Notes to the Financial Statements -
Statement of Financial Position: Assets

25. Classification of Financial Assets and Financial Liabilities

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

25.1 Classification of financial assets and financial liabilities – Group

25.1 (a) Group

As at December 31, 2017	Note		Held for Trading (HFT) Rs. ’000	Held to Maturity (HTM) Rs. ’000	Loans and Receivables Rs. ’000	Available for Sale (AFS) Rs. ’000	Other amortised cost Rs. ’000	Total Rs. ’000
Financial assets
Cash and cash equivalents	27		–	–	34,673,424	–	–	34,673,424
Balances with central banks	28		–	–	45,546,349	–	–	45,546,349
Placements with banks	29		–	–	17,633,269	–	–	17,633,269
Derivative financial assets	30		2,334,536	–	–	–	–	2,334,536
Other financial instruments – Held for trading	31		4,410,913	–	–	–	–	4,410,913
Loans and receivables to banks	32		–	–	640,512	–	–	640,512
Loans and receivables to other customers	33		–	–	742,444,130	–	–	742,444,130
Financial investments – Available for sale	34		–	–	–	154,913,643	–	154,913,643
Financial investments – Held to maturity	35		–	69,365,796	–	–	–	69,365,796
Financial investments – Loans and receivables	36		–	–	48,712,477	–	–	48,712,477
Total financial assets			6,745,449	69,365,796	889,650,161	154,913,643	–	1,120,675,049
Financial liabilities
Due to banks	43		–	–	–	–	60,244,892	60,244,892
Derivative financial liabilities	44		3,678,494	–	–	–	–	3,678,494
Securities sold under repurchase agreements			–	–	–	–	49,532,385	49,532,385
Due to other customers/ deposits from customers	45		–	–	–	–	857,269,981	857,269,981
Other borrowings	46		–	–	–	–	23,786,094	23,786,094
Subordinated liabilities	52		–	–	–	–	25,165,924	25,165,924
Total financial liabilities			3,678,494	–	–	–	1,015,999,276	1,019,677,770

25.1 (b) Group

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

25.2 Classification of financial assets and financial liabilities – Bank

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

25.2 (a) Bank

As at December 31, 2017	Note		Held for Trading (HFT) Rs. ’000	Held to Maturity (HTM) Rs. ’000	Loans and Receivables Rs. ’000	Available for Sale (AFS) Rs. ’000	Other amortised cost Rs. ’000	Total Rs. ’000
Financial assets
Cash and cash equivalents	27		–	–	33,224,619	–	–	33,224,619
Balances with central banks	28		–	–	44,801,446	–	–	44,801,446
Placements with banks	29		–	–	17,633,269	–	–	17,633,269
Derivative financial assets	30		2,334,536	–	–	–	–	2,334,536
Other financial instruments – Held for trading	31		4,410,913	–	–	–	–	4,410,913
Loans and receivables to banks	32		–	–	640,512	–	–	640,512
Loans and receivables to other customers	33		–	–	737,446,567	–	–	737,446,567
Financial investments – Available for sale	34		–	–	–	154,714,132	–	154,714,132
Financial investments – Held to maturity	35		–	63,562,752	–	–	–	63,562,752
Financial investments – Loans and receivables	36		–	–	48,712,477	–	–	48,712,477
Total financial assets			6,745,449	63,562,752	882,458,890	154,714,132	–	1,107,481,223
Financial liabilities
Due to banks	43		–	–	–	–	57,120,991	57,120,991
Derivative financial liabilities	44		3,678,494	–	–	–	–	3,678,494
Securities sold under repurchase agreements			–	–	–	–	49,676,767	49,676,767
Due to other customers/ deposits from customers	45		–	–	–	–	850,127,511	850,127,511
Other borrowings	46		–	–	–	–	23,786,094	23,786,094
Subordinated liabilities	52		–	–	–	–	25,165,924	25,165,924
Total financial liabilities			3,678,494	–	–		1,005,877,287	1,009,555,781

25.2 (b) Bank

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

26. Fair Value Measurement

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

Level 1

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

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

Level 2

Inputs other than quoted prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices).

