NOTES TO THE FINANCIAL STATEMENTS

4. Gross Income

Accounting Policy

The Gross Income represents the Interest Income and the Non-Interest Income earned by the Bank and the Group during the year.

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

5. Net Interest Income

Accounting Policy

The Net Interest Income represents the Gross Interest Income earned from financial assets, after set off of interest expenses incurred on financial liabilities by the Bank and the Group during the year.

The Bank and the Group use the Effective Interest Rate (EIR) for Financial Assets and Financial Liabilities that are measured at amortized cost, held for trading or classified as available-for-sale.

Effective Interest rate (EIR) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability.

The carrying amount of financial assets or financial liabilities are adjusted if the Bank and the Group revise their estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR. The amortized cost is calculated by taking into account any discount or premium on an acquisition, fees and costs that are an integral part of the EIR. The change in the carrying amount is recorded as ‘interest income’ for financial assets and ‘Interest expenses’ for financial liabilities.

5.1 Interest Income

5.2 Interest Expenses

5.3 Interest Income from Sri Lanka Government Securities

5.4 Interest Income on Impaired Financial Assets

Notional Tax Credit on Secondary Market Transactions

Any company which derives income from secondary market transactions involving any security or Treasury Bonds or Treasury Bills, on which the income tax has been deducted at the rate of 10% at the time of issue of such security, is entitled to a notional tax credit at 10% of the grossed up amount of Net Interest Income from such secondary market transactions, to an amount of one ninth of the same. Accordingly, the Net Interest Income earned by the Bank and the Group from such transactions has been grossed up in the Financial Statements for the year ended 31 December 2016 and the notional tax credit amounted to LKR 279.4 million (2015 – LKR 197.1 million).

6. Fee and Commission Income

Accounting Policy

Income from Fee-based Activities

Fees and commission income that are earned from financial assets and financial liabilities, are recognized at the EIR and is accounted in the Statement of Profit or Loss over the life of the instrument.

Other fees and commission income on account servicing fees, investment management, fees for underwriting, advisory work, loan syndication and all other fees and commissions earned during the normal course of the business of the Bank and Group, are recognized as the related services are performed on an accrual basis. If a loan commitment is not expected to result in the drawdown of a loan, then the related loan commitment fees are recognized on a straight-line basis over the commitment period.

Income from Financial Guarantees

The Bank and Group issue financial guarantees, consisting of letters of credit, guarantees and acceptances, in the normal course of its business activities. Financial guarantees are initially recognized in the Statement of Financial Position as a contingent liability at the guarantee value.

The premium received is recognized in the Statement of Profit or Loss on a straight-line basis over the life time of the guarantee and the balance amount to be amortized to the Statement of Profit or Loss after the reporting date, is recognized in the Statement of Financial Position, as Other Liabilities.

Rental Income

The rental income earned by renting out premises is recognized on an accrual basis.

7. Net Gains/(Losses) from Trading

Accounting Policy

Net gains/(losses) from trading represent income from foreign exchange and include gains and losses from spot and forward contracts and other currency derivatives.

8. Net Gains/(Losses) from Financial Investments

Accounting Policy

All gains and losses from changes in fair value and dividend income from investments ‘held-for-trading’ or as ‘available-for-sale’ are included under Net Gains/(Losses) from Financial Investments.

Income from Equities – includes the results of buying and selling and changes in the fair value of equity securities.

Income from Debt Securities – includes the realized and unrealized gains of debt securities.

Income from Unit Trusts – includes changes in the fair value of unit trust investments.

9. Other Operating Income

Accounting Policy

Other Operating income includes capital gains/(losses), dividend income, foreign exchange gains, gains from property, plant & equipment and gains from investment properties.

Dividend Income

Dividend income from group investments in subsidiary companies and associate companies and other investments in shares held for other than trading purposes, are recognized when the Bank’s and the Group’s right to receive the payment, is established.

Capital Gains/(Losses)

Capital gains/(losses) from the sale of securities and from the sale of group investments represent the difference between the sales proceeds from sale of such investments and the carrying value of such investments at the time of disposal. This is recognized as an item of other income in the year, in which significant risk and rewards of the ownership are transferred to the buyer.

Foreign Exchange Gains

The change in exchange rate differences arising from the valuation of the retained profits held in foreign currency is included under ‘foreign exchange gains’.

Gains on Sale of Property, Plant & Equipment

Gains on sale of property, plant & equipment represent the difference between the sales proceeds and the net book value of property, plant & equipment that are disposed during the year.

Gains on Investment Properties

Gains from investment properties arise from the changes in the fair values of investment properties and are included in the Statement of Profit or Loss, in the year in which they arise.

10. Impairment for Loans and Receivables and Other Losses

Accounting Policy

The Bank and the Group recognize the changes in the impairment provisions for loans and receivables to banks and other customers, which are assessed as per the LKAS 39 – Financial Instruments: Recognition and Measurement. The methodology adopted by the Bank and the Group is explained in Note 25.5 to these Financial Statements. The Bank also makes provisions/write-backs for impairment of investments in subsidiary and associate companies and other financial assets, when there is a permanent diminution in the carrying value of these investments.

11. Personnel Expenses

Accounting Policy

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

Defined Contribution Plans

A defined contribution plan is a post employment benefit plan under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods, as defined in the Sri Lanka Accounting Standard – LKAS 19 (Employee Benefits).

