,512,471) Property plant and equipment 4,842,641 (2,350,116) - 2,492,525 1,938,278-4,430,803 Lease rentals - 653, , ,788-1,195,607 Bad debt provison (1,037,992) 1,037, Lease rentals (55,708) 55, ,970,185 (1,361,168) (358,622) 1,250,395 2,362, ,310 3,863,677 The Company has provided for the above deferred tax liability without considering the impact of the following deductible temporary difference, as it is not probable that future taxable profit will be available against which the Company can utilize the benefits, in the foreseeable future considering the pending restructuring/consolidation plans by the directors. 53

56 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Unrecognised deferred tax asset - Collective and significant impairment on loans 126,480,564 - Tax lossess carried forward 227,666, ,147, Employee Benefit 29.1 Amount recognized in balance sheet - Present value of defined benefit obligation 5,401,681 5,259, Movement in the present value of defined benefit obligation Defined benefit obligation as at 1 April 5,259,000 3,111,813 Actuarial (Gain)/Loss (893,963) 950,252 Benefits paid during the year (414,250) (236,250) Current service costs and interest 1,450,894 1,433,185 Defined benefit obligation as at 31 March 5,401,681 5,259, Expense recognized in profit or loss Current service cost 578,490 1,059,767 Interest cost 872, ,418 1,450,894 1,433, Amounts recognized in other comprehensive income Actuarial (gain)/loss (893,963) 1,280, Actuarial assumptions An actuarial valuation of the gratuity liability was carried out as at 31st March 2014 by Mr. M. Poopalanathan, AIA, of Messrs Actuarial and Management Consultants (Pvt) Ltd, a firm of professional actuaries. The valuation method used by the actuaries to value the Fund is the Projected Unit Credit Method, the method recommended by the Sri Lanka Accounting Standard (LKAS 19) Employee Benefits. Retirement age 55 Years 55 Years Discount rate 10% 11% Salary increment 10% 10% 29.6 Sensitivity analysis The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the employment benefit liability measurement. Discount Rate Salary escalation rate Effect on charge to OCI Effect on employee benefit obligation 1% Increase As given in the report (271,683) (271,683) 1% Decrease As given in the report 301, ,423 As given in the report 1% Increase 273, ,418 As given in the report 1% Decrease (251,088) (251,088) 54

57 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Other liabilities Accounts payable 30,543,655 31,804,992 Other tax payables 1,857,187 (9,871,156) Lease creditors (Note 30.1) 1,317,678 2,347,391 33,718,520 24,281, Lease creditors Less than one year 1,115, ,890 One to five years 201,724 1,403,501 1,317,678 2,347, Stated capital Stated capital. 250,000, ,000, ,000, ,000,070 No of shares 500,000, ,000,140 As per the Special Resolution passed at the Extraordinary General Meeting (EGM) held on 27th March, 2012, it was resolved that each of the issued and subscribed 25,000,007 Voting Ordinary shares be sub - divided in to 20 (Twenty) Ordinary shares (Voting) fully paid up. Therefore, the number of ordinary shares outstanding was increased without an increase in resources. 32. Reserves Statutory reserve fund (Note 32.1) 105,972, ,972,056 Investment fund (Note 32.2) 50,704,977 50,704,977 Available for sale reserve (Note 32.3) 2,665,509 (4,564,229) Retained earnings (1,214,159,880) 30,379,843 (1,054,817,338) 182,492, Statutory reserve Balance at the beginning of the year 105,972,056 45,093,956 Transfers during the year - 60,878,100 Balance at the end of the year 105,972, ,972,056 Statutory reserve is a capital reserve which contains profit transferred as required by Section 3(b)(ii) of Central Bank Direction No. 1 of 2003, issued to Finance Companies. As per the said Direction, every Licensed Finance Company shall maintain a Reserve Fund and transfer to such reserve fund out of the net profits of each year after due provisions have been made for taxation and bad and doubtful debts on the following basis: Capital funds to Deposit Liabilities % of transfer to Reserve Fund Not less than 25% 5% Less than 25% and not less than 10% 20% Less than 10% 50% No transfers have been made as at 31 March 2014 as the Company is incurring losses 32.2 Investment fund Balance at the beginning of the year 50,704,977 22,882,378 Transfers during the year - 27,822,599 Balance at the end of the year 50,704,977 50,704,977 55