This category includes instruments valued using:

• quoted prices in active markets for similar instruments,
• quoted prices for identical or similar instruments in markets that are considered to be less active, or
• other valuation techniques in which almost all significant inputs are directly or indirectly observable from market data.

Level 3

Inputs that are unobservable.

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

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

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

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

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

27. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand, placements with banks and loans at call/short notice and highly liquid financial assets with original maturities within three months or less from the date of acquisition that are subject to an insignificant risk of changes in fair value and are used by the Group in the management of its short-term commitments. These items are brought to Financial Statements at face values or the gross values, where appropriate. There were no cash and cash equivalents held by the Group companies that were not available for use by the Group.

Cash and cash equivalents are carried at amortised cost in the Statement of Financial Position.

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Cash in hand	23,577,061	17,599,901	23,280,599	17,406,776
Coins and notes held in local currency	20,846,435	15,497,697	20,836,652	15,488,867
Coins and notes held in foreign currency	2,730,626	2,102,204	2,443,947	1,917,909
Balances with banks	6,748,718	6,122,355	6,700,666	5,794,927
Local banks	–	–	–	–
Foreign banks	6,748,718	6,122,355	6,700,666	5,794,927
Money at call and at short notice	4,347,645	9,201,971	3,243,354	6,991,886
Total	34,673,424	32,924,227	33,224,619	30,193,589

The maturity analysis of cash and cash equivalents is given in Note 62.

28. Balances with Central Banks

Balances with central banks are carried at amortised cost in the Statement of Financial Position.

			GROUP		BANK
As at December 31,	Note	Page No.	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Statutory balances with central banks	28.1		45,546,349	43,935,258	44,801,446	43,873,205
Total			45,546,349	43,935,258	44,801,446	43,873,205

29. Placements with Banks

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Placements – within Sri Lanka	–	1,094,821	–	1,094,821
Placements – outside Sri Lanka	17,633,269	10,623,678	17,633,269	10,623,678
Total	17,633,269	11,718,499	17,633,269	11,718,499

The maturity analysis of placements with banks is given in Note 62.

30. Derivative Financial Assets

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

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

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Foreign currency derivatives
Currency swaps	1,067,259	261,664	1,067,259	261,664
Forward contracts	1,264,900	788,808	1,264,900	788,808
Spot contracts	2,377	2,357	2,377	2,357
Total	2,334,536	1,052,829	2,334,536	1,052,829

The maturity analysis of derivative financial assets is given in Note 62.

31. Other Financial Instruments – Held for Trading

Financial assets are classified as held for trading if:

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

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

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

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

			GROUP		BANK
As at December 31,	Note		2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Government securities	31.1		4,096,168	4,693,989	4,096,168	4,693,989
Equity securities	31.2		314,745	293,809	314,745	293,809
Total			4,410,913	4,987,798	4,410,913	4,987,798

32. Loans and Receivables to Banks

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

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

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

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Gross loans and receivables	640,512	624,458	640,512	624,458
Less: Provision for impairment	–	–	–	–
Net loans and receivables	640,512	624,458	640,512	624,458

The maturity analysis of loans and receivables to banks is given in Note 62.

The Bank did not make any payments to counterparty banks for the oil hedging transactions with effect from June 02, 2009 in response to a Directive received from the Exchange Controller of the Central Bank of Sri Lanka. Consequently, one of the counterparty banks appropriated USD 4.170 Mn. (Rs. 640.512 Mn.) which has been kept as a deposit with them. This action has been contested by the Bank. In view of the stance taken by the Bank in this regard, both the deposit (made by the Bank) and the amount due to the said counterparty bank, have been recorded in the Statement of Financial Position.

32. 1 (a) By currency

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
United States Dollar	640,512	624,458	640,512	624,458
Subtotal	640,512	624,458	640,512	624,458

33. Loans and Receivables to Other Customers

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

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

“Loans and receivables to other customers” include, Loans and Advances and Lease Receivables of the Group.