Employees’ Provident Fund and Employees’ Trust Fund

Employees are eligible for Employees’ Provident Fund contributions and Employees’ Trust Fund contributions, in accordance with the respective statutes and regulations. The Bank contributes 15% and 3% of gross salaries of employees to the Bank’s Employees’ Provident Fund and the Employees’ Trust Fund respectively. Group companies contribute 12% and 3% of gross salaries of employees to the Employees’ Provident Fund of Central Bank of Sri Lanka and Employees’ Trust Fund respectively.

The above expenses are identified as contributions to 'Defined Contribution Plans' as defined in the Sri Lanka Accounting Standard – LKAS 19.

Defined Benefit Plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Accordingly, the pension fund and staff gratuity were considered as defined benefit plans as per Sri Lanka Accounting Standard – LKAS 19 (Employee Benefits).

The contributions to the defined benefit plans are recognized in the Statement of Profit or Loss, based on an actuarial valuation carried out for the gratuity liability and the pension fund of the Bank and the Group in accordance with the LKAS 19.

The assumptions used in actuarial valuations are given in detail in Note 40 to these Financial Statements.

Share Based Payments

Share-based payments represent the Bank’s cost on the Equity Linked Compensation Plan (ELCP) which is morefully described in Note 43.2 and 46.3 to these Financial Statements.

12. Other Expenses

Accounting Policy

Other expenses include operating expenses of the Bank and the Group which are recognized in the Statement of Profit or Loss on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant & equipment in a state of efficiency has been charged to the Statement of Profit or Loss in arriving at the profit for the year. Other expenses excluding depreciation of property, plant & equipment and amortization of intangible assets are recognized on an accrual basis.

Directors’ emoluments include fees paid to Non-Executive Directors. Remunerations paid to Executive Directors are included under salary and bonus in Note 11.

13. Tax on Financial Services

Accounting Policy

Tax on Financial Services include Value Added Tax and Nation Building Tax on Financial Services. The base for the computation of Value Added Tax on Financial Services is the accounting profit before emoluments paid to employees and income tax, which is adjusted for the depreciation computed on the prescribed rates. The regulatory tax rate for the period from 2 May 2016 to
11 July 2016 and from 1 November 2016 to 31 December 2016 was 15%. The rate for the balance period of the current year was 11% (2015 – 11%).

The same base is also applied for the computation of the Nation Building Tax on Financial Services and the regulatory tax rate is 2%.

14. Share of Associate Companies’ Profits/(Losses)

The Group’s share of profit/(loss) of an investment in an associate company which is recognized as per the equity method, is shown on the face of the Statement of Profit or Loss. This is the profit/(loss) attributable to equity holders of the associate company and therefore, is profit/(loss) after tax and non-controlling interests of the subsidiary companies and the associates, if any.

14.1

In April 2015, Resus Energy PLC was accounted as an Investment in Associate, which was a 32% owned associate company of NDB Capital Holdings Ltd. However NDB Capital Holdings Ltd. divested part of its 32% owned investment in Resus Energy PLC on 17 September 2015 and subsequently the investment was reclassified as ‘Available-for-Sale’ Investments on 30 September 2015. As such, the LKR 77.8 million was recognized as an equity accounted profit for the period in which the Investment was accounted as an Investment in Associate.

15. Taxation

Accounting Policy

As per the Sri Lanka Accounting Standard – LKAS 12 – ‘Income Taxes’, the tax expense/tax income is the aggregate amount included in determination of profit or loss for the year in respect of income tax and deferred tax. The tax expense/income is recorded in the Statement of Profit or Loss except to the extent that it relates to items recognized directly in Equity in which case it is recognized in the Other Comprehensive Income.

The tax rates and laws used to compute the amount are those that are enacted or substantively enacted by the Reporting date.

The components of the income tax expense for the years ended 31 December 2016 and 2015 are:

15.1 Reconciliation of the Accounting Profit to Current Tax Expense

15.2 Applicable Income Tax rates

The applicable income tax rates of the Bank and the subsidiary companies for the years 2016 and 2015 are as follows:

* The Company is, however, entitled to a tax credit equivalent to the higher of actual foreign tax suffered or 80% of the Mauritius tax chargeable on its foreign source income.

15.3 Deferred Tax

The following table shows the deferred tax expense recorded in the Statement of Profit or Loss and the Other Comprehensive Income due to the changes in the deferred tax assets and liabilities:

16. Earnings Per Share on Profit

Accounting Policy

The Bank and the Group present the Basic and Diluted Earnings per Share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.

Diluted EPS is determined by adjusting both the profit or loss attributable to the equity holders of the parent and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees as required by the Sri Lanka Accounting Standard – 33 (LKAS 33) – ‘Earnings per Share’:

17. Dividend Per Share

Accounting Policy

Interim and final dividends are recognized and accrued when the dividends are recommended and declared by the Board of Directors in accordance with the Companies Act No. 07 of 2007.

The Board of Directors of the Bank has recommended the payment of a total final dividend of LKR 8.00 per share comprising of a cash dividend of LKR 2.00 per share and a scrip dividend of LKR 6.00 per share for the year ended 31 December 2016.

Dividend Paid during the Year

18. Analysis of Financial Instruments by Measurement Basis

Financial instruments in the Statement of Financial Position are measured on an ongoing basis either at fair value or at amortized cost. The Accounting Policies describe how each category of financial instrument is measured and how income and expenses, including fair value gains and losses are recognized. The following tables analyze the carrying amount of the financial instruments by category as defined in Sri Lanka Accounting Standard – LKAS 39 – ‘Financial Instruments: Recognition and Measurement’ under headings of the Statement of Financial Position:

19. Cash and Cash Equivalents

Accounting Policy

For the purpose of reporting in the Statement of Financial Position, cash and cash equivalents comprise of cash in hand and balances with banks. The cash in hand comprises of both local currency and foreign currency.