58 Notes to the Financial Statements (Contd.) As proposed in the budget proposals of 2011 every person or partnership who is in the business of banking or financial services is required to established to operate an Investment fund account. As and when taxes are paid after 1 January 2011, Registered Finance Companies (RFCs) shall transfer the following funds to the IFA and build a permanent fund in the RFC. - 8% of the profits calculated for the payment of value Added Tax (VAT) on financial services on dates as specified in the VAT Act for payment of VAT. - 5% of the profit before tax calculated for payment of income tax on dates specified in Section 113 of the Inland Revenue Act and amendments thereto for the self-assessment payment of tax. As per the requirements specified by the Central Bank guidelines on the operations of the Investment Fund Account, the funds are invested in government treasury bonds purchased from Wealth Trust securities Ltd, with a maturity of greater than 7 years. ISIN Code Interest rate Maturity Amount (Rs) LKB01022A % 1-Jan-22 27,768,346 LKB01019E % 1-May-19 5,027,598 32,795,944 No transfers were made to the investment fund as the Company incurred losses in the current year Available for sale reserve Balance at the beginning of the year (4,564,229) (7,211,400) Gain/(Loss) during the year 8,749,075 7,431,194 Matured T-bills and T-bonds (1,519,337) (4,784,023) Balance at the end of the year 2,665,509 (4,564,229) 33. Commitments and contingencies There were no commitments and contingencies as at reporting date, which require adjustments to or disclosures in the financial statements other than the below mentioned lease commitments Lease commitments Minimum lease payments Not later than one year 33,088,858 31,585,358 Later than one year & less then five years 124,541, ,774,610 Later than five years 88,989, ,844, ,619, ,204, Related party disclosures The Company carries out transactions in the ordinary course of its business with parties who are defined as related parties as per the Sri Lanka Accounting Standard - LKAS 24 Related Party Disclosures, the details of which are reported below Parent and ultimate controlling party The Company s parent company is ETI Finance Ltd which is the ultimate controlling party with 90% shareholding Transactions with Key Management Personnel (KMP) According to Sri Lanka Accounting Standard - LKAS 24 Related Party Disclosures, Key Management Personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly including any director(whether executive or otherwise of that entity). The Company considered the members of its Board and their close family members as Key Management Personnel (KMP) of the Company. Close family members are defined as spouse or dependent. Dependent is defined as any one who depends on the respective director for more than 50% of his/her financial needs. Since they have the authority and responsibility for planning, directing and controlling the activities of the Company. 56

59 Notes to the Financial Statements (Contd.) As at 31st March All Amounts in Sri Lanka Rupees Compensation to KMP Short term employment benefits (including CEO) 15,114,571 17,300,000 There were no post employment benefits or long term benefits provided to key management personnel Mr. Jeewaka Edirisinghe, Ms. Deepa Edirisinghe, Mr. Nalaka Edirisinghe, Mr. Asanka Edirisinghe, Mr. Sumathipala Kariyawasam, and Mr. Sujith D. Jayawardena are the Directors of the Company and Key Management Personnel of the following companies and have had transactions as disclosed below. Company names Mr. J. H. Edirisinghe Mrs. A. D. Edirisinghe Mr. N. P. Edirisinghe Mr. A. S. Edirisinghe Mr. Sumathipala Kariyawasam Mr. Sujith D. Jayawardena EAP Holdings Ltd ETI Finance Ltd * * Swarnamahal Jewellers (Pvt) Ltd EAP Network (Pvt) Ltd Lavinia Breeze Sea Food Restaurant (Pvt) Ltd EAP Security Services (Pvt) Ltd EAP Films & Theatres (Pvt) Ltd Hotel Sapphire (Pvt) Ltd EAP RMS Insurance Brokers (Pvt) Ltd Hotel Concord (Pvt) Ltd Mr. B. G. Wimalarathna Banda is an Iindipendent Non Executive Director and Mr. Sameera Ganegoda is a Non - Executive Director and CEO of ETI Finance Ltd. * Mr. Sumathipala Kariyawasam and Mr. Sujith D. Jayawardana had tendered their resignation to resign from the Directorship of ETI Finance Ltd. w.e.f 1 November

