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Financial Reports

Notes to the Consolidated Financial Statements

1. Corporate Information

1.1 Reporting entity

Ceylinco Life Insurance Limited (the Company) is a public limited liability company, incorporated and domiciled in Sri Lanka. The registered office of the Company is located at No. 106, Havelock Road, Colombo 05. Additional corporate information is given in this section.

1.2 Consolidated Financial Statements

The Consolidated Financial Statements of Ceylinco Life Insurance Limited, as at and for the year ended 31 December 2015, encompass the Company, its Subsidiaries (together referred to as the ‘Group’) and the Group’s interest in Associates.

All companies in the Group are limited liability companies incorporated and domiciled in Sri Lanka.

1.3 Nature of operations and principal activities of the Company and the Group

Descriptions of the nature of operations and principal activities of the Company, its Subsidiaries and Associates, are given on this report. There were no significant changes in the nature of the principal activities of the Company and the Group during the financial year under review.

The parent of Ceylinco Life Insurance Limited, is Ceylinco Insurance PLC, incorporated and domiciled in Sri Lanka.

1.4 Approval of Financial Statements

The Consolidated Financial Statements of Ceylinco Life Insurance Limited and its subsidiaries (collectively, the Group) for the year ended 31 December 2015, were authorised for issue by the Directors on 17 February 2016.

1.5 Responsibility for Financial Statements

The Board of Directors is responsible for preparation and presentation of the Financial Statements of the Company, as per the provisions of the Companies Act No. 07 of 2007 and the Sri Lanka Accounting Standards. The responsibility of the Directors in relation to the Financial Statements, is set out in detail in the Statement of Directors’ Responsibility in the Annual Report.

2. Basis of Preparation

2.1 Statement of compliance

The Consolidated Financial Statements have been prepared in accordance with the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, which requires compliance with Sri Lanka Accounting Standards (hereinafter referred to as SLFRS/LKAS) promulgated by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and with the requirements of the Companies Act No. 07 of 2007 and the requirements of the Regulation of Insurance Industry Act No. 43 of 2000.

2.2 Basis of measurement

The Financial Statements have been prepared on the historical cost basis except for the following:

  • Financial assets and financial liabilities have been measured at fair value.
  • Policyholders’ liabilities are measured at the actuarial valuation.
  • Net defined benefit assets/(liabilities) are measured actuarially valued and recognised at the present value.

The Group measures financial instruments such as derivatives and non-financial assets such as land, at fair value at each reporting date. Fair value related disclosures for financial instruments and non-financial assets, that are measured at fair value or where fair values are disclosed, are summarised in the following notes:

  • Disclosures for valuation methods, significant estimates and assumptions (Note – 4).
  • Quantitative disclosures of fair value measurement hierarchy (Note – 3.24.3).
  • Property (land) under revaluation model (Note – 3.34.4).
  • Financial instruments (including those carried at amortised cost) (Note – 3.24.1.5).

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

  • In the principal market for the asset or liability, or
  • In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the Financial Statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

  • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities
  • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
  • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the Financial Statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

2.3 Functional and presentation currency

These Financial Statements are presented in Sri Lankan Rupees, which is the Company’s functional currency. All financial information is presented in Sri Lankan Rupees rounded to the nearest thousand (Rs. ‘000).

2.4 Basis of consolidation

Subsidiaries and Equity Accounted Associates are disclosed in Note No. 10 to the Financial Statements.

2.4.1 Subsidiaries

Subsidiaries are entities controlled by the parent Company. The Consolidated Financial Statements comprise the Financial Statements of the Group and its subsidiaries as at 31 December 2015. Control is achieved when the Group is exposed or has the right, to variable returns from its involvement with the investee and when it has the ability to affect those returns through its power over the investee, specially, the Group controls an investee if and only if, the Group has:

  • Power over the investee (i.e. Existing rights that give it the current ability to direct the relevant activities of the investee)
  • Exposure or rights, to variable returns from its involvement with the investee
  • The ability to use its power over the investee to affect its return

Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee including:

  • The contractual agreement with the other vote holders of the investee
  • Rights arising from other contractual agreements
  • The Group’s voting rights and potential voting rights

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated Financial Statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the Financial Statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss in the Income Statement. Any investment retained is recognised at fair value.

The Consolidated Financial Statements comprise the Financial Statements of the Group as at 31 December each year. The Financial Statements of the subsidiaries are prepared for the same reporting year as the parent Company, using consistent accounting policies. Losses within a subsidiary are attributed to the non-controlling interest even if this results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

Transactions eliminated on consolidation

Intragroup balances and transactions and any unrealised income expenses arising from intragroup transactions and dividend, are eliminated in preparing the Consolidated Financial Statements.

Business combination

Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree’s identifiable net assets.

The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group measures the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Transaction costs, other than those associated with the issue of debt or equity securities that the Group incurs in connection with a business combinations are expensed and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in Income Statement.

Any contingent consideration to be transferred by the acquirer, will be recognised at fair value at the acquisition date. Subsequent changes in the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognised in accordance with LKAS 39 either in Income Statement or as a change to Other Comprehensive Income. If the contingent consideration is classified as equity, it will not be remeasured. Subsequent settlement is accounted for within equity. In instances where the contingent consideration does not fall within the scope of LKAS 39, it is measured in accordance with the appropriate SLFRS/LKAS.

As described in Note No. 45, CIPLC transferred its assets and liabilities pertaining to life insurance segment with effect from 1 June 2015 to the Company. Together with the other assets, CIPLC transferred its investment in following companies to the Company.

Subsidiaries

Serene Resorts Ltd.

Ceylinco Seraka Ltd

Ceylinco Healthcare Services Ltd.

Associate

Citizens Development Business Finance PLC

The above transaction is considered as a common control business combination. A business combination involving entities or businesses under common control is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory.

As the common control business combinations are scoped out in SLRFS 3–Business combinations, management used the guidance available in IAS 8 Accounting Guidance Policies, changes in Accounting Estimates and Errors and the issued under the Statement of Recommended Practice (“SoRP”)–Merger Accounting for Common Control Business Combinations issued by the Institute of Chartered Accountants of Sri Lanka.

In applying merger accounting, Financial Statement items of the combining entities or businesses for the reporting period in which the common control combination occurs, and for any comparative periods disclosed, are included in the Consolidated Financial Statements of the combined entity as if the combination had occurred from the date when the combining entities or businesses first came under the control of the controlling party or parties.

Accordingly the comparative figures of the Consolidated Financial Statements were presented as if the combination had occurred from the date when the combining entities or businesses first came under the control of the controlling party or parties (CIPLC)

Transactions with non-controlling interests

The profit or loss and net assets of a subsidiary attributable to equity interests that are not owned by the parent, directly or indirectly through subsidiaries, is disclosed separately under “Non-controlling Interest”. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance.

2.4.2 Associates (equity accounted investees)

Associates are those entities, in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but it is not control or joint control over those policies. Associates are accounted for using the equity method.

Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date.

The Income Statement reflects the Group’s share of the results of operations of the associate . Any change in Other Comprehensive Income of those investees is presented as part of the Group’s Other Comprehensive Income. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the Statement of Changes in Equity. Unrealised gains and losses resulting from transactions between the Group and the associate is eliminated to the extent of the interest in the associate.

The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the Income Statement outside operating profit and represents profit or loss after tax and non-controlling interests in the subsidiaries of the associate.

The Financial Statements of the associate is 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 recognise an additional impairment loss on the Group’s investment in associates. At each reporting date, the Group determines whether there is any objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the ‘share of profit of an associate’ in the Income Statement.

Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any differences between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal, are recognised in Income Statement.

Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

3. Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these Consolidated Financial Statements. The Company/Group’s financial position represents assets, liabilities and equity. The Income Statement and Statement of Profit or Loss and Other Comprehensive Income reflects the total revenue, benefits and claims, surplus from Long term insurance business and expenses of life insurance business. Set out below, is an index of the significant accounting policies.

No. Significant accounting policies
Life Insurance
3.1 Gross Written Premium
3.2 Reinsurance Premium
3.3 Acquisition Cost
3.4 Reinsurance Commission Income
3.5 Gross Benefits and Claims Expense
3.6 Reinsurance Claims Recoveries
Other
3.7 Finance Income
3.8 Dividend Income
3.10 Realised Gains and Losses
3.11 Fair Value Gains and Losses
3.12 Other Income
3.15 Expenditure Recognition
3.16 Finance Cost
3.17 Income Tax Expense
3.22 Earnings per Share
3.23 Insurance and Investment Contracts
3.24 Financial Assets and Liabilities
3.34 Property, Plant and Equipment
3.35 Intangible Assets
3.37 Leased Assets – Lessee
3.28 Inventories
3.24.4 Impairment of Non-Financial Assets
3.24.5 Insurance Contract Liabilities
3.25 Reinsurance
3.30 Employee Benefits
3.31 Provisions and Contingencies
3.32 Capital Commitments
3.38 Cash Flow Statements
6 Operating Segments

Income Statement

3.1 Gross written premiums (GWP)

Gross recurring premiums are recognised as revenue when receivable from the policyholder (policies within a month grace period are considered as due). For single premium business, revenue is recognised on the date on which the policy is effective.

3.2 Reinsurance premiums

Reinsurance premiums are recognised as an expense on the earlier of the date, when premiums are payable or when the policy becomes effective. The premiums are payable to the reinsurer.

3.3 Acquisition costs

Commission expense is charged to the period in which it is incurred. Commission payable on accrued premium, is recognised to the extent that these costs are recoverable out of future premiums. All expenses vary with, and are primarily related to, the acquisition of new insurance contracts.

3.4 Reinsurance commission income

Commission received or receivable in respect of premium paid or payable to a reinsurer. Reinsurance commission income on outwards reinsurance contracts is recognised as revenue when receivable.

3.5 Gross benefits and claims expense

Gross benefits and claims for life insurance contracts include the cost of all claims arising during the year, including internal and external claims handling costs that are directly related to the processing and settlement of claims, and policyholder bonuses. Death claims and surrenders are recorded on the basis of notifications received. Maturities and annuity payments are recorded when due. Interim payments and surrenders are accounted at the time of settlement. . Changes in the valuation of insurance contract liabilities are disclosed in the Statement of Compressive Income under Gross change in contract Liabilities.

3.6 Reinsurance claims recoveries

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

3.7 Finance income

Finance income comprises interest income on funds invested (including available-for-sale financial assets) and dividend income. Interest income is recognised in the Income Statement as it accrues and is calculated by using the Effective Interest Rate method (EIR). Fees and commissions that are an integral part of the effective yield of the financial asset or liability are recognised as an adjustment to the effective interest rate of the instrument. Finance income also includes dividends which are recognised when the right to receive payment is established. For listed securities, this is the date the security is listed as ex-dividend. Finance expenses consist of costs relating to investment such as custodian fees, bank guarantee fee and brokerage fee etc. These expenses are recognised on accrual basis.

3.8 Dividend income

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

3.9 Gains and losses

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the net sales proceeds with the carrying amounts of property, plant and equipment and are recognised on net within ‘other operating income’ in Income Statement.

3.10 Realised gains and losses

Realised gains and losses on investments recorded in the Income Statement include gains and losses on financial assets. Gains and losses on the sale of investments are calculated as the difference between net sales proceeds and the original or amortised cost and are recorded on occurrence of the sale transaction.

3.11 Fair value gains and losses

Fair value gains and losses on investments recorded in the Income Statement include fair value gains and losses on financial assets at fair value through profit or loss.

3.12 Other income

Other income comprises fees charged for policy administration services, disposal gains on property, plant and equipment, gains on foreign currency translations and miscellaneous income. Gains on foreign currency translations are recognised on a net basis.

3.13 Rental income

Rental income from property is recognised in profit or loss on a straight line basis over the term of the lease.

3.14 Revenue from other operations

1. Healthcare segment

Income of the Company comprises of two revenues i.e., from screening packages and screening tests. All such revenue is recognised in the Statement of Income on accrual basis.

2. Services

Revenue is recognised in the accounting periods in which the services are rendered.

3.15 Expenditure recognition

Expenses are recognised in the Income Statement 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 property, plant and equipment in a state of efficiency is charged to the Income Statement

3.16 Finance cost

Finance costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, are capitalised as part of the cost of the asset. Interest paid is recognised in the Income Statement as it accrues and is calculated by using the effective interest rate method. Accrued interest is included within the carrying value of an interest bearing financial liability.

3.17 Income tax expense

Tax expense comprises current and deferred tax. Current tax and deferred tax is recognised in items recognised directly in equity or in Income Statement and Other Comprehensive Income.

3.18 Current tax

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years.

The Inland Revenue Act No. 10 of 2006 and amendments thereto are applied in determining the taxable income/loss of the Company and its subsidiaries.

Subsidiaries of the Company, are tax liable under concessionary rates [Please refer Note No. 34(c)].

3.19 Deferred tax

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

  • Temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss.
  • Temporary differences related to investments in subsidiaries, associates and jointly controlled entities to the extent that the Company is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future, and

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

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.

Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised 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 utilised, except–

  • When 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.
  • In respect of deductible temporary differences associated with investments in subsidiaries and equity accounted investees, deferred tax assets are recognised 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 utilised.

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 utilised. Unrecognised deferred tax assets are reassessed at each Reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates that have been enacted or substantively enacted at the Reporting date.

Deferred tax relating to items recognised outside Income Statement, is recognised outside Income Statement. Deferred tax items are recognised in correlation to the underlying transaction, either in other comprehensive income or directly in equity.

Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognised subsequently, if new information about facts and circumstances changed. Tax withheld on dividend income from subsidiaries is recognised as an expense in the Consolidated Income Statement at the same time as the liability to pay the related dividend is recognised.