The balances of cash in hand are recorded at book value and the balances with banks are carried at amortized cost in the Statement of Financial Position. For the purpose of the Statement of Cash Flow, cash and cash equivalents consist of cash and
short-term deposits as defined above, net of unfavourable Nostro balances.

20. Balances with the Central Bank of Sri Lanka

Balances with the Central Bank of Sri Lanka includes the cash balance that is required to be maintained with the Central Bank of Sri Lanka as per the provisions of Section 93 of the Monetary Law Act.

The minimum cash reserve requirement was 7.5% of the Rupee deposit liabilities as at 31 December 2016 (6.0% as at 31 December 2015). This reserve requirement is not applicable for the foreign currency deposit liabilities of the Domestic Banking Unit and the Foreign Currency Banking Unit.

21. Placements with Banks

Accounting Policy

Placements with Banks include short-term deposits placed in banks and are subjected to insignificant risk of changes in fair value, and are used by the Bank and the Group in the management of its short-term commitments. They are recorded in the Financial Statements at their face values or the gross values, where appropriate.

22. Derivative Financial Instruments

Accounting Policy

Derivatives are financial instruments that derive their values in response to changes in interest rates, financial instrument prices, commodity prices, foreign exchange rates, credit risk and indices. Derivatives are categorized as ‘trading’ unless they are designated as hedging instruments.

The Bank and the Group use derivatives such as currency SWAPs, forward foreign exchange contracts and currency options. Derivatives are recorded at fair value and are recorded as assets when their fair value is positive and as liabilities when their fair value is negative. The derivatives are valued using valuation techniques which consider current market interest rates, forward interest rates and spot and forward exchange rates. Where the initially recognized fair value of a derivative contract is based on a valuation model that uses inputs that are not observable in the market, it follows the same initial recognition accounting policy as for other financial assets and liabilities.

The changes in the fair value of derivatives are included in ‘Net Gains/(Losses) from trading except the currency SWAP entered with the Central Bank of Sri Lanka.

It is assumed that the SWAP arrangement that the Bank has, with Central Bank of Sri Lanka, would be renewed annually.

All derivatives are initially recognized and subsequently measured at fair value with all revaluation gains recognized in the Statement of Profit or Loss (except where cash flow of the net investment hedging has been achieved in which case the effective portion of changes in fair value is recognized within Other Comprehensive Income).

The method of recognizing the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument and if so, the nature of the item being hedged. The Bank only has hedges of highly probable future cash flows attributable to a recognized asset or liability or a forecast transaction (cash flow hedge).

Hedge Accounting

Hedge accounting is used for derivatives designated in this way, provided certain criteria are met. At the inception, the Bank and the Group document the transaction, the relationship between hedging instruments and hedged items as well as its risk management objective and strategy for undertaking various hedge transactions. The Bank and the Group also document their assessment, both at the inception of the hedge and on an ongoing basis, if the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Cash Flow Hedge

The effective portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedging instruments is recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the Statement of Profit or Loss.

The amounts accumulated in Equity are reclassified to the Statement of Profit or Loss in the periods in which the hedged items, affect, profit or loss. When a hedging instrument is expired or is sold, or when a hedge no longer meets the criteria for hedge accounting. Any cumulative gain or loss existing in Equity at that time remains in Equity and is recognized when the forecast transaction is ultimately recognized in the Statement of Profit or Loss. When a forecast transaction is no longer expected to occur, the cumulative gains or losses that were reported in Equity are immediately transferred to the Statement of Profit or Loss.

The changes in the fair value of any derivative instrument which do not qualify for hedge accounting are recognized immediately in the Statement of Profit or Loss.

The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amounts indicate the volume of transactions outstanding as at 31 December 2016 and are indicative of neither the market risk nor the credit risk:

22.1 Currency SWAP

The Bank raised USD 75 million on 21 July 2014 through foreign borrowings for a period of seven years, against which a SWAP arrangement was entered into with the Central Bank of Sri Lanka for 50 per cent of the borrowing value. The SWAP arrangement will be renewed annually over the tenor of the borrowing.

As per Sri Lanka Accounting Standard – LKAS 39 – Financial Instruments: Recognition and Measurement, the Bank identified this particular transaction as a ‘Cash Flow Hedge’ after documenting the hedge relationship.

The objective of the hedge was to reduce the variability of the capital portion of cash flows of a foreign currency denominated borrowings attributable to changes in LKR/USD exchange rate.

A brief description of the hedge is give below:

22.1 (a) SWAP Agreement

22.1 (b) Total Amount Recognized in the Statement of Comprehensive Income Relating to the Currency SWAP

22.1 (c) The expected impact to the Statement of Financial Position on the Hedge is as follows:

The expected impact to the Statement of Financial Position is forecasted with the assumption that the currency SWAP with Central Bank of Sri Lanka is renewed annually.

23. Financial Assets Held-for-Trading

Accounting Policy

Financial assets held-for-trading consist of quoted equity securities, Unit Trust Investments and Sri Lanka Government Debt Securities, that have been acquired principally for the purpose of selling or repurchasing in the near term, and are recorded at fair values using assumptions that a market participant would make, when valuing such instruments. The quoted equity securities and the Unit Trust Investments are valued using the market prices published by the Colombo Stock Exchange. Sri Lanka Government Debt Securities are valued using discounted cash flow techniques which incorporate market interest rates for investments in Government Securities.