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

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

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

			GROUP		BANK
As at December 31,	Note		2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Gross loans and receivables			760,453,937	637,982,536	754,707,977	633,390,907
Less: Provision for individual impairment	33.2		7,853,654	8,453,457	7,853,654	8,453,457
Provision for collective impairment	33.2		10,156,153	9,399,591	9,407,756	8,919,222
Net loans and receivables			742,444,130	620,129,488	737,446,567	616,018,228

The maturity analysis of loans and receivables to other customers is given in Note 62.

33.1 Analysis

33.1 (a) By product

			GROUP		BANK
As at December 31,	Note		2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Loans and receivables
Overdrafts			118,072,316	100,985,232	117,362,030	100,903,024
Trade finance			58,291,188	43,088,097	58,275,965	43,088,097
Lease/hire purchase receivable	33.3		40,766,415	39,040,966	37,865,183	35,993,964
Credit cards			9,639,046	6,679,059	9,639,046	6,679,059
Pawning			1,339,259	1,239,785	1,339,259	1,239,785
Staff loans			7,980,429	7,276,285	7,973,685	7,274,154
Housing loans			53,628,645	47,275,462	53,628,645	47,275,462
Personal loans			28,401,829	25,996,196	28,272,669	25,906,055
Term loans
Short-term			88,668,616	72,590,084	87,600,808	71,219,300
Long-term			333,059,523	277,354,045	332,144,016	277,354,682
Loans granted from Investment Fund Account (IFA)	33.4		3,499,574	3,974,359	3,499,574	3,974,359
Bills of exchange			17,107,097	12,482,966	17,107,097	12,482,966
Subtotal			760,453,937	637,982,536	754,707,977	633,390,907

33.1 (b) By currency

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Sri Lankan Rupee	600,058,048	506,118,547	595,745,318	501,609,126
United States Dollar	113,192,698	94,727,963	112,496,635	94,645,778
Great Britain Pound	892,245	695,403	892,245	695,403
Euro	1,500,772	1,545,852	1,500,772	1,545,852
Australian Dollar	690,992	514,017	690,992	514,017
Japanese Yen	135,765	71,144	135,765	71,144
Singapore Dollar	5,504	127	5,504	127
Bangladesh Taka	43,164,009	34,174,199	43,164,009	34,174,199
Maldivian Rufiyaa	737,167	23	–	–
Others	76,737	135,261	76,737	135,261
Subtotal	760,453,937	637,982,536	754,707,977	633,390,907

33.5 Summary of individually impaired loans and receivables – Bank

As at December 31,	2017		2016
	Individually impaired loans and receivables Rs. ’000	Provision for individual impairment Rs. ’000	Individually impaired loans and receivables Rs. ’000	Provision for individual impairment Rs. ’000
Loans and advances
Overdrafts	2,350,482	1,522,572	2,311,257	1,554,417
Trade finance	906,384	533,034	749,241	507,360
Lease/hire purchase receivable	295,761	133,536	444,882	241,185
Pawning	484	7	–	–
Housing loans	581,651	183,109	480,970	169,831
Personal loans	8,583	5,024	6,586	4,338
Term loans	18,899,904	5,476,372	18,109,141	5,976,326
Bills of exchange	–	–	–	–
Total	23,043,248	7,853,654	22,102,077	8,453,457

The net exposure of Rs. 15,189.594 Mn. (Rs. 13,648.620 Mn. As at December 31, 2016) is substantially covered by collaterals excluding machinery and stocks.

34. Financial Investments – Available for Sale

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

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

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

			GROUP		BANK
As at December 31,	Note		2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Government Securities			154,366,556	159,642,243	154,167,169	159,573,316
Government securities – Sri Lanka	34.1 (a)		154,366,556	159,642,243	154,167,169	159,573,316
Government securities – Bangladesh	34.1 (b)		–	–	–	–
Equity securities	34.2 34.3		547,087	293,819	546,963	293,695
Quoted shares (market value)	34.2 (a) 34.3 (a)		500,278	246,548	500,278	246,548
Unquoted shares (at cost)	34.2 (b) 34.3 (b)		46,809	47,271	46,685	47,147
Investment in unit trust	34.4 34.5		–	156,460	–	156,460
Total			154,913,643	160,092,522	154,714,132	160,023,471

There were no impairment losses on Financial Investments – Available for Sale as at December 31, 2017 (2016 – Nil).