3.20 Withholding tax on dividends

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

3.21 Sales taxes

Revenues, expenses and assets are recognised net of the amount of sales taxes and premium taxes except–

  • Where the sales or premium tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case, the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable.
  • Receivables and payables that are stated with the amount of sales or premium tax included.

Outstanding net amounts of sales or premium tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position.

3.22 Earnings per share (EPS)

The Company presents basic and diluted Earnings Per Share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company, by the weighted average number of ordinary shares outstanding during the period.

Statement Of Financial Position

3.23 Insurance and investment contracts

3.23.1 Product classification

SLFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or ‘investment contracts’, depending on the level of insurance risk transferred.

Insurance contracts

Insurance contracts are contracts under which one party (the Insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder, if a specified uncertain future event (the insured event) adversely affects the policyholder. Significant insurance risk exists, if an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). The classification of contracts identifies both insurance contracts that the Company issues and reinsurance contracts that the Company holds.

Contracts where the Company does not assume a significant insurance risk is classified as investment contracts.

Investment contracts

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

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

3.23.2 Unit-linked contracts

Unit-linked contracts are those contracts that do not meet the definition of insurance or investment contracts with discretionary participating features. For these Unit-Linked contracts, the liabilities are valued at current unit value, i.e. on the basis of the fair value of the financial investments backing those contracts at the Reporting date together with rights to future management fees.

3.23.3 Discretionary participating features (DPF)

DPF is a contractual right to receive, as a supplement to guaranteed benefits, additional benefits that are–

  • Likely to be a significant portion of the total contractual benefits;
  • the amount or timing of which is contractually at the discretion of the issuer;

and that are contractually based on–

  • The performance of a specified pool of contracts or a specified type of contract,
  • Realised and or unrealised investment returns on a specified pool of assets held by the issuer, and
  • The profit or loss of the Company, fund or other entity that issues the contract.

Derivatives embedded in an insurance contract or an investment contract with DPF are separated and fair valued through the Income Statement, unless the embedded derivative itself is an insurance contract or investment contract with DPF. The derivative is also not separated if the host insurance contract and/or investment contract with DPF is measured at fair value through the profit and loss.

IBSL regulations and the terms and conditions of these contracts set out the bases for the determination of the amounts, on which the additional discretionary benefits are based (the DPF eligible surplus) and within which the Company may exercise its discretion as to the quantum and timing of their payment to contract holders. At least 90% of the eligible surplus must be attributed to contract holders as a group (which can include future contract holders) and the amount and timing of the distribution to individual contract holders is at the discretion of the Company, subject to the advice of the appointed actuary. All DPF liabilities including unallocated surpluses, both guaranteed and discretionary, at the end of the reporting period are held within insurance contract liabilities, as appropriate.

3.24 Financial assets and liabilities

3.24.1 Non-derivative financial assets

3.24.1.1 Initial recognition and measurement

The Company initially recognises loans and receivables, and deposits on the date they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument. In the case of financial assets not at fair value through profit or loss, a financial asset is measured initially at fair value plus transaction costs that are directly attributable to its acquisition or issue. Depending on the intention and ability to hold the invested assets, the Company classifies its non-derivative financial assets into following categories:

  • Financial assets at fair value through profit or loss (FVTPL)
  • Held-to-maturity (HTM)
  • Loans and receivables (L&R) and
  • Available-for-sale (AFS) financial assets as appropriate.

Income and expenses are presented on a net basis only when permitted under SLFRS/LKAS or for gains and losses arising from a group of similar transactions such as in the Company’s

trading activity.

3.24.1.2 Subsequent measurement
(a) Fair value through profit or loss (FVTPL)

A financial asset is classified as fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial assets are designated 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 investment strategy. Attributable transaction costs are recognised in Income Statement as incurred.

Financial assets at fair value through profit and loss investments are carried in the statement of financial position at fair value with changes in fair value recognised in the Income Statement. Financial assets designated at fair value through profit or loss comprises of quoted equity instruments unless otherwise have been classified as available-for-sale

(b) Held-to maturity financial assets (HTM)

Financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold it to maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortised cost, using the effective interest method, less any impairment losses.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate (EIR). The EIR amortisation is included in finance income in the Income Statement.

The losses arising from impairment are recognised as finance cost in the Income Statement. Held-to-maturity financial assets comprise of Debt Securities and Treasury Bonds.

(c) Loans and receivables (L&R)

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the Effective Interest Rate method (EIR), less impairment. Amortised cost is calculated by taking into account, any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the Income Statement. The losses arising from impairment are recognised in the Income Statement in finance costs for loans and in other operating expenses for receivables.

(d) Available-for-sale financial assets (AFS)

Available-for-sale financial assets are financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses on available-for-sale equity instruments are recognised in Income Statement and Statement of Profit or Loss and Other Comprehensive Income and presented within equity in the available-for-sale reserve. When an investment is derecognised, the cumulative gain or loss in Income Statement and Statement of Profit or Loss and Other Comprehensive Income is transferred to the Income Statement.

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

The Company evaluates its available-for-sale financial assets to determine whether the ability and intention to sell them in the near term would still be appropriate. In the case where the Group is unable to trade these financial assets, due to inactive markets and management’s intention significantly changes to do so in the foreseeable future, the Group may elect to reclassify these financial assets in rare circumstances. Reclassification to loans and receivables is permitted when the financial assets, meet the definition of loans and receivables and management has the intention and ability to hold these assets for the foreseeable future or until maturity. There classification to held-to-maturity, is permitted only when the entity has the ability and intention to hold the financial asset until maturity. Available-for-sale financial assets comprise of long term unquoted equity investments, investments in reverse repos and investments in treasury bills and bonds.

3.24.1.3 Derecognition of financial assets

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

  • The rights to receive cash flows from the assets have expired, or
  • The Group has transferred its rights to receive cash flows from the assets or has assumed an obligation to pay the received cash flows in full, without material delay to a third party under a ‘pass-through’ arrangement; and either

(a) the Group has transferred substantially all risks and rewards of the asset, or

(b) the Group has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control of the asset.

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

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

3.24.1.4 Impairment of financial assets

The Group assesses, at each Reporting date, whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if and only if, there is objective evidence of impairment, as a result of one or more events, that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets, that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and when observable data indicate, that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

3.24.1.5 Financial assets carried at amortised cost

For financial assets carried at amortised cost, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets, with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised, are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Income Statement. 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. The interest income is recorded as part of finance income in the Income Statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the Income Statement.

3.24.1.6 Available-for-sale financial investments

The Group assesses at each Reporting date, whether there is objective evidence that an investment or a group of investments is impaired.

In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. ‘Significant’ is evaluated against the original cost of the investment and ‘prolonged’ against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment, previously recognised in the Income Statement – is removed from Other Comprehensive Income and recognised in the Income Statement. Impairment losses on equity investments are not reversed through the Income Statement; increases in their fair value after impairment are recognised directly in Other Comprehensive Income.

In the case of debt instruments classified as available-for-sale, impairment is assessed, based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the Income Statement. Future interest income continues to be accrued, based on the reduced carrying amount of the asset and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in the Income Statement, the impairment loss is reversed through the Income Statement.

The determination of what is ‘significant’ or ‘prolonged’ requires judgment. In making this judgment, the Group evaluates among other factors, the duration or extent to which the fair value of the investment is less than its cost.

3.24.1.7 Financial liabilities
Initial recognition and measurement

Financial liabilities within the scope of LKAS 39, are classified as financial liabilities at fair value through profit or loss, loans and borrowings or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value plus, in the case of loans and borrowings, directly attributable transaction costs.

The Group’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, financial guarantee contracts, amounts due to equity accounted investees and derivative financial instruments.

Subsequent measurement

The measurement of financial liabilities depends on their classification as described below:

Financial liabilities at fair value through profit or loss, include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading, if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships, as defined by LKAS 39. Separated embedded derivatives are also classified as held for trading, unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the Income Statement.

Financial liabilities designated upon initial recognition at fair value through profit and loss so designated at the initial date of recognition and only if criteria of LKAS 39 are satisfied.

Loans and borrowings

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in the Income Statement, when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the Income Statement.

3.24.1.8 Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Income Statement.

3.24.2 Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position if and only if, there is a currently enforceable legal right to offset derecognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expense will not be offset in the consolidated income statement, unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group.

3.24.3 Fair value of financial instruments

The fair value of financial instruments that are actively traded in organised financial markets, is determined by reference to quoted market bid prices for assets and offer prices for liabilities, at the close of business on the Reporting date, without any deduction for transaction costs. For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published net asset values.

For financial instruments, where there is not an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, net assets, comparison to similar instruments, for which market observable prices exist and other relevant valuation models.

The fair value of repo and call deposits with credit institutions, is their carrying value. The carrying value is the cost of the investment and accrued interest. The fair value of fixed interest-bearing deposits, is estimated using discounted cash flow techniques. Expected cash flows are discounted at current market rates for similar instruments, at the Reporting date.

If the fair value cannot be measured reliably, these financial instruments are measured at cost, being the fair value of the consideration paid for the acquisition of the investment or the amount received on issuing the financial liability. All transaction costs, directly attributable to the acquisition, are also included in the cost of the investment.

3.24.4 Impairment of non-financial assets

The carrying amounts of the Group’s non-financial 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.

For intangible assets, that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each Reporting date or more frequently, if events or changes in circumstances indicate that they might be impaired.

Calculation of recoverable amount

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 pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Impairment/Reversal of impairment

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit, exceeds its estimated recoverable amount. Impairment losses are recognised in Income Statement.

In respect of other assets, impairment losses, recognised in prior periods, are assessed at each Reporting date for any indications that the loss has decreased or no longer exists. 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.

3.24.5 Life insurance contract liabilities

These liabilities are measured by using the net premium method. The liability is determined as the sum of the discounted value of the expected future benefits, claims handling and policy administration expenses, policyholder options and guarantees and investment income from assets backing such liabilities, which are directly related to the contract, less the discounted value of the expected premiums that would be required to meet the future cash outflows, based on the valuation assumptions used. The liability is either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case, a margin for risk and adverse deviation is generally included. Adjustments to the liabilities at each Reporting date are recorded in the Income Statement under Gross change in contract liabilities’.

The liability is derecognised when the contract expires, is discharged or cancelled.

At each Reporting date, an assessment is made of whether the recognised life insurance liabilities are adequate, by using an existing liability adequacy test in accordance with SLFRS 4 as set out in Note 2.24.5.1.

For products containing DPF the amount of the DPF is deemed to be the investment return on all related assets where the apportionment between the shareholder and the policyholder has not yet been determined. The liability includes certain elements of net unrealized gains/(losses) and retained earnings attributable to the DPF, based on the mandated rates applied to these gains and earnings on the assumption that they had been realised as of the statement of Financial Position date.

The minimum mandated amounts, which are to be paid to policyholders plus any declared/undeclared additional benefits, are recorded in liabilities

3.24.5.1 Liability adequacy test (LAT)

At each Reporting date, an assessment is made of whether the recognised life insurance liabilities are adequate by using an existing liability adequacy test, as laid out under SLFRS 4. The liability value is adjusted to the extent that it is insufficient to meet future benefits and expenses. In performing the adequacy test, current best estimates of future contractual cash flows, including related cash flows such as claims handling and policy administration expenses, policyholder options and guarantees, as well as investment income from assets backing such liabilities, are used. A number of valuation methods are applied, including discounted cash flows to the extent that the test involves discounting of cash flows, the interest rate applied based on management’s prudent expectation of current market interest rates. Any deficiency shall be recognised in the Income Statement by setting up a provision for liability adequacy.

3.25 Reinsurance

The Company cedes insurance risk in the normal course of business for all its businesses. Reinsurance assets represent balances due from reinsurance companies. These assets consist of short term balances due from reinsurers, as well as longer term receivables, that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsurer’s policies and are in accordance with the related reinsurance contract. Reinsurance is recorded gross in the financial position, unless a right to offset exists.

Reinsurance assets are reviewed for impairment at each Reporting date or more frequently, when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset, that the Company may not receive all outstanding amounts due, under the terms of the contract and the event has a reliably measurable impact on the amounts that the Company will receive from the reinsurer. The impairment loss is recorded in the Income Statement.

Reinsurance liabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the related reinsurance contract. Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party.

3.26 Insurance receivables

Insurance receivables are recognised when due and measured on initial recognition at the fair value of the consideration receivable. The carrying value of insurance receivables is reviewed for impairment, whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss being recorded in the Income Statement.

Insurance receivables are derecognised when the derecognition criteria for financial assets have been satisfied.

3.27 Insurance payables

Insurance payables are recognised, when due and measured on initial recognition at the fair value of the consideration payable, less directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest rate method.

3.27.1 Derecognition of insurance payables

Insurance payables are derecognised when the obligation under the liability is discharged, cancelled or expired.

3.28 Inventories

Inventories include all consumable items and are measured at the lower of cost and net realisable value. Cost is generally determined by reference to weighted average cost. Net realisable value is the estimated market price in the ordinary course of business, less any estimated expense to sell.

The cost incurred in bringing inventories to its present location and condition, is accounted using the following cost formulae:

3.29 Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the Statement of Cash Flows.

Liabilities and provisions

3.30 Employee benefits

3.30.1 Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions to a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to Provident and Trust Funds covering all employees, are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. The Group contributes 12% and 3% of gross emoluments to employees as Provident Fund and Trust Fund contributions respectively. Obligations for contributions to a defined contribution pension plan are recognised as an employee benefit expense in profit or loss, when they are due.