The changes in the fair value are recognized in ‘Net gains/(losses) from financial investments’. Dividend income is recorded in ‘Net gains/(losses) from financial investments’ according to the terms of the contract, or when the right to receive the payment has been established.

24. Loans and Receivables to Banks

Accounting Policy

Loans and receivables to Banks include refinance lending to other banks with fixed or determinable payments that are not quoted in an active market. After initial measurement, loans and receivables to banks are subsequently measured at amortized cost using the EIR, less allowance for impairment. The amortization is included in ‘interest income’ in the Statement of Profit or Loss. The losses arising from impairment are recognized in the Statement of Profit or Loss as ‘impairment for loans and receivables and other losses’.

25. Loans and Receivables to Other Customers

Accounting Policy

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

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

After initial measurement, ‘loans and receivables to other customers' are subsequently measured at amortized cost using
the EIR, less allowance for impairment. The amortization is included in ‘interest income’ in the Statement of Profit or Loss. The losses arising from impairment are recognized in the Statement of Profit or Loss as ‘impairment for loans and receivables and other losses’.

Write-off of Loans and Receivables to Other Customers

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

Rescheduled Loan Facilities

Where possible, the Bank and the Group seek to restructure loans and receivables rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. The management continually reviews rescheduled loan facilities to ensure that all criteria are met and that future payments are likely to occur. The loan facilities continue to be subject to an individual or collective impairment assessment, calculated using the original EIR of the loan facilities.

Collateral Valuation

The Bank and the Group seek to use collateral, where possible, to mitigate their risks on loans and receivables to other customers. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and other credit enhancements.

To the extent possible, the Bank and the Group use active market data for valuing financial assets, held as collateral. Other financial assets which do not have a readily determinable market value are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as independent valuers, Audited Financial Statements and other independent sources.

Leasing and Hire Purchases

Assets leased to customers under agreements that transfer substantially all the risks and rewards associated with ownership other than legal title, are classified as finance leases. Lease and hire purchase rentals receivable in the Statement of Financial Position include total lease and hire purchase payments due net of unearned interest income not accrued to revenue and allowance for impairment.

25.1 Loans and Receivables to Other Customers – By Product

25.2 Loans and Receivables to Other Customers – By Currency

25.3 Loans and Receivables to Other Customers – By Industry

25.4 Loans and Receivables to Other Customers – By Province

The province-wise disclosure is made based on the location of the branch from which the facilities have been disbursed.

25.5 Allowance for Impairment Charges for Loans and Receivables to Other Customers

Accounting Policy

The Bank and the Group assess at each reporting date, whether there is any objective evidence that loans and receivables to other customers are impaired. Loans and receivables to other customers are deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an ‘incurred loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the loans and receivables that can be reliably estimated.

The Bank and the Group review their individually-significant loans and receivables at each reporting date to assess whether an impairment loss should be recorded in the Statement of Profit or Loss. In particular, the management’s judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance for impairment.

Loans and receivables to other customers that have been assessed individually and found not to be impaired are assessed together with all individually insignificant loans and advances in groups of assets with similar risk characteristics. This is to determine whether a provision should be made due to incurred loss events for which there is objective evidence, but the effects of which are not yet evident. The collective assessment takes into account data from the loan portfolio such as, loan ownership types, levels of arrears, industries etc. and judgments on the effect of concentrations of risks and economic data (including levels of unemployment, inflation rate, interest rates, and exchange rates).

Individually Assessed Loans and Receivables to Other Customers

The criteria used to determine that there is such objective evidence includes:

• known cash flow difficulties experienced by the borrower;
• past due contractual payments of either principal or interest;
• breach of loan covenants or conditions;
• the probability that the borrower will enter bankruptcy or other financial realization; and
• a significant downgrading in credit rating by an external credit rating agency.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the Statement of Profit or Loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Such interest income is recorded as part of ‘interest income’.

The present value of the estimated future cash flows is discounted at the financial asset’s original EIR of the loan facility. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

Collectively Assessed Loans and Receivables to Other Customers

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the credit risk characteristics such as asset type, industry, past-due status and other relevant factors.

Impairment is assessed on a collective basis in two circumstances:

• To cover losses which have been incurred but have not yet been identified on loans subject to individual assessment; and
• For homogeneous groups of loans that is not considered individually significant.

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

Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows reflect, and are directly consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

25.5 (a) Allowance for Impairment Charges for Loans and Receivables to Other Customers

25.5 (b) Movements in the Allowances for Individual and Collective Impairment Charges during the year for Loans and Receivables to Other Customers

25.6 Leasing and Hire Purchases

25.6 (a) Allowance for Impairment Charges

25.6 (b) Movements in Individual and Collective Impairment Provision during the year for Lease & Hire Purchase Rentals Receivables

25.7 Maturity of Leasing and Hire Purchases

26. Financial Investments – Loans and Receivables

Accounting Policy

Financial investments – Loans and receivables include Government Securities, unquoted Debt Instruments and Securities purchased under resale agreements and quoted Debentures. After initial measurement, these are subsequently measured at amortized cost using the EIR, less provision for impairment. The amortization is included in interest income in the Statement of Profit or Loss. The losses arising from impairment are recognized in the Statement of Profit or Loss as impairment charges for loans and receivables and other losses.

Securities Purchased Under Resale Agreements

The Bank and the Group purchase a financial asset and simultaneously enter into an agreement to resell the asset (or similar asset) at a fixed price at a future date. The arrangement is accounted for as a financial asset in the Financial Statements of the Bank and the Group, reflecting the transactions economic substance as a loan granted by the Bank and the Group. Subsequent to initial recognition, these are measured at their amortized cost using the EIR method with the corresponding interest receivable being recognized in the Statement of Profit or Loss.

