BRAC Lanka Finance PLC Annual Report 2016/17 01 02 04 Financial and Profiles of the Financial Operational Directors Review Highlights
08 32 45 Governance Risk Financial Reports management Statements
Financial and operational highlights 1 Financial statements Profiles of the directors 2 Independent auditors’ report 45 Financial review 4 Statement of financial position 46 Corporate governance report 8 Statement of profit or loss and Risk management 32 Other comprehensive income 47 Report of the board of directors 35 Statement of changes in equity 48 Directors’ statement on internal Statement of cash flows 49 Control over financial reporting 37 Notes to the financial statements 50 Directors’ responsibility for financial reporting 38 Shareholders’ information 93 Chief executive officer’s and Ten years summary 95 Chief financial officer’s responsibility statement 39 Quarterly financial statements 97 Report of the related party Transactions review committee 40 Investor information 99 Report of the audit committee 41 Other disclosures 100 Report of the integrated risk Notice of meeting 102 Management committee 42 Form of proxy 103 Report of the remuneration committee 43 Corporate information inner back cover BRAC Lanka Finance PLC Annual Report 2016/17 Financial and Operational Highlights
Change in 2017 Change in 2016 2017 - % 2016 - %
Results for the year (Rs.'000) Interest income (Rs.'000) 81.73 3,385,930 257.01 1,863,179 Profit before VAT on financial services and income tax (Rs.'000) 36.26 476,665 54.28 349,816 Profit before income tax (PBT) (Rs.'000) 35.49 352,792 33.00 260,385 Income tax expense (Rs.'000) 22.05 132,865 498.76 108,864 Profit after tax (PAT) (Rs.'000) 45.15 219,927 (14.68) 151,521
At the year end (Rs'000) Shareholders' funds (capital and reserves) (Rs.'000) 24.35 1,123,861 18.02 903,761 Total deposits (Rs.'000) 138.21 2,813,322 1,163.68 1,181,016 Total loans and advances (total portfolio) (Rs.'000) 41.68 11,332,333 164.47 7,998,723 Total assets (Rs.'000) 35.71 12,899,695 152.25 9,505,225
Information per ordinary share (Rs.) Earnings (basic) 45.45 2.08 (17.90) 1.43 Net assets value per share 24.30 10.63 13.84 8.55 Market value at the year end- ordinary voting shares 100.00 9.30 - -
Key ratios Return on shareholders' funds (%) 16.70 19.57 (36.06) 16.77 Return on assets (%) 6.92 1.70 (74.41) 1.59 Price earnings (times) - ordinary voting shares 100.00 4.47 - - Price to book value (times) 100.00 0.88 - -
Statutory Ratios Liquid assets to deposits (%) 190.85 237.84 (99.49) 81.77 Capital Adequacy Ratio Tier 1 (%) - minimum requirement - 5% (13.46) 9.71 (43.64) 11.22 Total capital ratio (%) - minimum requirement - 10% (5.76) 10.96 (42.24) 11.63
Rs.3.39Bn Revenue +82%
Rs.352.79Mn Profit Before Tax +35%
Rs.219.93Mn Net Profit After Tax +45% 1 BRAC Lanka Finance PLC Annual Report 2016/17 Profiles of the Directors
Mr. I. C. Nanayakkara Endorsing his entrepreneurial spirit, Mr. Ishara Mr. Ishara Nanayakkara is a prominent entrepreneur Nanayakkara received the prestigious ‘Young Entrepreneur serving on the Boards of many corporates and of the Year’ Award at the Asia Pacific Entrepreneurship conglomerates in the region. He initially ventured into the Awards (APEA) in 2012. He holds a diploma in Business arena of financial services with a strategic investment in Accounting from Australia. Lanka ORIX Leasing Company PLC and was appointed to the Board in 2002. Today, he is the Deputy Chairman of Other Directorships held LOLC and the Executive Deputy Chairman of LOLC Finance Chairman: Brown & Company PLC, Commercial Leasing & PLC, holding directorships in many of its subsidiaries and Finance PLC, LOLC Micro Credit Ltd, Browns Investments associate companies. PLC and LOLC Life Assurance Limited
Backed by over a decade of professional experience in Deputy Chairman: Lanka ORIX Leasing Co. PLC, LOLC the industry, Mr. Nanayakkara holds the role of Chairman Finance PLC and Seylan Bank PLC of Commercial Leasing & Finance PLC, one of Sri Lanka’s leading financial service providers for over 28 years, as Director: Agstar Fertilizers PLC, Sierra Constructions (Pvt) well as LOLC Life Assurance Limited. He is also Deputy Ltd, PRASAC Micro Finance Institution, LOLC Myanmar Chairman of Seylan Bank PLC, a premier commercial bank Microfinance Co Ltd, Associated Battery Manufacturers in the country. His vision to cater to the entire value chain (Cey) Ltd, B Commodities ME FZE, LOLC International of the finance sector manifested in the development of Private Limited and LOLC Private Limited Micro Finance, Islamic Finance, factoring through LOLC Factors, LOLC Life & General Insurance Companies and Mr. W. D. K. Jayawardena stock broking through LOLC Securities Ltd. Mr. Kapila Jayawardena holds a MBA in Financial Management and is a fellow member of the Institute of Leveraging LOLC Group’s expertise in the SME sector, Bankers and an Associate Member of the Institute of Cost the expansion into the Micro Sector was spearheaded and Executive Accountants, London. He served as Country by Mr. Nanayakkara, who is the Chairman of their Micro Head and CEO (Sri Lanka and Maldives) of Citibank NA Credit Companies: LOLC Micro Credit Company Ltd, the from 1998 to 2007. only private sector microfinance institution in the country with foreign equity, and BRAC Lanka Finance PLC. He also With his varied experience in the fields of Investment holds a directorship at PRASAC, the largest microfinance Banking, Banking Operations, Audit, Relationship Company in Cambodia. Mr. Nanayakkara’s interest in Management, Corporate Finance, Corporate Banking and microfinance led to the inauguration of LOLC Myanmar Treasury Management, He served in the following Boards/ Micro Finance Company Ltd, a green field investment Committees: in Myanmar in which he was the founding Chairman, and currently serves as a Director. His proficiency in • Chairman of the Sri Lanka Banks’ Association (SLBA) micro finance in the region is further demonstrated by in 2003/04 his involvement at a strategic level in LOLC Cambodia • President of the American Chamber of Commerce in Ltd (Previously known as Thaneakea Phum Ltd); the 5th Sri Lanka in 2006/2007 largest microfinance company in Cambodia. He was also recently appointed as a director in LOLC International • Member of the Financial Sector Reforms Committee Private Limited & LOLC Private Limited. (FSRC) • Member of the National Council of Economic Mr. Nanayakkara’s motivation to expand into various Development (NCED) growth peripheries is further illustrated through his role as the Executive Chairman of Browns Investments PLC. • Board Member of the United States - Sri Lanka Through various strategic investments, he is committed Fulbright Commission. to catalyzing development in the growth sectors of the Sri Lankan economy. Mr. Nanayakkara’s involvement in Mr. Jayawardena joined LOLC in the year 2007 as the the Boards of Agstar Fertilizers PLC, Associated Battery Group Managing Director/CEO and is the Chairman of Manufacturers (Cey) Ltd and Sierra Constructions Ltd, the following companies and is also on the Boards of the reflects this business philosophy. subsidiaries of the LOLC Group.
2 BRAC Lanka Finance PLC Annual Report 2016/17
Chairman Mr. Peiris served as the Vice President of the Clearing Eden Hotel Lanka PLC Association of Bankers (CAB). He was also the Co-coordinator - CBSL SEACEN Financial Statistics. He LOLC General Insurance Ltd is a member of the Sri Lanka Economic Association. LOLC Securities Ltd He served in the the Sri Lanka Army Volunteer Force Palm Garden Hotels PLC attached to the 2nd Sri Lanka Army Service Corps as a Browns Capital PLC Commissioned Officer too.
Director Mr. W. R. A. Dharmaratne LOLC Micro Credit Ltd Apart from two years spent overseas in Postgraduate BRAC Lanka Finance PLC studies, Mr. Dharmaratne has an unbroken service record at the Central Bank of Sri Lanka (‘CBSL’) from 1990. Commercial Leasing & Finance PLC
Brown & Company PLC While at the CBSL he worked in several different Riverina Resorts (Pvt) Ltd departments including Economic Research, Currency, Browns Capital PLC Management Audit, Financial Sector Research and Human Resource. LOLC International (Pvt) Ltd
Browns Investments PLC Mr. Dharmaratne holds an MA in Economics from Seylan Bank PLC the University of Essex, UK, a BA in Development Studies (Special) Statistics from the University of Sri Mr. R. D. Tissera Jayawardenapura, a Postgraduate Diploma in Economic Mr. Ravi Tissera joined the LOLC Group in 1993 and Development from the University of Colombo and a is a Development Finance Specialist. He introduced Postgraduate Diploma in Computer Technology from the microfinance to the LOLC Group which has now expanded University of Colombo. outside Sri Lanka in Myanmar, Cambodia and Pakistan. Mr. Tissera has obtained his Post Graduate Diploma in Mr. W. A. R. Kumara Marketing and is a member of the Chartered Institute Mr. Rohana Kumara joined the LOLC Group in 1998. Since of Marketing UK. He has followed Strategic Leadership then he has served at Lanka ORIX Leasing Company PLC Training in micro finance at Harvard Business School. for 12 years and LOLC Micro Credit Ltd for 4 years. He is the Director / Chief Executive Officer of LOLC Micro Credit Limited and he serves as a Director in LOLC With 16 years of experience in marketing, branch Myanmar Microfinance Company Limited, LOLC Cambodia management and microfinance in these two companies PLC., LOLC Micro Investments Ltd and Sundaya Lanka (Pvt) he joined BRAC Lanka Finance PLC (another LOLC Group Ltd. company) in December 2015 as Deputy Chief Executive Officer. Mr. A. J. L. Peiris Mr. Luxman Peiris retired as Additional Director of the He was appointed Chief Executive Officer in August 2016. Central Bank of Sri Lanka (“CBSL”). His career at the CBSL spanned 25 years, during which he worked in several Mr. Kumara holds an MBA from the University of Cardiff different departments in the CBSL, including Economic Metropolitan University and he is a member of the Research, Management Development Centre, Governor’s Chartered Institute of Marketing and the Institute of Office (Chief Protocol Officer), Domestic Operations and Bankers of Sri Lanka. Payments and Settlements.
Mr. Peiris holds a BSc (Physical Science) with a First Class honours from the University of Kelaniya, Sri Lanka an MSc and a Postgraduate Diploma in Agricultural Economics from the University of Reading, UK and an MSc and a Postgraduate Diploma in Quantitative Development Economics from the University of Warwick, UK.
3 BRAC Lanka Finance PLC Annual Report 2016/17 Financial Review
Assets Interest income reached Rs.3.3Bn level during the year which is the highest income level achieved in
Rs.3.4Bn the Company history. Total interest YoY 36% income of the Company improved by Rs.1.5Bn (82%) while the 95% PAT of interest income was generated through Micro Finance Loans. Growth was supported by growth in loans Rs.68.4Mn and advances, rising interest rates and reaching new customer bases YoY 45% during the year.
Deposits Overview Year ended 31 March 2017 has been a remarkable year Rs.1.6Bn for BRAC which surpasses healthy levels in all financial and operational aspects. Portfolio growth, mobilization of deposit products and strategic rebalancing of assets have YoY 138% been the key driver throughout the year. Since acquisition by the LOLC Group, the Company geared its Micro Finance driven business for aggressive overall growth recording Loans and Advances strong growth surpassing the industry growth and becoming a key player in Micro Finance industry. Rs.3.3Bn Income Statement Analysis Net Interest Income YoY 42% Interest income reached Rs.3.3Bn level during the year which is the highest income achieved in the Company history. Total interest income improved by Rs.1.5Bn (82%) ROE and 95% of interest income was generated through Micro Finance Loans. The increase is contributed by, growth in loans and advances, rising interest rates and reaching new 20% customer bases during the year. Income from government securities and deposits also reported a notable growth of Rs.93Mn (379%) as a result of improved treasury YoY 16.7% operations.
However, Net Interest Margin ratio (NIM) declined ROA from 68.81% to 62.09% due to challenging economic environment, with steady rise in the interest rates increasing borrowing cost and interest expense on savings 1.70% deposits. YoY 6.92%
4 BRAC Lanka Finance PLC Annual Report 2016/17
“Despite the challenging environment the profitability of the Company was resilient and was able to sustain its profitability. PAT growth of 45.15% in 2017 to Rs.220Mn was supported by higher net interest income, remains the key contributor to the profitability of the Company.”
Impairment Charges Operating Expenses Reflecting the restructuring of the existing loan book and All components of operating expenses increased during high Micro Finance portfolio growth, impairment charges the year due to efforts taken in supporting growth of the significantly increased by Rs.274Mn (423%) during the Company, especially in the areas of upgrading the branch year including Rs.230Mn loan written off done.. network and human resources, resulting in an overall increase of 47% over the previous year. Collective impairment charges, which considers the Probability of Default (PD) and the Loss Given Default (LGD) The Company’s Cost to Income ratio, which stood at of each product portfolio, also reflected market conditions 61.37% as at end 2017 (67.99% - 2016), reflects the focus specially in the Micro Finance portfolio. on delivering operational excellence and the initiatives implemented. Personnel costs increased by 47% as head During the year the Company made adequate provisions count, remuneration and staff development activities on individual impairment basis, impairment indications increased during the year. Other expenses reflect a similar were identified on specific products and Branches. trend linked to growth and supported by productivity.
Total balance sheet provision as a percentage of total Profitability loan portfolio was slightly increased from 1.21% to 1.84% Despite the challenging environment the profitability of the during the year. Company was resilient and maintained profitability ratios. PAT growth of 45.15% in 2017 to Rs.220Mn was supported Impairment Expense by higher net interest income derived from the portfolio of Rs. Mn. lending. 2017 2016 The ability to retain and grow the profits made in the previous period can be primarily attributed to the ability 2015 of the management to make timely decisions and the 2014 ability of the organization to adopt to challenging economic conditions. Collective Impairment Individual Impairment
5 BRAC Lanka Finance PLC Annual Report 2016/17 Financial Review
equipment grew by Rs.70.25Mn (94.95%) compared to year PBT & PAT 2016. The investments in Treasury Bills and Fixed Deposits Rs. Mn. grew by 604Mn during the year. 2017 2016 Asset Growth Rs. Mn. 2015
2014 2017
PBT PAT 2016
ROA and ROE Loans and adavances Other assets Other interest earning assets The return ratios recorded improvement over the previous year . The return on equity (ROE) stood at 19.57% and the return on assets (ROA) stood at 1.70% for the year Loan Growth and Asset Quality compared to 16.77% (ROE) and 1.59% (ROA) in the previous capitalising on the Micro Finance initiatives, the Company year respectively. achieved Rs.11.20Bn in Micro Finance while the total portfolio stood at Rs.11.33Bn. Total number of customer Improving ROE and ROA shows the effectiveness of the base reported as 239,243 (2016- 241,464). Following Company’s equity and its assets management. factors can be considered as key drivers of this growth.
ROA & ROE • Expertise of micro–finance operations to the field staff % through multi-phased credit trainings. Moreover, new 2017 Management offered several apprenticeships to the 2016 staff including leadership development programmes and outbound trainings. 2015
2014 • Prudential documentation: Loan documentations realigned to achieve higher level of effectiveness and ROA efficiency. ROE
• Performance based incentive schemes and bonus Balance Sheet Analysis payments which fostering a performance driven culture within the Company. Assets The Company reached Rs.12.9Bn in total assets, a • Improved travelling facilities provided for field staff growth of Rs.3.39Bn (35.71%) compared to last year by achieving higher level of productivity . Balance of signifying the sustained growth of the Company year to portfolio quality while achieving strong portfolio growth year. The growth in the loan portfolio resulted in 86.23% through Improved loan appraisal process maintaining representation in the total assets. However, the asset strong NPA levels 2017- 0.58%, 2016- 0.82%. Further, composition did not see a significant change during the while focusing on Micro Finance industry, expanding its year. products offering the management is to other lending products. Further, concentration on developing a superior branch network led the Company to commit on a higher level of capital expenditure and as a result, property plant and
6 BRAC Lanka Finance PLC Annual Report 2016/17
Liquid assets Gross Loan Portfolio Rs. Mn. The liquid assets of the Company stood at Rs.1,182Mn which was well above the required minimum amount 2017 of Rs.1,133Mn. The liquid assets are maintained in government securities and deposits with banks and other financial institutions optimizing returns to the Company. 2016 The Company is optimistic on the future and the strategies Hire-Purchase Loan and Advances adopted during the year is expected to have a positive Lease effect and is expected to result in higher profitability in the future periods.
Liabilities Upgrading of existing branch network, deposit mobilizing With the financing requirement of total assets, total and product diversification will be the main key initiatives liabilities grew by Rs.3.17Bn (36.90%) during the year. for the medium term supported by improvements in The main contributor to the borrowing structure of the technology, facilitating the Company’s move towards a company were Intercompany borrowings, other bank mobile driven loan appraisals, disbursements, collections borrowings and Deposits. Company is focusing on growing and deposit schemes platform. the deposit base and strong growth is envisaged in this area broad basing the funding options. Deposit base grew by Rs.1.63Bn in 2017 compared to 2016, mainly due to deposits from institutional investors. However, the Company is now in the process of concentrating on the granular deposits from individuals as a major funding source to the Company.
Debt to equity ratio with deposit liabilities and bank overdrafts increased to 9.98 times from 8.95 times as at the end of the year. However, with the Right Issue of Rs.1.3Bn done after the reporting date, debt to equity ratio has been improved significantly.
Capital, Funding and Liquidity Managing capital, funding and liquidity is key to optimising returns to shareholders while ensuring sufficient liquidity to meet foreseeable demands.
Capital Adequacy Ratio (CAR) Equity improved by 24.35% in 2017 supported by growth in profits the period enhanced the core capital of the company. Consequently, the Tier I / Core capital adequacy ratio (Minimum 5%) of the Company was 9.71% (2016 – 11.22%) and the Total Risk Weighted Capital Ratio (Minimum 10%) was 10.96% (2015/16- 11.63%). Despite the challenging growth in risk weighted assets, the Company managed to maintain CAR within regulatory levels throughout the year. However, with the capital infusion of Rs.1.3Bn after the reporting date current CAR is well above than the regulatory required levels.