60 Notes to the Financial Statements (Contd.) 34.4 Transactions with entities that are controlled, jointly controlled or significantly influenced by Key Management Personnel or their close member of family, or shareholders who have either control, significant influences or joint control over entity are as follows; Transactions with related parties Name of the Company Description of Transaction Amounts (paid)/received Rs. Balance as at 31st March 2014 Rs. Swarnamahal Jewellers (Pvt) Ltd. Settlement of loan (122,115,500) - Loan Granted during the year (Note 34.5) 824,893,679 - Loan balance due from the company - 774,634,936 Gold sales 532,254,422 - Amount recovered during the year (532,254,422) Balance due from gold sales - - EAP Security Services (Pvt) Ltd Security expenses 4,207,177 (971,444) EAP Holdings Ltd Shared services expense 4,689,031 - Prepaid balance - 26,378,565 Lavinia Breeze Sea Food Restaurant (Pvt) Ltd Rent income (600,000) Provision for rent not recevied 600,000 EAP Broadcasting Company Limited Advertising Expense 889, Related party lending to Swarna Mahal Jewellers (Private) Limited This accommodation was unsecured and exceeded the Single Borrower Limit set by the CBSL Directions. It was rescheduled in March 2014 effective from 1 April 2014, by reducing the rate of interest from 24% to 16% and waiver of penal interest. However, the outstanding amount has reduced to Rs. 661,559,961/- as at 31 August Events after the reporting date There have been no other material events occurred between the reporting date and the date on which the financial statements are authorised for issue which require adjustments to or disclosure in the financial statements 36 Litigation and Claims There were no litigation claims against the company as at the reporting date 58

61 Notes to the Financial Statements (Contd.) 37 Comparative Information 37.1 Restatement The following comparative figures have been restated in the 2013 Financial Statement due to the adoption of LKAS 19 (Revised)- Employee Benefits to maintain comparability of Financial Statements in order to provide a better presentation as required by LKAS 8-Accounting policies, Changes in Accounting Estimates and Errors; Defined Benefit Obligation As Disclosed in 2012/13 Restated balance Adjustment Employee Benefits 3,982,079 5,259,000 1,276,921 Personal Expenses 81,461,145 81,457,272 (3,873) Other comprehensive income - Actuarial loss - 1,280,794 1,280,794 - Deferred tax impact - (358,622) (358,622) 922,172 Income Tax expense 76,161,903 76,162,987 1,084 Reconciliation of retained earnings As per 2012/13 annual report 31,299,226 Defined benefit obligation 3,873 Actuarial gain (922,172) Deferred tax impact (1,084) As per 2013/14 annual report 30,379, Re-Classification The following comparative figures have been reclassified in the financial statements for the year ended 31 March 2014 in order to provide a better presentation. Comparative information in the financial statements have been reclassified as follows Interest income has been reclassified as follows; 2013 Interest income previously reported 1,339,429,496 Transferred to other income (8,683,808) Reclassified balance 1,330,745,688 Other income has been reclassified as follows Other income previously reported 748,459 Transferred from interest income 8,683,808 Reclassified balance 9,432, Going Concern The Company incurred a loss of Rs.1,245,183,376/- during the year ended 31 March 2014 and as of that date the Company s total liabilities exceeded its total assets by Rs.804,817,268/-. The financial statements of the Company have been prepared on a going concern basis without making adjustments that may be required to the recorded assets and the classification of liabilities if the Company is unable to continue as a going concern. The validity of the above going concern assumption is justified by a 5 year cash flow projection of the company. The significant and sudden drop in Gold Prices has significantly affected the Company s performance and the provisions made in this regard is the main reason for the loss during the year and the resultant negative net liability. The Company is under the Central Bank of Sri Lanka s Financial Consolidation Restructuring program and the directors plan to divest/merge it with an adequate capital injection to regain compliance and therefore continue as a going concern. 59