27. Financial Investments – Available-for-Sale

Accounting Policy

Available-for-sale investments include equity and Government Securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss.

Government Securities in this category are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity or in response to changes in the market conditions.

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

Unrealized gains and losses are recognized directly in equity (Other Comprehensive Income) in the ‘Available-for-Sale Reserve’. When the investment is disposed of, the cumulative gain or loss previously recognized in equity is recognized in the Statement of Profit or Loss in ‘Net gain/(loss) from financial investments’. Where the Bank and the Group hold more than one investment in the same security, they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the effective interest rate (EIR).

Dividends earned whilst holding available-for-sale financial investments are recognized in the Statement of Profit or Loss as ‘other operating income’ when the right of the payment has been established.

Impairment of Financial Investments – Available-for-Sale

The Bank and the Group review their debt securities classified as available-for-sale investments to assess whether they are impaired by performing a counter party risk assessment at each reporting date.

The Bank and the Group also record impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. In making this judgment, the Bank and the Group identify facilities which have been impaired for more than six months and considers impairment adjustments if the impairment is more than 20% of the carrying value of the investment. The losses arising from impairment of such investments are recognized in the Statement of Profit or Loss in ‘impairment for loans and receivables and other losses’ and is removed from the ‘Available-for-Sale Reserve’.

The majority of non-quoted ordinary shares include share investments that have been made primarily for regulatory purposes. Such investments are recorded at cost due to unavailability of information to value such investments at fair value.

28. Financial Investments – Held-to-Maturity

Accounting Policy

Financial investments – held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Bank and the Group have the intention and ability to hold to maturity. After initial measurement, financial investments – held-to-maturity are subsequently recorded at amortized cost using the EIR, less impairment. The amortization is included in ‘interest income’ in the Statement of Profit or Loss.

If the Bank and the Group were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as ‘available-for-sale’. Furthermore, the Bank and the Group would be prohibited from classifying any financial asset as ‘held-to-maturity’ during the following two years.

29. Investments – Held-for-Sale

Accounting Policy

Non-current assets and disposal groups (including both the assets and liabilities of the disposal groups) are classified as Investments – ‘held-for-sale’ when their carrying amounts will be recovered principally through sale, they are available-for-sale in their present condition and their sale is highly probable. Non-current assets held-for-sale and disposal groups are measured at the lower of their carrying amount and fair value less cost to sell, except for those assets and liabilities that are not within the scope of the measurement requirements of SLFRS 5 – ‘Non-current Assets Held-for-Sale and Discontinued Operations’ such as deferred taxes, financial instruments, investment properties, insurance contracts and assets and liabilities arising from employee benefits.

These are measured in accordance with the accounting policies described above. Immediately before the initial classification as ‘held-for-sale’, the carrying amounts of the asset (or assets and liabilities in the disposal group) are measured in accordance with applicable SLFRSs. On subsequent remeasurement of a disposal group, the carrying amounts of the assets and liabilities noted above that are not within the scope of the measurement requirements of SLFRS 5 are remeasured in accordance with applicable SLFRSs before the fair value less costs to sell of the disposal group is determined.

Investments – Held-for-Sale includes the investment in NDB Venture Investment (Pvt) Ltd., an associate company, which is under liquidation. A special resolution was passed by the Board of Directors of the Company to wind up the affairs voluntarily and appointed the liquidator, for the distribution of the assets.

The amount shown in the Statement of Financial Position is the fair value of the investment which the Bank will receive at the time of concluding the liquidation process and an impairment provision has not been made as sufficient liquid assets are available in the Financial Statements of the Company based on the liquidation Financial Statements prepared as at 31 December 2016.

30. Investments in Subsidiary Companies

Accounting Policy

Investments in subsidiary companies are accounted at cost less allowance for impairment in the Financial Statements of the Bank. The net assets of each subsidiary company are reviewed at each Reporting date to determine whether there is any indication of impairment. If any such indication exists, then the recoverable amount of the investment is estimated and the impairment loss is recognized to the extent of its loss in net assets.

30.1 Movement in the Allowance for Impairment of Investments

30.2 Summarized Financial Information of the NDB Group’s Investments in Subsidiaries

31. Investments in Associate Companies

Accounting Policy

An associate is an entity in which the Group has significant influence, but not control, over the variable returns through its power over the investee. Significant influence is presumed to exist when the Group holds 20% or more of the voting power of another entity.

The Group’s investments in its associate companies are accounted for by using the equity method. Under the equity method, the investment in the associate is carried in the Statement of Financial Position at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortized nor individually tested for impairment.

The Statement of Profit or Loss reflects the Group’s share of the results of operations of the associate. When there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any change and discloses this, when applicable, in the Statement of Changes in Equity. Unrealized gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.

The Financial Statements of the associate companies are prepared for the same Reporting period as the Group. When necessary, adjustments are made to bring the Accounting Policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognize an additional impairment loss on its investment in its associate. The Group determines at each Reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the ‘share of associate companies profits/(losses)’ in the Statement of Profit or Loss.

Upon loss of significant influence over the associate, the Group measures and recognizes any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognized in the Statement of Profit or Loss.