7 BRAC Lanka Finance PLC Annual Report 2016/17 Corporate Governance Report
Good Corporate Governance benefits all stakeholders and contributes towards the sustainability of the Company. The Board of Directors therefore support the principles of good corporate governance, and processes are in place to ensure regular monitoring to facilitate continuous improvement and maintenance of good governance.
The chart below gives more details on the Company’s compliance.
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
2 The Responsibilities of the Board of Directors 2.1 The Board of Directors shall strengthen the safety and soundness of the finance company by: a. approving and overseeing the finance The Company has Board approved vision, mission and company’s strategic objectives and corporate corporate values and these have been communicated values and ensuring that such objectives and throughout the Company. values are communicated throughout the finance company; b. approving the overall business strategy of the The Company has a Three Year Business Plan. Having finance company, including the overall risk approved this plan, the Directors will be monitoring policy and risk management procedures and performance at the monthly Board meetings. mechanisms with measurable goals, for at least immediate next three years; The Company has a Board approved risk policy and procedures. c. identifying risks and ensuring implementation The Board has approved an annual plan submitted by the of appropriate systems to manage the risks Enterprise Risk Management Division, which covers both prudently; internal audit and risk management. In line with the Risk policy, ERM reports are submitted to the Integrated Risk Management Committee or the Audit Committee, which then reviews the risk and agrees on appropriate mitigation methods. Where necessary, the participation of relevant offices, and /or the obtaining of additional information is called for. d. approving a policy of communication with all A Board approved Stakeholder Communication Policy stakeholders, including depositors, creditors, which covers all stakeholders is in place. shareholders and borrowers; e. reviewing the adequacy and the integrity of the The Board has delegated this function to the Audit finance company’s internal control systems Committee, which is a sub-committee of the Board. This and management information systems; facilitates detailed study of the systems, including the IT systems. The approved minutes of the Audit Committee meetings are tabled at a subsequent Board Meeting, enabling the Board as a whole to be kept informed.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008 f. identifying and designating key management The Board has identified KMPs. personnel, who are in a position to:
(i) influence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management; g. defining the areas of authority and key A Board approved, documented description of the role of responsibilities for the Board and for the key the Board defines the powers and duties of the Board of management personnel; Directors.
Each of the identified KMPs has his or her individual appropriate job description. h. ensuring that there is appropriate oversight The Chief Executive Officer works with the Chief of the affairs of the finance company by key Financial Officer to ensure robust systems and management personnel, that is consistent with procedures are in place. These, together with regular the finance company’s policy; reporting to the Board, facilitate prevention and /or early detection of any deviations. The effectiveness of this oversight is reviewed by the Enterprise Risk Management Division. i. periodically assessing the effectiveness of its Confirmations of compliance with governance governance practices, including: requirements are called for periodically and new requirements are noted for compliance as and when (i) the selection, nomination and election they arise. of directors and appointment of key management personnel; There is a Board approved procedure for appointment (ii) the management of conflicts of interests; of Directors. Directors are selected on the basis of their and skills and experience, which will enable them to play an effective role and add value to the discussion and (iii) the determination of weaknesses and decision making of the Board. implementation of changes where necessary; The Board has approved a procedure relating to related party transactions, which addresses conflicts of interest. At each meeting, directors declare other companies in which they are directors or significant shareholders.
Discussions at Board meeting, based on follow up of previous decisions and information provided in board papers, enable the Directors to detect weakness and strengthen controls and/or improve processes where necessary. j. ensuring that the finance company has A succession plan has been approved by the Board. an appropriate succession plan for key management personnel;
9 BRAC Lanka Finance PLC Annual Report 2016/17 Corporate Governance Report
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
k. meeting regularly with the key management The Chief Executive Officer and the Chief Financial personnel to review policies, establish lines of Officer are invited to be present at Board meetings. Other communication and monitor progress towards KMPs are invited to be present at Board or Board sub corporate objectives; committee meetings where risk or other issues relevant to them are discussed. l. understanding the regulatory environment; The Board at its regular meetings updates and refreshes its understanding of the regulatory environment. This is facilitated by the board papers, which include any new regulations covering either operations or governance. Discussions with the External Auditors deepens this understanding.
The Company also participates in industry-specific associations, which facilitates dialogue with regulators. m. exercising due diligence in the hiring and The Auditors of the Company are KPMG, a reputed audit oversight of external auditors. firm and one of the globally recognized audit firms.
It is one of the tasks of the Audit Committee, to annually review the effectiveness and independence of the Auditors.
Based on the recommendation of the Audit Committee, the Board is recommending to the shareholders that the auditors be re-appointed for 2017/18. 2.2 The Board shall appoint the Chairman and the The Board has appointed a Non-Executive Chairman and Chief Executive Officer and define and approve a Chief Executive Officer. the functions and responsibilities of the Chairman and the Chief Executive Officer in line The role of the Chairman and CEO have been with paragraph 7 of this Direction. documented and approved by the Board. 2.3 There shall be a procedure determined by the Provision for Directors to obtain independent Board to enable directors, upon reasonable professional advice has been included in a documented request, to seek independent professional and Board approved policy on the Role of the Board. advice in appropriate circumstances, at the finance company’s expense. The Board shall resolve to provide separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the finance company. 2.4 A director shall abstain from voting on any A Board approved procedure on Related Party Board resolution in relation to a matter in which Transactions provides for Directors to declare he or any of his relatives or a concern in which their interests and refrain from participating in the he has substantial interest, is interested, and discussions or decision making. This is also detailed in he shall not be counted in the quorum for the the Board approved policy on the Role of the Board. relevant agenda item at the Board meeting.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
2.5 The Board shall have a formal schedule of The role of the Board has been defined, documented matters specifically reserved to it for decision and approved by the Board. This includes details of to ensure that the direction and control of the the Board’s responsibilities and the matters which are finance company is firmly under its authority. specifically reserved to it for approval.
At its meetings the Board discusses both performance and compliance, ensuring that control is exercised. 2.6 The Board shall, if it considers that the finance In the unlikely event of such a situation occurring, the company is, or is likely to be, unable to meet its Board will ensure that the Company complies with all obligations or is about to become insolvent or is requirements. about to suspend payments due to depositors and other creditors, forthwith inform the Director of the Department of Supervision of Non-Bank Financial Institutions of the situation of the finance company prior to taking any decision or action. 2.7 The Board shall include in the finance This report fulfills the said requirement company’s Annual Report, an annual corporate governance report setting out the compliance with this Direction. 2.8 The Board shall adopt a scheme of self- The Board has adopted such a scheme, which is carried assessment to be undertaken by each director out annually and records maintained. annually, and maintain records of such assessments. 3. Meetings of the Board 3.1 The Board shall meet at least twelve times The Board met 12 times during the year. a financial year at approximately monthly intervals. Obtaining the Board’s consent On rare occasions, Board decisions were sought through through the circulation of written or electronic circular resolutions. These resolutions are subsequently resolutions/papers shall be avoided as far as tabled at the following Board meeting. possible. 3.2 The Board shall ensure that arrangements A Board approved Policy on the Board’s relationship are in place to enable all directors to include with the Company Secretary provides for all directors to matters and proposals in the agenda for include matters and proposals in the agenda for regular regular Board meetings where such matters board meetings. and proposals relate to the promotion of business and the management of risks of the As notice of a meeting is given in advance, any director is finance company. able to request the inclusion of matters on the agenda in time for such item to be discussed at the meeting.
11 BRAC Lanka Finance PLC Annual Report 2016/17 Corporate Governance Report
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
3.3 A notice of at least 7 days shall be given of a The process in place ensures that Directors receive an regular Board meeting to provide all directors annual schedule of meetings, a monthly reminder and an opportunity to attend. For all other Board seven days’ notice prior to the meeting. meetings, a reasonable notice shall be given. Reasonable notice is given for any other meetings. 3.4 A director who has not attended at least Alternate directors will be appointed where necessary to two-thirds of the meetings in the period of satisfy this requirement. 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a director. Provided that participation at the directors’ meetings through an alternate director shall, however, be acceptable as attendance. 3.5 The Board shall appoint a Company Secretary LOLC Corporate Services (Pvt) Ltd have been appointed whose primary responsibilities shall be to Secretaries. handle the secretarial services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations. 3.6 If the Chairman has delegated to the Company Preparing the agenda for Board Meetings has been Secretary the function of preparing the agenda delegated to the Company Secretaries. for a Board meeting, the Company Secretary shall be responsible for carrying out such function. 3.7 All Directors shall have access to advice All directors have access to the advice/services of the and services of the Company Secretary with Company Secretaries, and this is also documented in the a view to ensuring that Board procedures Board approved policy on the Board’s relationship with and all applicable laws, directions, rules and the Company Secretary. regulations are followed. 3.8 The Company Secretary shall maintain the The Minutes are in the custody of the Company minutes of Board meetings and such minutes Secretaries, who can provide them to any director for shall be open for inspection at any reasonable inspection at any reasonable time, on reasonable notice time, on reasonable notice by any director by any director. This is also provided for in the policy on the Board’s relationship with the Company Secretary.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
3.9 Minutes of Board meetings shall be recorded Detailed minutes are kept covering the given criteria. in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes of a Board meeting shall clearly contain or refer to the following:
(a) a summary of data and information used by the Board in its deliberations; (b) the matters considered by the Board; (c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence; (d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations; (e) the Board’s knowledge and understanding of the risks to which the finance company is exposed and an overview of the risk management measures adopted; and (f) the decisions and Board resolutions. 4. Composition of the Board 4.1 The number of directors on the Board shall not During the financial year under review, the Board be less than 5 and not more than 13. comprised 5 members. A sixth director was appointed in July 2017 4.2 The total period of service of a director other None of the Non-Executive Directors have completed 9 than a director who holds the position of chief years of service during the financial year executive officer or executive director shall not exceed nine years. The total period in office of a Non-Executive Director shall be inclusive of the total period of service served by such director up to the date of this Direction. 4.3 Subject to the transitional period an employee During the financial year under review, none of the of a finance company may be appointed, Directors were executive directors. In July 2017 the CEO elected or nominated as a director of the was appointed a director. finance company (hereinafter referred to as an “executive director”) provided that the number of executive directors shall not exceed one-half of the number of directors of the Board. In such an event, one of the executive directors shall be the Chief Executive Officer of the company.
13 BRAC Lanka Finance PLC Annual Report 2016/17 Corporate Governance Report
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
4.4 Subject to the transitional period the number The Board comprises two Independent Directors; of independent Non-Executive Directors of the Mr. A. J. L. Peiris (who is also the Senior Independent Board shall be at least one fourth of the total Director) and Mr. W. R. A. Dharmaratne numbers of directors. A Non-Executive Director shall not be considered independent if such director:
a) has shares exceeding 2% of the paid up capital of the finance company or 10% of the paid up capital of another finance company; b) has or had during the period of two years immediately preceding his appointment as director, any business transactions with the finance company as described in paragraph 9 hereof, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds of the finance company as shown in its last audited balance sheet; c) has been employed by the finance company during the two year period immediately preceding the appointment as director; d) has a relative, who is a director or chief executive officer or a key management personnel or holds shares exceeding 10% of the paid up capital of the finance company or exceeding 12.5% of the paid up capital of another finance company. e) represents a shareholder, debtor, or such other similar stakeholder of the finance company; f) is an employee or a director or has a share holding of 10% or more of the paid up capital in a company or business organization: (i) which has a transaction with the finance company as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds as shown in its last audited balance sheet of the finance company; or
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
(ii) in which any of the other directors of the finance company is employed or is a director or holds shares exceeding 10% of the capital funds as shown in its last audited balance sheet of the finance company; or (iii) in which any of the other directors of the finance company has a transaction as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds, as shown in its last audited balance sheet of the finance company. 4.5 In the event an alternate director is appointed In the event any alternate directors are appointed to represent an independent Non-Executive for independent Non-Executive Directors, this will be Director, the person so appointed shall also complied with. meet the criteria that apply to the independent Non-Executive Director. 4.6 Non-Executive Directors shall have necessary Directors profiles are provided on pages 2 to 3. skills and experience to bring an objective judgment to bear on issues of strategy, performance and resources. 4.7 A meeting of the Board shall not be duly Board meetings are constituted accordingly. constituted, although the number of directors required to constitute the quorum at such meeting is present, unless at least one half of the number of directors that constitute the quorum at such meeting are Non-Executive Directors. 4.8 The independent Non-Executive Directors shall The Directors for the year under review are: be expressly identified as such in all corporate I. C. Nanayakkara - Non-Executive Chairman communications that disclose the names of directors of the finance company. The finance W. D. K. Jayawardena - Non-Executive Director company shall disclose the composition of the R. D. Tissera - Non-Executive Director Board, by category of directors, including the Appointed with effect from 6 April 2016 names of the chairman, executive directors, Non-Executive Directors and independent Non- A. J. L. Peiris - Senior Independent Director Executive Directors in the annual corporate W. R. A. Dharmaratne - Independent Director governance report which shall be an integral Appointed with effect from 26 July 2017 part of its Annual Report. W. A. R. Kumara - Executive Director/CEO
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
4.9 There shall be a formal, considered and There is a Board approved procedure for appointment transparent procedure for the appointment of of a Director. In addition, the Board ensures that all new directors to the Board. There shall also be regulatory and statutory requirements are complied procedures in place for the orderly succession with. of appointments to the Board. 4.10 All directors appointed to fill a casual vacancy The Company has ensured compliance in all such shall be subject to election by shareholders situation. at the first general meeting after their appointment. In terms of Articles 74, Mr. R D Tissera and Mr. I C Nanayakkara and in terms of Articles 69, Mr. W. A. R. Kumara will be retiring by rotation at the Annual General Meeting to be held in September 2017, and offering themselves for re-election. 4.11 If a director resigns or is removed from office, The Company has ensured compliance in the past and the Board shall announce to the shareholders will ensure compliance in the future if such a situation and notify the Director of the Department of arises. Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka, regarding the resignation of the director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant director’s disagreement with the Board, if any. 5. Criteria to assess the fitness and propriety of directors 5.1 Subject to the transitional provisions contained None of the Directors are over 70 years of age. All herein, a person over the age of 70 years shall the Directors have been assessed as fit and proper in not serve as a director of a finance company terms of section 3 (3) and (4) of the Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No. 3 of 2011 5.2 A director of a finance company shall not hold No director holds directorships of more than 20 office as a director or any other equivalent companies /entities/ institutions inclusive of subsidiaries position in more than 20 companies/societies/ or associate companies. bodies corporate, including associate companies and subsidiaries of the finance company. 6. Delegation of Functions 6.1 The Board shall not delegate any matters to The Board has approved policies on delegation of a board committee, chief executive officer, authority by the directors to the CEO and Management, executive directors or key management and on oversight of the affairs of the company by KMPs. personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.
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6.2 The Board shall review the delegation Delegated authority is reviewed periodically by the processes in place on a periodic basis to ensure Board. that they remain relevant to the needs of the finance company. 7. The Chairman and the Chief Executive Officer 7.1 The roles of Chairman and Chief Executive The roles of Chairman and CEO are separate and held by Officer shall be separated and shall not be two different individuals, appointed by the Board. performed by the one and the same person. 7.2 The Chairman shall be a Non-Executive The Chairman is a Non-Executive Director. To bring in Director. In the case where the chairman is a greater element of independence, Mr. A J L Peiris has not an independent Non-Executive Director, been appointed the Senior Independent Director the Board shall designate an independent Non-Executive Director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the finance company’s Annual Report. 7.3 The Board shall disclose in its corporate There is no financial, business, family or other governance report, which shall be an integral relationship between the Chairman, Mr. Ishara part of its Annual Report, the name of the Nanayakkara and the Executive Director/CEO Mr. Rohana Chairman and the Chief Executive Officer Kumara. and the nature of any relationship [including financial, business, family or other material/ There is no financial, business, family or other material relevant relationship(s)], if any, between the relationship between any other members of the Board Chairman and the Chief Executive Officer and except for some Directors serving together on other the relationships among members of the Board. Boards. 7.4 The Chairman shall: In giving effect to this requirement, the Chairman ensures that all directors participate in discussion and (a) provide leadership to the Board; decision making, that relevant information is made (b) ensure that the Board works effectively and available and that relevant officers (including the CEO) discharges its responsibilities; and are invited to the meeting to provide clarifications and additional information. (c) ensure that all key issues are discussed by the Board in a timely manner. 7.5 The Chairman shall be primarily responsible The Chairman has delegated this function to the for the preparation of the agenda for each Company secretaries. Board meeting. This has been included in the “Policy on Board’s The Chairman may delegate the function of relationship with the Company Secretary” approved by preparing the agenda to the company secretary. the Board.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
7.6 The Chairman shall ensure that all directors are The Company Secretaries, through the authority informed adequately and in a timely manner of delegated by the Chairman, ensure that the agendas the issues arising at each Board meeting. of Board meetings notify all directors of the issues to be discussed, with supporting board papers containing further information.
As Minutes of previous month’s Board meeting are among the agenda items and Board papers, issues can be discussed to a satisfactory conclusion. 7.7 The Chairman shall encourage each director The Chairman ensures that all Directors participate in to make a full and active contribution to the discussions. Board’s affairs and take the lead to ensure that the Board acts in the best interests of the finance company. 7.8 The Chairman shall facilitate the effective All but one of the Directors are Non-Executive Directors, contribution of Non-Executive Directors and the Chairman facilitates their effective contribution in particular and ensure constructive by ensuring that they have received the relevant papers relationships between executive and Non- and other information in a timely manner. Executive Directors. 7.9 The Chairman shall not engage in activities The Chairman is a Non-Executive Director and does not involving direct supervision of key management engage in any executive activities personnel or any other executive duties whatsoever. 7.10 The Chairman shall ensure that appropriate The Board has approved a policy on communication with steps are taken to maintain effective stakeholders. communication with shareholders and that the views of shareholders are communicated to the The Annual General Meeting of the Company provides Board. a forum for shareholder communication. Periodic announcements made to the Colombo Stock Exchange also contribute towards keeping all stakeholders informed and updated on significant actions of the Company. 7.11 The Chief Executive Officer shall function as The Executive Director/CEO is currently the apex the apex executive-in-charge of the day-to- executive-in charge of the Company’s business day-management of the finance company’s operations. operations and business.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
8. Board appointed Committees 8.1 Every finance company shall have at least the The Company has established an Audit Committee and two Board committees set out in paragraphs an Integrated Risk Management Committee. These 8(2) and 8(3) hereof. Each committee shall Committees report to the Board. report directly to the Board. The Board has also appointed a Remuneration Each committee shall appoint a secretary Committee and a Related Party Transactions Review to arrange its meetings, maintain minutes, Committee, in compliance with the Listing Rules of the records and carry out such other secretarial Colombo Stock Exchange. functions under the supervision of the chairman of the committee. The Company’s secretaries are LOLC Corporate Services (Pvt) Ltd, and they perform all these functions. The Board shall present a report on the performance, duties and functions of each Please refer the Committee reports on pages 40 to 43. committee, at the annual general meeting of the company. 8.2 Audit Committee Please refer page 41 for the Committee Report a. The Chairman of the committee shall be Mr. W. D. K. Jayawardena has been appointed as the a Non-Executive Director who possesses Chairman of the Audit Committee by the Board. qualifications and experience in accountancy and/or audit. His qualifications are as follows: MBA in Financial Management Fellow Member of the Institute of Bankers Over 30 years of Banking (of which 9 years was as CEO of Citibank Sri Lanka) Associate of the Institute of Cost and Executive Accountants. b. The Board members appointed to the The members of the Audit Committee are: committee shall be Non-Executive Directors. W. D. K. Jayewardene - (Committee Chairman) Non-Executive Director A. J. L. Peiris - Non-Executive Independent Director W. R. A. Dharmaratne - Non-Executive Independent Director
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
c. The committee shall make recommendations The Committee makes recommendations on these on matters in connection with: matters to the Board.