3.30.2 Pensions and other post-employment benefits

The Group operates a defined benefit pension plan, which requires contributions to be made to a separately administered fund. The cost of providing benefits under the defined benefit plan, is determined separately using the projected unit credit valuation method, as recommended by LKAS 19 – Employee Benefits. Actuarial gains and losses are recognised immediately in the statement of financial position, with a corresponding debit or credit to retained earnings, through other comprehensive income (OCI), in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

Past service costs are recognised in profit or loss on the earlier of–

  • The date of the plan amendment or curtailment, and
  • The date that the Group recognises restructuring-related costs.

The defined benefit asset or liability comprises the present value of the defined benefit obligation, less the fair value of plan assets, out of which the obligations are expected to be settled directly.

Plan assets are assets that are held by a long term employee benefit fund. Plan assets are not available to creditors of the Group nor can they be paid directly to the Group.

Fair value is based on market price information and, in the case of quoted securities, it is the published market price. The value of any defined benefit asset is restricted to the sum of any past service cost and actuarial gains and losses not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The amount recognised as defined benefit liabilities has been netted with the fair value of the plan assets of the Reporting period. Any surplus in plan assets has been measured, based on the requirements of LKAS 19 – Employee Benefits, Para 58 and IFRIC 14 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction.

Actuarial gains and losses for the defined benefit plans are recognised in full in the period in which they occur in other comprehensive income.

However, according to the Payment of Gratuity Act No. 12 of 1983, the liability for gratuity payments to an employee arises on the completion of five years of continued service with the Company. The provision is externally funded.

3.30.3 Short term benefits

Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short term cash bonus, if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

3.31 Provisions

Provisions are recognised, when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits, will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the Income Statement, net of any reimbursement.

3.32 Capital commitments and contingencies

Capital commitments and contingent liabilities of the Group are disclosed in Note 41 to the Financial Statements.

3.33 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.

3.34 Property, plant and equipment

3.34.1 Recognition and measurement

Items of property, plant and equipment are stated at cost or revalued amount, less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure, that is directly attributable to the acquisition or construction of the asset. The cost of self-constructed assets, includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are also capitalised.

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. When revalued assets are sold, the amounts included in the revaluation surplus reserve in respect of such assets are transferred to retained earnings.

3.34.2 Subsequent costs

The cost of replacing 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 in the part will flow to the Group 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.

3.34.3 Depreciation

Depreciation is recognised in profit or loss on a straight-line basis, over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The assets are depreciated from the month it is available for use and cease to depreciate from the month of disposal.

The estimated useful lives for the current and comparative periods are as follows:

Item Useful Life
Buildings 50-70 Years
Improvement on leasehold building 04-06 Years
Furniture and fittings 05-10 Years
Office equipment 03-10 Years
Computer equipment 02-05 Years
Motor vehicles 04-05 Years
Plant and Machinery/Project equipment 4-33 Years
Civil construction 57-60 Years
Medical equipment 05 Years
Electric equipment 05 Years

Depreciation methods, useful lives and residual values are reviewed at each Reporting date.

3.34.4 Revaluation

Revaluation is performed on freehold land and buildings by professionally qualified valuers, using open market value. Land and buildings are revalued every three years.

The revaluation surplus is recognised on the net carrying value of the asset and is transferred to a revaluation reserve, after restating the asset at the revalued amount. The revaluation reserve is transferred to retained earnings at the point of derecognition.

3.34.5 Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. 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 recognised in profit and loss in the year the asset is derecognised.

3.35 Intangible assets

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

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment, whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life, are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the Income Statement in the expense category, consistent with the function of the intangible asset. The estimated useful lives for the current and comparative periods are as follows:

Item Useful life
Computer software 03 - 05 Years

Intangible assets with infinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangible assets are not amortised. The useful life of an intangible asset with an infinite life is reviewed annually to determine whether infinite life assessment continues to be supportable. If not, the change in the useful life assessment from infinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset, are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the Income Statement when the asset is derecognised.

3.36 Investment properties

Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property, at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the Reporting date. Gains or losses arising from changes in the fair values of investment properties, are included in the Income Statement in the year in which they arise.

Fair values are evaluated annually by an accredited external, independent valuer, applying a valuation model, when there are indications of fair value changes in investment property.

Investment properties are derecognised either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the Income Statement in the year of retirement or disposal.

Transfers are made to or from investment property, only when there is a change in use, evidenced by the end of owner-occupation, commencement of an operating lease to another party or completion of construction or development. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner-occupied property becomes investment property, the Company and the Group account for such property in accordance with the policy stated under property, plant and equipment up to the date of the change in use.

3.37 Leasing

3.37.1 Group as a lessee

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

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

Leases which do not transfer to the Group substantially, all risks and benefits incidental to ownership of the leased items, are operating leases. Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term. Contingent rentals are recognised as an expense in the period in which they are incurred.

3.38 Cash flow statement

The Statements of Cash Flows has been prepared using the ‘Direct Method’. Interest paid is classified as a an operating cash flow. Grants received, which are related to purchase and construction of property, plant and equipment are classified as investing cash flows. Dividend and interest income are classified as cash flows from investing activities. Dividends paid are classified as financing cash flows.

3.39 Comparative information

Accounting policies have been consistently applied by the Company with those of the previous year. Classification of comparative amounts were changed, where necessary to confirm with the current year presentation.

4. Use of Judgments, Estimates and Assumptions

The preparation of Financial Statements in conformity with Sri Lanka Accounting Standards (SLFRS and LKAS) 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 based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources.

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 significant areas of estimation under uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognised in the Financial Statements is included in the following notes:

Disclosure reference
Critical accounting judgments, estimates and assumptions
Note
Insurance provision - Life 22
Valuation of investment property 9
Deferred tax - Utilisation of tax losses 16(b)
Measurement of defined benefit obligation 13-14

4.1 Going concern

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

4.2 Taxation

Uncertainties exist with respect to the interpretation of complex tax regulation, changes in tax laws and the amount and timing of future taxable income. Given the wide range of international business relationships and the long term nature and the complexity of existing contractual agreements, differences arising between the actual results and the assumptions made or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establish provisions, based on reasonable estimates, for possible consequences of audits by the tax authority The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the domicile of the Group companies.

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based on the likely timing and the level of future taxable profits together with future tax planning strategies.

4.3 Measurement of the defined benefit obligations

The present value of the defined benefit obligations 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 13 - 14 to the Financial Statements. Any changes in these assumptions will impact the carrying amount of defined benefit obligations.

4.4 Impairment of property, plant and equipment and intangible assets other than goodwill

The impairment analysis is principally based upon discounted estimated cash flows from the use and eventual disposal of the assets. Factors like lower than anticipated sales and resulting decreases of net cash flows and changes in the discount rates could lead to impairment.

5. Standards Issued But Not Yet Effective

The standards and interpretations that are issued but not yet effective up to the date of issuance of Company’s/Group’s Financial Statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective.

5.1 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. This standard was originally effective for annual periods commencing on or after 1 January 2015. However, the effective date has been deferred subsequently.

5.2 SLFRS 14 – Regulatory deferral accounts

The scope of this standard is limited to first time adopters of SLFRS that already recognise regulatory deferral account balances in their Financial Statements. Consequently, the Financial Statements of rate regulated entities that already apply SLFRS or that do not otherwise recognise such balances, will not be affected by this standard. This standard is effective for the annual periods beginning on or after 1 January 2016.

5.3 SLFRS -15 – Revenue from contracts with customers

SLFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including LKAS 18 Revenue, LKAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programme. This standard is effective for the annual periods beginning on or after 1 January 2017.

None of these new standards and interpretations are expected to have an effect on the Consolidated Financial Statements of the Group or the Financial Statements of the Company, except for SLFRS 9 and 15. Pending the detailed review of such standards and interpretations, the extent of the impact has not been determined by the management.

6. Segment Reporting

A segment is a distinguishable component of the Group that is engaged either in providing related products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and returns that are different from those of other segments. The Group’s primary format for segment reporting is based on business segments. The business segments are determined based on the Group’s management and internal reporting structure.

Inter-segment pricing is determined on an arm’s length basis.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

The activities of the Group are carried out mainly in Sri Lanka. Consequently, the economic environment in which the Group operates is not subject to risks and rewards that are significantly different on a geographical basis. Hence, disclosure by geographical region is not provided.

For management purposes, the Group is organised into business units based on their products and services and has following reportable operating segments as follows:

  • The Company offers a wide range of whole life, term assurance, unitised pensions, guaranteed pensions, pure endowment pensions and mortgage endowment products.
  • Healthcare segment includes Healthcare centre for Cancer Screening, Radiation Treatment units and Diabetes Centre.
  • Other segment includes investment management services.

Transaction between operating segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment income, expenses and results will include those transfers between business segments which will then be eliminated on consolidation.

Segment Income Statement for the year ended 31 December 2015

Insurance
life

Rs.’000
Healthcare


Rs. ’000
Other
operations

Rs. ’000
Adjustments
and
eliminations
Rs. ’000
Total


Rs. ’000
Gross premiums 8,291,277 8,291,277
Premiums ceded to reinsurers (183,464) (183,464)
Net premiums 8,107,813 8,107,813
Income from subsidiaries 310,693 7,023 317,716
Fees and commission income 50,662 50,662
Investment income 3,896,071 772 3,896,843
Realised gains 4,369 4,369
Fair value gains and losses 65,389 65,389
Other operating revenue 4,758 4,758
Other revenue 4,021,249 310,693 7,795 4,339,738
Segment revenue 12,129,063 310,693 7,795 12,447,551
Gross benefits and claims paid (3,805,625) (3,805,625)
Claims ceded to reinsurers 115,746 115,746
Gross change in contract liabilities (3,675,856) (3,675,856)
Cost of sales of subsidiaries (127,727) (127,727)
Net benefits and claims (7,365,736) (127,727) (7,493,463)
Acquisition cost (977,782) (977,782)
Other operating and administrative expenses (1,761,496) (124,780) (7,055) (1,893,331)
Finance costs (6,001) (3,708) (17) (9,726)
Other expenses (2,745,279) (128,488) (7,072) (2,880,839)
Segment benefits, claims and other expenses (10,111,015) (256,215) (7,072) (10,374,302)
Share of profit of associates 200,666 200,666
Segment results 2,018,048 54,478 201,389 2,273,915

Segment Income Statement for the year ended 31 December 2014

Insurance
life

Rs.’000
Healthcare


Rs. ’000
Other
operations

Rs. ’000
Adjustments
and
eliminations
Rs. ’000
Total


Rs. ’000
Gross premiums
Premiums ceded to reinsurers
Change in reserve for unearned premium
Net premiums
Income from subsidiaries 279,185 279,185
Fees and commission income
Investment income 5,546 5,546
Realised gains
Fair value gains and losses
Other operating revenue 4,489 2,259 6,748
Other revenue 4,489 281,444 5,546 291,479
Segment revenue 4,489 281,444 5,546 291,479
Gross benefits and claims paid
Claims ceded to reinsurers
Gross change in contract liabilities
Net benefits and claims
Direct cost of subsidiaries (123,114) (123,114)
Acquisition cost
Other operating and administrative expenses (1,472) (126,477) (4,589) (132,536)
Finance costs (7) (18,148) (15) (18,170)
Other expenses (1,478) (267,739) (4,602) (273,819)
Segment benefits, claims and other expenses (1,478) (267,739) (4,602) (273,819)
Share of profit of associates 116,768 116,768
Segment results 3,010 13,705 117,712 134,427

Segment Statement of Financial Position as at 31 December 2015

Insurance
life

Rs.’000
Healthcare


Rs. ’000
Other
operations

Rs. ’000
Adjustments
and
eliminations
Rs. ’000
Total


Rs. ’000
Intangible assets 645 594 1,239
Property, plant and equipment 5,343,752 538,348 5,882,100
Investment property 1,399,171 1,399,171
Investment in associates 365,553 955,797 1,321,350
Investments in subsidiaries 521,000 (521,000)
Financial instruments 64,853,851 9,500 12,485 64,875,836
Reinsurance assets 46,007 46,007
Loans to policyholders 1,335,634 1,335,634
Premium receivables 192,401 192,401
Other assets 6,177,151 16,615 2,579 6,196,345
Total assets 80,235,166 565,057 15,064 434,797 81,250,084
Insurance contract liabilities 68,279,597 68,279,597
Other liabilities 2,509,199 47,713 2,456 2,353 2,561,721
Total liabilities 70,788,796 47,713 2,456 2,353 70,841,318

Segment Statement of Financial Position as at 31 December 2014

Insurance
life

Rs.’000
Healthcare


Rs. ’000
Other
operations

Rs. ’000
Adjustments
and
eliminations
Rs. ’000
Total


Rs. ’000
Intangible assets
Property, plant and equipment 604,787 604,787
Investment property
Investment in associate 926,917 926,917
Investments in subsidiaries 521,000 (521,000)
Financial instruments 100,000 12,751 112,751
Reinsurance assets
Loans to policyholders
Premium receivables
Other assets 2,694 19,149 7,625 29,468
Total assets 623,694 623,936 20,376 405,917 1,673,923
Insurance contract liabilities
Other liabilities 526 142,238 4,783 147,547
Total liabilities 526 142,238 4,783 147,547

6. (a) Summarised information of significant subsidiaries

Summarised Statement of Comprehensive Income

Healthcare
2015
Rs. ’000
2014
Rs. ’000
Revenue 310,693 281,444
Cost of sales (127,727) (123,114)
Administrative expenses (121,606) (116,645)
Selling and distribution expenses (3,174) (9,832)
Finance cost (3,708) (18,148)
Profit before tax 54,477 13,705

Summarised Statement of Financial Position

Healthcare
2015
Rs. ’000
2014
Rs. ’000
Current assets 26,116 19,149
Non-current assets 538,942 606,292
Current liability 15,799 90,085
Non-current liability 30,182 48,575
Total equity 519,077 486,782

Summarised Statement of Cash Flows

Healthcare
2015
Rs. ’000
2014
Rs. ’000
Operating 122,199 77,398
Investing (10,756) 51,987
Financing (89,000) (151,467)
Net increase/(decrease ) in cash and cash equivalents (5,715) (28,157)

7. Intangible Assets

Group
Company
Note
Computer
software
& license
Rs. ’000
Total


Rs. ’000
Computer
software
& license
Rs. ’000
Total


Rs. ’000
Cost
As at 1 January 2014 10,841 10,841
Addition during the year
As at 1 January 2015 10,841 10,841
Transferred from Ceylinco Insurance PLC 279,487 279,487 279,487 279,487
Addition during the year 1,026 1,026 406 406
Disposals
As at 31 December 2015 291,354 291,354 279,893 279,893
Accumulated amortisation and impairment
As at 1 January 2014 10,512 10,512
Amortisation for the year 329 329
As at 1 January 2015 10,841 10,841
Transferred from Ceylinco Insurance PLC 278,016 278,016 278,016 278,016
Amortisation for the year 32 1,257 1,257 1,232 1,232
Disposals
As at 31 December 2015 290,114 290,114 279,248 279,248
Carrying amount
As at 1 January 2015
As at 31 December 2015 1,240 1,240 645 645

7. (a) Acquisition of intangible assets during the year

During the year, the Company acquired intangible assets to the aggregate value of Rs. 406,000 and cash payments amounting to Rs. 406,000 were made during the year of purchase for intangible assets.