The maturity analysis of Financial Investments – Available for Sale is given in Note 62.

34.1 Government securities

35. Financial Investments – Held to Maturity

Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, that the Group has the positive intention and ability to hold to maturity, and which are not designated as at Fair value through profit or loss or Available-for-sale. After initial measurement, held-to-maturity financial investments are subsequently measured at amortised cost using the EIR, less provision for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortisation is included in “Interest Income” while the losses arising from impairment of such investments are recognised in ‘Impairment charges for loans and other losses’ in the Income Statement.

A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments as available-for-sale, and would prevent the Group from classifying investment securities as held to maturity for the current and the following two financial years. However, sales and reclassifications in any of the following circumstances would not trigger a reclassification:

• sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;
• sales or reclassifications after the Group has collected substantially all of the asset’s original principal; and
• sales or reclassifications that are attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated.

	GROUP		BANK
As at December 31,	2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Government Securities – Sri Lanka	53,555,302	50,980,717	53,555,302	50,980,717
Treasury bonds	38,675,911	36,599,599	38,675,911	36,599,599
Sri Lanka Sovereign Bonds	14,879,391	14,381,118	14,879,391	14,381,118
Government Securities – Bangladesh	10,007,450	10,000,581	10,007,450	10,000,581
Treasury bills	1,197,755	1,524,677	1,197,755	1,524,677
Treasury bonds	8,809,695	8,475,904	8,809,695	8,475,904
Government Securities – Maldives	5,803,044	2,645,300	–	–
Treasury bills	5,803,044	2,645,300	–	–
Total	69,365,796	63,626,598	63,562,752	60,981,298

Please refer Notes 34.1 (a), 34.1 (b) and 34.1 (c) for the details of re-classification to Held-to-maturity (HTM) investments from
Available-for-sale (AFS) category effected during 2016.

The maturity analysis of financial investments – Held to maturity is given in Note 62.

36. Financial Investments – Loans and Receivables

Financial investments classified as loans and receivables include unquoted debt instruments. After initial measurement, these are subsequently measured at amortised cost using the EIR, less provision for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in “Interest Income” while the losses arising from impairment are recognised in “Impairment charges for loans and other losses” in the Income Statement.

			GROUP		BANK
As at December 31,	Note		2017 Rs. ’000	2016 Rs. ’000	2017 Rs. ’000	2016 Rs. ’000
Investments in Government securities	36.1		40,566,702	40,076,392	40,566,702	40,076,392
Other investments	36.2		8,145,775	11,747,634	8,145,775	11,747,634
Total			48,712,477	51,824,026	48,712,477	51,824,026

37. Investments in Subsidiaries

Subsidiaries are investees controlled by the Group. The Group “controls” an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee.

The cost of an acquisition is measured at fair value of the consideration, including contingent consideration. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Subsequent to the initial measurement the Bank continues to recognise the investments in Subsidiaries at cost.

The Financial Statements of Subsidiaries are included in the Consolidated Financial Statements from the date on which control commences until the date when control ceases.

The Financial Statements of all Subsidiaries in the Group have a common financial year which ends on December 31, except for the Serendib Finance Ltd., a licensed finance company, whose financial year ends on March 31. The Financial Statements of the Bank’s Subsidiaries are prepared using consistent accounting policies.

The reason for using a different reporting date by the aforesaid subsidiary is due to the requirement imposed by the Central Bank of Sri Lanka for licensed finance companies to publish their key financial data and key performance indicators for a 12-month period ending March 31 and 6 month period ending September 30, every year, in accordance with a format prescribed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.

All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions, income and expenses are eliminated in full.

There are no significant restrictions on the ability of Subsidiaries to transfer funds to the Parent (the Bank) in the form of cash dividend or repayment of loans and advances.

All Subsidiaries of the Bank have been incorporated in Sri Lanka except Commex Sri Lanka S.R.L. which was incorporated in Italy, Commercial Bank of Maldives Private Limited which was incorporated in the Republic of Maldives and CBC Myanmar Microfinance Company Limited which was incorporated in Myanmar.