(i) the appointment of the external auditor for The Board has approved Terms of Reference for the audit services to be provided in compliance Audit Committee. with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to auditors from time to time; (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the auditor, provided that the engagement of an audit partner shall not exceed five years, and that the particular audit partner is not re- engaged for the audit before the expiry of three years from the date of the completion of the previous term. d. The committee shall review and monitor the The Committee performs this function and annually external auditor’s independence and objectivity makes a determination on the External Auditor’s and the effectiveness of the audit processes in independence. accordance with applicable standards and best practices. The External Auditors report direct to the Audit Committee.
20 BRAC Lanka Finance PLC Annual Report 2016/17
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008 e. The committee shall develop and implement The Board has approved a policy for engagement of the a policy with the approval of the Board on the external auditors for providing non-audit services. engagement of an external auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that the provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the committee shall consider:
(i) whether the skills and experience of the auditor make it a suitable provider of the non-audit services; (ii) whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and (iii) whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the external auditor.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
f. The committee shall, before the audit The Audit Committee carries out this function. commences, discuss and finalize with the external auditors the nature and scope of the audit, including:
(i) an assessment of the finance company’s compliance with Directions issued under the Act and the management’s internal controls over financial reporting; (ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and (iii) the co-ordination between auditors where more than one auditor is involved. g. The committee shall review the financial This has been included in the Board approved Terms of information of the finance company, in order to Reference for the Audit Committee and is carried out monitor the integrity of the financial statements quarterly. of the finance company, its annual report, accounts and periodical reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the finance company’s annual report and accounts and periodical reports before submission to the Board, the committee shall focus particularly on:
(i) major judgemental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements. h. The committee shall discuss issues, problems This has been done by the Audit Committee. and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary.
22 BRAC Lanka Finance PLC Annual Report 2016/17
Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008 i. The committee shall review the external This has been done by the Audit Committee. auditor’s management letter and the management’s response thereto. j. The committee shall take the following steps This has been done by the Audit Committee. with regard to the internal audit function of the finance company:
(i) Review the adequacy of the scope, functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work; (ii) Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department; (iii) Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department; (iv) Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function; (v) Ensure that the committee is apprised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning; (vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care; k. The committee shall consider the major This is done by the Audit Committee. findings of internal investigations and management’s responses thereto;
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
l. The Chief Finance Officer, the Chief Internal The CEO, CFO and CRO are invited to be present at Auditor and a representative of the external meeting of the Audit Committee. The Committee also auditors may normally attend meetings. Other met with the external auditors without the Board members and the Chief Executive Officer may also attend meetings upon the invitation Executive officers being present. of the committee. However, at least once in six months, the committee shall meet with the external auditors without the executive directors being present. m. The committee shall have: The Board approved Terms of Reference of the Audit Committee ensure that the Committee has the authority (i) explicit authority to investigate into any as required. matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. n. The committee shall meet regularly, with due According to the annual schedule and agenda, the notice of issues to be discussed and shall Committee will meet quarterly, with provision for the record its conclusions in discharging its duties Committee Chairman to convene additional meetings if and responsibilities. deemed necessary. o. The Board shall, in the Annual Report, disclose Please refer the Audit Committee Report on page 41 in an informative way,
(i) details of the activities of the audit committee; (ii) the number of audit committee meetings held in the year; and (iii) details of attendance of each individual member at such meetings. p. The secretary to the committee (who may LOLC Corporate Services (Pvt) Ltd, Secretaries to be the company secretary or the head of the the Company, function as Secretaries to the Audit internal audit function) shall record and keep Committee. Minutes of the Meetings of the Committee detailed minutes of the committee meetings are recorded and maintained by them.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008 q. The committee shall review arrangements A whistleblowing policy has been approved and a by which employees of the finance company whistleblowing hotline has been publicised to all may, in confidence, raise concerns about employees. possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the finance company’s relations with the external auditor. 8.3 Integrated Risk Management Committee Please refer page 42 for the Committee Report a. The committee shall consist of at least For the financial year under review The Integrated Risk one Non-Executive Director, CEO and key Management Committee comprised the following; management personnel supervising broad risk categories, i.e., credit, market, liquidity, R. D. Tissera - Non-Executive Director, operational and strategic risks. The committee Committee Chairman shall work with key management personnel W. A. R. Kumara - Executive Director/CEO closely and make decisions on behalf of the Mrs. S Wickremasekera - Group Chief Risk Officer Board within the framework of the authority and responsibility assigned to the committee. L Pieris - Head of IT G. Herath - Assistant Manager - Finance/ Compliance Officer C. Wijewarnasooriya - Chief Manager, Channels H. Senarathne - Head of Treasury Operations C. Karunathilaka - Chief Manager - Credit Risk Management S. Perera - Manager, Collection & Recoveries b. The committee shall assess all risks, i.e., The Terms of reference of the Committee have been credit, market, liquidity, operational and approved by the Board. The Risk Review Reports strategic risks to the finance company on submitted by the Enterprise Risk Management Division a monthly basis through appropriate risk cover these risks. indicators and management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on the finance company basis and group basis.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
c. The committee shall review the adequacy During the year under review, Minutes of the Meetings of and effectiveness of all management level the Asset Liability Committee (“ALCO”) were submitted to committees such as the credit committee the IRMC. and the asset-liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the committee. d. The committee shall take prompt corrective At its meetings, the Committee reviews any such risks action to mitigate the effects of specific risks and takes the necessary prompt action. in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the finance company’s policies and regulatory and supervisory requirements. e. The committee shall meet at least quarterly 4 meetings were held during the financial year 2016/17. to assess all aspects of risk management including updated business continuity plans. f. The committee shall take appropriate actions If such instances are identified, appropriate steps will be against the officers responsible for failure taken. to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka. g. The committee shall submit a risk assessment This report is submitted. report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions. h. The committee shall establish a compliance A Compliance Officer has been appointed, having function to assess the finance company’s obtained the approval of the Central Bank of Sri Lanka, to compliance with laws, regulations, directions, carry out these functions. rules, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to the committee periodically. 9. Related party transactions 9.1 The following shall be in addition to the provisions contained in the Finance Companies (Lending) Direction, No. 1 of 2007 and the Finance Companies (Business Transactions with Directors and their Relatives) Direction, No. 2 of 2007 or such other directions that shall repeal and replace the said directions from time to time.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
9.2 The Board shall take the necessary steps to The Board has approved a procedure on related party avoid any conflicts of interest that may arise transactions. from any transaction of the finance company with any person, and particularly with the Further, at each Board meeting the Directors individually following categories of persons who shall be declare any companies in which they have a significant considered as “related parties” for the purposes influence, which facilitates avoidance of conflicts of of this Direction: interest. The existing process and reporting system have been noted and approved by the Board and documented. a) A subsidiary of the finance company; b) Any associate company of the finance company; c) A director of the finance company; d) A key management personnel of the finance company; e) A relative of a director or a key management personnel of the finance company; f) A shareholder who owns shares exceeding 10% of the paid up capital of the finance company; g) A concern in which a director of the finance company or a relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance company, has substantial interest. 9.3 The transactions with a related party that are The Board has approved a procedure on related party covered in this Direction shall be the following: transactions.
a) Granting accommodation, Further, at each Board meeting the Directors individually b) Creating liabilities to the finance company declare any companies in which they have a significant in the form of deposits, borrowings and influence, which facilitates avoidance of conflicts of investments, interest. The existing process and reporting system have been noted and approved by the Board and documented. c) providing financial or non-financial services to the finance company or obtaining those services from the finance company, d) creating or maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
9.4 The Board shall ensure that the finance The existing process and reporting system have been company does not engage in transactions with noted and approved by the Board and documented. a related party in a manner that would grant such party “more favourable treatment” than that is accorded to other similar constituents of the finance company. For the purpose of this paragraph, “more favourable treatment”
shall mean: a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the finance company’s regulatory capital, as determined by the Board. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the finance company’s share capital and debt instruments with a remaining maturity of 5 years or more. b) Charging of a lower rate of interest than the finance company’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty; c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/ commissions, that extends beyond the terms granted in the normal course of business with unrelated parties; d) Providing or obtaining services to or from a related-party without a proper evaluation procedure; e) Maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for the performance of legitimate duties and functions.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
10. Disclosures 10.1 The Board shall ensure that: (a) annual audited The financial statements are prepared in accordance financial statements and periodical financial with the new Sri Lanka Accounting Standards (SLFRSs/ statements are prepared and published in LKASs) and the formats prescribed by the regulators. accordance with the formats prescribed by the regulatory and supervisory authorities Annual financial statements are disclosed in the annual and applicable accounting standards, and report; biannual (unaudited) financial statements are that (b) such statements are published in the published in newspapers in all three languages and the newspapers in an abridged form, in Sinhala, quarterly statements are posted on CSE website Tamil and English. 10.2 The Board shall ensure that at least the following disclosures are made in the Annual Report: a. A statement to the effect that the annual The Annual Audited financial statements have been audited financial statements have been prepared in line with applicable accounting standards prepared in line with applicable accounting and regulatory requirements, inclusive of specific standards and regulatory requirements, disclosures. inclusive of specific disclosures. b. A report by the Board on the finance Please refer the Directors Statement on Internal Controls company’s internal control mechanism that Over Financial Reporting on page 37. confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements. c. The external auditor’s certification on the The Company has obtained a certification from KPMG effectiveness of the internal control mechanism Chartered Accountants on the effectiveness of the in respect of any statements prepared or internal controls over financial reporting published after March 31, 2010. d. Details of directors, including names, Directors names and details are given on pages 2 to 3. transactions with the finance company. Please refer Note 37.2 to the Financial Statements, on page 88. e. Fees/remuneration paid by the finance Directors Remuneration is disclosed in the notes to the company to the directors in aggregate, in the financial statements. Annual Reports published after 1 January, 2010.
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Direction Reference to the Finance Companies The Company’s level of compliance No. Corporate Governance Direction No. 3 0f 2008
f. Total net accommodation as defined in Please refer Note 37.3 to the Financial Statements, on paragraph 9(4) outstanding in respect of page 89. each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage of the finance company’s capital funds. g. The aggregate values of remuneration paid by Please refer Note 37.2 to the Financial Statements, on the finance company to its key management page 88. personnel and the aggregate values of the transactions of the finance company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the finance company. h. A report setting out details of the compliance The Company has not engaged in any activity that with prudential requirements, regulations, laws contravenes any applicable law or regulation, and to the and internal controls and measures taken to best of the knowledge of the Directors the Company has rectify any non - compliances. been in compliance with all prudential requirements, regulations and laws. i. A statement of the regulatory and supervisory There were no significant supervisory concerns / lapses concerns on lapses in the finance company’s in the Company’s risk management and compliance with risk management, or non compliance with this direction to be directed by the Monetary Board to be the Act, and rules and directions that have disclosed to the public. been communicated by the Director of the Department of Supervision of Non-Bank Financial Institutions, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the finance company to address such concerns. j. The external auditor’s certification of the The Company has engaged the services of the external compliance with the Act and rules and auditors to assess the company’s level of compliance directions issued by the Monetary Board in the with the Finance Companies Corporate Governance annual corporate governance reports published Direction No. 3 of 2008 issued by the Monetary Board. after January 1, 2011
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Section Rules of the Colombo Stock Exchange The Company’s Level of compliance No.
7.10 Corporate Governance 7.10 Statement confirming that as at the date The Company is compliant with the corporate of the annual report that the Company is in governance requirements of the Listing Rules of the compliance with these rules. Colombo Stock Exchange. 7.10.1 Non-executive Directors As at 31st March 2017 the Board comprised 5 directors The Board of Directors of a listed entity shall of whom all are Non-Executive Directors. In July 2017 include at least: two Non-Executive Directors; the Chief Executive Officer was appointed a director. or such number of Non-Executive Directors equivalent to one third of the total number of directors whichever is higher 7.10.2 Independent Directors The Board comprised 2 Independent Non-Executive Where the constitution of the Board of Directors Directors. includes only two Non-Executive Directors in terms of 7.10.1, both such Non-Executive Directors shall be independent. In all other instances two or 1/3rd of the no executive directors appointed to the Board, whichever is higher shall be independent. 7.10.3-4 Directors disclosures The Directors have submitted the relevant declaration, as Annual determination as to the independence prescribed by the Colombo Stock Exchange. or non-independence of each Non-Executive Director 7.10.5 Remuneration Committee As at 31st March 2017 the Committee comprised 3 Non- Shall comprise of a minimum of two Executive directors, of whom 2 are independent. independent Non-Executive Directors or of Non- Executive Directors a majority of whom shall be Please refer the Committee’s report on page 43. independent, which ever shall be higher 7.10.6 Audit Committee Shall comprise of a minimum of two As at 31st March 2017 the Committee comprised 3 Non- independent Non-Executive Directors or of Non- Executive directors, of whom 2 are independent. Executive Directors a majority of whom shall be independent, which ever shall be higher Please refer the Committee’s report on page 41.
31 BRAC Lanka Finance PLC Annual Report 2016/17 Risk Management
Enterprise Risk Management Risk Management is a dynamic and evolving process and it is imperative that it adopt to the changing business landscape. Therefore, we believe that the Risk Governance structures should be geared to respond to organization dynamics in an efficient and effective manner. Risk Management at BRAC Lanka Finance Plc is a group level (LOLC group) centralized function. The risk governance structures in place allows for group level policies and decisions taken with regard to Risk management initiatives cascade down to entities in the group with
Internal Audit Functions Audit Committee
Information Systems Board of Audit Functions Management
Integrated Risk Risk Management Management Committee Functions
minimum lead time and any structural changes and Risk Governance structures implemented at BRAC are process level changes can be replicated at any entity in the a combination of Risk Management, Internal Audit and group. This strategy allows us to optimizing our resource IS audit functions which forms the Enterprise Risk utilization. Management Department (ERM) while the compliance department functions separately. The Audit function and The Risk governance structures adopted at BRAC reflect the Risk Management function works in cohesion to derive the commitment for Risk management initiatives at the the best possible synergies highest level with both the Risk Management functions and Audit functions given total independence via their The Risk Management function identify possible risks operational and reporting lines which have a reasonable probability to hinder the realization of our strategic and tactical objectives. This allows the board of management to be appraised of It appraises the management of the impacts on the organizational risks in an unbiased manner and this crystallization of identified risks and the mitigation boosts the confidence the board has on the internal control strategies available. The Integrated risk management structures implemented and their effectiveness. The board committee (IRMC) evaluates the possible impacts and of management drives the risk governance effort via the in consultation with the risk owners decides on the Integrated risk management committee and the audit best possible risk mitigation strategies and the internal committee. controls to be adopted. The board of directors are kept informed through regular communications of the activities of the IRMC.
32 BRAC Lanka Finance PLC Annual Report 2016/17
Enterprise risk management is a collaborative effort of all Information Systems Audit function reviews information stake holders and the views and the perception of risk of systems and critical system infrastructure and plays a the process owners are taken in to account by compulsory supporting role to general audits in reviewing the relevant reporting requirements established, which requires them processes and controls which are supported by computer to submit risk related information to ERM on a monthly systems. basis for further analysis and onward submission to the board of Directors while the IRMC is conveyed every A Corporate whistle blower hotline is available for quarter for a more detailed analysis of the risk landscape employees to report any irregularity or suspicious of the company. activities and a customer feedback line too is operational for customers to escalate any dissatisfaction of any fact Enterprise Risk Management at BRAC Lanka Finance is which needs the attention of the management, These lines an organization wide process where every employee are operated by ERM and any information provided are has a responsibility to manage risks with in their scope treated confidentially. All complains are followed up until of functions. our vision in risk management “Building resolution. an organizational Culture where Protection, Assurance, Reliability, Accountability, Transparency and Confidentiality Continuous quality, Knowledge and skill improvements are are treasured and lasting values “, require us to inculcate prerequisite of an effective risk management strategy and within all stake holders the appropriate risk culture. the ERM staff are continuously trained and opportunities/ Enterprise risk management department firmly believes facilities provided for enhancement of their skills and proper risk awareness facilitates the appropriate risk knowledge inventory. An internal quality assurance system response. Therefore, dissemination of risk & response is well operational within the department which enable us related knowledge to all employees is a critical success to maintain consistent and uniformity in our processes. factor. The Enterprise risk management department continues to engage in structured training in co-ordination Risk Profile with the human resource department and other business The following is based on the perceived risk and is a high units to enhance the knowledge and skills of staff engaged level categorisation of risk used only for the illustration in critical operational activities in the organization. purposes of this report.
We strongly believe that there is no limits to improvements Risk Levels Risk Score and risk management process is also no exception. In order to add value to the business we incorporated risk Very High 5 department participations in an advisory capacity for High 4 major product or process formulations in an effort to formulate appropriate risk control and internal control Medium 3 structures within the organization. Low 2 Very Low 1 The Internal Audit is entrusted with providing the management a reasonable assurance of the reliability, consistency and effectiveness of the internal control frame work. The audit teams adopt a three pronged strategy and consists of teams that engages in process level / department level audits, branch based audits and field based audits. This strategy has allowed us to maintain a more frequent presence in different levels of operations at any given time. The data analytics techniques are used for auditing purposes which facilitate the analysis of the entire audit universe rather than sampling.