During the year, the Group acquired intangible assets, to the aggregate value of Rs. 1,026,000 and cash payments amounting to Rs. 1,026,000 were made during the year for purchase of intangible assets.

8. Property, Plant and Equipment

Group
Note
Freehold
land

Rs. ’000
Building


Rs. ’000
Plant &
machinery

Rs. ’000
Motor
vehicles

Rs. ’000
Office
equipment

Rs. ’000
Computer
equipment

Rs. ’000
Furniture &
fittings
Rs. ’000
Capital
WIP

Rs. ’000
Total


Rs. ’000
Cost
As at 1 January 2014 859,744 4,850 12,788 10,996 74,299 962,677
Additions during the year 14,588 350 98 371 15,407
Disposals (13,252) (13,252)
As at 1 January 2015 861,080 4,850 13,138 11,094 74,670 964,832
Transferred from Ceylinco Insurance PLC 2,568,726 1,710,515 470,045 443,394 486,578 279,643 76,543 6,035,443
Additions during the year 189,973 333 7,636 28,891 83,058 13,692 95,058 418,641
Transfers 110,000 (169,648) (59,648)
Disposals (3,788) (1,829) (12,786) (2,840) (21,243)
As at 31 December 2015 2,678,726 1,900,488 861,413 478,743 483,594 567,944 365,165 1,953 7,338,025
Accumulated depreciation
As at 1 January 2014 241,245 2,425 8,933 10,507 41,057 304,167
Depreciation for the year 32 59,433 970 1,088 496 6,801 68,788
Disposals (12,911) (12,911)
As at 1 January 2015 287,767 3,395 10,021 11,003 47,858 360,044
Transferred from Ceylinco Insurance PLC 44,152 151,503 221,772 363,608 143,782 924,817
Depreciation for the year 32 20,900 61,729 38,127 23,128 28,389 17,846 190,119
Disposals (2,645) (1,170) (12,646) (2,595) (19,056)
As at 31 December 2015 65,052 349,496 190,380 253,751 390,354 206,891 1,455,924
Carrying amount
As at 1 January 2015 573,313 1,455 3,117 91 26,812 604,788
As at 31 December 2015 2,678,726 1,835,436 511,917 288,363 229,843 177,590 158,274 1,953 5,882,101

Company Note Freehold
land

Rs. ’000
Building


Rs. ’000
Plant &
machinery

Rs. ’000
Motor
vehicles

Rs. ’000
Office
equipment

Rs. ’000
Computer
equipment

Rs. ’000
Furniture &
fittings
Rs. ’000
Capital
WIP

Rs. ’000
Total


Rs. ’000
Cost
As at 1 January 2014
Additions during the year
Disposals
As at 1 January 2015
Transferred from Ceylinco Insurance PLC 2,568,726 1,710,515 470,045 443,394 486,578 279,643 76,543 6,035,443
Additions during the year 189,973 7,636 28,621 83,011 13,648 95,058 417,947
Transfers 110,000 (169,648) (59,648)
Disposals (3,788) (1,829) (12,786) (2,840) (21,243)
As at 31 December 2015 2,678,726 1,900,488 473,893 470,186 556,803 290,451 1,953 6,372,499
Accumulated depreciation
As at 1 January 2014
Depreciation for the year 32
Disposals
As at 1 January 2015
Transferred from Ceylinco Insurance PLC 44,152 151,503 221,772 363,608 143,782 924,817
Depreciation for the year 32 20,900 37,157 23,038 28,368 13,523 122,986
Disposals (2,645) (1,170) (12,646) (2,595) (19,056)
As at 31 December 2015 65,052 186,015 243,640 379,330 154,710 1,028,747
Carrying amount
As at 1 January 2015
As at 31 December 2015 2,678,726 1,835,436 287,878 226,546 177,473 135,741 1,953 5,343,752

8.(a) Acquisition of property, plant and equipment during the year

Company

During the financial year, the Company acquired property, plant and equipment to the aggregate value of Rs. 418 Mn. Cash payments amounting to Rs. 357 Mn were made during the year for purchase of property, plant and equipment.

Group

During the financial year, Group acquired property, plant and equipment to the aggregate value of Rs. 419 Mn (2014 – Rs. 15 Mn). Cash payments amounting to Rs. 358 Mn – (2014 – Rs. 14 Mn) were made for the purchase of property, plant and equipment.

8.(b) Capital commitments

The Company has committed to pay an amount of Rs. 124,086,826 – as at the Reporting date under contract entered into on capital expenditure projects.

8.(c) Title restriction on property, plant and equipment

There are no restriction that existed on the title of the property, plant and equipment of the Group and Company as at Reporting date.

8.(d) Temporarily idle property, plant and equipment

There were no temporarily idle property as at year ended 31 December 2015.

8.(e) Details of freehold land and building of the Group/Company

Address Building

Sq. Ft.
Land extent Cost

Rs. ’000
Value of land
Rs. ’000
Company
No. 115, Greens Road, Negombo 13,169 A-0-R-0-P-15.00 58,000 35,500
No. 63, Janadhipathi Mawatha, Colombo 01 - A-0-R-0-P-13.84 90,000 90,000
No. 60, Colombo Road, Kaluwella, Galle 13,984 A-0-R-0-P-16.09 90,000 40,000
No. 54, Harischchandra Mawatha, Anuradhapura 23,100 A-0-R-1-P-10.68 123,000 38,000
Serene Resorts, Bopitiya Road, Uswetakeiyyawa 38,176 A-2-R-3-P-30 243,563 94,000
No. 223, Main Street, Tissamaharama 8,468 A-0-R-1-P-0 50,000 18,000
No. 45, Dharmapala Mawatha, Ratnapura 3,044 A-0-R-0-P-35.5 51,000 42,000
No. 45, Dharmapala Mawatha, Ratnapura (New Building) 6,920 67,453
No. 264, Galle Road, Panadura A-0-R-0-P-23 30,000 30,000
No. 423, Main Street, Kalutara 12,000 A-0-R-0-P-32.75 111,000 29,500
No. 327, Badulla Road, Bandarawela 8,800 A-0-R-0-P-17.01 86,217 12,000
No. 106, Havelock Road, Colombo 05 61,630 A-0-R-0-P-35.2 860,000 194,000
Block No. 32, Mistry Hills, Nuwara-Eliya 5,400 A-0-R-0-P-26.9 26,000 5,000
No. 15 , Rexdias Mawatha, Wennappuwa 8,671 A-0-R-0-P-37.4 53,600 26,000
No. 91, Bauddhaloka Mawatha, Gampaha 8,975 A-0-R-0-P-32.5 142,000 71,000
No. 40, Rajapihilla Mawatha, Kurunegala 10,485 A-0-R-0-P-15.5 109,000 20,000
No. 90/4, Kurunegala Road, Chilaw A-0-R-0-P-30.0 15,000 15,000
No. 38, Abdul Gafoor Mawatha, Colombo 03 A-0-R-1-P-4.5 245,000 245,000
No. 406, Galle Road Rawatawatta, Moratuwa 7,544 A-0-R-0-P.39.73 76,000 59,000
Nos. 37,39 & 41, Vannarponnai, South-East in the Parish of Vannarponnai, Jaffna 4,144 A-0-R-1-P-7.9 68,000 60,000
No. 22, Lloyd’s Avenue, Batticaloa 12,320 A-0-R-0-P-23.83 99,767 24,000
Nos. 2, Gower Street, Colombo 05 5,210 A-0-R-1-P-27.25 366,000 353,000
No. 20 & 22/3, Kandy Road, Trincomalee 10,910 A-0-R-1-P-20 115,966 36,000
Nos. 38, 38/B, Rajapihilla Road, Kurunegala A-0-R-0-P-23.93 29,344 29,344
Nos. 92 & 98, Jampettah Street, Colombo 13 17,000 A-0-R-1-P-11.22 168,383 107,500
No. 70, Park Street, Colombo 02 4,510 A-0-R-1-P-32.40 593,620 470,000
No. 615, Galle Road, Mount Lavinia 4,315 A-0-R-1-P-12.5 121,137 101,719
No. 274, Panadura Road, Horana A-0-R-0-P-25.5 40,163 40,163
No. 63, King Street, Kandy 14,670 A-0-R-1-P-1.25 250,000 209,000
No. 45, Anagarika Dharmapala Mawatha, Matara 7211 A-0-R-0-P-26.44 90,000 74,000
No. 401, Main Street, Panadura A-0-R-1-P-4.12 110,000 110,000
Total 4,579,213 2,678,726

8.(f) Fully-depreciated Property, plant and equipment

The initial cost of fully-depreciated Property, plant and equipment which are still in use as at Balance Sheet date is as follows;

Group
Company
As at 31 December
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Computer equipment 146,727 146,727
Office equipments 37,581 37,581
Furniture and fittings 31,109 31,109
Motor vehicles 54,836 54,836
270,253 270,253

9. Investment Properties

Group
Company
As at 1 January
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Transferred from Ceylinco Insurance PLC 1,513,171 1,513,171
Additions during the year
Transfers (110,000) (110,000)
Disposal during the year (4,000) (4,000)
Fair value gains
As at 31 December 1,399,171 1,399,171

9.(a) Details of investment property of the Group/Company

Addresses Building

Sq. Ft.
Land extent Value of
land
Rs. ’000
Value of
building
Rs. ’000
Total

Rs. ’000
Nuwara-Eliya, Block No. 07 Mistry Hills A-0-R-0-P-13.5 5,000 5,000
No. 36, Talbot Town, Lane 1, Galle 7,196 A-0-R-0-P-20 64,000 26,000 90,000
No. 27, Fifth Cross Street, Nambimulla, Ambalangoda 4,614 A-0-R-0-P-20 40,000 13,000 53,000
No. 115, Green Road, Negombo A-0-R-0-P-37.5 80,000 80,000
No. 428, R A De Mel Mawatha, Colombo 03 8,300 Condominium 102,000 102,000
No. 60, Park Street, Colombo 02 34,854 A-0-R-1-P-2.82 275,000 183,000 458,000
No. 70, Park Street, Colombo 02 4,510 123,620 123,620
No. 06, Station Road, Matara 2,682 A-0-R-0-P-25.88 44,000 3,900 47,900
Ceylinco House, No. 69, Janadhipathi Mawatha, Colombo 01 (7th Floor) 5,318 84,651 84,651
Ceylinco House, No. 69, Janadhipathi Mawatha, Colombo 01 (6th Floor) 11,323 180,000 180,000
Ceylinco House, No. 69, Janadhipathi Mawatha, Colombo 01 (5th Floor) 11,320 175,000 175,000
Subtotal 508,000 891,171 1,399,171

The fair value of investment property reflects the actual market value as at the Reporting date.

9.(b) Rental income and operating expenses

Group
Company
As at 1 January
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Rental income derived from investment properties 39,566 40,585
Direct operating expenses generating rental income (590) (590)
Direct operating expenses that did not generating rental income (1,048) (1,048)
Net profit arising from investment properties 37,928 38,948

10. Investment in Subsidiaries

Investments in subsidiaries (Unquoted)

% of Holding (Direct)
Number of shares
Cost
2015
2014
2015
2014
2015
Rs. ’000
2014
Rs. ’000
Company
Serene Resorts Limited 75% 75% 1,500,000 1,500,000
Ceylinco Seraka Limited 5% 5% 5,000 5,000
Ceylinco Healthcare Services Limited 99% 99% 52,100,000 52,100,000 521,000
521,000

All the subsidiaries above are incorporated in Sri Lanka. The details of subsidiaries including principal activities are set out this section, Group structure. The cost of investments in Serene Resorts Limited and Ceylinco Seraka Limited is fully impaired.

11. Investment in Associate

Company/Group investments in associate

% Holding
Number of shares
Value
2015
2014
2015
2014
2015
Rs. ’000
2014
Rs. ’000
Quoted investments
Citizens Development Business Finance PLC 26.96% 28.60% 15,529,116 14,642,163 365,553 271,925
Investments in associate (at cost) 365,553 271,925
Group
Excess of equity acquired over consideration
Citizens Development Business Finance PLC 103,749 12,859
Group's share of associate companies retained assets
Citizens Development Business Finance PLC 852,048 642,133
Group investments in associate (equity basis) 1,321,350 926,917

11.1 Summarised financial information of the associate

Group
2015
Rs. ’000
2014
Rs. ’000
Group’s share of associate’s statement of financial position
Total assets 13,553,733 10,470,084
Total liabilities 12,232,383 9,366,520
Net Assets 1,321,350 1,103,564
Group’s share of associate’s statement of comprehensive income
Revenue 1,996,201 1,394,326
Profit before tax 342,716 202,501
Profit after tax 262,527 132,980
Other comprehensive income 9,765 (5,820)

Citizens Development Business Finance PLC (CDB) is a public limited liability company incorporated in Sri Lanka. CDB is a listed company in Colombo Stock Exchange and provides a vast range of Financial Services which includes accepting deposits, leasing, hire purchase and loan facilities etc.