				GROUP				BANK
As at December 31,				2017		2016		2017		2016
			Holding	Cost	Market value/ Directors’ valuation	Cost	Market value/ Directors’ valuation	Cost	Market value/ Directors’ valuation	Cost	Market value/ Directors’ valuation
	Note		%	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Local subsidiaries:
Quoted:
Commercial Development Company PLC			92.97*	–	–	–	–	269,821	780,963	272,363	845,755
(11,156,619 Ordinary shares)									(@ Rs. 70.00)		(@ Rs. 75.10)
(11,261,717 Ordinary shares as at December 31, 2016)			(93.85 in 2016)
Unquoted:
ONEzero Company Limited			100	–	–	–	–	5,000	5,000	5,000	5,000
(500,001 Ordinary shares)									(@ Rs. 10.00)		(@ Rs. 10.00)
(500,001 Ordinary shares as at December 31, 2016)
Unquoted:
Serendib Finance Limited			100	–	–	–	–	1,616,046	1,616,046	1,116,046	1,116,046
(53,352,686 Ordinary shares)
(30,728,252 Ordinary shares as at December 31, 2016)
Foreign subsidiaries:
Unquoted:
Commex – Sri Lanka S.R.L. (incorporated in Italy) (**)			100	–	–	–	–	112,400	69,622	193,080	27,140
(300,000 Ordinary shares) (300,000 Ordinary shares as at December 31, 2016)
Commercial Bank of Maldives Private Limited			55	–	–	–	–	1,040,934	1,040,934	1,014,843	1,014,843
(104,500 Ordinary shares)
(104,500 Ordinary shares as at December 31, 2016)
CBC Myanmar Microfinance Co. Limited (***)			100	–	–	–	–	64,512	64,512	–	–
(420,000 Ordinary shares)
Gross Total				–	–	–	–	3,108,713	3,577,077	2,601,332	3,008,784
Provision for impairment	37.7							(42,778)	–	(165,940)	–
Net Total				–	–	–	–	3,065,935	3,577,077	2,435,392	3,008,784

(*) During 2015, the Board of Directors of the Bank resolved to reduce the shareholding of Commercial Development Company PLC, (in which the Bank originally had a stake of 94.55%) to comply with the requirements of the Listing Rule No. 7.13 of the Colombo Stock Exchange on Minimum Public Holding. Accordingly, the Bank disposed 189,086 shares since November 2015 through the Colombo Stock Exchange and reduced the shareholding in the above Company to 92.97% by December 31, 2017 and is in the process of taking steps to dispose the required number of shares to adhere to the requirements of the Listing Rules.

Consequent to the above disposal, ownership interests of the Bank has changed while retaining control. As per SLFRS 10 on “Consolidated Financial Statements”, changes in a parent’s ownership interest in a subsidiary that do not result in the parent losing control are equity transactions and hence, the resulting gain/loss is recognised in equity.

(**) The investment made in Commex Sri Lanka S.R.L. – Italy has been written down to account for pre-operational expenses.

(***) The CBC Myanmar Microfinance Company Limited was incorporated as a fully owned subsidiary in Myanmar. The Bank obtained a licence from the Myanmar Microfinance Supervisory Enterprise to operate a non-savings deposit organisation.

38. Investments in Associates

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

Investments in associates are accounted for using the equity method and are recognised initially at cost, in terms of Sri Lanka Accounting Standard – LKAS 28 on “Investments in Associates and Joint Ventures”. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The Consolidated Financial Statements include the Group’s share of the income and expenses and equity movements of equity-accounted investees, after adjustments to align the Accounting Policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. Accordingly, under the Equity Method, investments in Associates are carried at cost plus post-acquisition changes in the Group’s share of net assets of the Associates and are reported as a separate line item in the Statement of Financial Position. The Income Statement reflects the Group’s share of the results of operations of the Associates. Any change in OCI of those investees is presented as part of the Group’s OCI. 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 Equity through OCI. Unrealised gains and losses resulting from transactions between the Group and the Associate are eliminated to the extent of the interest
in Associate.

When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. If the Associate subsequently reports profits, the Group resumes recognising its share of those profits only after its share of the profits equal the share of losses not recognised previously.