33 BRAC Lanka Finance PLC Annual Report 2016/17 Risk Management
Financial Risks Operational Risks
Asset & Business Strategy Risk Liability Risk
5 5 Profitability Currency Risk 4 4 & Income 3 3 2 2 Mismanagement Internal 1 Capital & 1 Systems & Market Risk 0 Adequacy Risk Fraud Risk 0 Operational Risk
Interest rate Risk Credit Risk
Liquidity Risk Series 1 Technology Risk Series 1
Business Risks Event Risk
Legal Risk Event Risk
5 5 4 4 Industry 3 Policy Risk Risk 3 2 2 1 Exogenous 1 Contagion 0 Risk 0 Risk
Financial Image Risk Infrastructure Risk
Systemic Risk Disaster Series 1 Management & Business Series 1
34 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Board of Directors
The Directors have pleasure in presenting their Annual Directors’ Remuneration Report for the year ended 31st March 2017, and trust that The Company has a Board approved Remuneration the financial statements and all our other reports provide Policy. This policy stipulates that remuneration should be you with a comprehensive view of the performance and linked to competence and contribution, while serving to progress of your Company over the last financial year. incentivize and motivate. This policy has been taken into account when determining remuneration for both staff and Principal activity directors. Directors Remuneration is disclosed on page 89. The Company’s principal activities are to provide financial The Report of the Remuneration Committee is on page 43. products and services, with a focus on micro finance, and the mobilization of public deposits. Recommendations for re-election of Directors In terms of Article 74 of the Articles of Association Directorate Mr. Dhammika Ravindra Tissera and Mr. Ishara Chinthaka The Directors of the Company are as follows: Nanayakkara will retire by rotation at the Annual General Meeting of the Company and offer themselves for re- election. The Board recommends their re-election. I. C. Nanayakkara Non-Executive Chairman In terms of Article 69 of the Articles of Association W. D. K. Jayawardena Non-Executive Director Mr. Wanni Achchige Rohana Kumara will retire by rotation (and alternate director to at the Annual General Meeting of the Company and offer I. C. Nanayakkara) himself for re-election. The Board recommends their re- election. A. J. L. Peiris Senior Independent Director (Appointed 6th April 2016) The re-election of these Directors, subject to shareholder W. R. A. Dharmaratne Independent Director approval, has been approved by the Central Bank of Sri (Appointed 6th April 2016) Lanka. R. D. Tissera Non-Executive Director Board sub committees W. A. R. Kumara Executive Director/CEO The Board had appointed the following Board (Appointed 26th July 2017) sub committees:
The Directors’ profiles are given on pages 2 to 3. • Audit Committee • Remuneration Committee Directors’ shareholdings • Integrated Risk Management Committee The Directors’ shareholdings are as given below: • Related Party Transactions Review Committee
As at As at These Committees assist the Board with its role 31.03.2017 31.03.2016 of oversight of the Company’s performance and conformance. Minutes of the meetings of these I. C. Nanayakkara - - Committees are tabled at the next Board meeting, enabling W. D. K. Jayawardena - - the Board to benefit from the focused review of these Committees on the areas and issues within their purview. A. J. L. Peiris - - W. R. A. Dharmaratne - - The Reports of these Committees can be found on pages . R. D. Tissera - - 40 to 43.
Directors’ Interests Compliance with Laws and Regulations The Directors have made the declarations required by the The Company has not engaged in any activity that Companies Act No. 07 of 2007. These have been noted by contravenes any applicable law or regulation, and to the the Board, recorded in the Minutes and entered into the best of the knowledge of the Directors the Company has Interest Register which is maintained by the Company. been in compliance with all prudential requirements, regulations and laws. The Company is in compliance with all applicable Corporate Governance requirements. The Related Party Transactions are disclosed in the Notes to Corporate Governance report is on page 8. the Financial Statements
35 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Board of Directors
Corporate Governance Auditors The Company is compliant with the Corporate Governance M/s KPMG, the Auditors of the Company retire and offer Requirements of the Listing Rules of the Colombo Stock themselves for reappointment. The Board recommends Exchange, and with the requirements of the Finance their re-appointment for the year 2017/18 at a fee to be Companies (Corporate Governance) Direction No. 3 of decided upon by the Board. 2008 (and subsequent amendments thereto) issued by the Central Bank of Sri Lanka. During the year under review, the Auditors were paid Rs. Rs. 660,000/- as audit fees. The Corporate Governance Report is on page 8. As far as the Directors are aware, the Auditors do not have Directors’ responsibility for financial reporting any other relationship with the Company nor do they have The Directors are responsible for the preparation of any interest in contracts with the Company. Financial Statements of the Company to reflect a true and fair view of the state of its affairs .The Directors The Report of the Auditors is given on page 45. are of the view that the financials have been prepared in accordance with the requirements of the Sri Lanka Shareholding Structure Accounting Standards, the Companies Act No. 7 of 2007 The stated capital of the Company as at 31st March 2017 and amendments/additions thereto, the Finance Business was Rs. 171,180,454/- divided into 105,752,566 shares. Act No. 42 of 2011 and amendments/additions thereto , More details on the shareholders can be found on pages the Listing Rules of the Colombo Stock Exchange, and all 93 to 94. relevant directions of the Central Bank of Sri Lanka. Events after the reporting date Significant Accounting Policies Rights Issue The Accounting Policies adopted in the preparation of In April 2017 the Company received shareholder approval the financial statements and any changes thereof where for a Rights Issue of shares. 132,190,708 new ordinary applicable have been included in the Notes to the financial shares were offered in the proportion of five (05) new statements. ordinary shares for every four (04) ordinary shares held, at a price of Rupees Ten (Rs 10/- ) per share. Transactions with Related Parties Details of related party transactions are disclosed in the At the completion of this issue, Lanka ORIX Leasing financial statements. Company PLC (“LOLC”) held 55.55 % of the shares in issue. Statutory Payments For the year under review, all known statutory payments Annual General Meeting have been made and all retirement, gratuities have been The Notice of the Annual General Meeting is included in provided for. Further, all management fees and payments this Annual Report. If you are unable to be present at the to related parties for the year under review have been Meeting, please complete and return the proxy form to the reflected in the accounts. Company, as instructed thereon.
Going concern On behalf of the board of Directors The Directors believe that the Company is in a position to continue its operations in the foreseeable future. Accordingly, the Financial Statements are prepared on the basis that the Company is a going concern.
Responsibility statements Mr. Ishara Nanayakkara Mr. Kapila Jayawardena The Chief Executive Officer’s and Chief Financial Officer’s Non-Executive Chairman Non-Executive Director responsibility statement appears on page 39.
Financial Statements and Auditor’s Report The Financial Statements together with the Auditors Report and Notes thereon, found on pages 45 to 92 are in compliance with Sri Lanka Accounting Standards and the requirements of the Companies Act No. 7 of 2007 .
36 BRAC Lanka Finance PLC Annual Report 2016/17 Directors’ Statement on Internal Control over Financial Reporting
Responsibility External Auditor’s Certification In line with the section 10(2)(b) of the Finance Companies The External Auditors have submitted a certification on the Direction No. 03 of 2008 as amended by the Direction No. process adopted by the Directors on the system of internal 06 of 2013, the Board of Directors present this report on controls over financial reporting. The matters addressed Internal Control over Financial Reporting. by the External Auditors in this respect, will be taken in to consideration and appropriate steps will be taken to The Board of Directors (“the Board”) is responsible for incorporate same, where applicable. the adequacy and effectiveness of the internal control mechanism in place at BRAC Lanka Finance PLC. (“the By order of the Board Company”).
The Board has established an on-going process for identifying, evaluating and managing the significant risks faced by the Company and this process includes the system of Internal Control over Financial Reporting. The Kapila Jayawardena process is regularly reviewed by the Board. Non Executive Director/Chairman-Audit Committee
The Board is of the view that the system of Internal Control over Financial Reporting in place is sound and adequate to provide reasonable assurance regarding the reliability of Financial Reporting and that the preparation of Financial Statements for external purposes is in accordance Ishara Nanayakkara with relevant accounting principles and regulatory Chairman/ Non- Executive Director requirements. 31 May 2017 The management assists the Board in the implementation of the Board’s policies and procedures pertaining to Internal Control over Financial Reporting. In assessing the Internal Control System over Financial Reporting, identified officers of the Company collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Company and continue to review and update every year. These in turn are being observed and checked by the Internal Audit Department of the Company for suitability of design and effectiveness on an on-going basis.
Confirmation Based on the above processes, the Board confirms that the Financial Reporting System of the Company has been designed to provide reasonable assurance regarding the reliability of Financial Reporting and the preparation of Financial Statements for external purposes and has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.
37 BRAC Lanka Finance PLC Annual Report 2016/17 Directors’ Responsibility for Financial Reporting
Auditors’ Responsibility The Directors confirm that the Company’s Financial Statements for the year ended 31st March 2017, are prepared and presented in conformity with the requirements of the Sri Lanka Accounting Standards, the Regulations and Directions of the Central Bank of Sri Lanka, the Listing Rules of the Colombo Stock Exchange and the Companies Act No. 07 of 2007. They believe that the Financial Statements present a true and fair view of the state of the affairs of the Company as at the end of the financial year. The Financial Statements comprise the Statement of Financial Position as at 31st of March 2017, the Statement of Profit or Loss and other Comprehensive Income, Statement of Changes in Equity and the Cash Flow Statement for the year then ended and notes thereto.
The Directors also accept responsibility for the integrity and accuracy of the Financial Statements presented and confirm that appropriate accounting policies have been selected and applied and reasonable and prudent judgment has been exercised so as to accurately report transactions. The Directors have taken reasonable steps to safeguard the assets of the Company, to prevent, deter and detect fraud, and to ensure the integrity, accuracy and safeguarding of operational and financial records.
The Directors confirm that to the best of their knowledge, all statutory payments due in respect of the Company as at the reporting date have been paid for, or where relevant, provided for.
The External Auditors, Messrs KPMG, were provided with the opportunity to make appropriate inspections of financial records, minutes and other documents to enable them to form an opinion of the Financial Statements. The Report of the Auditors is set out on page 45.
W. D. K. Jayawardena Director
31 May 2017
38 BRAC Lanka Finance PLC Annual Report 2016/17 Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement
The financial statements are prepared incompliance with The financial statements were audited by Messrs. KPMG, the Sri Lankan Financial Reporting Standards (SLFRS/ Chartered Accountants, the Independent Auditors. The LKAS) issued by the institute of Chartered Accountant of Audit Committee pre - approves the audit and non- Sri Lanka. The requirements of the Companies Act No.7 audit services provided by KPMG in order to ensure that of 2007, the Finance Business Act No.42 of 2011 and the the provision of such services does not impair KPMG’s Listing Rules of the Colombo Stock Exchange. independence and objectivity. The Audit Committee also reviews the external audit plan and the management Accordingly, the Company has prepared financial letters and follows up on any issues raised during the statements which comply with SLFRSs/ LKASs and statutory audit. The Audit Committee also meets with the related interpretations applicable for period ended 31 external and internal auditors to review the effectiveness March 2017, together with the comparative period data as of the audit. at and for the year ended 31 March 2016, as described in the accounting policies. We confirm that the Company has complied with all applicable laws and regulations and guidelines and that We accept responsibility for the integrity and accuracy of there are no material litigations that are pending against these financial statements. Significant accounting policies the Company other than those arising in the normal course have been applied consistently. Application of significant of conducting business. accounting policies and estimates that involve a high degree of judgment and complexity were discussed with the Audit Committee and the external auditors. Estimate and judgment relating to the financial statements were made on a prudent and reasonable basis, in order to ensure that the financial statements are true and fair. Ms Sunjeevani Kotakadeniya To ensure this, our internal auditors have conducted Chief Financial Officer - LOLC Group periodic audits to provide reasonable assurance that the established policies and procedures of the company were consistently followed.
We confirm that to the best of our knowledge, the financial statements and other financial information included in this Mr. Rohana Kumara annual report, fairly present in all material respects the Chief Executive Officer financial position, results of operations and cash flows of the company as of, and for, the periods presented in this 31 May 2017 annual report.
We are responsible for establishing and maintaining internal controls and procedures. We have designed such controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the company is made known to us and for safeguarding the company’s assets and preventing and detecting fraud and error. We have evaluated the effectiveness of the company’s internal controls and procedures and are satisfied that the controls and procedures were effective as of the end of the period covered by this annual report. We confirm, based on our evaluations that there were no significant deficiencies and material weaknesses in the design or operation of internal controls and any fraud that involves management or other employees.
39 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Related Party Transactions Review Committee
The Related Party Transaction Review (“RPTR”) Committee Through these methods, the Committee reviews the comprises the following directors: related party transactions entered into during the financial year. By submitting the Committee minutes to the Board A. J. L. Peiris - Non Executive Independent at the next Board meeting, the Committee ensures that Director (Committee Chairman) it’s comments and observations are communicated to the Board. W. R. A. Dharmaratne - Non Executive Independent Director The Committee met four times in the financial year. W. D. K. Jayawardena - Non-Executive Director
As the Committee was re-constituted this year, the members re-visited the Committee’s role, which served to provide them with clarity and direction. While studying “the Code of Best Practices on related party transactions” A. J. L. Peiris the Committee also discussed and agreed on its scope and Committee Chairman - Related Party Transaction Review the guidelines which had been drawn up previously. Committee
The Committee noted the definition of “related parties” as laid down in the relevant accounting standards, and also took note of the parties consequently considered as related to the Company. The Committee has accepted as suitable the Company’s recording process and reporting system. This process includes regular disclosures by the Directors of any entities to whom they can be considered as related. The system captures relevant transactions made with these entities or other related entities. The resultant Report gives details of the related party transacted with and the nature of the transaction. All these elements work together to facilitate review of Related Party Transactions.
The Committee meets regularly at least once a quarter, and the Related Party Transactions Report is submitted at each Committee Meeting. Discussion of this report, and a review of the previous meeting’s minutes enable the Committee to clarify transactions and seek further information where necessary. To enrich these discussions, the Chief Executive Officer and the Chief Financial Officer are invited to attend the meetings.
For greater control, the Committee requires that the Report include a confirmation that all relevant statutory and regulatory requirements have been complied with when entering into a related party transaction. Where necessary, a disclosure on a related party transaction is made on the Colombo Stock Exchange. This is supported by relevant Board approval.
40 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Audit Committee
The Audit Committee comprises the following directors: As and when appropriate, the Committee invites the Chief Executive Officer, Compliance Officer and Chief Financial W. D. K. Jayawardena - Non-Executive Director Officer to be present at Committee meetings. (Committee Chairman) The Committee met six times during the financial year. A. J. L. Peiris - Non Executive Independent Director W. R. A. Dharmaratne - Non Executive Independent Director
The Audit Committee enhances the Board’s role of W. D. K. Jayawardena oversight by giving greater focus to the financial recording Committee Chairman - Audit Committee and reporting systems of the Company. To facilitate this, the Committee works closely with the Internal and External Auditors and the Chief Financial Officer.
The role of the Audit Committee, as envisioned by regulators, has been taken into account when drafting the Committee’s Terms of Reference (“ToR”). Guided by the Board approved ToR, the Audit Committee has embedded certain functions into the annual agenda of meetings. This ensures that time and attention is given to identified critical aspects of financial performance and conformance.
When reviewing the interim financial statements and the Management Letter, the Committee takes the opportunity to meet with the External Auditors to discuss any aspect of operations which need to be improved. This also enables the Committee to review the effectiveness of the audit process and the efficiency and independence of the External Auditors themselves. The Committee reviews the Audit fees, before recommending them to the Board for approval.
The Chief Risk Officer submits an annual internal audit plan for the Committee’s information. When discussing the periodic Internal Audit Reports submitted, the Committee sometimes invites relevant operational management to be present, to clarify issues and reach consensus on methods for rectifying deficiencies. While there is an annual pre -agreed schedule of Committee meetings, the Committee is empowered to convene extra meetings to discuss Internal Audit reports if felt necessary.
41 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Integrated Risk Management Committee
The Integrated Risk Management Committee is chaired by Mr. R. D. Tissera, a Non-Executive Director of the Company. As stipulated by the Central Bank of Sri Lanka, the other members of the Committee are officers of the Company overseeing key identified risk areas. They include the CEO, the Chief Risk Officer, the Head of Finance / Compliance Officer, and officers handling Credit Evaluation, Treasury, Recoveries, IT and Channels. The Independent Directors may choose to attend if they wish, and in most cases have done so. When and where deemed necessary, the Committee is empowered to invite other officers to enhance discussion and decision making.
The scope of the Committee has been documented in its Terms of Reference (“ToR”). While this ToR provides a framework for the Committee’s responsibilities, it is broad enough to enable the Committee to take whatever steps are necessary to be effective in its duties.
The Committee regularly reviews reports which cover all areas of risk, including reports which confirm that all current risks have been identified and mitigated. In a dynamic environment, having these reports updated and submitted for each meeting enables the management to be constantly alert to any new or emerging risk.
Referring to minutes of previous meetings enables the Committee to ensure that decisions taken were implemented, and that any follow up action is being pursued.
The Committee met four times during the financial year.
R. D. Tissera Committee Chairman - Integrated Risk Management Committee
42 BRAC Lanka Finance PLC Annual Report 2016/17 Report of the Remuneration Committee
The Remuneration Committee comprises the following Directors:
W. R. A. Dharmaratne - Non Executive Independent Director (Committee Chairman) A. J. L. Peiris - Non Executive Independent Director W. D. K. Jayawardena - Non-Executive Director
The Company’s Remuneration policy has been noted by the Committee, which is satisfied that the policy facilitates incentivizing and rewarding performance, and keeping remuneration at competitive levels. These ensure both recruitment and retention of talent.
As the Board had been regularly reviewing operational improvements, the Committee agreed that it would extend its focus to staff. For this purpose, the Committee invited the Chief Executive Officer to report on changes introduced.
The changes have been two fold. Firstly, the working environment has been improved. Branch offices and facilities have been upgraded, security has been strengthened for both offices and staff making field visits, and field work has been made easier by providing motor bikes and fuel. Improved systems, increased automation and better procedures have all combined to make daily operations easier.