2015
Rs. ’000
2014
Rs. ’000
Fair value 1,552,912 1,371,971

12. Financial Instruments and Fair Values of Financial Instruments

The Group/Company’s financial instruments are summarised by categories as follows:

Group
Company
Note
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Held-to-maturity financial assets 12(a) 46,856,945 46,856,945
Loans and receivables 12(b) 16,752,882 112,751 16,730,897 100,000
Available-for-sale financial assets 12(c) 1,051,072 1,051,072
Financial assets at fair value through profit or loss 12(d) 214,936 214,936
Total financial instruments 64,875,836 112,751 64,853,851 100,000

The following table compares the fair values of the financial instruments to their carrying values:

Group
Company
2015
2014
2015
2014
Carrying value
Rs. ’000
Fair value

Rs. ’000
Carrying value
Rs. ’000
Fair value
Rs. ’000
Carrying value
Rs. ’000
Fair value

Rs. ’000
Carrying value
Rs. ’000
Fair value
Rs. ’000
Held-to-maturity financial assets 46,856,945 46,721,344 46,856,945 46,721,344
Loans and receivables 16,752,882 16,752,882 112,751 112,751 16,730,897 16,730,897 100,000 100,000
Available-for-sale financial assets 1,051,072 1,051,072 1,051,072 1,051,072
Financial assets at fair value through profit or loss 214,936 214,936 214,936 214,936
Total financial instruments 64,875,836 64,740,234 112,751 112,751 64,853,851 64,718,249 100,000 100,000

12.(a) Held-to-maturity financial assets

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Fair value
Treasury Bonds 35,010,675 35,010,675
Debentures – Quoted 11,710,669 11,710,669
Total held-to-maturity financial assets at fair value 46,721,344 46,721,344
Amortised cost
Treasury Bonds 35,396,292 35,396,292
Debentures – Quoted 11,460,653 11,460,653
Total held to maturity financial assets at amortised cost 46,856,945 46,856,945

12.(b) Loans and receivables

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Staff vehicle loans 363,989 363,989
Staff loans other than vehicle loans 154,927 154,927
Repo investment 49,811 49,811
Debentures – Unquoted 250,000 250,000
Term Deposits 15,934,155 112,751 15,912,170 100,000
Total loans and receivables at amortised cost 16,752,882 112,751 16,730,897 100,000

12.(c) Available-for-sale financial assets

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Treasury Bond and Bills 190,915 190,915
Unquoted preference share investment 131,886 131,886
Quoted debentures 512,405 512,405
Quoted share investment 215,867 215,867
Total available-for-sale financial assets at fair value 1,051,073 1,051,073

12.(d) Financial assets at fair value through profit or loss

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Fair value
Treasury Bonds 194,353 194,353
Short term investment – Quoted 20,583 20,583
Total financial assets at fair value through profit or loss 214,936 214,936

12.(e) Carrying values of financial instruments – Company

Held-to-
maturity

Rs. ’000
Loans and
receivables

Rs. ’000
Available-
for-sale

Rs. ’000
Fair value through
profit or loss
Rs. ’000
Total


Rs. ’000
As at 1 January 2014
Purchases 198,500 198,500
Maturities (98,500) (98,500)
Disposals
As at 1 January 2015 100,000 100,000
Transferred from Ceylinco Insurance PLC 33,230,585 17,578,227 3,378,423 1,084,898 55,272,132
Purchases 17,224,493 76,041,176 1,224,709 7,054,965 101,545,343
Maturities (4,905,000) (77,002,610) (81,907,610)
Disposals (3,556,102) (7,990,315) (11,546,418)
Fair value gains recorded in the income statement 65,389 65,389
Fair value gains recorded in other comprehensive income 4,043 4,043
Amortisation adjustment 1,306,868 14,104 1,320,972
As at 31 December 2015 46,856,946 16,730,897 1,051,072 214,936 64,853,852

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

The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the Financial Statements (i.e., held-to-maturity and loans and receivables).

Assets for which fair value approximates carrying value

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

Fixed rate financial instruments

The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments.

For quoted debt instruments the fair values are determined based on quoted market prices.

For unquoted equity investments book values have been used as a base to calculate fair value of investments.

For unquoted debt instruments, the carrying value approximates the fair value of the investments.

12.(f) Instrument category – fair value basis

Government securities Measurement basis
Treasury Bonds Average of the buy/sell yields included in the weekly economic indicators published daily by CBSL
Treasury Bills Average of the buy/sell yields included in the weekly economic indicators published daily by CBSL
Investment in listed shares Volume Weighted-Average (VWA) prices
Corporate debt
Listed Last traded price
Unlisted fixed rate Discounted Cash Flow (DCF) Method (Cost plus accrued interest)
Fixed and term deposits
Deposit > 1 year Discounted Cash Flow (DCF) Method (Cost plus accrued interest)

12.(g) Legal title of the assets transferred

As at 31 December 2015, the legal title of all the assets were transferred from Ceylinco Insurance PLC (CIPLC) to the Company except for the below stated quoted securities of which the legal tittle is yet to be transferred to the Company.

Category Note Amount reported in the financial statements
Rs. ’000
Quoted Shares - AFS 12 (i) (1) 215,867
Quoted Debentures - AFS 12 (i) (3) 512,405
Quoted Debentures - HTM 12 (i) (3) 11,460,653
Total 12,188,925

The delay in the above transfer was due to pending approval from IBSL and Securities and Exchange Commission of Sri Lanka. However, on 16 February 2016, subsequent to the Statement of Financial Position date, the approval form IBSL was received.

12.(h) Determination of fair value and fair values hierarchy

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

Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities;

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

Level 3: Techniques using inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:

2015
2014
Level 1

Rs. ’000
Level 2

Rs. ’000
Level 3

Rs. ’000
Total fair
value
Rs. ’000
Level 1

Rs. ’000
Level 2

Rs. ’000
Level 3

Rs. ’000
Total fair
value
Rs. ’000
Company/Group
Financial assets
Financial assets at fair value through profit/loss
Equity securities 20,583 20,583
Debt securities 194,353 194,353
214,936 214,936
Available-for-sale financial assets:
Equity securities 215,867 131,886 347,753
Debt securities 703,320 703,320
919,187 131,886 1,051,073
Total financial assets 1,134,123 131,886 1,266,009
Financial liabilities
Repo borrowings

Reconciliation of movements in level 3 financial instruments measured at fair value

The following table shows a reconciliation of the opening and closing recorded amount of Level 3 financial assets which are recorded at fair value:

As at 1 January
2015


Rs. ’000
Transferred
from Ceylinco
Insurance
PLC
Rs. ’000
Total gains/(loss)
recorded in other
comprehensive
income
Rs. ’000
Additions/
settlements


Rs. ’000
As at 31
December
2015

Rs. ’000
Financial assets
Available-for-sale financial assets:
Debt securities
Equities 131,886 131,886
Total level 3 financial assets 131,886 131,886

In case of change in assumptions having 10% variation, the effect to Other Comprehensive Income could be as follows:

Carrying
amount
as at
31 Dec. 2014
Rs. ’000
Effect of
possible
alternate
assumptions
Rs. ’000
Carrying
amount
as at
31 Dec. 2015
Rs. ’000
Effect of
possible
alternate
assumptions
Rs. ’000
Equity securities 131,886 13,189
131,886 13,189

12.(i) Entity-wise details of financial instruments

12.(i).(1)

AFS – Quoted Share Investment Carrying value
(Rs. ‘000)
Blue Diamonds Jewellery Worldwide Limited 2,880
Commercial Credit and Finance PLC 212,787
Merchant Bank of Sri Lanka 200
Total 215,867

12.(i).(2)

L & R – Term deposits Carrying value
(Rs. ‘000)
Bank of Ceylon 1,000,000
Citizens Development Business Finance PLC 250,000
Commercial Bank of Ceylon PLC 600,000
DFCC Bank PLC 7,035,000
Hatton National Bank PLC 2,170,020
National Development Bank PLC 2,330,000
Peoples Bank 27,000
Sampath Bank PLC 1,000,000
Seylan Bank PLC 1,500,050
Nations Trust Bank PLC 100
Total 15,912,170

12.(i).(3)

Debentures - Quoted Carrying value
(Rs. ‘000)
Bank of Ceylon 1,691,597
Central Finance Company PLC 345,328
Citizens Development Business Finance PLC 99,770
Commercial Credit & Finance PLC 14,222
DFCC Bank PLC 61,150
DFCC Vardhana Bank 850,714
Hatton National Bank PLC 2,178,014
National Development Bank PLC 1,812,553
Nations Trust Bank PLC 721,974
People‘s Leasing and Finance PLC 482,952
Sampath Bank PLC 3,058,013
Seylan Bank PLC 520,674
SMB Leasing PLC 10,000
Siyapatha Finanace PLC 126,096
11,973,057

12.(i).(4)

Debentures - Unquoted Carrying value
(Rs. ‘000)
Central Finance Company PLC 250,000

13. Gratuity Benefit Liability/(Asset)

The amounts recognised in the Income Statement are as follows:

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Current service cost 18,913 18,913
Interest cost on benefit obligation 29,310 29,310
Expected return on plan assets (53,658) (53,658)
(5,435) (5,435)

Net actuarial gain/(loss) recognised in the Other Comprehensive Income.

The amounts recognised in the Statement of Financial Position at the Reporting date are as follows:

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Present value of the defined benefit obligation (868,467) (868,467)
Fair value of plan assets 1,594,193 1,594,193
Total net defined benefit asset 725,726 725,726

The movement in the defined benefit liability is as follows:

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
As at 1 January
Transferred from Ceylinco Insurance PLC 863,223 863,223
Current service cost 18,913 18,913
Interest cost 29,310 29,310
Benefits paid (10,641) (10,641)
Actuarial gains/(losses) (32,339) (32,339)
As at 31 December 868,467 868,467
Gratuity liability – Subsidiaries 10,357 8,287

The gratuity benefit liability was valued by K A Pandit Actuarial Valuer.

The movement in the plan assets is as follows:

Company
2015
Rs. ’000
2014
Rs. ’000
As at 1 January
Transferred from Ceylinco Insurance PLC 1,531,787
Expected return on plan assets 53,658
Actuarial gains 8,748
As at 31 December 1,594,193

Gratuity funds plan assets include investment in equity shares of Ceylinco Insurance PLC, the ultimate parent entity, market value amounting to Rs. 269,804,273 as at the Reporting date.

The overall expected rate of return on assets is determined based on market expectations prevailing on that date, applicable to the period over which the obligation is to be settled.

The principal actuarial assumptions used in determining the gratuity benefit obligation for the Group’s plan assets are as follows:

2015 2014
Future salary increases 8.50%
Discount rate 10.00%
Expected rate of return on plan assets 10.00%
Retirement age 55 Yrs

Changes in the defined benefit obligation and fair value of plant assets

Amounts Charged to Profit or Loss
Amounts Charged to Profit or Loss
Remeasurement Gains/(Losses) in Other Comprehensive Income
1 Jan. 2015








Rs. ’000
Transferred
from
Ceylinco
Insurance
PLC




Rs. ’000
Service
cost







Rs. ’000
Net
interest







Rs. ’000
Subtotal
included
in profit
or loss





Rs. ’000
Benefit
paid







Rs. ’000
Return on
plan assets
(Excluding
amounts
included in
net interest
expenses)
Rs. ’000
Actuarial
changes
arising from
changes in
demographic
assumptions



Rs. ’000
Actuarial
changes
arising from
changes in
financial
assumptions



Rs. ’000
Experience
adjustments







Rs. ’000
Subtotal
included in
OCI





Rs. ’000
Contribution
by
employers






Rs. ’000
31 Dec. 2015







Rs. ’000
Defined benefit obligation (863,223) (18,913) (29,310) (48,224) 10,641 32,339 32,339 (868,467)
Fair value of plan assets 1,531,787 53,658 8,748 8,748 1,594,193
Benefit assets/(liability) 668,565 (18,913) (29,310) (48,224) 10,641 53,658 41,086 41,086 725,726

A quantitative sensitivity analysis for significant assumptions as at 31 December 2015 is shown bellow:

Discount rate
Future salary increasement rate
Increase 1%
Rs. ’000
Decrease 1%
Rs. ’000
Increase 1%
Rs. ’000
Decrease 1%
Rs. ’000
Sensitivity level
Impact on defined benefit obligation (42,890) 48,707 48,944 (43,826)

Following payments are expected contributions to the defined benefit plan obligation on the future years:

2015
Rs. ’000
2014
Rs. ’000
Within the next 12 months 321,464
Between 2 and 5 years 114,094
Between 5 and 10 years 624,324

The average duration of the defined benefit plan obligation at the end of the Reporting period is nine years. (2014: nine years)

14. Pension Benefit Liability/(Assets)

The Company has two defined benefit pension plans, both of which require contributions to be made to separately administered funds namely Pension Trust Fund of Ceylinco Insurance PLC and Pension Fund of Ceylinco Insurance PLC.