The Group discontinues the use of the Equity Method from the date that it ceases to have significant influence over an Associate and accounts for such investments in accordance with the Sri Lanka Accounting Standard – LKAS 39 on “Financial Instruments: Recognition and Measurement”.

Upon loss of significant influence over the Associate, the Group measures and recognises any retained investment at its fair value.
Any difference between the carrying amount of the Associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

After application of the Equity Method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its Associate. At each reporting date, the Group determines whether there is 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 loss as “Share of profits of associates” in the Income Statement.

As at December 31,				2017		2016
	Incorporation and operation	Ownership interest	No. of shares	Cost	Carrying value	Cost	Carrying value
		%		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Equity Investments Lanka Limited	Sri Lanka	22.92	4,110,938	44,331	66,528	44,331	68,621
Commercial Insurance Brokers (Pvt) Limited	Sri Lanka	18.59 *	120,000	100	43,316	100	40,238
				44,431	109,844	44,431	108,859

(*) 20% stake of Commercial Insurance Brokers (Pvt) Limited is held by Commercial Development Company PLC, a 92.97% owned Subsidiary of the Bank, which is listed on the Colombo Stock Exchange. The Bank has a significant influence over financial and operating activities of Commercial Insurance Brokers (Pvt) Limited though it effectively holds only 18.59%.

38.2 Summarised financial information in respect of associates is set out below:

38.2 (a) Summarised income statement

For the year ended December 31,	2017			2016
	Equity Investments Lanka Ltd.	Commercial Insurance Brokers (Pvt) Ltd.	Total	Equity Investments Lanka Ltd.	Commercial Insurance Brokers (Pvt) Ltd.	Total
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Percentage ownership interest
Revenue	21,048	274,885	295,015	28,000	252,335	280,335
Expenses	(27,159)	(230,556)	(257,715)	(21,602)	(214,731)	(236,333)
Income tax	(605)	(15,618)	(16,223)	783	(12,090)	(11,307)
Profit from continuing operations, net of tax	(6,716)	28,711	21,077	7,181	25,514	32,695
Group’s share of profit from continuing operations, net of tax	(1,539)	5,217	3,678	1,645	4,809	6,454
Other comprehensive income, net of tax	15,519	(166)	15,353	16,201	499	16,700
Group’s share of other comprehensive income from continuing operations, net of tax	3,557	(31)	3,526	3,713	94	3,807
Share of results of equity-accounted investee recognised in Income Statement and Statement of Profit or Loss and Other Comprehensive Income	2,018	5,186	7,204	5,358	4,903	10,261

38.2 (b) Summarised statement of financial position

As at December 31,	2017		2016
	Equity Investments Lanka Ltd.	Commercial Insurance Brokers (Pvt) Ltd.	Equity Investments Lanka Ltd.	Commercial Insurance Brokers (Pvt) Ltd.
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Percentage ownership interest
Non-current assets	202,474	138,530	194,144	143,515
Current assets	97,902	165,034	114,197	152,333
Non-current liabilities	(1,448)	(23,485)	(5,975)	(22,366)
Current liabilities	(8,672)	(47,072)	(2,974)	(60,020)
Net assets	290,256	233,007	299,392	213,462
Group’s share of net assets	66,528	43,316	68,621	40,238
Less: Unrealised profits	–	–	–	–
Carrying amount of interest in associates	66,528	43,316	68,621	40,238

The Group recognises the share of net assets of the Associates under the Equity Method to arrive at the Directors’ valuation.

The maturity analysis of Investments of Associates is given in Note 62.

39. Property, Plant and Equipment

The Group applies the requirements of the Sri Lanka Accounting Standard – LKAS 16 on “Property, Plant and Equipment” in accounting for its owned assets (including buildings under operating leases where the Group is the lessor) which are held for and used in the provision of services, for rental to others or for administrative purposes and are expected to be used for more than one year.

Basis of recognition

Property, plant and equipment is recognised if it is probable that future economic benefits associated with the asset will flow to the Group and cost of the asset can be reliably measured.