31.1 Bank

32. Investment Property

Accounting Policy

Distinction Between Investment Properties and Owner-Occupied Properties

The Bank and the Group determine whether a property qualifies as an investment property by considering whether the property generates cash flows largely independently of the other assets held by the entity. Some properties comprise a portion that is held to earn rentals or for capital appreciation and another portion that is held for use in the production or supply of goods or services or for administrative purposes. If these portions can be sold separately (or leased out separately under a finance lease), the Bank and the Group account for the portions separately. If the portions cannot be sold separately, the property is accounted for as an investment property only if as an insignificant portion is held for use in the production or supply of goods or services or for administrative purposes. The Bank and the Group consider each property separately in making its judgment.

Valuation of Investment Properties

The Land and Building of Development Holdings (Pvt) Ltd., which is held to earn rental income and for capital appreciation has been classified as an ‘investment property’, and is reflected at fair value.

Investment properties are initially recognized at cost. Subsequent to the initial recognition, the investment properties are stated at fair values. The Bank and the Group engaged an External Independent Valuer, having appropriate recognized professional qualifications and recent experience in the location and category of property being valued, to determine the fair value of land and building. In estimating the fair values, the Independent Valuer considers current market prices of similar assets, so as to reflect market conditions at the Reporting date. Gains or losses arising from changes in the fair values are included in the Statement of Profit or Loss, in the year in which they arise.

Cost includes expenditure that is directly attributable to the acquisition of the investment property. The cost of self-constructed investment property includes the cost of materials and direct labour, any other costs directly attributable to bringing the investment property to a working condition for their intended use.

Owner-occupied portion of an Investment property is recognized and measured in line with the accounting policy used for property, plant & equipment of the Bank and the Group and are presented under property, plant & equipment in the Financial Statements.

Investment properties are derecognized when disposed of or permanently withdrawn from use because no future economic benefits are expected. Any gains or losses on retirement or disposal are recognized in the Statement of Profit or Loss in the year of retirement or disposal.

Basis of Valuation

Investment properties are stated at fair value, which has been determined based on valuations performed by a Professional Valuer, A A M Fathihu, B.Sc. (Hons.), EMV, FIV Sri Lanka.

The income approach using the current market rent including passing rents has been used as the methodology by the valuer to value the investment property as recommended by SLFRS 13 – ‘Fair Value Measurements’.

Significant Assumptions Used for the Valuation

– Outgoing at 40% of estimated rent (2015 – 40%)

– Capitalize YP at 16% (2015 – 16%)

Statement of Income and Expenditure of the Investment Property.

The Group has no restrictions on the realisability of its investment properties and no contractual obligations to purchase, construct or develop investment properties or for repairs, maintenance and enhancement.

Fair value hierarchy disclosures for investment properties are given in Note 55 (a).

33. Intangible Assets

The intangible assets of the Bank and the Group include the value of computer software and software under development.
An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank and the Group.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following the initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.

Intangible assets are amortized using the straight-line method to write down the cost over its estimated useful economic lives and the useful life for the years ended 31 December 2016 and 2015 are given below:

Intangible assets are derecognized on disposal or when no future economic benefits are expected. Any gain or loss arising on derecognition of an intangible asset is measured as the difference between the net disposal proceeds and the carrying amount
of the asset and is included in the Statement of Profit or Loss in the year in which the asset is derecognized.

33.1 Computer Software

33.2 Software Under Development

34. Property, Plant & Equipment

Accounting Policy

Revaluation of Freehold Land and Buildings

The Bank and the Group reassessed their accounting policy for property, plant & equipment with respect to measurement of certain classes of property, plant & equipment after initial recognition. The Bank and Group have previously measured all property, plant & equipment using the ‘cost model’ as set out LKAS 16, whereby after initial recognition of the asset classified
as property, plant & equipment, the asset was carried at cost less accumulated depreciation and accumulated impairment losses.

However, during 2014, the Bank and the Group elected to change the method of accounting for freehold land and buildings classified under property, plant & equipment to the ‘revaluation model’, since the Bank and Group believe that the revaluation model, more effectively demonstrates the financial position of freehold land and buildings.

After the initial recognition, the Bank and the Group use the revaluation model, whereby, land and buildings will be measured at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The Bank and the Group applied the exemptions in LKAS 8 – ‘Accounting Policies and Changes in Accounting Estimates and Errors’, which exempts this change in accounting policy from retrospective application and extensive disclosure requirements.

Basis of Recognition

Property, plant & equipment are recognized, if it is probable that future economic benefits associated with the asset will flow to the Bank and the Group and the cost or the fair value of the asset can be reliably measured.

Basis of Measurement

An item of property, plant & equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the assets and subsequent cost as explained below. The cost of self-constructed assets includes the cost of the materials and direct labour, any other cost directly attributable to bringing the assets to a working condition for its intended use and cost of dismantling and removing the old items and restoring the site on which they are located. Purchased software which is integral to the functionality of the related equipment is capitalized as part
of computer equipment.

Cost Model

The Bank and the Group apply the ‘Cost Model’ to all property, plant & equipment other than freehold land and buildings and record at cost of purchase together with any incidental expenses thereon, less accumulated depreciation and any accumulated impairment losses.

Revaluation Model

The Bank and the Group adopted the revaluation model for the entire class of freehold land and buildings for measurement
during the year 2014. Such properties are carried at revalued amounts, being their fair value at the Reporting date, less any subsequent accumulated depreciation on land and buildings and any accumulated impairment losses charged subsequent to the date of the valuation.

Freehold land and buildings of the Bank and the Group are revalued every three years or more frequently if the fair values are substantially different from their carrying amounts to ensure that the carrying amounts do not differ from the fair values at the Reporting date.

The Bank and the Group engaged an Independent Professional Valuer A A M Fathihu, B.Sc. (Hons.) EMV, FIV Sri Lanka to determine the fair value of freehold land and buildings. In estimating the fair values, the Independent Valuer considered current market prices of similar assets.