2015 - changes in the defined benefit obligation, fair value of plan assets and unrecognised past service costs:

Amounts Charged to Profit or Loss
Amounts Charged to Profit or Loss
Remeasurement Gains/(Losses) in Other Comprehensive Income
January 2015
Transferred from Ceylinco Insurance PLC
Current service cost
Interest cost on benefit obligation
Subtotal included in profit/loss
Benefit paid
Return on plan assets (excluding amounts in net interest expenses)
Past service costs recognised
Recognised in income statement Note
Actuarial changes arising from changes in demographic assumptions
Actuarial changes arising from changes in financial assumptions
Experience adjustments
Subtotal included in OCI
Contributions by employer
December 2015
Defined benefit obligation (444,915) (1,206) (24,944) (26,150) 1,371 (24,779) 14,987 14,987 (454,707)
Fair value of plan assets 1,446,093 (1,371) 68,692 67,321 (216,941) (216,941) 31,315 1,327,788
Total recognised benefit (liability)/asset 1,001,178 (1,206) (24,944) (26,150) 68,692 42,541 (201,954) (201,954) 31,315 873,081

Pension benefit obligation is valued by K A Pandit Actuarial Valuers.

Projected pension benefit obligation has been valued based on projected unit cost method.

Actuarial gains and losses have been recognised immediately in the Statement of Other Comprehensive Income.

The principal assumptions used in determining pension and post-employment medical benefit obligations for the Company’s plans are shown below:

2015
Rs. ’000
2014
Rs. ’000
Discount rate 10%
Rate of return on plan assets Current 10%
Previous 10%
Salary escalation rate Scheme A 0%
Scheme B,C & D 10%
Attrition rate 1%
Retirement age Scheme A 60 Yrs
Scheme B,C & D 55 Yrs
Mortality table PA 90

A quantitative sensitivity analysis for significant assumption as at 31 December 2015 as shown below:

Discount rate Future salary increment rate Life expectancy
Sensitivity level Increase 1% Decrease 1% Increase 1% Decrease 1% Increase by 1 year Decrease by 1 year
Impact on defined benefit obligation (24,382) 27,494 1,673 (1,527) 9,045 (9,204)

Pension plan assets include investment in equity shares of Ceylinco Insurance PLC, the ultimate parent entity, market value amounting to Rs. 2,015,177,774 at the reporting date.

Following are expected payments from the defined benefit pension obligation on the future years:

2015
Rs. ’000
2014
Rs. ’000
Within the next 12 months 55,504
Between 2 and 5 years 153,938
Between 5 and 10 years 251,245

The average duration of defined benefit plan obligating at the end of the Reporting period is 15 years (2014: 15 years)

15. Reinsurance Receivables

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Reinsurance of insurance contracts 46,007 46,007
Total reinsurance receivables 46,007 46,007

The carrying amounts disclosed above is in respect of the reinsurance of insurance contracts approximate fair value at the Reporting date.

16. Taxation

16.(a) Tax receivable

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
As at 1 January
Transferred from Ceylinco Insurance PLC 1,107,957 1,107,957
Amounts recorded in the income statement (111,450) (111,450)
Notional tax recognised 187,329 187,329
Payments made on-account during the year
As at 31 December 1,183,836 1,183,836

16.(b) Deferred tax asset/liability – Company

Other comprehensive income statement Income statement Statement of financial position
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Losses carried forward 65,106 44,803
Temporary difference from retirement benefit liability 9,057 (10,523) 243,171
Temporary difference from property, plant and equipment (9,679) (312,708)
Available-for-sale financial assets (2) (47,106)
Deferred tax expense/(income) 9,055 44,903
Deferred tax liabilities (71,840)

Movement of deferred tax liability

Company
2015
Rs. ’000
2014
Rs. ’000
As at 1 January
Transferred from Ceylinco Insurance PLC 17,880
Amounts recorded in the income statement 44,903
Amounts recorded in other comprehensive income 9,057
As at 31 December 71,840

16.(c) deferred tax liability on AFS

As at 1 June 2015, the date on which the assets and liabilities were transferred from Ceylinco Insurance PLC, the AFS financial assets were transferred at the book value existed at that date in the books of CIPLC which consisted the unrealised fair value gains and losses (AFS reserves). Accordingly, the deferred tax liability above has been determined taking into account the unrealised gains and losses referred above.

16.(d) Deferred tax assets/liabilities – Group

Consolidated other comprehensive income statement Consolidated income statement Consolidated statement of financial position
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Losses carried forward 77,497 (18,714)
Temporary difference from retirement benefit obligation 9,057 (12,247) 244,311
Temporary difference from property, plant and equipment (701) (269,972)
Available-for-sale financial assets (2) (47,108)
Deferred tax expense/(income) 9,055 64,548
Deferred tax liability (91,481)

Movement of deferred tax liability

Group
2015
Rs. ’000
2014
Rs. ’000
As at 1 January
Transferred from Ceylinco Insurance PLC 17,880
Amounts recorded in the income statement 64,548
Amounts recorded in other comprehensive income 9,055
As at 31 December 91,483

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which such tax losses can be utilised.

17. Loans to Policyholders

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Balance as 1 January 2015
Transferred from Ceylinco Insurance PLC 1,511,406 1,511,406
Loans granted during the period 463,036 463,036
Repayment during the period (638,808) (638,808)
Total policyholder loans 1,335,634 1,335,634

17.(a) Fair value of loans to life policyholders

The fair value of the policyholder loans are equal to its carrying value as those are given at competitive market rates.

17.(b) Concentration risk of loans to life policyholders

There is lower concentration of credit risk with respect to policyholders, as the Company has a large number of dispersed receivables.

17.(c) Impairment of loans to life policyholders

As of 31 December 2015, there was no impairment loss recorded for policyholder loans.

17.(d) Number of policy loans

Number of policy loans due as at 31 December 2015 was 44,029.

17.(e) Collateral details

The Company does not hold any collateral as security against potential default by policyholders other than surrender value.

18. Accrued Income

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Held-to-maturity investments 1,377,032 1,377,032
Financial assets at fair value through profit or loss 1,096,226 1,096,226
Loans and receivables 6,498 1,068 6,498 1,068
Available-for-sale investments 5,666 5,666
2,485,422 1,068 2,485,422 1,068

19. Other Assets

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Advances, deposits and prepayments 97,918 17,440 80,265 50
Inventories 63,579 63,579
Deferred staff benefits 126,251 126,251
Other receivables 40,340 40,340
328,088 17,440 310,435 50

20. Cash and Cash Equivalents

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Cash in hand and at bank 600,192 10,959 598,651 1,575
Bank overdraft (450,534) (31,198) (443,955)
Total cash and cash equivalents 149,658 (20,239) 154,696 1,575

The carrying amounts disclosed above reasonably approximate fair value at the Reporting date.

21. Stated Capital

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Classes of shares
Issued and fully paid
Ordinary shares - Voting [21 (a)] 500,001 100,001 500,001 100,001
500,001 100,001 500,001 100,001

All issued shares are fully paid. There is one class of ordinary shares.

The holders of ordinary shares – voting are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

21.(a) Ordinary shares – Voting

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Balance as at January 500,001 100,001 500,001 100,001
50,000,050 ordinary shares-voting 500,001 100,001 500,001 100,001

21.(b) Other reserves

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Retained earnings 2,683,456 621,273 1,733,281 2,167
Available-for-sale reserve (92,663) 5,900 (98,563)
Special reserve 21.(c) 7,311,651 792,925 7,311,651
9,902,444 1,420,098 8,946,369 2,167

21.(c) Special Reserve

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Special reserve recognised on segregation 7,311,651 792,925 7,311,651
7,311,651 792,925 7,311,651

This reserve represents the value (net book value) of net assets transferred from Ceylinco Insurance PLC on 1 June 2015 as a result of the segregation. (Refer Note 45 for more information on Segregation).

22. Insurance Contract Liabilities

Group Company
Note 2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Life insurance contract 22 (a) 68,011,535 68,011,535
Total insurance contract liabilities 68,011,535 68,011,535

The Company’s actuaries have performed Liability Adequacy Test in accordance with the requirements of SLFRS 4 – ‘Insurance Contracts‘.

22.(a) Life insurance contract liabilities

As at 1 January 2015 Insurance contract liabilities with DPF Rs. ’000 Insurance contract liabilities without DPF Rs. ’000 Total gross insurance contract liabilities Rs. ’000
As at 1 January 2015
Transferred from Ceylinco Insurance PLC 34,236,865 30,098,814 64,335,679
Gross premium income 3,436,169 4,855,108 8,291,277
Premiums ceded to reinsurers (7,965) (175,498) (183,463)
Liabilities paid for death, maturities, surrenders, benefits and claims (1,557,815) (2,132,080) (3,689,895)
Investment return 1,766,988 2,069,567 3,836,555
Reinsurance commission income (682) 30,671 29,989
Other operating and admin expenses including income taxes (704,509) (1,126,315) (1,830,824)
Underwriting and net acquisition cost (516,846) (460,936) (977,782)
Net Transfer to shareholder (166,229) (1,633,771) (1,800,000)
Aa at 31 December 2015 36,485,976 31,525,560 68,011,536

The actuarial valuation of the Life Fund of Ceylinco Life Insurance Limited as at 31 December 2015 was carried out by the Appointed Actuary, Mr. Mark Birch(FIA) of Willis Towers Watson. Following the valuation, Rs.1.8 Bn was transferred from the Life Fund to the Shareholder’s Retained Profit Account (Rs.1.3 Bn following the previous year end valuation). In the opinion of the Actuary, adequate and proper reserves have been provided as at 31 December 2015 for all known liabilities in respect of the long term insurance business of the Life Fund, taking into account all bonus declared as at that date.

23. Other Financial Liabilities

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Repo borrowings 299,811 299,811
299,811 299,811

24. Trade and Other Payables

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Policyholders payments in advance 453,745 453,745
Agency commission payable 194,492 194,492
Government levies 432 1,524 501
Trade creditors and accrued expenses 899,280 106,540 883,770 25
Death claims payable 103,431 103,432
1,651,380 108,064 1,635,439 525

The carrying amounts disclosed above reasonably approximate fair value at the Reporting date.

All amounts are payable within one year.

25. Net Premiums

25.(a) Gross premiums on insurance contracts

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Gross written premiums 8,291,271 8,291,277

25.(b) Premiums ceded to reinsurers on insurance contracts

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Premiums ceded to reinsurers 183,464 183,464
Annualised new business life premium 2,203,997 2,203,997

25.(c) Net Income

Net income represents total net earned premium, other revenue and revenue from subsidiaries (Group).

26. Fees and Commission Income

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Reinsurance commission income 29,989 29,989
Other fees 20,673 20,673
Total fees and commission income 50,662 50,662

27. Investment Income

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Rental income from investment properties 39,566 40,585
Financial assets at fair value through profit or loss (held-for-trading purposes)
Interest income 34,160 34,160
Held-to-maturity financial assets interest income 2,344,236 2,344,236
Available-for-sale financial assets
Interest income 126,639 126,639
Dividend income 50,045 50,045
Loans and receivables interest income 1,284,834 5,546 1,286,594 4,489
Interest income from staff loan 13,812 13,812
Total investment income 3,893,292 5,546 3,896,071 4,489

28. Realised Gains

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Property, plant and equipment
Realised gains 361 361
Available-for-sale financial assets
Realised gains
Debt securities 7,008 7,008
Realised losses
Equity securities (3,000) (3,000)
Total realised gains for available-for-sale financial assets 4,008 4,008
Total realised gains 4,369 4,369

29. Fair Value Gains and Losses

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Fair value gains on financial assets at fair value through profit or loss (held-for-trading purposes) 65,389 65,389
Total fair value gains and losses 65,389 65,389

30. Net Benefits and Claims

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
(a) Gross benefits and claims paid
Life insurance contracts 3,805,625 3,805,625
Total gross benefits and claims paid 3,805,625 3,805,625
(b) Claims ceded to reinsurers
Life insurance contracts (115,746) (115,746)
Total claims ceded to reinsurers (115,746) (115,746)
(c) Gross change in contract liabilities
Change in life insurance contract liabilities 3,675,856 3,675,856
Total gross change in contract liabilities 3,675,856 3,675,856
Net benefits and claims 7,365,736 7,365,736
Gross claims and benefits (excluding life fund increase)
Claims – death,disability and hospitalisation 355,161 355,161
Policy maturities 2,296,443 2,296,443
Interim payments on anticipated endowment plans 421,581 421,581
Surrenders 573,957 573,957
Cash and loyalty bonus expenses 144,500 144,500
Annuities 13,983 13,983
3,805,625 3,805,625
Reinsurance recoveries (115,746) (115,746)
Life insurance net claims and benefits 3,689,879 3,689,879

31. Acquisition Costs

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Fees and commission expenses 966,369 977,782
966,369 977,782

32. Other Operating and Administrative Expenses

Group Company
Notes 2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Amortisation of intangible assets 7 12,098 1,232
Depreciation on property and equipment 8 126,038 122,986
Other operating expenses 665,232 132,518 605,074 1,447
Auditors’ remuneration 6,541 25 6,291 25
Employee benefits expense 32 (a) 835,391 784,813
Selling expenses 219,522 216,347
Legal expenses 32 (b) 24,894 24,753
Total other operating and administrative expenses 1,889,716 132,543 1,761,496 1,472

32.(a) Employee Benefits Expense

Group Company
Notes 2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Wages and salaries including bonus and incentives 780,747 737,752
Employees' Provident Fund 54,715 48,646
Employees' Trust Fund 13,692 12,175
Defined gratuity benefit and Pension costs (29,856) (29,856)
Other staff-related cost 16,096 16,096
Total employee benefits expense 32 835,391 784,813

32.(b) Legal expenses

The significant increase in legal expenses are mainly attributed to legal costs incurred in relation to regulatory compliances on segregation.