62 Notes to the Financial Statements (Contd.) 39 Maturity of assets and liabilities An analysis of the total assets employed and total liabilities as at the year end,based on the remaining period at the reporting date to the respective contractual maturity dates is given below. Assets/Liabilities Maturity period Up to Over 5 Total 1 month Months Months Years Years Rs. Rs. Rs. Rs. Rs. Rs. Interest earning assets Cash at bank 245,973, ,973,008 Deposits with financial institutions Financial assets available for sale - Treasury Bills 39,914, ,564, ,865, ,343,404 - Treasury Bonds ,221,181 36,243,070 54,464,251 - CRIB ,500 2,500 Loans & receivables * - Pawning 972,102, ,897, ,609, ,260,610,147 - Leasing 1,964,572 3,929,144 17,681,148 7,571,601-31,146,465 - HP 8,790,689 17,581,378 79,116,200 34,592, ,080,557 - Term Loans 28,142,056 53,648, ,176, ,651, ,618,296 1,296,887, ,620,452 1,299,449, ,036,291 36,245,570 4,069,238,628 Non interest earning assets Cash in hand 62,411, ,411,425 Financial assets held at fair value through profit and loss 3,813, ,813,915 Real estate stock ,806, ,422, ,228,928 Gold stock - 48,635, ,635,177 Property, plant & equipment ,202,231 53,202,231 Investment property ,675,000 35,675,000 Other assets ,767,395 5,147,538 66,914,933 66,225,340-60,441, ,190,296 94,024, ,881,609 Total assets 1,363,112, ,620,452 1,359,890, ,226, ,270,339 4,494,120,237 Percentage - 31st March Percentage - 31st March Bank overdrafts - 23,845, ,845,768 Deposits from customers 720,229,652 1,267,344,635 2,128,057,822 1,017,108,560-5,132,740,669 Interest bearing borrowings ,000, ,000, ,229,652 1,291,190,403 2,230,058,549 1,017,108,560-5,258,587,164 Non interest bearing assets Other liabilities 94, , ,080 1,418,380 37,802,523 40,350,341 Equity (804,817,268) (804,817,268) 94, , ,080 1,418,380 (767,014,745) (764,466,927) Total liabilities 720,323,770 1,291,378,643 2,230,905,629 1,018,526,940 (767,014,745) 4,494,120,237 Percentage - 31st March (17.07) 100 Percentage - 31st March * Loans and receivables are reported net of impairment 60

63 Notes to the Financial Statements (Contd.) 40. Segmental information As at 31st March All Amounts in Sri Lanka Rupees Pawning Other Total Income Interest income 812,900, ,078,296 1,057,979,109 Other income (694,151,214) (148,244,364) (842,395,578) Total income 118,749,599 96,833, ,583,531 Percentage 76.84% 23.16% 100% Less : Interest 625,239, ,501, ,740,984 Other expenses 495,178, ,289, ,467,658 Total expenses 1,120,418, ,790,497 1,458,208,642 Profit before taxation (1,001,668,547) (240,956,565) (1,242,625,111) Less : income tax - (2,558,265) (2,558,265) Profit after taxation (1,001,668,547) (243,514,829) (1,245,183,376) Segment assets 2,309,245,326 2,184,874,910 4,494,120,237 Percentage 51.38% 48.62% 100% Segment liabilities 2,722,790,228 2,563,800,909 5,298,937,505 For the year ended 31st March 2013 Income Interest income 1,168,702, ,043,188 1,330,745,688 Other income (15,373,693) 24,702,737 9,329,044 Total income 1,153,328, ,745,925 1,340,074,732 Percentage 87.82% 12.18% 100% Less : Interest 697,823,363 96,754, ,578,117 Other expenses 305,250,924 42,323, ,574,640 Total expenses 1,003,074, ,078,470 1,142,152,757 Profit before taxation 150,254,520 47,667, ,921,976 Less : income tax (66,888,718) (9,274,269) (76,162,987) Profit after taxation 83,365,802 38,393, ,758,989 Segment assets 4,663,929,273 1,438,766,049 6,102,695,322 Percentage 76.42% 23.58% 100% Segment liabilities 4,332,698,026 1,336,585,196 5,669,283,222 61