Secondly, the management has sought to build employee capacity and raise morale. To this end the management has taken steps to identify knowledge / skill gaps and provide necessary training in order to mitigate the skill gaps. Company sponsored and organized social events have helped foster team work and demonstrate management commitment to worker welfare. Improved remuneration packages and an appraisal system that enables performance to be measured and rewarded have also been introduced.
The Committee, which met once during the year, is satisfied that human resources and talent development are being optimized.
W. R. A. Dharmaratne Committee Chairman - Remuneration Committee
43 Financial Statements
Financial Reports Independent auditors’ report 45 Statement of financial position 46 Statement of profit or loss and Other comprehensive income 47 Statement of changes in equity 48 Statement of cash flows 49 Notes to the financial statements 50
44 BRAC Lanka Finance PLC Annual Report 2016/17 Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT opinion on the effectiveness of the entity’s internal control. TO THE SHAREHOLDERS OF BRAC LANKA FINANCE PLC An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of Report on the Financial Statements accounting estimates made by Board, as well as evaluating We have audited the accompanying financial statements the overall presentation of the financial statements. of BRAC Lanka Finance PLC, (“the Company”), which comprise the statement of financial position as at March We believe that the audit evidence we have obtained is 31, 2017, and the statements of profit or loss and other sufficient and appropriate to provide a basis for our audit comprehensive income, changes in equity and, cash flows opinion. for the year then ended, and a summary of significant accounting policies and other explanatory information set Opinion out on pages 46 to 92 of the Annual Report. In our opinion, the financial statements give a true and fair view of the financial position of the Company as at March Board’s Responsibility for the Financial Statements 31, 2017, and of its financial performance and cash flows The Board of Directors (“Board”) is responsible for the for the year then ended in accordance with Sri Lanka preparation of these financial statements that give a true Accounting Standards. and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Board Report on Other Legal and Regulatory Requirements determines is necessary to enable the preparation As required by section 163 (2) of the Companies Act No. 07 of financial statements that are free from material of 2007, we state the following: misstatement, whether due to fraud or error. a) The basis of opinion and scope and limitations of the Auditors’ Responsibility audit are as stated above. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our b) In our opinion we have obtained all the information audit in accordance with Sri Lanka Auditing Standards. and explanations that were required for the audit Those standards require that we comply with ethical and, as far as appears from our examination, proper requirements and plan and perform the audit to obtain accounting records have been kept by the Company reasonable assurance about whether the financial and the financial statements of the Company, comply statements are free from material misstatement. with the requirements of section 151 of the Companies Act. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making CHARTERED ACCOUNTANTS those risk assessments, the auditor considers internal Colombo control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to 31 May 2017 design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
45 BRAC Lanka Finance PLC Annual Report 2016/17 Statement of Financial Position
As at 31 March 2017 2016 Note Rs. Rs.
ASSETS Cash and Cash Equivalents 12 87,570,777 594,238,040 Investment in Fixed Deposits 349,077,329 - Investment in Government Securities 13 1,107,390,343 852,809,992 Investment Securities - Unquoted 14 11,000 11,000 Rentals Receivable on Hire-Purchase 15 9,522,875 16,052,586 Rentals Receivable on Lease 16 99,003,982 73,954,736 Loan and Advances 17 11,015,224,285 7,811,840,971 Amount due from Related Companies 18 4,189,200 143,825 Other Receivables 19 83,450,073 80,130,318 Inventory 20 - - Deferred Tax Assets 28 - 2,048,359 Property, Plant and Equipment 21 144,254,924 73,995,375 Total Assets 12,899,694,788 9,505,225,202
EQUITY AND LIABILITIES Liabilities Bank Overdraft 12 414,237,336 424,109,313 Deposits from Customers 22 2,813,322,351 1,181,016,450 Interest Bearing Loans and Borrowings 23 2,050,139,173 1,932,052,416 Current Tax Liabilities 24 107,112,352 124,447,948 Amount due to Related Companies 25 6,275,427,381 4,833,891,523 Accrued Charges and Other Payables 26 81,177,909 85,191,138 Employee Benefits 27 23,595,217 20,755,104 Deferred Tax Liabilities 28 10,821,573 - Total Liability 11,775,833,292 8,601,463,892
Equity Stated Capital 29 171,180,454 171,180,454 Reserves 30 83,296,702 74,262,150 Revenue Reserves 31 869,384,340 658,318,706 Total Equity 1,123,861,496 903,761,310
Total Equity and Liabilities 12,899,694,788 9,505,225,202
The annexed notes to the financial statements on pages 50 through 92 form an integral part of these financial statements. Figures in brackets indicate deductions.
These Financial Statements are prepared and presented in accordance with the requirements of the Companies Act No 07 of 2007.
(Mrs.) S. S. Kotakadeniya Chief Financial Officer-LOLC Group
The Board of Directors is responsible for the preparation and presentation of these Financial Statements. Approved and signed for and on behalf of the Board of BRAC Lanka Finance PLC;
W. D. K. Jayawardena R. D. Tissera Director Director
31 May 2017 Colombo
46 BRAC Lanka Finance PLC Annual Report 2016/17 Statement of Profit or Loss and other Comprehensive Income
For the year ended 31 March 2017 2016 Note Rs. Rs.
Interest Income 4 3,385,929,995 1,863,178,981 Interest Expense 5 (1,283,578,463) (581,161,462) Net Interest Income 2,102,351,532 1,282,017,519 Other Operating Income 6 9,083,471 13,055,079 Personnel Expenses (510,089,816) (347,153,793) General & Administration Expenses (770,810,558) (522,979,493) Depreciation and Amortization (14,975,538) (10,365,728) Allowance for Impairment & Write Offs 7 (338,894,294) (64,757,825) Profit from Operations 476,664,797 349,815,759
Value Added Tax (VAT) on Financial Services and NBT 8 (123,872,402) (89,430,784)
Profit Before Tax 9 352,792,395 260,384,975
Income Tax Expense 10 (132,865,385) (108,864,214)
Profit for the Year 219,927,010 151,520,761
Other Comprehensive Income Items that will never be reclassified to profit or loss Actuarial Gain/ (Losses) on defined benefit plan 27.1.3 2,965,243 (13,311,338)
Items that are or may be reclassified to profit or loss Net change in fair value of available-for-sale financial assets 13.3 (1,961,799) (242,523)
Income tax recognised in other comprehensive income 28.1 (830,268) -
Total Other Comprehensive Income, net of tax 173,176 (13,553,861)
Total Comprehensive Income for the year 220,100,186 137,966,900
Basic and Diluted Earnings Per Share 11 2.08 1.43
The annexed notes to the financial statements on pages 50 through 92 form an integral part of these financial statements
Figures in brackets indicate deductions.
47 BRAC Lanka Finance PLC Annual Report 2016/17 Statement of Changes in Equity
Capital Reserves Revenue Reserves For the year ended 31 March Stated Statutory Fair Value Retained Total Equity Capital Reserve Fund Reserve on Earnings AFS Rs. Rs. Rs. Rs. Rs.
Balance as at 1 April 2015 171,180,454 67,075,582 (146,947) 527,685,321 765,794,410
Comprehensive income for the year Profit for the Year - - - 151,520,761 151,520,761
Actuarial losses on defined benefit plan - - - (13,311,338) (13,311,338) Net change in fair value of available-for-sale financial assets - - (242,523) - (242,523) - - (242,523) (13,311,338) (13,553,861) Total comprehensive income for the year - - (242,523) 138,209,423 137,966,900
Transactions recorded directly in equity Transfer to/ (from) during the year - 7,576,038 - (7,576,038) - Total transactions recorded directly in equity - 7,576,038 - (7,576,038) -
Balance as at 31 March 2016 171,180,454 74,651,620 (389,470) 658,318,706 903,761,310
Balance as at 1 April 2016 171,180,454 74,651,620 (389,470) 658,318,706 903,761,310
Comprehensive income for the year Profit for the Year - - - 219,927,010 219,927,010
Actuarial gain on defined benefit plan - - - 2,965,243 2,965,243 Net change in fair value of available-for-sale financial assets - - (1,961,799) - (1,961,799) Tax on Other Comprehensive Income - - - (830,268) (830,268) - - (1,961,799) 2,134,975 173,176 Total Comprehensive income for the year - - (1,961,799) 222,061,985 220,100,186
Transactions recorded directly in equity Transfer to/ (from) during the year - 10,996,351 - (10,996,351) - Total transactions recorded directly in equity - 10,996,351 - (10,996,351) - Balance as at 31 March 2017 171,180,454 85,647,971 (2,351,269) 869,384,340 1,123,861,496
The annexed notes to the financial statements on pages 50 through 92 form an integral part of these financial statements
Figures in brackets indicate deductions.
48 BRAC Lanka Finance PLC Annual Report 2016/17 Cash Flow Statement
For the year ended 31 March 2017 2016 Note Rs. Rs.
Cash Flows from Operating Activities Profit Before Tax 352,792,395 260,384,975 Adjustment for: Gain on sale of Property, Plant and Equipment - (1,470,000) Depreciation and amortization 21 14,975,538 10,365,728 Provision for employee benefits 27.1.2 6,055,060 4,311,599 Net impairment loss on financial assets 7 341,546,357 64,757,825 Investment Income 4 (117,411,272) (24,507,428) Interest Expense 5 1,283,578,463 577,931,525 Dividend Income 6 (64,350) (59,400) Provision made /(reversal) for repossess vehicles 7 (2,652,063) 3,570,578 Operating profit before working capital changes 1,878,820,128 895,285,401
Working capital changes Increase in trade and other payables 1,458,758,062 3,960,338,597 (Increase)/decrease in investment in leases and hire purchases (4,152,684) 6,303,514 (Increase) in investment in advances and other loans (3,559,296,522) (4,925,460,253) Decrease in inventories 1,723,443 2,867,740 Decrease in trade and other receivables 7,916,467 475,727,187 Increase in deposits from customers 1,632,305,901 323,182,659 Cash generated from operations 1,416,074,795 738,244,846
Finance cost paid (1,296,618,476) (521,427,519) Income tax and Economic Service Charge paid 24 (138,161,317) (20,668,000) Employee Benefits Paid 27.1.1 (249,704) (3,137,604) Net cash (used in)/ generated from operating activities (18,954,702) 193,011,723
Cash Flows from Investing Activities Purchase and acquisition of Property, Plant and Equipment 21 (85,650,928) (57,592,618) Net additions to investment securities (256,542,150) (745,606,303) Net investment in term deposits (349,077,329) - Proceeds from the sale of Property, Plant and Equipment/write off 415,843 3,066,439 Interest received 103,058,295 24,507,428 Dividend received 64,350 59,400 Net cash flow used in investing activities (587,731,919) (775,565,654)
Cash Flows from Financing Activities Proceeds from long-term interest bearing loans and borrowings 200,000,000 2,234,118,997 Repayments of long-term interest bearing loans and borrowings 23 (90,108,666) (1,501,129,079) Net cash generated from financing activities 109,891,334 732,989,918
Net (decrease)/increase in cash and cash equivalents during the year (496,795,287) 150,435,987 Cash and cash equivalents at the beginning of the year 170,128,728 19,692,741 Cash and cash equivalents at the end of the year 12 (326,666,559) 170,128,728
Analysis of cash and cash equivalents at the end of the year Cash in hand and favourable bank balances 87,570,777 594,238,040 Unfavourable bank balances used for cash management purposes (414,237,336) (424,109,313) (326,666,559) 170,128,728
The annexed notes to the financial statements on pages 50 through 92 form an integral part of these financial statements
Figures in brackets indicate deductions.
49 BRAC Lanka Finance PLC Annual Report 2016/17 Notes to the Financial Statements For the year ended 31 March
1. General 2.2 Presentation of Financial Statements 1.1 Corporate Information The assets and liabilities of the company presented BRAC Lanka Finance PLC was incorporated in the Statement of Financial Position are grouped in January 1961 (Formerly known as Nanda by nature and listed in-order to reflect their Investment PLC) and registered under the relative liquidity and maturity pattern. An analysis Companies Act No. 07 of 2007 and Finance Leasing regarding recovery or settlement within twelve Act No 56 of 2000.The company has obtained months after the reporting date (current) and more license to carry on finance business under the than twelve months after the reporting date (non- finance business act no.42 of 2011 The Company’s current) is presented in note 38 (Maturity analysis). registered office is No. 100/1, Sri Jayewardenepura Mawatha, Rajagiriya, Sri Lanka and the current Financial assets and financial liabilities are offset principal place of business is situated at No.481 and the net amount reported in the Statement T.B. Jaya Mawatha, Colombo 10. of Financial Position only when there is a legally enforceable right to off-set the recognized amounts The Company is registered with the Central Bank and there is an intention to settle on a net basis, of Sri Lanka as a Finance Company under the or to realize the assets and settle the liability provision of the Finance Business Act No. 42 of simultaneously. Income and expenses are not 2011. offset in the Statement of Profit or Loss unless required or permitted by an accounting standard or 1.2 Parent entity and Ultimate Parent Company an interpretation, and as specially disclosed in the accounting policies of the Company. The Company’s immediate parent entity is Commercial Leasing & Finance PLC and ultimate 2.3 Basis of Measurement parent entity is Lanka Orix Leasing Company PLC, which are incorporated in Sri Lanka. The Financial Statements of the Company have been prepared on the historical cost basis and 1.3 Principal Activities and Nature of Operations applied consistently with no adjustments being made for inflationary factors affecting the financial The principal activities of the Company comprised Statements, except for the following material items of leasing, hire purchase, secured loans, Micro in the Statement of Financial Position; finance, property mortgaged loans and mobilization of public deposits. The company has more focus • Non-derivative financial instruments classified on Micro finance business during the financial year as ‘Loans and receivables’ and ‘other financial under review. liabilities’ measured at amortised cost. There were no significant changes in the nature • Financial instruments at Fair Value through of principal activities of the Company during the Profit or Loss are measured at fair value. financial year under review. • Derivative financial instruments are measured at fair value. 1.4 Number of Employees The staff strength of the company as at 31st March • Available-for-sale financial assets are 2017 was 729 (31.03.2016 – 683). measured at fair value. • The liability for defined benefit obligations 2. Basis of Preparation are measured at present value, based on an 2.1 Statement of Compliance actuarial valuation as explained in note 27. The Financial Statements of the Company have been prepared in accordance with the Sri Lanka Land and buildings are measured at the revalued Accounting Standards (LKASs/SLFRSs) laid amounts. down by the Institute of Chartered Accountants of Sri Lanka (ICASL) and the requirements of the 2.4 Functional and presentation currency Companies Act No.7 of 2007. The functional currency is the currency of the primary economic environment in which the The presentation of these Financial Statements is entity operates. These Financial Statements are also in compliance with the requirements of the presented in Sri Lankan Rupees (LKR), which Finance Business Act no 42 of 2011 and the listing are the Company’s functional currency and the rules of the Colombo Stock Exchange.
50 BRAC Lanka Finance PLC Annual Report 2016/17
presentation currency. All financial information has 2.6 Comparative Information been rounded to the nearest Rupee unless stated The accounting policies have been consistently otherwise. applied by the Company and are consistent with those used in the previous period. Comparative 2.5 Use of Significant Judgments, Estimates and information has not been reclassified or restated. Assumptions The preparation of the financial statements 2.7 Materiality and Aggregation in conformity with SLFRSs/LKASs requires As per LKAS – 01 “Presentation of Financial management to make judgments, estimates Statements”, each material class of similar items is and assumptions that affect the application of presented separately in the Financial Statements. accounting policies and the reported amounts of Items of dissimilar nature or function are assets, liabilities, income and expenses. Actual presented separately unless they are immaterial. results may differ from these estimates. 2.8 Going Concern Estimates and underlying assumptions are The Board of Directors is satisfied that the based on historical experience and various other Company has adequate resources to continue factors that are believed to be reasonable under its operations in the foreseeable future and the circumstances, the results which form the management is not aware of any material basis of making the judgments about the carrying uncertainties that may cast significant doubt amount of assets and liabilities that are not readily upon the Company’s ability to continue as a going apparent from other sources. concern. Therefore, going-concern basis has been adopted in preparing these Financial Statements. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to 2.9 Directors’ Responsibility for the Financial accounting estimates are recognized in the period Statements in which the estimates are revised and in any future periods affected. The respective carrying The Board of Directors is responsible for the amounts of assets and liabilities are given in the preparation and fair presentation of these related Notes to the Financial Statements. Financial Statements in accordance with Sri Lanka Accounting Standards and as per the Information about critical judgments, estimates provisions of the Companies Act No. 07 of and assumptions in applying accounting policies 2007. This responsibility includes: designing, that have the most significant effect on the implementing and maintaining internal controls amounts recognized in the financial statements are relevant to the preparation and fair presentation of included in the following notes to these Financial Financial Statements that are free from material Statements; misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are Critical accounting estimate/ Disclosure reasonable in the circumstances. judgment reference Note These Financial Statements include the following components; Financial Instruments – fair 3.4.5 value • A Statement of Financial Position providing Useful lives of property, plant 3.9.1.7 the information on the financial position of the and equipment Company as at the year-end; Measurement of Deferred Tax 28 • A Statement of Profit or Loss providing the Liability information on the financial performance of the Employee Benefits 27 Company for the year under review; Allowance for impairment 15.2 , 16.2 & • A Statement of Other Comprehensive Income 17.2,17.3 providing the information of the other comprehensive income of the Company;
51 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
• A Statement of Changes in Equity depicting all The measurement basis will generally depend on changes in shareholders’ funds during the year whether there has been a significant increase in under review of the Company; credit risk since initial recognition. • A Statement of Cash Flows providing the A simplified approach is available for trade information to the users, on the ability of receivables, contract assets and lease receivables, the Company to generate cash and cash allowing or requiring the recognition of lifetime equivalents and the needs of entities to utilize expected credit losses at all times. Special rules those cash flows, and apply to assets that are credit impaired at initial • Notes to the Financial Statements comprising recognition. The new standard carries guidance on Accounting Policies and other explanatory new general hedge accounting requirements. information. SLFRS 9 introduces new presentation 2.10 Approval of Financial Statements by the Board of requirements and extensive new disclosure Directors requirements. Effective date of SLFRS 9 is for The Financial Statements of the Company period beginning on or after January 01, 2018. for the year ended 31 March 2017 (including comparatives) were approved and authorized for Possible Impact on Financial Statements issue by the Board of Directors on 31 May 2017. The company has completed the initial high level assessment of the potential impact on its Financial 2.11 New Accounting Standards Issued but Not Statements resulting from the application of SLFRS Effective at Reporting Date 9. Certain new accounting standards and amendments / improvements to existing standards As the next step the company will establish a have been published, that are not mandatory for 31 business model test and cash flow characteristics March 2017 reporting periods. None of those have test to identify the categories of financial assets. been early adopted by the Company. For the purpose of determining impairment the SLFRS 9 Financial Instruments company needs to build a model with appropriate methodologies and controls to ensure that proper Summary of the Requirements judgment is exercised to assess recoverability SLFRS 9, replaces the existing guidance in LKAS of loans and make robust estimates of expected 39 – Financial Instruments: Recognition and credit losses and point at which there is significant Measurement. SLFRS 9 contains three principal increase in credit risk. Judgment will need to classification categories for financial assets – i.e. be applied to ensure that the measurement of measured at amortised cost, fair value through expected credit losses reflects reasonable and other comprehensive income (FVTOCI) and fair supportable information. value through profit or loss (FVTPL). The existing LKAS 39 categories of Held-to-maturity, Loans and Given the nature of the company’s operations, this receivables and Available-for-sale are removed. standard is expected to have a pervasive impact on the company’s financial statements. In particular, SLFRS 9 replaces the ‘incurred loss’ model in calculation of impairment of financial instruments LKAS 39 with an ‘expected credit loss’ model. The on an expected credit loss model is expected new model applies to financial assets that are not to result in an increase in the overall level of measured at FVTPL. impairment allowances.