Subsequent Cost

These are costs that are recognized in the carrying amount of an item if it is probable that the future economic benefits embodied within that part will flow to the Bank and the Group and it can be reliably measured.

Ongoing repairs and maintenance are expensed as incurred.

Capital Work-in-Progress

These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, waiting capitalisation. These are stated in the Statement of Financial Position at cost. Capital work-in-progress is transferred to the relevant asset when it is completed and converted into a usable condition as expected by the Management of
the Bank and the Group.

Derecognition

An item of property, plant & equipment is derecognized upon disposal or when no future economic benefits are expected.
Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the Statement of Profit or Loss in the year, in which the asset is derecognized.

Useful Life Time of Property, Plant & Equipment and Depreciation

Depreciation is calculated on a straight-line basis over the useful life of the assets, commencing from the date when the assets are available for use, since this method closely reflects the expected pattern of consumption of the future economic benefits embodied in the assets. No depreciation is charged in the month of disposal of the asset and the Bank and the Group do not charge depreciation on freehold land. The depreciation rates are determined separately for each significant part of the assets.

The Bank and the Group review the residual values, useful lives and methods of depreciation of property, plant & equipment at each Reporting date. Judgment of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

The estimated useful lives of the assets for the year ended 31 December 2016 and 2015, are as follows:

34.1 The Movement in Property, Plant & Equipment – Bank

34.2 Details of Revalued Freehold Land and Buildings – Bank

34.3 Freehold Land and Buildings on the Cost Basis – Bank

The carrying amount of Bank’s revalued freehold land and buildings that would have been included in the Financial Statements and the assets being carried at cost less depreciation is as follows:

34.4 The Movement in Property, Plant & Equipment – Group

34.5 Cost of Fully Depreciated Property, Plant & Equipment and Intangible Assets

The initial cost of fully depreciated property, plant & equipment and intangible assets as at 31 December 2016, which are still in use as at 31 December 2016 are as follows:

35. Other Assets

Accounting Policy

The Bank and the Group classify all their other assets as ‘other financial assets’ and ‘other non-financial assets’. Other assets mainly comprise of deposits and prepayments, unamortized staff costs and sundry receivables. Deposits are carried at historical cost less provision for impairment. Prepayments are amortized during the period in which they are utilized and are carried at historical cost less provision for impairment.

As all staff loans granted at below market interest rates, are recognized at fair value, the difference between the fair value and the amount disbursed was treated as a Day 1 difference. The Day 1 difference is classified as ‘unamortized staff cost’ and is amortized over the loan period by using the EIR. The staff loans are subsequently measured at amortized costs.

Other financial assets and other non-financial assets included under other assets are summarised below:

35.1 Other Financial Assets

35.2 Other Non-Financial Assets

35.3 Unamortized Staff Cost

36. Due to Banks

Accounting Policy

Due to banks, include call money borrowings and credit balances in Nostro accounts. Subsequent to initial recognition, these are measured at their amortized cost using the EIR method. Interest paid/payable on these dues are recognized in the Statement of Profit or Loss under ‘Interest Expenses’.

36.1 Due to Banks – By Currency

37. Due to Other Customers

Accounting Policy

Due to other customers include non-interest bearing deposits, savings deposits, term deposits, margins and other deposits. Subsequent to initial recognition, deposits are measured at their amortized cost using the EIR method. Interest paid/payable on deposits are recognized in the Statement of Profit or Loss under ‘Interest Expenses’.

37.1 Due to Other Customers – By Product

37.2 Due to Other Customers – By Currency

37.3 Due to Other Customers – By Province

38. Debt Securities Issued and Other Borrowed Funds

Accounting Policy

Debt Securities issued and other borrowed funds represent the funds borrowed by the Bank and the Group for long-term and short-term liquidity funding requirements and include borrowings from concessionary credit lines, institutional borrowings, securities sold under repurchase agreements and non-quoted debentures. Subsequent to initial recognition, these are measured at their amortized cost using the EIR method. Interest paid/payable on debt securities and other borrowed funds are recognized in the Statement of Profit or Loss, under ‘Interest Expenses’.

Securities Sold Under Repurchase Agreements

The Bank and the Group sell a financial asset and simultaneously enter into an agreement to repurchase the asset (or similar asset) at a fixed price at a future date. Such an arrangement is accounted for as a financial liability and the underlying asset continues to be recognized in the Financial Statements of the Bank and the Group, as the Bank and the Group retain
substantially all risks and rewards of ownership. Subsequent to initial recognition, these are measured at their amortized cost using the EIR method with the corresponding interest paid/payable being recognized in the Statement of Profit or Loss, under ‘Interest Expenses’.

38.1 Non-Quoted Debentures

Non-quoted debentures consisted of 400,000 unlisted unsecured redeemable debentures of LKR 1,000/- each issued by the Bank in 2011. These debentures matured during the year and given below are the features of the non-quoted debentures:

39. Deferred Tax Liabilities

Accounting Policy

Deferred tax is provided on temporary differences at the date of the Statement of Financial Position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences except:

• Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized except:

• Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• In respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply for the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the date of the Statement of Financial Position.

Significant Accounting Estimates and Assumptions

Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

Deferred Tax Liabilities/Assets Recorded in the Statement of Financial Position

Deferred Tax Charge/(Reversal) to the Statement of Profit or Loss and Other Comprehensive Income

40. Employee Benefit Liabilities

Accounting Policy

Employee benefit liabilities include the provisions made for retirement gratuity and the pension fund.