64 Eight Years at a Glance Year Ended 31st March (Audited) Profit performance Gross Income ,078 1, Interest Income ,061 1,332 1,058 Interest Expenses Interest on customers deposits Interest on other borrowings Net Interest Income Other Income (842) Operating Expenses * Impairment charges/ (reversals) for loans and other losses (27) Profit before tax (PBT) 5 (39) (12) 26 (25) (1,228) Income Tax & Other Tax expenses ** Profit after tax (PAT) 3 (39) (12) 17 (74) (1,245) Other comprehensive income for the year, net of tax (1) (6) 1 8 Total comprehensive income for the year 3 (39) (12) 17 (75) (1,237) Assets Cash and cash equivalents Investments In Government Securities Other Investments Pawning Gold Jewellery ,714 3,694 4,610 2,261 Hire Purchase Receivable Lease rentals receivable Other Loans & Advances Value of non performing Advances ,280 Other Trading Stock Other Receivables Fixed assets Total Assets 933 1,371 1,664 2,419 3,948 5,194 6,103 4,494 Liabilities Fixed Deposits 682 1,120 1,285 1,896 3,502 4,456 5,345 5,068 Savings Borrowings (Refinance) Other Liabilities

65 Total Liabilities 725 1,202 1,507 2,188 3,792 4,885 5,671 5,299 Shareholders Funds Stated Capital Reserves 8 (31) (43) (19) (94) (1,055) Total Shareholders Fund (805) Total Equity and Liabilities , ,194 6,103 4,494 Other Information Number of Staff as at 31st March Number of Branches & Pawning Centers Ratios Growth of Income -9.4% 22.6% 62.6% 37.5% 68.0% 51.0% 24.2% -83.9% Cost to Income Ratio 90.6% 200.0% 114.8% 80.1% 69.5% 57.4% 60.6% 458.6% Growth of Deposits -27.4% 64.2% 18.6% 44.0% 82.7% 26.9% 19.8% -4.9% Growth of Advances -45.6% 18.0% 7.6% 101.1% 126.1% 30.7% 23.3% -33.8% ROA (before Tax) 0.5% -3.4% -0.8% 1.3% -0.8% 5.7% 3.9% -23.2% ROA (After Tax) % -0.8% 0.8% -2.3% 3.5% 2.2% -23.5% ROE (after Tax) 1.6% -20.7% -7.4% 8.8% 38.8% 65.8% 33.2% % Advances to Deposits & Borrowings 80.5% 57.9% 54.2% 70.2% 88.0% 88.7% 92.8% 65.4% Total Assets to Shareholders funds (times) EPS (after Tax) (Rs.){considered Subdivision} Net Asset Value P.S. (Rs.) {considered Subdivision} Interest Cover (times) Net Interest Margin 4.8% 1.8% 3.5% 12.1% 13.2% 13.6% 10.7% 5.2% Net Interest Spread *** 3.6% 2.9% 8.3% 15.2% 14.4% 14.0% 10.7% 7.2% Liquid Assets Ratio 15.7% 18.6% 13.6% 11.9% 8.4% 11.2% 9.0% 13.0% Government Security / TB Ratio 11.9% 12.6% 12.4% 8.6% 10.0% 11.1% 10.1% 7.1% NPL Ratio 0% 0% 0% 0.64% 0.35% 0.31% 10.2% 30.95% Core Capital Ratio 28.8% 16.8% 12.9% 16.0% 10.3% 17.4% 22.3% -43.0% Total Risk Weighted Capital Ratio 28.8% 16.8% 12.9% 23.7% 16.9% 21.8% 25.3% -40.9% * Ratios for the FY s before 2011 have been calculated based on the Financial Statement prepared in accordance with the SLAS. 63