The model uses a dual measurement approach, SLFRS 15 Revenue from Contracts with Customers under which the loss allowance is measured as Summary of the Requirements either: SLFRS 15 establishes a comprehensive framework - 12 month expected credit loss; or for determining whether, how much and when revenue is recognised. It replaces existing revenue - Lifetime expected credit losses. recognition guidance, including LKAS 18 Revenue, LKAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes.
52 BRAC Lanka Finance PLC Annual Report 2016/17
SLFRS 15 is effective for annual reporting periods Non-monetary assets and liabilities denominated beginning on or after 1 January 2018, with early in foreign currencies that are measured at fair adoption permitted. value are retranslated to the functional currency at the exchange rate at the date that the fair value Possible Impact on Financial Statements was determined. Non-monetary items in a foreign The Company does not expect significant impact currency that are measured in terms of historical on its Financial Statements resulting from the cost are translated using the exchange rate at the application of SLFRS 15 date of the transaction.
SLFRS 16 – ‘Leases’ Foreign currency differences arising on retranslation are recognized in Statement of Profit Summary of the Requirements or Loss. SLFRS 16 eliminates the current dual accounting model for lessees which distinguishes between on- 3.3. Financial Assets and Financial Liabilities balance sheet finance leases and off-balance sheet 3.3.1. Non-derivative financial assets operating leases. Instead there will be a single on-balance sheet accounting model that is similar 3.3.1.1. Initial recognition of financial assets to current finance lease accounting. Date of recognition The Company initially recognizes loans and SLFRS 16 is effective for annual Reporting periods receivables and deposits with other financial beginning on or after January 01, 2019. institutions on the date that they are originated. All other financial assets are recognized initially on the Possible Impact on Financial Statements trade date at which the Company becomes a party The Company is assessing the potential impact to the contractual provisions of the instrument. on its Financial Statements resulting from the application of SLFRS 16. Initial measurement of financial assets The classification of financial instruments at 3. Significant Accounting Policies initial recognition depends on their purpose and The accounting policies set out below have been characteristics and the management’s intention applied consistently to all periods presented in in acquiring them. All financial instruments these Financial Statements unless otherwise are measured initially at their fair value plus indicated. transaction costs that are directly attributable to acquisition or issue of such financial instrument, 3.1 Reporting Date except in the case of financial assets at fair The Company financial year end is 31st March. value through profit or loss as per the Sri Lanka Accounting Standard – LKAS 39 on ‘Financial 3.2 Foreign Currency Instruments: Recognition and Measurement’. 3.2.1 Foreign Currency Transactions Transaction cost in relation to financial assets Transactions in foreign currencies are translated at fair value through profit or loss are dealt with to the respective functional currency (Sri Lankan through the statement of profit or loss. Rupees-LKR) at exchange rates at the dates of the transactions. ‘Day 1’ profit or loss on employee loans below market rates. Monetary assets and liabilities denominated in foreign currencies at the reporting date are When the transaction price differs from the retranslated to the functional currency at the fair value of other observable current market exchange rate at that date. The foreign currency transactions in the same instrument, or based gain or loss on monetary items are the difference on a valuation technique whose variables include between amortized cost in the functional currency only data from observable markets, the Company at the beginning of the year, adjusted for effective recognises the difference between the transaction interest and payments during the year, and the price and fair value (a ‘Day 1’ profit or loss) in amortized cost in foreign currency translated at the ‘Interest Income and Personnel Expenses’. exchange rate at the end of the year.
53 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
In cases where fair value is determined using data positive intention and ability to hold it to maturity. which is not observable, the difference between Held-to-maturity financial assets are recognized the transaction price and model value is only initially at fair value plus any directly attributable recognised in the profit or loss when the inputs transaction costs. Subsequent to initial recognition become observable, or when the instrument is held to-maturity financial assets are measured at derecognised. The ‘Day 1 loss’ arising in the case of amortized cost using the effective interest method, loans granted to employees at concessionary rates less any impairment losses. under uniformly applicable schemes is deferred and amortised using Effective Interest Rates (EIR) Amortized cost is calculated by taking into account over the remaining service period of the employees any discount or premium on acquisition and fees or tenure of the loan whichever is shorter. or costs that are an integral part of the effective interest rate (EIR). The EIR amortization is included 3.3.1.2. Classification of financial assets in interest income in the Statement of Profit or The Company classifies non-derivative financial Loss and Other Comprehensive Income. The assets into the following categories: losses arising from impairment are recognized as impairment cost in the Statement of Profit or Loss • financial assets at fair value through profit or and Other Comprehensive Income. The Company loss; has not classified any instrument as held to maturity. • held-to-maturity financial assets; • loans and receivables; and Loans and receivables Loans and receivables are financial assets with • available- for-sale financial assets. fixed or determinable payments that are not quoted 3.3.1.3. Subsequent measurement of financial assets in an active market. Such assets are recognized initially at fair value plus any directly attributable The subsequent measurement of financial assets transaction costs. Subsequent to initial recognition depends on their classification. loans and receivables are measured at amortized cost using the effective interest method, less any Financial assets at fair value through profit or loss impairment losses. A financial asset is classified as fair value through profit or loss if it is held for trading or is designated Loans and receivables comprise of cash and as such upon initial recognition. Financial assets cash equivalents, deposits with banks and other are designated at fair value through profit or loss financial institutions, investments in Standing if the Company manages such investments and Deposit Facilities (REPO’s), lease receivables, hire makes purchase and sale decisions based on purchase receivables, advances and other loans their fair value in accordance with the Company’s granted amount due from related parties and other investment strategy. Attributable transaction costs receivables. are recognized in statement of profit or loss as incurred. - Cash and cash equivalents Cash and cash equivalents comprise cash balances Financial assets at fair value through profit or loss and call deposits with maturities of three months are carried in the statement of financial position at or less from the acquisition date that are subject to fair value with changes in fair value recognized in an insignificant risk of changes in their fair value, the statement of profit or loss. and are used by the Company in the management of its short-term commitments. Financial assets at fair value through profit or loss comprises of quoted equity instruments and unit - Finance leases and hire purchase trusts unless otherwise have been classified as available-for-sale. When the Company is the lessor in a lease agreement that transfers substantially all of the Held-to-maturity financial assets risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified Financial assets with fixed or determinable as a finance lease and a receivable equal to the payments and fixed maturities are classified net investment in the lease is recognized. Amounts as held to maturity when the Company has the
54 BRAC Lanka Finance PLC Annual Report 2016/17
receivable under finance leases are included under The Company classifies non-derivative financial “Rentals receivable on leased assets”. Leasing liabilities into the other financial liabilities category. balances are stated in the statement of financial Such financial liabilities are recognized initially at position after deduction of initial rentals received, fair value less any directly attributable transaction unearned lease income and the provision for costs. Subsequent to initial recognition, these impairment losses. financial liabilities are measured at amortized cost using the effective interest method. Other financial - Advances and other loans to customers liabilities comprise of bank overdrafts, interest Advances and other loans to customers comprised bearing borrowings, customer deposits, trade of revolving loans and loans with fixed instalment. payables, accruals & other payables and amounts Loans to customers are reflected in the Statement due to related parties: of Financial Position at amounts disbursed less repayments and provision for impairment losses. - Bank overdrafts Bank overdrafts that are repayable on demand - Financial guarantees and form an integral part of the Company’s cash Financial guarantees are contracts that require management are included as a component of the Company to make specified payments to cash and cash equivalents for the purpose of the reimburse the holder for a loss it incurs because a statement of cash flows. specified debtor fails to make payment when due in accordance with the terms of a debt instrument. - Deposits and bank borrowings The Company in its normal course of the business classified as other financial liabilities carried at issues guarantees on behalf of the depositors, amortized cost Deposits and bank borrowings holding the deposit as collateral. are the Company’s sources of debt funding. The Company classifies capital instruments as financial Available-for-sale financial assets liabilities or equity instruments in accordance ‘Available-for-sale investments’ are non-derivative with the substance of the contractual terms of investments that are designated as available-for- the instruments. Subsequent to initial recognition sale or are not classified as another category of deposits and bank borrowings are measured at financial assets. Available-for-sale investments their amortized cost using the effective interest comprise equity securities and debt securities. method. Unquoted equity securities whose fair value cannot be measured reliably are carried at cost. All other 3.3.3. Reclassification of financial assets and liabilities available-for-sale investments are measured at fair The Company reclassifies non-derivative financial value after initial recognition. assets out of the ‘held-for-trading’ category and into the ‘available-for-sale’, ‘loans and receivables’, Interest income is recognised in profit or loss using or ‘held-to-maturity’ categories as permitted the effective interest method. Dividend income is by the Sri Lanka Accounting Standard – LKAS recognised in profit or loss when the Company 39 on ‘Financial Instruments: Recognition and becomes entitled to the dividend. Impairment Measurement’. Further, in certain circumstances, losses are recognised in profit or loss. the Company is permitted to reclassify financial instruments out of the ‘available-for-sale’ category Other fair value changes, other than impairment and into the ‘loans and receivables’ category. losses, are recognised in OCI and presented in the AFS reserve within equity. When the investment Reclassifications are recorded at fair value at the is sold, the gain or loss accumulated in equity is date of reclassification, which becomes the new reclassified to profit or loss. amortised cost. Reclassification is at the election of the Management and is determined on an 3.3.2 Non-derivative financial liabilities instrument-by-instrument basis. The Company Classification and subsequent measurement of does not reclassify any financial instrument into financial liabilities the fair value through profit or loss category after initial recognition. Further, the Company does The Company initially recognizes non-derivative not reclassify any financial instrument out of the financial liabilities on the date that they are fair value through profit or loss category if upon originated. initial recognition it was designated as at fair value through profit or loss.
55 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
No reclassifications of financial instruments were 3.4.4. Amortized cost measurement done during the year. The amortized cost of a financial asset or liability is the amount at which the financial asset or 3.4. De-recognition of financial assets and financial liability is measured at initial recognition, minus liabilities repayments, plus or minus the cumulative 3.4.1. Financial assets amortization using the effective interest method The Company derecognises a financial asset when of any difference between the initial amount the rights to receive cash flows from the asset recognized and the maturity amount, minus any have expired or the Company has transferred its reduction for impairment. rights to receive cash flows from the asset or has assumed an obligation to pay the received cash 3.4.5. Fair value measurement flows in full without material delay to a third party Fair value is the amount for which an asset could under a ‘pass-through’ arrangement; and either. be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length (a) The Company has transferred substantially all transaction on the measurement date. the risks and rewards of the asset, or When available, the Company measures the fair (b) The Company has neither transferred nor value of an instrument using quoted prices in retained substantially all the risks and rewards an active market for that instrument. A market of the asset, but has transferred control of the is regarded as active if quoted prices are readily asset. On de-recognition of a financial asset, the and regularly available and represent actual and difference between the carrying amount of the regularly occurring market transactions on an asset (or the carrying amount allocated to the arm’s length basis. portion of the asset transferred), and the sum of; If a market for a financial instrument is not (i) The consideration received (including any new active, the Company establishes fair value using asset obtained less any new liability assumed) valuation techniques. Valuation techniques include and using recent arm’s length transactions between knowledgeable, willing parties (if available), (ii) Any cumulative gain or loss that had been reference to the current fair value of other recognized in other comprehensive income is instruments that are substantially the same, recognized in profit or loss. discounted cash flow analysis and other equity pricing models. 3.4.2. Financial liabilities
The Company derecognises a financial liability The chosen valuation technique makes maximum when its contractual obligations are discharged or use of market inputs, relies as little as possible on cancelled or expired. estimates specific to the Company, incorporates all factors that market participants would consider 3.4.3. Offsetting of financial instruments in setting a price, and is consistent with accepted Financial assets and financial liabilities are offset economic methodologies for pricing financial and the net amount reported in the statement of instruments. financial position if, and only if, there is a currently enforceable legal right to offset the recognized The best evidence of the fair value of a financial amounts and there is an intention to settle on a instrument at initial recognition is the transaction net basis, or to realize the assets and settle the price, i.e. the fair value of the consideration liabilities simultaneously. given or received, unless the fair value of that instrument is evidenced by comparison with other Income and expenses are presented on a net observable current market transactions in the basis only when permitted under SLFRSs, or for same instrument or based on a valuation technique gains and losses arising from a group of similar whose variables include only data from observable transactions such as in the company’s trading markets. When transaction price provides the activity. best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between
56 BRAC Lanka Finance PLC Annual Report 2016/17
this price and the value initially obtained from a The Company widely recognized valuation models valuation model is subsequently recognized in for determining the fair value of common and Statement of Financial position. more simple financial instruments. Observable prices and model inputs are usually available in 3.4.6 Valuation of Financial Instruments the market for listed debt and equity securities. The Company measures the fair values using Availability of observable market inputs reduces the following fair value hierarchy that reflects the need of management judgment and estimation the significance of the inputs used in making the and also reduces the uncertainty associated measurements. with determination of fair values. Availability of observable market prices and inputs varies Level 1 – Quoted market price (unadjusted) in an depending on the products and markets are is active market of an identical instrument. prone to changes based on specific events and general conditions in the financial markets. Level 2 – Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly 3.5. Impairment of Financial Instruments (i.e., derived from prices), this category included At each reporting date the Company assesses instruments valued using: quoted market prices in whether there is objective evidence that financial active markets similar instruments; quoted prices assets not carried at fair value through Profit or for identical or similar instruments in markets Loss are impaired. A financial asset or a Group of are considered less than active: or other valuation financial assets is (are) impaired when objective techniques where all significant inputs are directly evidence demonstrates that a loss event has observable from market data. occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future Level 3 – Valuation techniques use significant cash flows of the asset(s) that can be estimated unobservable inputs. This category includes reliably. all instruments where the valuation technique includes inputs not based on observable data and Objective evidence that financial assets (including the unobservable inputs have a significant effect on equity securities) are impaired can include: the instrument’s valuation. • significant financial difficulty of the borrower or This category includes instruments that are valued issuer, based on quoted prices for similar instruments • default or delinquency by a borrower where significant unobservable adjustments or assumptions are required to reflect differences • restructuring of a loan or advance by the between the instruments. Company on terms that the Company would not otherwise consider Fair values of financial assets and financial • indications that a borrower or issuer will enter liabilities that are traded in active markets are bankruptcy, based on quoted market prices or dealer price quotations. For all other financial instruments the • the disappearance of an active market for a Company determines fair values using valuation security techniques. • other observable data relating to a Group of assets such as adverse changes in the payment Valuation techniques include comparison to status of borrowers or issuers in the Company similar instruments for which market observable of economic conditions that correlate with prices exist, other equity pricing models and other defaults in the Company. valuation models.
In addition, for an investment in an equity security, The objective of valuation techniques is to arrive a significant or prolonged decline in its fair value at a fair value determination that reflects the below its cost is objective evidence of impairment. price of the financial instruments at the reporting date that would have been determined by market participants acting at arm’s length.
57 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.5.1 Impairment of Financial Assets carried at recognised previously in profit or loss. Changes Amortized Cost in cumulative impairment losses attributable to The Company considers evidence of impairment application of the effective interest method are for loans and advances at both a specific and reflected as a component of interest income. If, in collective basis. All individually significant loans a subsequent period, the fair value of an impaired and advances and held-to-maturity investment available-for-sale debt security increases and securities are assessed for specific impairment. the increase can be related objectively to an All individually significant loans and advances and event occurring after the impairment loss was held-to-maturity investment securities found not recognised, then the impairment loss is reversed, to be specifically impaired are then collectively with the amount of the reversal recognised in profit assessed for any impairment that has been or loss. However, any subsequent recovery in the incurred but not yet identified. fair value of an impaired available-for-sale equity security is recognised in other comprehensive Loans and advances that are not individually income. significant are collectively assessed for impairment by grouping them together with similar risk In the case of equity investments classified as characteristics based on product types. available for sale, objective evidence would also include a ‘significant’ or ‘prolonged’ decline in the In assessing collective impairment the Company fair value of the investment below its cost. Where uses statistical modelling of historical trends of there is evidence of impairment, the cumulative the probability of default, timing of recoveries loss measured as the difference between the and the amount of loss incurred, adjusted for acquisition cost and the current fair value, management’s judgment as to whether current less any impairment loss on that investment economic and credit conditions are such that previously recognized in the Statement of profit the actual losses are likely to be greater or less or loss is removed from equity and recognized than suggested by historical modelling. Default in the Statement of Profit or Loss. However, rates, loss rates and the expected timing of future any subsequent recovery in the fair value of an recoveries are regularly taken into account to impaired available-for-sale equity security is ensure that they remain appropriate. recognized in Other Comprehensive Income as reversal of impairment loss. Impairment losses on assets carried at amortized cost are measured as the difference between If, in a subsequent period, the fair value of an the carrying amount of the financial asset and impaired available-for-sale debt security increases the present value of estimated future cash flows and the increase can be objectively related to an discounted at the asset’s original effective interest event occurring after the impairment loss was rate. Impairment losses are recognized in Profit or recognized in Profit or Loss, the impairment Loss and reflected in an allowance account against loss is reversed, with the amount of the reversal loans and advances. Interest on impaired assets recognized in Profit or Loss. However, any continues to be recognized through the unwinding subsequent recovery in the fair value of an of the discount. When a subsequent event causes impaired available-for-sale equity security is the amount of impairment loss to decrease, the recognized in Other Comprehensive Income. The decrease in impairment loss is reversed through Company writes off certain loans and advances and Profit or Loss. investment securities when they are determined to be uncollectible. 3.5.2. Impairment of Financial Investments - Available for Sale 3.6 Accounting for Derivative Financial Instruments Impairment losses on available-for-sale financial Derivatives are initially recognized at fair value on assets are recognised by reclassifying the losses the date on which a derivative contract is entered accumulated in the fair value reserve in equity into and are subsequently re-measured at their to profit or loss. The cumulative loss that is fair value. Fair values are obtained from quoted reclassified from equity to profit or loss is the market prices in active markets, or using valuation difference between the acquisition cost, net of techniques. All derivatives are carried as assets any principal repayment and amortisation, and when the fair value is positive and as liabilities the current fair value, less any impairment loss when the fair value is negative.