33. Finance Costs

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Current borrowings
Interest expense 9,815 18,163 6,001 7
Total finance cost 9,815 18,163 6,001 7

34. Income Tax Expense

The major components of income tax expense for the years ended 31 December 2015 and 2014 are–

34.(a) Current year tax charge

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Current tax
Income tax 55,892 11,632 52,184 843
Over/under provision in respect of previous year 19,675 19,675
Total current tax 75,567 11,632 71,859 843
Deferred tax
Origination of temporary differences (Note 16 b, c and d) 66,053 44,903
Total income tax expense 141,620 11,632 116,762 843

The under provision of Rs. 19,675,000 refers to Ceylinco Insurance PLC.

34.(b) Tax recorded in other comprehensive income (see Note 38)

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Current tax
Deferred tax 9,053 9,053
Total tax charge to other comprehensive income 9,053 9,053

34.(c) Reconciliation of tax charge

Company

A reconciliation between income tax expense and the product of accounting profit multiplied by the statutory tax rate is as follows:

2015
Rs. ’000
2014
Rs. ’000
Accounting profit before tax 2,018,048 3,010
Less – Income not a part of taxable income
Net premium income (8,107,814)
Non investment income (125,178)
Add – Benefits, claims and other expenses 10,111,015
Investment income from the business 3,896,071 3,010
Less – Exempted interest income (597,489)
Less – Management expenses (2,903,753)
Total Statutory income 394,829 3,010
Tax losses utilised during the year (138,190)
Taxable income 256,639 3,010
Income Tax @ 28% 71,859 843

2015
Rs. ’000
2014
Rs. ’000
Tax Losses
Tax losses brought forward
Tax losses transferred from Ceylinco Insurance PLC 298,199
Tax losses utilised during the year (138,190)
Loss incurred during the year
Tax losses carried forward 160,009

The Company is liable to pay income tax at the rate of 28% on its taxable profits in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and subsequent amendments thereto. There is no payment due to the Department of Inland Revenue as the tax liability is fully-absorbed by payments made in lieu of credit available on the Withholding Tax on Corporate Debt and Notional Tax Credits generated from investments in Government Securities.

Ceylinco Healthcare Services Limited is liable to pay income tax at 12% on its business income and 28% on its investment income.

The Company has received a Tax Intimation Letter on Life Insurance Taxation. However, no assessment has been issued yet on this intimation. The Company is of the strong view that no additional tax liability will arise due to this intimation letter and has filed a response highlighting the Company’s view, which was done in consultation with Tax Consultants. Even if this tax intimation would materialised against the Company, no additional tax liabilities are required for the Company.

35. Non-Controlling Interests (NCI)

35.(a) Accumulated balances of non-controlling interest

Name of Company 2015 2014 Effective ownership by NCI %
Ceylinco Healthcare (Pvt) Limited 4,153 3,886 1.00%
Srerene Resort Limited 2,173 2,390 25.00%
6,326 6,276

35.(b) Profit allocated to non-controlling interest

Name of Company 2015 2014
Ceylinco Healthcare (Pvt) Limited 259 28
Serene Resort Limited (209) 134
50 162

36. Basic/Diluted Earnings Per Share

Basic/diluted earnings per share has been calculated by dividing profit after taxation attributable to ordinary shareholders of the parent by the weighted average ordinary shares in issue at the year end.

Group
Company
2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Profit for the year (Rs. '000) 2,132,214 122,633 1,901,286 2,167
Weighted average number of ordinary shares ('000) 50,000 10,000 50,000 10,000
Basic/diluted earnings per ordinary share (Rs.) 42.64 12.26 38.03 0.22

There were no potential dilutive ordinary shares outstanding at any time during the year. Therefore, diluted earnings per share is same as basic earnings per share shown above.

37. Dividends Paid and Proposed

Company
2015 2014
Final proposed dividend (Rs.) 312,500 250
No. of shares in issue for the year (‘000) 50,000 10,000
Dividend per share (Rs.)
Proposed final 6.25 0.02

The Board of Directors has proposed a final dividend of Rs. 6.25 per share (2014 – Rs. 0.02) for the year ended 31 December 2015, which is to be approved by the shareholders at the Annual General Meeting to be held on 30 March 2016. As stipulated by LKAS 10 – 'Events after the Reporting Period', this proposed dividend is disclosed, but not recognised as a liability as at 31 December 2015.

However, for the purpose of computing dividend per share the final dividend proposed has been taken into consideration.

38. Income Tax Effects Relating to Other Comprehensive Income

2015 2014
Company Amount
before tax
Rs. ’000
(Expense)
benefit
Rs. ’000
Amount
net of tax
Rs. ’000
Amount
before tax
Rs. ’000
(Expense)
benefit
Rs. ’000
Amount
net of tax
Rs. ’000
Net gain/(loss) on available-for-sale financial assets (98,565) 2 (98,563)
Actuarial gain on defined benefit plans (160,867) (9,055) (169,922)
Total (259,432) (9,053) (268,485)

2015 2014
Group Amount
before tax
Rs. ’000
(Expense)
benefit
Rs. ’000
Amount
net of tax
Rs. ’000
Amount
before tax
Rs. ’000
(Expense)
benefit
Rs. ’000
Amount
net of tax
Rs. ’000
Net gain/(loss) on available-for-sale financial assets (98,565) 2 (98,563)
Actuarial gain on defined benefit plans (160,867) (9,055) (169,922)
Share of other comprehensive income of equity accounted investees 9,250 9,250
Total (250,182) (9,053) (259,235)

39. Risk Management Framework

39.(a) Governance framework

The primary objective of the Group’s risk and financial management framework is to protect the Group’s shareholders from events that hinder the sustainable achievement of financial performance objectives, including failing to exploit opportunities. Key management recognises the critical importance of having efficient and effective risk management systems in place.

The Company has established a risk management process with specified objectives with clear tasks. The Board of Directors and senior management manages the risks through various committees and delegated authorities. The reviews of risks on regular basis and the strategies adopted timely ensures the risk management function an important activity within the organisation.

The risks are identified with clear understanding of market environment, regulatory environment and macroeconomic changes. The Company has well-experienced and skilled Directors who could assess the risks and execute appropriate strategies and achieve the targets with less negative effect to shareholders.

39.(b) Capital management objectives, policies and approach

The Group has established the following capital management objectives, policies and approach to managing the risks that affect its capital position:

  • To maintain the required level of stability of the Group thereby providing a degree of security to policyholders
  • To allocate capital efficiently and support the development of business by ensuring that returns on capital employed meet the requirements of its capital providers and of its shareholders
  • To retain financial flexibility by maintaining strong liquidity and access to a range of capital markets
  • To align the profile of assets and liabilities taking account of risks inherent in the business
  • To maintain financial strength to support new business growth and to satisfy the requirements of the policyholders, regulators and stakeholders

Operations of the Group are also subject to regulatory requirements within the jurisdictions in which it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the insurance companies to meet unforeseen liabilities as these arise.

The Company maintains capital, investments and solvency as per the regulations prescribed by Insurance Board of Sri Lanka (IBSL). New changes in regulations are timely adopted and necessary changes are made to internal processes.

Approach to capital management

The Group allocates capital to businesses as required and ensures the sufficient returns to shareholders and policyholders. The assets and liabilities management establishes the required level of liquidity and reduces the risks of the Company and achieves the required capital levels of the Company.

The primary source of capital used by the Group is equity shareholders’ funds. The Group also utilises, where efficient to do so, sources of capital such as reinsurance.

The returns expectations are regularly forecast and comparisons are made in order to ensure the requirements of stakeholders are achieved.

The Group has had no significant changes in its policies and processes to its capital structure during the past year from previous years.

39 (c). Regulatory framework

Regulators are primarily interested in protecting the rights of policyholders and monitor them closely to ensure that the Group is satisfactorily managing affairs for their benefit. At the same time, regulators are also interested in ensuring that the Group maintains an appropriate solvency position to meet unforeseen liabilities arising from economic shocks or natural disasters.

The Company is regulated by Insurance Board of Sri Lanka with the objective of protecting shareholders and policyholders. There are various regulations and directives the Company is expected to adhere in order to achieve the expected norms, which leads the Company to maintain required solvency and maintain sufficient capital.

Financial risks arise due to movements in market rates. The risks mainly involve interest rates risks, share price changes etc. The Company manages these risks through various strategies adopted at Asset Liability Committee, Investment Committee and Risk Management Committees.

39 (d). Asset Liability Management (ALM) framework

ALM is the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organisation’s financial objectives, given the organisation’s risk appetite, tolerance and other constraints. ALM deals with the optimal investment of assets in view of meeting current goals and future liabilities.

Various financial risks arise from open positions in interest rates, currency and equity products, all of which are exposed to general and specific market movements. The main risk that the Company faces, due to the nature of its investments and liabilities, is the interest rate risk.

The Investment Committee identifies the nature of the liabilities arising from the product portfolio and evaluates the investment options that best suit to hedge/manage the liability. The Company manages these selected positions within a strategically crafted ALM framework that has been developed considering the cyclical nature of the domestic interest rates to achieve investment returns in excess of its obligations in the long term.

40. Insurance and Financial Risk

40.(a) Insurance risk

The principal insurance risk the Group faces is that the actual claims and benefit payments or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long term claims. Therefore, the objective of the Group is to ensure that sufficient reserves are available to cover these liabilities.

The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements.

The Group has entered into reinsurance treaties with world’s leading reinsurers as a part of its risks mitigation programme. All reinsurance is designed to mitigate the Group’s net exposure to a single claim as well as to catastrophic losses.

Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance treaties. Although the Group has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. The Group’s placement of reinsurance is diversified such that it is not dependent on a single reinsurer. The Group has all reinsurance arrangements with many leading reinsurance companies.

40.(a).(1) Life insurance contracts

Life insurance contracts offered by the Group include: whole life, term assurance and endowment plans.

Whole life and term assurance are conventional regular premium products when lump sum benefits are payable on death.

Death and maturity benefits of endowment products are subject to a guaranteed minimum amount.

For contracts with DPF the guaranteed minimum may be increased by the additions such as bonuses.

The main risks that the Group is exposed to are as follows:

  • Mortality risk – risk of loss arising due to policyholder death experience being different than expected
  • Morbidity risk – risk of loss arising due to policyholder health experience being different than expected
  • Investment return risk – risk of loss arising from actual returns being different than expected
  • Expense risk – risk of loss arising from expense experience being different than expected
  • Policyholder decision risk – risk of loss arising due to policyholder experiences (lapses and surrenders) being different than expected

These risks do not vary significantly in relation to the location of the risk insured by the Group.

The Group’s underwriting strategy is designed to ensure that risks are well diversified in terms of type of risk and level of insured benefits. This is largely achieved through diversification across industry sectors and geography, the use of medical screening in order to ensure that premium charged takes account of current health conditions and family medical history, regular review of actual claims experience and product pricing, as well as detailed claims handling procedures. Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Group has the right not to revive individual policies and it has the right to reject the payment of fraudulent claims. Insurance contracts also entitle the Group to pursue third parties for payment

of some or all costs. The Group further enforces a policy of actively managing and promptly pursuing claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Group. For contracts when death or disability is the insured risk, the significant factors that could increase the overall frequency of claims are epidemics, widespread changes in lifestyle and natural disasters, resulting in earlier or more claims than expected.

The insurance risk described above is also affected by the contract holder’s right to pay reduced premiums or no future premiums, to terminate the contract completely. As a result, the amount of insurance risk is also subject to contract holder behaviour.

40.(b) Credit risk

Credit risk (in ALM context) is the risk that a borrower or counterparty will fail to meet its obligations towards Ceylinco Life in accordance with agreed terms due to various reasons such as declining financial strength.

The sub-categories of credit risk include:

i. Default risk: the risk that the issuer will fail to make timely interest or principal payments.

ii. Downgrade risk: the risk that the debt instrument will be downgraded, reducing its market value.

iii. Credit spread risk: the risk that credit spreads (in general) will widen or narrow, decreasing or increasing, respectively, the market value of a debt instrument.

To minimise credit risk, financial investments (such as term deposits, debentures, etc.) are placed, investment transactions (such as Government Security purchases and sales, repurchase/reverse repurchase agreements) are entered into, strictly with Board Investment Committee approved counterparties.

In addition, the individual exposures to such approved counterparties are set and monitored based on IBSL determinations and internal limits.

The internal exposure limits are reviewed and refined periodically.

Since a default by an issuer could create a significant credit loss, Ceylinco Life usually invests in credit instruments (term deposits, corporate debentures, etc.) issued by reputed and stable issuers such as top Tier Licensed Commercial Banks.

Since this check for the credit rating floor is applied at the point of purchase, the subsequent rating upgrades/downgrades are monitored periodically.

  • Reinsurance is placed with counterparties that have a good credit rating. At each Reporting date, an assessment of creditworthiness of reinsurers are performed and updates the reinsurance purchase strategy, ascertaining suitable allowance for impairment.
  • The credit risk in respect of customer balances incurred on non-payment of premiums or contributions will only persist during the grace period specified in the policy document until expiry, when the policy is either paid-up or terminated. Commission paid to intermediaries is netted off against amounts receivable from them to reduce the risk of doubtful debts.