66 Share Information 1. Colombo Stock Exchange The Company s Ordinary Voting shares were listed on the DiriSavi Board of the Colombo Stock Exchange with effect from 26 th May The interim financial statements of the Company were submitted to the Colombo Stock Exchange within two months from the reporting date. 2. Twenty largest Ordinary Shareholders as at 31 st March 2014 Names No. of Shares Percentage (%) M/s ETI Finance Ltd 450,000, Mr. W.A.S.P. De Saram 8,054, M/s Awis Holdings (Private) Ltd. 4,173, Mrs. N. Muljie 2,148, Mrs. T.H. Fernando 2,144, Mr. P.A. Anil 1,334, Mr. W.A.K.D. Saparamadu 670, Mrs. F.R. Rafaideen 575, Mr. K.L. Udayananda 536, Mr. R.E. Rambukwelle 505, Mr. J.M.I. Jayaweera 500, M/s Seylan Bank PLC/Mr.S.N.C.W.M.Bandara Chandrasekera Kandegedara 484, Mrs. S.S.Navaratnam 456, Mr.R.M.I. Rajapaksa 451, Mr. A.Y. Gunawardane 450, Mr. H.A. Van Starrex 400, Mr. H.W.M. Woodward 390, Mr. T. Rajasekaran 375, Mr. S.N.C.W.M.B.C. Kandegedara 350, Mrs. F.F. Hamid 318, Others 25,681, Total Shares 500,000, The stated Capital of the company consisting solely issued and fully paid up Ordinary Voting Shares of 500,000,140 as at 31 st March Market Price of an Ordinary Share 31 st March st March 2013 Highest Lowest Closing No. of Ordinary Voting Shares 500,000, ,000,140 64

67 4. Number of Ordinary Shareholders as at 31 st March 2014 Share Holdings Resident Non Resident Total No of Shares Number of Shareholders Percentage (%) Number of Shareholders No of Shares Percentage (%) Number of Shareholders No of Shares Percentage (%) 1 to , , to 10, ,034, , ,069, ,001 to 100, ,593, , ,696, ,001 to1000, ,065, , ,045, Over 1,000, ,710, ,144, ,854, Total 2, ,737, ,262, , ,000, Categories of shareholders No. of Shareholders No. of Shares Percentage (%) Individuals 2,236 43,846, Institutional ,153, Total 2, ,000, Public holding as a percentage of Issued Share Capital as at 31st March % 65

68 Our Network FULLY FLEDGED BRANCHES No Branch Address Tele No. 01 Batticaloa No. 190, Trincomalee Road, Batticaloa Chilaw No.24A, Bazaar Street, Chilaw 03 Hatton No.15, Main Street, Hatton Jaffna 04 Jaffna No.338, Hospital Road, Jaffna Kandy No.156, Kotugodella Street, Kandy Kollupitiya No.654, Galle Road, Colombo Negombo No.93, Rajapaksha, Broadway, Negombo 08 Nugegoda No.31, St. Thilakaratna Mw, Nugegoda Vavuniya Trincomalee 09 Ratnapura No.15, Main Street, Ratnapura Trincomalee No.31, Central Road, Trincomalee Vavuniya No.141, Kandy Road, Vavuniya PAWNING CENTRES No Branch Address Tele No. Chilaw Batticaloa 12 Aluthgama No.164, Galle Road, Aluthgama 13 Gampaha No.16, Market Street, Gampaha 14 Ja-Ela No.120, Negombo Road, Ja- Ela 15 Ragama No.62A, Tewatte Road, Ragama 16 Sea Street No. 05, Jampettah Street, Colombo Ja-ela Wattala Kollupitiya Negombo Gampaha Ragama Sea Street Nugegoda Aluthgama Kandy Hatton Ratnapura 17 Wattala No.416, Negombo Road, Wattala