58 BRAC Lanka Finance PLC Annual Report 2016/17
3.7. Reclassification of Financial Instruments 3.8.1. Finance Leases The Company reclassifies non-derivative financial Finance leases – Company as a lessee assets out of the ‘held for trading’ category and Finance leases that transfer to the Company into the ‘available-for-sale’, ‘loans and receivables’ substantially all of the risks and benefits incidental or ‘held to maturity’ categories as permitted to ownership of the leased item, are capitalized at by LKAS 39. Further, in certain circumstances, the commencement of the lease at the fair value of the Company is permitted to reclassify financial the leased property or, if lower, at the present value instruments out of the ‘available-for-sale’ category of the minimum lease payments. Lease payments and into the ‘loans and receivables’ category. are apportioned between finance charges and Reclassifications are recorded at fair value at the reduction of the lease liability so as to achieve a date of reclassification, which becomes the new constant rate of interest on the remaining balance amortised cost. of the liability. Finance charges are recognized in finance cost in the statement of profit or loss. For a financial asset with a fixed maturity reclassified out of the ‘available-for-sale’ category, Leased assets are depreciated over the useful life any previous gain or loss on that asset that has of the asset. However, if there is no reasonable been recognized in equity is amortised to Profit certainty that the Company will obtain ownership or Loss over the remaining life of the investment by the end of the lease term, the asset is using the EIR. Any difference between the new depreciated over the shorter of the estimated amortised cost and the expected cash flows is useful life of the asset and the lease term. also amortised over the remaining life of the asset using EIR. In the case of a financial asset does not Finance leases – Company as a lessor have a fixed maturity, the gain or loss is recognized When the Company is the lessor under finance in the Profit or Loss when such a financial asset leases the amounts due under the leases, after is sold or disposed of. If the financial asset is deduction of unearned charges, are included in subsequently determined to be impaired, then “Rentals receivable on leased assets”. The finance the amount recorded in equity is recycled to the income receivable is recognised in ‘interest income’ Statement of Comprehensive Income. over the periods of the leases so as to give a constant rate of return on the net investment in the The Company may reclassify a non-derivative leases. trading asset out of the ‘held for trading’ category and into the ‘loans and receivables’ category if it 3.8.2. Operating Leases meets the definition of loans and receivables and the Company has the intention and ability to hold Leases that do not transfer substantially all the the financial asset for the foreseeable future or risks and benefits incidental to ownership of the until maturity. If a financial asset is reclassified, leased items to the lessee are operating leases. and if the Company subsequently increases its Operating leases – Company as a lessee estimates of future cash receipts as a result of increased recoverability of those cash receipts, Operating lease payments are recognized as an the effect of that increase is recognized as an expense in the statement of profit or loss on a adjustment to the EIR from the date of the change straight line basis over the lease term. Contingent in estimate. Reclassification is at the election of rent payable is recognized as an expense in the management, and is determined on an instrument- period in which they are incurred. by-instrument basis. Operating leases – Company as a lessor 3.8 Leases Initial direct costs incurred in negotiating operating The determination of whether an arrangement leases are added to the carrying amount of the is a lease, or contains a lease, is based on the leased asset and recognised over the lease term on substance of the arrangement at the inception and the same basis as rental income. Contingent rents requires an assessment of whether the fulfilment are recognised as revenue in the period in which of the arrangement is dependent on the use of they are earned. a specific asset or assets and the arrangement conveys a right to use the asset.
59 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.9 Property, Plant and Equipment retained earnings and is not taken into account in 3.9.1 Freehold Property, Plant & Equipment arriving at the gain or loss on disposal 3.9.1.1 Basis of Recognition 3.9.1.5 Subsequent Costs Property, plant and equipment are recognized Subsequent expenditure is capitalised only when if it is probable that future economic benefits it is probable that the future economic benefits associated with the asset will flow to the Company associated with the expenditure will flow to the and cost of the asset can be reliably measured. Company. Ongoing repairs and maintenance are expensed as incurred. 3.9.1.2 Basis of Measurement Items of property, plant and equipment are 3.9.1.6 Reclassification to investment property measured at cost/revaluation less accumulated When the use of a property changes from owner- depreciation and accumulated impairment losses. occupied to investment property, the property is re-measured to fair value and reclassified as Cost includes expenditure that is directly investment property. Any gain arising on re- attributable to the acquisition of the asset. measurement is recognized in profit or loss to the extent that it reverses a previous impairment Purchased software that is integral to the loss on the specific property, with any remaining functionality of the related equipment is capitalized gain recognized and presented in the revaluation as part of that equipment. reserve in equity. Any loss is recognized When parts of an item of property, plant and immediately in profit or loss. equipment have different useful lives, they are 3.9.1.7 Depreciation accounted for as separate items of property, plant Depreciation is based on the cost of an asset and equipment. less its residual value. Significant components 3.9.1.3 Cost Model of individual assets are assessed and if a component has a useful life that is different from The Company applies the cost model to all the remainder of that asset, that component is property, plant and equipment except freehold land depreciated separately. and buildings; which records at cost of purchase together with any incidental expenses thereon less Depreciation is recognized in profit or loss on a any accumulated depreciation and accumulated straight-line basis over the estimated useful life of impairment losses if any. each component of an item of property, plant and equipment. Leased assets are depreciated over 3.9.1.4 Revaluation Model the shorter of the lease term and their useful lives unless it is reasonably certain that the Company The Company revalues its land and buildings will obtain ownership by the end of the lease term. which are measured at its fair value at the date Lands are not depreciated. of revaluation less any subsequent accumulated depreciation and accumulated impairment losses. Depreciation of an asset begins when it is available Revaluations are made with sufficient regularity for use and ceases at the earlier of the date that to ensure that the carrying amount does not differ the asset is classified as held for sale and the materially from that which would be determined date that the asset is de-recognized. Depreciation using fair value at the reporting date. methods, useful life values are assessed at the reporting date. The estimated useful lives for the On revaluation of lands and buildings, any increase current year are as follows: in the revaluation amount is credited to the revaluation reserve through other comprehensive Free hold building 10 years income in shareholder’s equity unless it off sets a previous decrease in value of the same asset that Furniture and Fittings 10 years was recognized in the Statement of Profit or Loss. Office Equipment 10 years A decrease in value is recognized in the Statement Free-hold motor Vehicles 04 years of Profit or Loss where it exceeds the increase Plant and Machinery 03 years previously recognized in the revaluation reserve. Upon disposal, any related revaluation reserve is transferred from the revaluation reserve to
60 BRAC Lanka Finance PLC Annual Report 2016/17
3.9.1.8 De-recognition 3.11 Tax expense An item of property, plant and equipment is Tax expense comprises current, deferred tax and de-recognized upon disposal or when no future other statutory taxes. Income tax and deferred economic are expected from its use or disposal. tax expense is recognized in Statement of Profit or Loss except to the extent that it relates to The gain or loss on disposal of an item of property, items recognized in the Statement of Other plant and equipment is determined by comparing Comprehensive Income or Statement of Changes in the proceeds from disposal with the carrying Equity. amount of the property, plant and equipment, and is recognized net within other income/other 3.11.1 Current tax expense expenses in the Statement of Profit & Loss. When Current tax is the expected tax payable or revalued assets are sold, the amounts included in recoverable on the taxable income or loss for the revaluation surplus reserve are transferred to the year, using tax rates enacted or substantively retained earnings. enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current 3.10 Impairment of Non-financial Assets tax payable also includes any tax liability arising The carrying amounts of the Company’s non- from the tax on dividend income. financial assets are reviewed at each reporting date to determine whether there is any indication The provision for income tax is based on the of impairment. If any such indication exists, then elements of income and expenditure as reported the asset’s recoverable amount is estimated. in the Financial Statements and computed in An impairment loss is recognized if the carrying accordance with the provisions of the Inland amount of an asset or its related cash-generating Revenue Act. No 10 of 2006 and subsequent unit (CGU) exceeds its estimated recoverable amendments thereto. amount. Current tax assets and liabilities for the current and The Company’s corporate assets do not generate prior periods are measured at the amount expected separate cash inflows and are utilized by more to be recovered from or paid to the Commissioner than one CGU. Corporate assets are allocated to General of Inland Revenue. CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the 3.11.2 Deferred tax CGUs to which the corporate asset is allocated. Deferred tax is recognized in respect of temporary differences between the carrying amounts of Impairment losses are recognized in profit or loss. assets and liabilities for financial reporting Impairment losses recognized in respect of CGUs purposes and the amounts used for taxation are allocated first to reduce the carrying amount of purposes. Deferred tax is not recognized for: any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the • temporary differences on the initial recognition other assets in the CGU (group of CGUs) on a pro of assets or liabilities in a transaction that is rata basis. not a business combination and that affects neither accounting nor taxable profit or loss; An impairment loss recognized in prior periods are assessed at each reporting date for any indications • temporary differences related to investments in that the loss has decreased or no longer exists. subsidiaries, associates and jointly controlled An impairment loss is reversed if there has been entities to the extent that the company is able a change in the estimates used to determine to control the timing of the reversal of the the recoverable amount. An impairment loss is temporary difference, it is probable that they reversed only to the extent that the asset’s carrying will not reverse in the foreseeable future; and amount does not exceed the carrying amount that • taxable temporary differences arising on the would have been determined, net of depreciation initial recognition of goodwill. or amortization, if no impairment loss had been recognized. • taxable temporary differences arising on subsidiaries, associates or joint ventures who have not distributed their entire profits to the parent or investor.
61 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
Deferred tax is measured at the tax rates that are thereto, Nation Building Tax should be payable at expected to be applied to temporary differences the rate of 2% with effect from 1 January 2011 on when they reverse, based on the laws that have the liable turnover as per the relevant provisions of been enacted or substantively enacted by the the Act. reporting date. 3.11.6 Value Added Tax on Financial Services (VAT on FS) Deferred tax assets and liabilities are offset if there VAT on Financial Services is calculated in is a legally enforceable right to offset current tax accordance with the amended VAT Act No. 7 of liabilities and assets, and they relate to income 2003 and subsequent amendments thereto. The taxes levied by the same tax authority on the same base for the computation of VAT on Financial taxable entity, or on different tax entities, but they Services is the accounting profit before income intend to settle current tax liabilities and assets on tax adjusted for the economic depreciation and a net basis or their tax assets and liabilities will be emoluments of employees. VAT on financial realized simultaneously. services is computed on the prescribed rate of 15%. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary The VAT on Financial service is recognized as differences, to the extent that it is probable that expense in the period it becomes due. future taxable profits will be available against which they can be utilized. Deferred tax assets are 3.11.7 Crop Insurance Levy (CIL) reviewed at each reporting date and are reduced As per the provisions of the Section 14 of the to the extent that it is no longer probable that the Finance Act No. 12 of 2013, the CIL was introduced related tax benefit will be realized. with effect from April 01, 2013 and is payable to the National Insurance Trust Fund. Currently, the Deferred tax assets and liabilities are not CIL is payable at 1% of the profit after tax. discounted. The net increase in the carrying amount of deferred 3.12. Borrowing Costs tax liability net of deferred tax asset is recognized Borrowing costs that are directly attributable to the as deferred tax expense and conversely any net acquisition, construction or production of qualifying decrease is recognized as reversal to deferred tax assets that take a substantial period of time to get expense, in the Statement of Profit or Loss. ready for its intended use or sale, are capitalized as part of the assets. 3.11.3 Withholding Tax on Dividends Dividend distributed out of taxable profit of the Borrowing costs that are not directly attributable local companies attracts a 10% deduction at source to the acquisition, construction or production of and is not available for set off against the tax a qualifying asset are recognized in profit or loss liability of the Company. Withholding tax that arises using the effective interest method. from the distribution of dividends by the Company is recognized at the same time as the liability to 3.13 Other Non-Financial Liabilities and Provisions pay the related dividend is recognized. Liabilities are recognized in the Statement of Financial Position when there is a present 3.11.4 Economic Service Charge (ESC) obligation as a result of a past event, the As per the provisions of Economic Service Charge settlement of which is expected to result in an Act No. 13 of 2006 and subsequent amendments outflow of resources embodying economic benefits. thereto, ESC is payable on the liable turnover at Obligations payable at the demand of the creditor specified rates. ESC is deductible from the income within one year of the reporting date are treated as tax liability. Any unclaimed amount can be carried current liabilities. Liabilities payable after one year forward and set off against the income tax payable from the reporting date are treated as non-current in the five subsequent years as per the relevant liabilities. provision in the Act. 3.14 Deposits due to Customers 3.11.5 Nation Building Tax (NBT) Deposits include term deposits and saving As per the provisions of the Nation Building Tax Act, deposits. They are stated in the Statement of No. 9 of 2009 and the subsequent amendments Financial Position at amount payable. Interest paid
62 BRAC Lanka Finance PLC Annual Report 2016/17
/ payable on these deposits based on effective 3.18 Employee Benefits interest rate is charged to the Statement of Profit 3.18.1 Defined Contribution Plans or Loss. A Defined Contribution Plan is a post-employment benefit plan under which an entity pays fixed 3.15 Deposit Insurance Scheme contributions into a separate entity and will have In terms of the Finance Companies Direction no legal or constructive obligation to pay further No 2 of 2010 “Insurance of Deposit Liabilities” amounts. Obligations for contributions to defined issued on 27th September 2010, all Registered contribution plans are recognized as an employee Finance Companies are required to insure their benefit expense in the Statement of Comprehensive deposit liabilities in the Deposit Insurance Scheme Income in the periods during which services are operated by the Monetary Board in terms of Sri rendered by employees. Lanka Deposit Insurance Scheme Regulations No 1 of 2010 issued under Sections 32A to 32E of the 3.18.1.1 Employees’ Provident Fund (EPF) Monetary Law Act with effect from 1st October The Company and employees contribute 15% and 2010. 10% respectively on the salary of each employee to the above mentioned funds. Deposits to be insured include time and savings deposit liabilities and exclude the following. 3.18.1.2 Employees’ Trust Fund (ETF) The Company contributes 3% of the salary of each • Deposit liabilities to member institutions employee to the Employees’ Trust Fund. • Deposit liabilities to Government of Sri Lanka 3.18.2 Defined Benefits Plans • Deposit liabilities to shareholders, directors, key management personnel and other related A defined benefit plan is a post-employment parties as defined in Finance Companies benefit plan other than a defined contribution plan. Act Direction No 03 of 2008 on Corporate The Company’s net obligation in respect of defined Governance of Registered Finance Companies benefit pension plans is calculated by estimating the amount of future benefit that employees have • Deposit liabilities held as collateral against any earned in return for their service in the current accommodation granted and prior periods; that benefit is discounted to • Deposit liabilities falling within the meaning determine its present value. Any unrecognised past of dormant deposits in terms of the Finance service costs are deducted. Companies Act, funds of which have been transferred to Central Bank of Sri Lanka The calculation is performed every year by a qualified actuary using the projected unit credit Registered Finance Companies are required to pay method. For the purpose of determining the charge a premium of 0.15% on eligible deposit liabilities as for any period before the next regular actuarial at end of the month to be payable within a period of valuation falls due, an approximate estimate 15 days from the end of the respective month. provided by the qualified actuary is used.
3.16 Debt Securities Issued When the benefits of a plan are improved, the portion of the increased benefit related to past These represent the funds borrowed by the service by employees is recognized in profit or loss Company for long-term funding requirements. on a straight-line basis over the average period Subsequent to initial recognition debt securities until the benefits become vested. To the extent issued are measured at their amortised cost using that the benefits vest immediately, the expense is the effective interest method, except where the recognized immediately in profit or loss. Company designates debt securities issued at fair value through profit or loss. Interest paid/payable The Company recognizes all actuarial gains and is recognised in profit or loss. losses arising from the defined benefit plan in other comprehensive income (OCI) and all other 3.17 Other Liabilities expenses related to defined benefit plans are Other liabilities are recorded at amounts expected recognize as personnel expenses in Statement of to be payable at the Reporting date. Profit or Loss. This retirement benefit obligation is not externally funded.
63 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
However, according to the Payment of Gratuity Act asset or liability (or, where appropriate, a shorter No.12 of 1983, the liability for the gratuity payment period) to the carrying amount of the financial to an employee arises only on the completion of 5 asset or liability. When calculating the effective years of continued service with the Company. interest rate, the Company estimates future cash flows considering all contractual terms of the 3.18.2.1 Short-term Employee Benefits financial instrument, but not future credit losses. Short-term employee benefit obligations are measured on an undiscounted basis and are The calculation of the effective interest rate expensed as the related service is provided. A includes all transaction costs and fees paid or liability is recognized for the amount expected to be received that are an integral part of the effective paid under short-term cash bonus, if the company interest rate. Transaction costs include incremental has a present legal or constructive obligation costs that are directly attributable to the acquisition to pay this amount as a result of past service or issue of a financial asset or liability. provided by the employee, and the obligation can be estimated reliably. Interest income and expense presented in the Statement of Profit or Loss includes, 3.19 Provisions, Contingent Assets and Contingent Liabilities • interest on financial assets and financial liabilities measured at amortized cost Provisions are made for all obligations (legal or calculated on an effective interest basis constructive) existing as at the reporting date when it is probable that such an obligation will result in • interest on available for sale investment an outflow of resources and a reliable estimate can securities calculated on an effective interest be made of the quantum of the outflow. The amount basis recognized is the best estimate of the consideration required to settle the present obligation at the Interest income and expense on all trading assets reporting date, taking into account the risks and and liabilities are considered to be incidental to the uncertainties surrounding the obligation at that Company’s trading operations and are presented date. together with all other changes in the fair value of trading assets and liabilities in net trading income. All contingent liabilities are disclosed as a note to the Financial Statements unless the outflow Fair value changes on other derivatives held for of resources is remote. Contingent assets are risk management purposes, and other financial disclosed, where inflow of economic benefit is assets and liabilities carried at fair value through probable. profit or loss, are presented in net income from other financial instruments at fair value through Statement of Profit or Loss and Other profit or loss in the Statement of Profit or Loss. Comprehensive Income The excess of aggregated contract receivable 3.20 Revenue Recognition over the cost of the assets constitutes the total Revenue is recognized to the extent that it is unearned income at the commencement of a probable that the economic benefits will flow to contract. The unearned income is recognized as the Company, and the revenue and associated income over the term of the facility commencing costs incurred or to be incurred can be reliably with the month that the facility is executed in measured. Revenue is measured at the fair value of proportion to the declining receivable balance, so the consideration received or receivable, taking into as to produce a constant periodic rate of return on account contractually defined terms of payment. the net investment.