Retirement Gratuity

The costs of retirement gratuities are determined by a qualified Actuary using the projected unit credit method. Actuarial gains and losses are recognized as income or expense in the Statement of Comprehensive Income, during the financial year in which it arose.

Pension Fund

The Bank operates an approved employee non-contributory pension fund for the payment of pensions to members of its permanent staff, who qualify for such payments when retiring. Employees who joined after 1999, are not covered under the said pension scheme. These employees are entitled to retirement gratuity. Up to 31 December 2002, annual contributions to the pension fund was payable by the Bank, based on a percentage of gross salaries, as stipulated in the pension deed. However, following the formulation of a revised pension deed, which has been approved by the Department of Inland Revenue, the contributions in subsequent years are determined on the basis of an actuarial valuation carried out each year.

Basis of Measurement

The cost of the defined benefit plans (retirement gratuity and pension fund) is determined using an actuarial valuation. The actuarial valuation involves making various assumptions, which may differ from actual developments in the future. These include the determination of discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the Long-term nature of these plans, such estimates are subject to significant uncertainties. All assumptions are reviewed at each reporting date. The assumptions used to arrive at the value of defined benefit obligation is given in Note 40.1 (b) and 40.2 (d).

In determining the appropriate discount rate, the Management considers the interest rates of Sri Lanka Government Bonds with extrapolated maturities, corresponding to the expected duration of the defined benefit obligation. The mortality rate is based on publicly available mortality tables. Future salary increases are based on expected future inflation rates and the policy on salary revisions, of the Bank and the Group.

40.1 Provision for Retirement Gratuity

40.1 (a) Contribution made for Retirement Gratuity

40.1 (b) Assumptions and the Sensitivity of the Assumptions used for the Provision of
Retirement Gratuity – Bank

An actuarial valuation of the retirement gratuity liability was carried out as at 31 December 2016 and 31 December 2015 by Messrs. Piyal S Goonetilleke and Associates, a professional Actuary.

The valuation method used by the Actuary to value the liability is the ‘Projected Unit Credit Actuarial Cost Method’, recommended by LKAS 19 – ‘Employee Benefits’.

Sensitivity of Assumptions used in the Actuarial Valuation

Reasonably possible changes at the reporting date to one of the significant actuarial assumptions, holding other assumptions constant, would have affected the provision for retirement gratuity and Other Comprehensive Income by the amounts shown below.

40.1 (c) The expected Benefit Payout in the future years for Retirement Gratuity

The expected benefits are estimated, based on the same assumptions used to measure the benefit obligation of the Bank at the end of the year and include benefits attributable to estimated future employee service.

The average duration of the defined benefit obligation is 12.5 years (2015 – 12.5 years).

40.2 Pension Fund

The amount recognized in the Statement of Financial Position is as follows:

* The over payment is recognized as prepaid expenses in Other Assets.

40.2 (a) Contribution made to the Pension Fund

40.2 (b) Defined Benefit Obligation Reconciliation

40.2 (c) Fair Value of Plan Assets Reconciliation

40.2 (d) Assumptions and the sensitivity of the assumptions used for the Pension Fund

An actuarial valuation of the Pension Fund was carried out as at 31 December 2016 and 31 December 2015 by Messrs Piyal S Goonetilleke Associates, a professional Actuary.

The valuation method used by the Actuary to value the Fund is the ‘Projected Unit Credit Actuarial Cost Method’, recommended by LKAS 19 – ‘Employee Benefits’.

Sensitivity of Assumptions used in the Actuarial Valuation

Reasonably possible changes at the reporting date to one of the significant actuarial assumptions, holding other assumptions constant, would have affected the pension liability and Other Comprehensive Income by the amounts shown below:

The fair value of the total plan assets are as follows:

40.2 (e) The Expected Benefit Payout from the Pension Fund in Future Years

The expected benefits are based on the same assumptions used to measure the Bank’s benefit obligation at the end of the year and include benefits attributable to estimated future employee service.

The average duration of the defined benefit obligation is 24 years as at 31 December 2016 (2015 – 24 years).

40.2 (f) The total amount recognized in the Other Comprehensive Income relating to
Employee Benefit liabilities

41. Other Liabilities

Accounting Policy

Other liabilities include other financial liabilities and other non-financial liabilities. Other non-financial liabilities include fees, expenses and other amounts payable for deposit insurance, dividend payable and other provisions. These liabilities are recorded at amounts expected to be payable at the reporting date.

Provisions are recognized when the Bank and the Group have a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Dividends on ordinary shares are recognized as a liability and deducted from equity, when they are approved by the Board of Directors.

Other financial liabilities and other non-financial liabilities included under other liabilities are summarised below:

41.1 Other Financial Liabilities

41.2 Other Non-Financial Liabilities

41.3 Dividend Payable

41.3 (a) Reversal of Dividends declared in Prior Years

Reversal of dividends declared in previous years represents unclaimed dividends which are written back to equity after six years.

42. Subordinated Term Debts

Accounting Policy

Subordinated term debts represent the funds borrowed by the Bank and the Group for long-term and short-term funding requirements and include foreign institutional borrowings and quoted debentures. Subsequent to initial recognition, these are measured at their amortized cost using the EIR method. Interest paid/payable on subordinated debts are recognized in the Statement of Profit or Loss. The direct costs attributable to these term debts are amortized over the term of the loan and are offset, in the presentation of the subordinated term debts in the Statement of Financial Position.

42.1 Subordinated Term Debts – by Products

42.1 (a) Term Loans

42.1 (b) Debentures