Credit exposure

The table below shows the maximum exposure to credit risk for the components of the Statement of Financial Position and items such as future commitments:

Group Company
Notes 2015
Rs. ’000
2014
Rs. ’000
2015
Rs. ’000
2014
Rs. ’000
Financial instruments
Held-to-maturity financial assets 12 (a)
Debt securities 46,856,945 46,856,945
Loans and receivables 12 (b)
Debt securities 16,233,966 112,751 16,211,981 100,000
Other 518,916 518,916
Available-for-sale financial assets 12 (c)
Equity securities 215,867 347,753
Debt securities 835,206 703,320
Financial assets at fair value through profit or loss 12 (d)
Equity securities 20,583 20,583
Debt securities 194,353 194,353
Reinsurance assets 15 46,007 46,007
Insurance receivables 17 1,335,634 1,335,634
Cash and cash equivalents 20 600,192 10,959 598,651 1,575
Total credit risk exposure 66,857,669 123,710 66,834,143 101,575

Industry analysis

31 December 2015 Financial
Services
Rs. ’000
Government

Rs. ’000
Services

Rs. ’000
Manufacturing
and Power
Rs. ’000
Others

Rs. ’000
Total

Rs. ’000
Assets
Held-to-maturity financial assets
Debt securities 11,460,653 35,396,292 46,856,945
11,460,653 35,396,292 46,856,945
Loans and receivables
Term deposits 15,912,170 15,912,170
Repo investments 49,811 49,811
Unquoted debentures 250,000 250,000
Staff and vehicle loans 518,916 518,916
16,162,170 568,727 16,730,897
Available-for-sale financial assets
Equity securities 212,987 2,880 131,886 347,753
Debt securities 512,405 190,915 703,320
725,392 190,915 2,880 131,886 1,051,073
Financial assets at fair value through profit or loss
Equity securities 392 98 19,660 433 20,583
Debt securities 194,353 194,353
392 194,353 98 19,660 433 214,936
Total credit risk exposure 28,348,607 35,781,560 98 22,540 701,046 64,853,852

31 December 2014 Financial
Services
Rs. ’000
Government

Rs. ’000
Services

Rs. ’000
Manufacturing
and Power
Rs. ’000
Others

Rs. ’000
Total

Rs. ’000
Loans and receivables
Term deposits 100,000 100,000
100,000 100,000
Total credit risk exposure 100,000 100,000

The below table indicates the rating of investments as at 31 December 2014 and 2015

31 December 2015 AAA

Rs. ‘000
AA+

Rs. ‘000
AA

Rs. ‘000
AA-

Rs. ‘000
A+

Rs. ‘000
A

Rs. ‘000
A-

Rs. ‘000
BBB+
Rs. ‘000
BBB

Rs. ‘000
BB+
Rs. ‘000
BB
Rs. ‘000
BB-
Rs. ‘000
B
Rs. ‘000
Not rated
Rs. ‘000
Total
Rs. ‘000
Financial instruments
Held-to-maturity financial assets
Debt securities 35,396,292 1,689,293 4,755,486 3,300,884 643,990 947,009 113,992 10,000 46,856,946
Loans and receivables 49,811 1,027,000 600,000 11,535,020 1,250,000 100 1,500,050 250,000 518,916 16,730,897
Available-for-sale financial assets
Equity securities 212,987 134,766 347,753
Debt securities 190,915 2,316 168,360 107,935 83,820 149,975 703,320
Financial assets at fair value through profit or loss
Equity securities 37 45 322 25 20,153 20,583
Debt securities 194,353 194,353
Total 35,831,409 2,718,609 600,045 16,459,188 4,658,843 727,910 2,597,034 576,979 683,836 64,853,852

31 December 2014 AAA
Rs. ‘000
AA+
Rs. ‘000
AA
Rs. ‘000
AA-
Rs. ‘000
A+
Rs. ‘000
A
Rs. ‘000
A-
Rs. ‘000
BBB+
Rs. ‘000
BBB
Rs. ‘000
BB+
Rs. ‘000
BB
Rs. ‘000
BB-
Rs. ‘000
B
Rs. ‘000
Not rated
Rs. ‘000
Total
Rs. ‘000
Loans and receivables 100,000 100,000
Total 100,000 100,000

40.(c) Liquidity risk

Liquidity risk is the risk that Ceylinco Life will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs, without affecting either daily operations or the financial condition of the firm.

In the context of providing financial protection to policyholders through Life Insurance, timely settlement of financial commitments such as customer benefits and claims is essential. In addition, preserving the confidence of the policyholders and investors are vital for a financial service provider such as Ceylinco Life.

Since a strain on liquidity would lead to fire sale of assets which would adversely affect the profitability and policyholder/investor confidence, very low tolerance is maintained for adverse deviations. Ceylinco Life ensures that sufficient liquid assets/credit lines are available to meet any such unforeseen cash outflows.

40.(d) Market risk

Market risk is the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in market prices and/or financial variables directly/indirectly related to financial markets.

The sub-categories of market risk include:

i. Interest rate risk: the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in interest rates. This includes reinvestment risk and inflation risk, which eventually impacts the interest rate.

ii. Exchange rate risk: the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in exchange rates.

iii. Equity price risk: the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in equity prices.

iv. Commodity price risk: the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in commodity prices.

40.(e) Currency risk

The Group has no significant concentration of currency risk.

40.(f) Interest rate risk

Interest rate risk is the risk that the market value or future cash flows of a financial instrument will fluctuate due to changes in interest rates. This includes reinvestment risk and inflation risk, which eventually impacts the interest rate.

Since financial investments of Ceylinco Life consist mainly of Fixed Income Securities (such as Government Securities, term deposits, corporate debt, etc.), interest rate risk is one of the most significant risks faced by Ceylinco Life.

Given the (a) unavailability of long term financial instruments with adequate yields; and (b) the cyclical and volatile movements in the domestic interest rates, to optimise the returns on its investment portfolio, Ceylinco Life diligently carries a duration mismatch in its asset liability management.

The Company’s interest risk policy identifies the volatile and cyclical nature of Sri Lankan interest rate environment. The Company closely monitors the current and future expected shifts in the monetary and fiscal policy, movements in domestic and global interest rates, inflation expectations, movements in exchange rates, balance of payment and other key macroeconomic indicators when making investment decisions and fine tune the investment horizons accordingly.

In addition to internal expertise, to ensure prudence and probity, the Company seeks the views of independent macro research providers in crafting investment strategy.

40.(g) Operational risks

‘This is the risk that the organisation may not meet its objectives due to failed, inadequate or incomplete internal processes, people, systems, controls or due to external events’.

The Company cannot expect to eliminate all operational risks, but by initiating a rigorous control framework and by monitoring and responding to potential risks, the Company is able to manage the risks. Controls include effective segregation of duties, access controls, authorisation and reconciliation procedures, staff education and assessment processes, including the use of internal audit.

Business risks such as changes in environment, technology and the industry are monitored through the strategic management and budgeting process. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications or can lead to financial loss.

41. Contingencies and Commitments

41.(a) Legal proceedings and regulations

There are no significant contingencies or commitments due to legal proceeding and regulations.

42. Assets Pledged

The following assets have been pledged as security for liabilities:

Nature of Assets Nature of Liability Carrying Amount
Pledged
Rs. ’000
Included Under
Treasury Bonds Pledged to Seylan Bank PLC to obtain banking facilities 134,000 Held-to-Maturities
Fixed Deposits Pledged to Seylan Bank PLC to obtain banking facilities 50 Loans & Receivables
Fixed Deposits Pledged to Nation Trust Bank PLC to obtain banking facilities 100 Loans & Receivables

43. Related Party Disclosures

According to Sri Lanka Accounting Standards (LKAS) 24 – on ‘Related Party Disclosure’, Key Management Personnel (KMP) are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Directors (including Executive and Non-Executive Directors) of the Company have been classified as Key Management Personnel of the Company. In addition, Chief Operating Officer has also been classified as Key Management Personnel of the Company further their immediate family members are also considered as related parties of the Company.

Immediate family member is defined as spouse or dependent. A dependent is defined as anyone who depends on the respective Director for his/her financial needs. As the Ceylinco Insurance PLC is the parent of the Company, and the Board of Directors of Ceylinco Insurance PLC have the authority and responsibility of planning, directing and controlling the activities of the Company, the Directors of the Ceylinco Insurance PLC and their immediate family members have also been identified as Key Management Personnel of the Company.

43.1 Related party transactions

(i)

Related Party Transaction Nature of Transaction Amount of Transactions/Outstanding Balances (Rs.)
2015 2014
(a) The aggregate value of transactions and outstanding balances relating to Key Management Personnel and entities over which they have control or significant influence were as follows:
Directors
P D M Cooray, P A Jayawardena, S R Abeynayake, S B Caldera, Ms A K Seneviratne Aggregated amounts of premium received from KMP under normal terms of insurance contracts 927,507
S B Caldera Legal fees paid (5,350,834)

(b) Transactions with associate companies

Other related entities are those which are controlled or significantly influence, directly or indirectly by the Key Management Personnel of the Company. Significant Influence is presumed to be established if a Key Management Person of the Company has more than 20% shareholding in an entity, unless otherwise reported by the Key Management Personnel. Further significant influence is also established if in the view of the respective Key Management Person, he/she has the ability to influence the operating and financial policies of an entity even in the absence of a 20% shareholding.

Name of the company Nature of the Transaction Amount of the Transaction (Rs.)

2015

2014

Citizens Development Business Finance PLC Insurance premium received 2,117,465
Dividend received 46,122,813
Purchase of shares by the Company 93,627,477
Investment in fixed deposits 250,000,000
Interest income received 15,963,200
Rent income received 1,257,061
(c) Transaction entered into where the Company has the ability to control the other party as subsidiaries are listed below:

The Company carries out transactions with ordinary course of business with the parties who are defined as related parties in Sri Lanka Accounting Standard (LKAS) 24 – on ‘Related Party Disclosure’.

The transaction with related parties was made on the basis of the price list in force with non-related parties, but subject to the approved discounts. Outstanding balances with related parties other than balances relating to investment-related transactions as at Reporting date are unsecured and interest fee. Settlement will take place in cash. Such outstanding balances have been included under respective assets and liabilities together with balances arising from transaction with non-related parties.

Name of the Company Nature of the Transaction Amount of the Transaction (Rs.)
2015 2014
Ceylinco Healthcare Services Limited Medical fees for staff and customers (11,413,375)
Ceylinco Healthcare Services Limited Insurance premium received 5,863
Ceylinco Healthcare Services Limited Rent income received 1,019,388
Ceylinco Healthcare Services Limited Reimbursement of expenses (electricity) 1,467,849
Serene Resorts Limited Training expenses paid (2,590,000)

(ii) Transactions with other related companies

Name of the Company Nature of the Transaction Amount of the Transaction (Rs.)
2015 2014
Ceylinco General Insurance Limited Insurance premium paid (10,009,040)
Ceylinco General Insurance Limited Insurance premium received 13,967,376
Ceylinco General Insurance Limited Rent income received 12,928,404
Ceylinco General Insurance Limited Other recoverable 40,340,279

(iii) Key Management Personnel Compensation

Name of the Company Nature of the Transaction Amount of the Transaction (Rs.)
2015 2014
Key Managerial Persons include members of the Board of Directors: Short term employee benefits received from the Company (167,484,175) (375,000)
Other long term/post employment benefits (EPF, ETF,Gratuity and Pension) (50,007,881)

(d) Investment in associate

No restrictions are placed on the ability of the associate to transfer funds to the parent company in the form of cash dividends or for the repayment of loans when due. No guarantees or collaterals were provided to the associate.

44. Events After the Reporting Date

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

There have been no material event occurring after the Reporting date that require adjustment to or disclosure in Consolidated Financial Statements.

45. Segregation

In terms of Section 53 of the Regulation of Insurance Industry (Amendment) Act No. 03 of 2011, all composite insurance companies were required to segregate their Life and General Insurance businesses into two separate legal entities (‘Segregation’). In consultation with the insurance industry, the Insurance Board of Sri Lanka (‘IBSL’) proposed the timeline for compliance as 1 January 2015 and issued a timetable with key milestones leading to the completion of the process by that date. Further, the IBSL has issued a set of Guidelines to Insurers in this regard.

As at 01 January 2015, Ceylinco Insurance PLC (‘CIPLC’), the parent entity, complied with all requirements, including obtaining Court approvals as required by the aforementioned Guidelines and the Regulation of Insurance Industry (Amendment) Act No. 3 of 2011. Additionally, on 22 April 2014, CIPLC incorporated Ceylinco Life Insurance Limited and Ceylinco General Insurance Limited as fully-owned subsidiaries of CIPLC in order to carry out the Life and General Insurance businesses, respectively. However, subsequently, a shareholder challenged the Judgment given by the District Court on the segregation and hence, the date of segregation was postponed.

Upon clearance of the above mentioned legal matters, the IBSL has approved 01 June 2015 to be the date of segregation and Ceylinco Insurance PLC transferred its Life and General Insurance businesses to its newly formed subsidiary companies, Ceylinco Life Insurance Limited and Ceylinco General Insurance Limited, respectively, with effect from 01 June 2015.

Ceylinco Life Insurance Limited was incorporated on 22 April 2014 with a stated capital of Rs. 100 Mn issued on 28 April 2014 and increased the stated capital up to Rs. 500 Mn on 31 May 2015 by issuing 40 Mn new shares for a consideration of Rs. 400 Mn. Accordingly, with effect from 1 June 2015, Ceylinco Life Insurance Limited has become a Life Insurance Company while Ceylinco Insurance PLC has become the Ultimate Parent of the entity.

The transfer of the Life Insurance business to the Company was carried out by transferring the assets and liabilities of Ceylinco Insurance PLC pertaining to Life Insurance business at its carrying value as at 31 May 2015, with effect from 01 June 2015.

Details of the assets and liabilities transferred from Ceylinco Insurance PLC as at 01 June 2015 are as follows:

(Rs.000)
Total assets 74,857,826
Total liabilities 66,712,872
Net assets 8,144,954

Ceylinco Insurance PLC would not be carrying on insurance business with effect from 01 June 2015.

Therefore, financial information disclosed under ‘Company’ includes insurance business information from the date of segregation.i.e. 1 June 2015. We provide following disclosures of Life Insurance Segment of Ceylinco Insurance PLC incorporating comparative information of the same for the fair and better presentation of Financial Statements.