Basis of measurement

An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and subsequent costs (excluding the costs of day-to-day servicing) as explained in Note below. 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 and capitalised borrowing costs. Purchased software which is integral to the functionality of the related equipment is capitalised as part of computer equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items
(major components) of property, plant and equipment.

• Cost Model
  The Group applies the Cost Model to all property, plant and equipment except freehold land and freehold & leasehold buildings.
  These are recorded at cost of purchase together with any incidental expenses thereon, less accumulated depreciation and any accumulated impairment losses.
• Revaluation Model
  The Group applies the Revaluation Model for the entire class of freehold land and freehold & leasehold buildings for measurement after initial recognition. Such properties are carried at revalued amounts, being their fair value at the date of revaluation, less any subsequent accumulated depreciation on buildings and any accumulated impairment losses charged subsequent to the date of valuation. Freehold land and buildings of the Group are revalued by independent professional valuers every three years or more frequently if the fair values as are substantially different from carrying amounts to ensure that the carrying amounts do not differ from the fair values as at the reporting date. On revaluation of an asset, any increase in the carrying amount is recognised in Revaluation Reserve in Equity through OCI or used to reverse a previous loss on revaluation of the same asset, which was charged to the Income Statement. In this circumstance, the increase is recognised as income only to the extent of the previous write down in value. Any decrease in the carrying amount is recognised as an expense in the Income Statement or charged to Revaluation Reserve in equity through OCI, only to the extent of any credit balance existing in the Revaluation Reserve in respect of that asset. Any balance remaining in the Revaluation Reserve in respect of an asset, is transferred directly to retained earnings on retirement or disposal of the asset. The Group revalued all its freehold land and freehold and leasehold buildings as at December 31, 2017. Methods and significant assumptions including unobservable market inputs employed in estimating the fair value together with the sensitivity of same are given in Note 39.5 (b) and Note 39.5 (c).

Subsequent cost

Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. 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 “Other Income (Net)” in profit or loss in the year the asset is derecognised.

When replacement costs are recognised in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is derecognised as required by Sri Lanka Accounting Standard – LKAS 16 on “Property, Plant and Equipment”.

Capital work-in-progress

These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation. These are stated in the Statement of Financial Position at cost less any accumulated impairment losses. Capital work-in-progress is transferred to the relevant asset when it is in the location and condition necessary for it to be capable of operating in the manner intended by the Management (i.e. available for use).

39.6 Title restriction on property, plant and equipment

There were no restrictions existed on the title of the property, plant and equipment of the Group/Bank as at the reporting date.

39.7 Property, plant and equipment pledged as security for liabilities – Bank

There were no items of property, plant and equipment pledged as securities for liabilities as at the reporting date.

39.8 Compensation from third parties for items of property, plant and equipment – Bank

The compensation received/receivable from third parties for items of property, plant and equipment that were impaired, lost or given up as at the reporting date of the Bank is as follows:

As at December 31,	2017 Rs. ’000	2016 Rs. ’000
Total claims lodged	17,096	4,832
Total claims received	(11,573)	(1,643)
Total claims rejected	–	–
Total claims receivable	5,523	3,189

39.9 Fully depreciated property, plant and equipment – Bank

The cost of fully depreciated property, plant and equipment of the Bank which are still in use is as follows:

As at December 31,	2017 Rs. ’000	2016 Rs. ’000
Computer equipment	1,458,542	1,205,702
Office equipment, furniture and fixtures	2,044,143	1,748,517
Motor vehicles	39,566	20,765

39.10 Temporarily idle property, plant and equipment – Bank

Following property, plant and equipment of the Bank were temporarily idle (until the assets are issued to the business units):

As at December 31,	2017 Rs. ’000	2016 Rs. ’000
Computer equipment	121,472	128,136
Office equipment, furniture and fixtures	100,175	45,887

39.11 Property, plant and equipment retired from active use – Bank

Following property, plant and equipment of the Bank were retired from active use:

As at December 31,	2017 Rs. ’000	2016 Rs. ’000
Computer equipment	182,080	160,181
Office equipment, furniture and fixtures	98,637	100,681

39.12 Borrowing costs

There were no capitalised borrowing costs related to the acquisition of property, plant and equipment during the year 2017 (2016 – Nil).