3.20.1 Interest Income on Leases, Hire Purchases, Loans 3.20.2 Service charge and facility fee from micro finance and Advances facilities Interest income and expense are recognized in Collection on service charge and facility fee from profit or loss using the effective interest method. micro finance facilities are accounted on cash The effective interest rate is the rate that exactly basis. discounts the estimated future cash payments and receipts through the expected life of the financial
64 BRAC Lanka Finance PLC Annual Report 2016/17
3.20.3 Fees and Other Income element of the Company’s performance, and hence Fees and commission income and expense that are such presentation method is adopted. integral to the effective interest rate on a financial asset or liability are included in the measurement 3.22 Earnings per Share of the effective interest rate. The Company presents basic earnings per share data for its ordinary shares. Basic earnings per Other fees and commission income, including share is calculated by dividing the profit or loss account servicing fees are recognized as the attributable to ordinary shareholders of the related services are performed. Company by the weighted average number of ordinary shares outstanding during the year. Profit or loss on contracts terminated, collections on contracts written off, interest on overdue 3.23 Statement of Cash Flow rentals, interest earned on property sale and buy The Statement of Cash Flows has been prepared back agreements are accounted for on cash basis. using the ‘Indirect Method’ of preparing Cash Flows in accordance with the Sri Lanka Accounting 3.20.4 Net income from other financial instruments at Standard 7 “Cash Flow Statements.” Cash and fair value through Profit or Loss cash equivalents comprise short term, highly liquid Net income from other financial instruments at investments that are readily convertible to known fair value through profit or loss relates to non- amounts of cash and are subject to an insignificant trading derivatives held for risk management risk of changes in value. purposes that do not form part of qualifying hedge relationships and financial assets and liabilities Cash and cash equivalents comprise of cash in designated at fair value through profit or loss, hand and cash at banks and other highly liquid and include all realized and unrealized fair value financial assets which are held for the purpose changes, interest, dividends and foreign exchange of meeting short-term cash commitments with differences. original maturities of less than three months which are subject to insignificant risk of changes in their 3.20.5 Other Income fair value. Rent income and non-operational interest income are accounted for on accrual basis. 3.24 Movement of Reserves Movement of Reserves is disclosed in the Dividend income is recognized when the right to Statement of Changes in Equity. receive payment is established. 3.25 Related Party Transactions Gain on disposal of property, plant and equipment Transactions with related parties are conducted on and other non-current assets, including normal business terms. The relevant disclosures investments held by the Company have been are given in Notes 37 to the Financial Statements. accounted for in the Statement of Profit or Loss, after deducting from the net sales proceeds on 3.26 Transactions with Related Parties disposal of the carrying amount of such assets. The Company carries out transactions in the ordinary course of its business with parties 3.21 Expenses Recognition who are defined as related parties in Sri Lanka Expenses are recognized in the Statement of Accounting Standard 24. Profit or Loss on the basis of a direct association between the cost incurred and the earning of 3.26.1 Transactions with Key Management Personnel specific items of income. All expenditure incurred According to Sri Lanka Accounting Standard 24 in the running of the business and in maintaining “Related Party Disclosures”, Key management the property, plant & equipment in a state of personnel, are those having authority and efficiency has been charged to income in arriving responsibility for planning, directing and controlling at the profit for the year. the activities of the entity. Accordingly, the company has pre-defined approved list of key management For the presentation of the Statement of Profit personnel. or Loss the Directors are of the opinion that the nature of the expenses method present fairly the
65 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.27 Operating Segments This note presents information about the An operating segment is a component of the Company’s exposure to each of the above risks, the Company that engages in business activities from which it may earn revenues and incur expenses, Company’s objectives, policies and processes for including revenues and expenses that relate to measuring and managing risk, and the Company’s transactions with any of the Company’s other management of capital. components. All operating segments operating results are reviewed regularly by Board of Further quantitative disclosures are included Directors of the Company to make decisions about throughout these Financial Statements. resources to be allocated to the segment and to 3.30.2. Risk management framework assess its performance, and for which discrete financial information is available. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s Accordingly, the segment comprises of financial risk management framework. The Board has services are described in Note 38. established the Integrated Risk Management Committee (IRMC), which is responsible for Segment results, assets and liabilities include developing and monitoring the Company’s risk items directly attributable to a segment as well management policies. The committee reports as those that can be allocated on a reasonable regularly to the Board of Directors on its activities. basis. Segment capital expenditure is the total cost incurred during the period to acquire segment The Company’s risk management policies are assets that are expected to be used for more than established to identify and analyses the risks faced one period. by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to Expenses that cannot be directly identified to a limits. All the Company level risks are escalated particular segment are allocated on bases decided to the parent company IRMC and the Board. Risk by the management and applied consistently management policies and systems are reviewed throughout the year. regularly to reflect changes in market conditions and the Company’s activities. 3.28 Subsequent Events All material subsequent events have been The Company Audit Committee oversees the considered and where appropriate adjustments reports submitted by the Enterprise Risk or disclosures have been made in the respective Management and monitors compliance with Notes to the Financial Statements. the Company’s risk management policies and procedures, and reviews the adequacy of the risk 3.29 Commitments and Contingencies management framework in relation to the risks faced. The Company Audit Committee is assisted All discernible risks are accounted for in in its oversight role by Internal Audit. Internal Audit determining the amount of all known liabilities. undertakes both regular and ad hoc reviews of risk Contingent Liabilities are possible obligations management controls and procedures, the results whose existence will be confirmed only by of which are reported to the Audit Committee. uncertain future events or present obligations where the transfer of economic benefit is 3.30.3. Credit Risk not probable or cannot be reliably measured. Contingent Liabilities are not recognized in the Credit risk is the risk of financial loss to the statement of financial position but are disclosed Company if a customer or counterparty to unless they are remote. financial instruments fails to meet its contractual obligations. Credit risk is mainly arising from 3.30. Financial risk management Company’s receivable from customers and investment in debt securities. 3.30.1. Overview The Company has exposure to the following risks a) Allowances for impairment from its use of financial instruments: Credit risk is managed by evaluating the credit - Credit risk worthiness and by periodical review on the credit - Liquidity risk granted. - Market risk 66 BRAC Lanka Finance PLC Annual Report 2016/17
The Company establishes an allowance for Fair value of collaterals 2017 2016 impairment that represents its estimate of at the time of incurred losses in respect of customer receivables. borrowings The Company policy on impairment consists of Rs. Mn Rs. Mn allowance for individual impairment that identified based on specific loss event and a collective Against collectively 211 434 impairment established for similar receivables in impaired term of their Credit risk on product basis where the loss event have incurred but not yet identified. The Value of the possession 8 4 collective impairment is determined based on the of collaterals historical data of payments statistics for similar Total 219 438 financial assets. c) Management of credit risk a) Write-off policy The Board of Directors has delegated responsibility The Company writes off a loan or an investment for the oversight of credit risk to its Company debt security balance, and any related allowances Credit Department. Credit department, reporting for impairment losses, when the Board of to the Company Credit Committee, is responsible Directors determines that the loan or security is for management of the Company’s credit risk, uncollectible. This determination is made after including: considering information such as occurrence of significant changes in the borrower’s/issuer’s 1. Formulating credit policies in consultation financial position such that the borrower/issuer with business units, covering collateral can no longer pay the obligation, or that proceeds requirements, credit assessment and reporting, from collateral will not be sufficient to pay back the documentary and legal procedures and entire exposure. For smaller balance standardized compliance with regulatory and statutory loans, write-off decisions generally are based on a requirements. product-specific past due status. 2. Establishing the authorization structure for the approval and renewal of credit facilities. The Company holds collateral against loans and Authorization limits are allocated to business advances to customers in the form of mortgage unit Credit Officers. Larger facilities require interests over property, other registered securities approval by Credit Committee and the board of over assets, and guarantees. Estimates of fair value directors as appropriate. are based on the value of collateral assessed at the time of borrowing, and generally are not updated 3. Reviewing and assessing credit risk. Company except when a loan is individually assessed as Credit assesses all credit exposures in excess impaired. Collateral usually is not held against of designated limits, prior to facilities being investment securities, and no such collateral was committed to customers by the business unit held as at 31 March 2017 (2016: no collateral held). concerned. Renewals and reviews of facilities are subject to the same review process. An estimate made at the time of borrowing / at the 4. Monitoring limiting concentrations of exposure time of impairment evaluation, of the fair value of to counterparties, geographies and industries collateral and other security enhancements held (for loans and advances). against loans and advances to customers is shown below; 5. Reviewing compliance of business units with agreed exposure limits, including those for selected industries, and product types. 6. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Company in the management of credit risk.
67 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.30.3.1. Credit quality by class of financial assets
As at 31 March 2017 Current Overdue Individually Total Gross carrying Net impaired amount (Net of exposure provision) Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Assets Cash and cash equivalents 88 - - 88 88 88 Investment securities 1,107 - - 1,107 1,107 1,107 Finance lease receivables and 120 16 - 137 109 5 hire purchases (Gross) Advances and other loans (Gross) 11,000 196 (80) 11,196 11,015 11,184 Trade and other current assets 77 - - 77 77 77 Total financial assets 12,392 212 (80) 12,605 12,396 12,461
Age analysis of facilities considered for collective impairment as at 31 March 2017
Overdue Description Less than 30 to 60 to More than Total 30 days 60 days 90 days 90 days Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Finance lease receivables and hire purchases 1 1 1 13 16 Advances and other loans 22 55 23 95 196 Total 23 57 24 108 212
3.30.3.2. Credit quality by class of financial assets
As at 31 March 2016 Current Overdue Individually Total Gross carrying Net impaired amount (Net of exposure provision) Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Assets Cash and cash equivalents 594 - - 594 594 594 Investment securities 853 - - 853 853 853 Finance lease receivables and 96 36 - 132 90 -90 hire purchases (Gross) Advances and other loans (Gross) 7,312 554 - 7,866 7,812 7,655 Trade and other current assets 70 - - 70 70 70 Total financial assets 8,925 590 - 9,515 9,419 9,082
68 BRAC Lanka Finance PLC Annual Report 2016/17
Age analysis of facilities considered for collective impairment as at 31 March 2016
Overdue Description Less than 30 to 60 to More than Total 30 days 60 days 90 days 90 days Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Finance lease receivables and hire purchases 2 3 2 30 36 Advances and other loans 453 40 11 49 554 Total 455 43 13 79 590
3.30.4. Liquidity Risk is maintained within the Company. The liquidity Liquidity risk is the risk that the Company will requirements of business units are discussed encounter difficulty in meeting the obligations at Company ALCO meetings (Asset Liability associated with its financial liabilities that are Committee) and are arranged by the Treasury. settled by delivering cash or another financial asset. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety The Company uses the maturity analysis all the of scenarios covering both normal and more financial instruments to manage the liquidity risk. severe market conditions. All liquidity policies and procedures are subject to review and approval by The Company’s approach to managing liquidity ALCO. Daily reports cover the liquidity position of is to ensure, as far as possible, that it will always the Company. A summary report, including any have sufficient liquidity to meet its liabilities exceptions and remedial action taken, is submitted when due without incurring unacceptable losses regularly to ALCO. or risking the financial position of the Company while maintaining regulatory requirements and The Company relies on issued debt securities such debt covenants agreed with the fund providers. as borrowing as its primary sources of funding. The treasury manages the liquidity position Company actively manages this risk through as per the treasury policies and procedures. maintaining competitive pricing and constant monitoring of market trends.
The treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, funding arrangements, to ensure that sufficient liquidity
69 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
The maturity analysis of financial liabilities based on undiscounted gross outflow is reflected below,
As at 31 March 2017 Carrying Gross nominal Up to 3 to More than amounts (outflows)/ 3 months 12 months 1 year inflows Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Cash and Cash Equivalents 88 88 88 - - Investment Securities 1,107 1,107 575 530 3 Finance Lease Receivables and Hire Purchases 109 137 69 13 54 Advances and Other Loans 11,015 11,196 4,284 5,297 1,615 Trade and Other Current Assets 88 - - 83 4 12,406 12,527 5,016 5,923 1,676 Bank overdraft 414 414 414 - - Deposit from customers 2,813 2,813 2,025 613 176 Interest bearing borrowings 2,050 2,050 1,706 345 - Trade and other payables 6,357 6,357 2,094 1,053 3,210 11,634 11,634 6,238 2,011 3,385 Liquidity gap 893 (1,222) 3,912 (1,709)
As at 31 March 2016 Carrying Gross nominal Up to 3 to More than amounts (outflows)/ 3 months 12 months 1 year inflows Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Cash and Cash Equivalents 594 594 594 - - Investment Securities 853 853 850 - 3 Finance Lease Receivables and Hire Purchases 90 132 34 28 70 Advances and Other Loans 7,812 7,866 2,667 4,884 316 Trade and Other Current Assets 80 80 - 80 - 9,429 9,525 4,121 4,992 388 Bank overdraft 424 424 424 - - Deposit from customers 417 417 95 202 120 Interest bearing borrowings 1,936 1,936 502 - 1,434 Trade and other payables 5,670 5,670 825 1,580 3,265 8,446 8,446 1,846 1,782 4,819 Liquidity gap 1,056 2,276 3,211 (4,430)
3.30.5. Market risk the banks. In this way the Company eliminates The Company is exposed to market risk due to substantial exposure on foreign currency risk. The changes foreign exchange rates and interest Company ensures the mix of variable and fixed rate rates. Company exposure to foreign currency is borrowings to manage the exposure due to interest mainly due to the loans and borrowings obtained rate movement in the market. These are monitored from foreign funding partners. The Company by the Group treasury division. manages its exposure to the foreign exchange rates by entering in to forward rate contracts with
70 BRAC Lanka Finance PLC Annual Report 2016/17
3.30.5.1. Sensitivity Analysis An analysis of the Company’s sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a constant financial position for 2017, is as follows.
Item Up to 4 to 1 to More than Total as at 3 months 12 months 5 years 5 years 31 March 2017
Interest earning assets Cash and cash equivalents 88 - - - 88 Investment in securities 575 530 3 - 1,107 Finance lease receivables and hire purchases (Gross) 69 13 54 - 137 Advances and other loans (Gross) 4,284 5,297 1,613 2 11,196 Total interest earning assets 5,016 5,839 1,670 2 12,528 Interest bearing liabilities Bank overdraft 414 - - - 414 Interest bearing borrowings 1,706 345 - - 2,050 Deposit from customers 2,025 613 175 0.2 2,813 Related party payable 2,066 1,000 3,210 - 6,275 Total interest bearing liabilities 6,211 1,957 3,385 0.2 11,552 Gap in interest earning assets and interest bearing liabilities - net assets / (liabilities) (1,194) 3,882 (1,714) 1.80 975 Effect on profitability by 1 percent increase in interest rates - increase / (decrease) in profits - annualized effect (11) 38 (17) 0.18 Effect on profitability by 1 percent decrease in interest rates - increase / (decrease) in profits - annualized effect 11 (38) 17 -0.18
71 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.30.5.2. Sensitivity Analysis An analysis of the Company’s sensitivity to an increase or decrease in market interest rates, assuming no asymmetrical movement in yield curves and a constant financial position for 2016, is as follows.
Item Up to 4 to 1 to More than Total as at 3 months 12 months 5 years 5 years 31 March 2016
Interest earning assets Cash and cash equivalents 594 - - - 594 Investment in Securities 850 - 3 - 853 Finance lease receivables and hire purchases (Gross) 34 28 70 0 132 Advances and other loans (Gross) 2,667 4,884 312 4 7,866 Total interest earning assets 4,145 4,912 384 4 9,446 Interest bearing liabilities Bank Overdraft 415 - - - 415 Interest Bearing Borrowings 502 - 1,434 - 1,936 Deposit from Customers 95 202 120 - 417 Related Party Payable 602 1,000 3,232 4,834 Total interest bearing liabilities 1,614 1,202 4,786 - 7,601 Gap in interest earning assets and interest bearing liabilities - net assets/ (liabilities) 2,531 3,711 (4,401) 4 Effect on profitability by 1 percent increase in interest rates - increase / (decrease) in profits - annualized effect 25 37 (44) 0.4 Effect on profitability by 1 percent decrease in interest rates - increase/ (decrease) in profits - annualized effect (25) (37) 44 (0.4)
3.31. Capital Management The Company’s regulatory capital consists of tier The Company’s capital management is performed 1 capital, which includes ordinary share capital, primarily considering regulatory capital. retained earnings and statutory reserves. Other negative reserves are included under prudence The Company’s lead regulator, the Central Bank basis. of Sri Lanka (CBSL) sets and monitors capital requirements for the Company. The Company’s policy is to maintain a strong capital base so as to ensure investor, creditor The Company is required to comply with the and market confidence and to sustain future provisions of the Finance Companies (Capital development of the business. The impact of the Funds) Direction No.01 of 2003, Finance Companies level of capital on shareholders’ return is also (Risk Weighted Capital Adequacy Ratio) Direction recognized and the Company recognizes the need No.02 of 2006 and Finance Companies (Minimum to maintain a balance between the higher returns Core Capital) Direction No.01 of 2011 in respect of that might be possible with greater gearing and regulatory capital. the advantages and security afforded by a sound capital position.
72 BRAC Lanka Finance PLC Annual Report 2016/17
The Company’s regulatory capital under the CBSL guidelines is as follows;
Capital element As at As at 31-03-2017 31-03-2016 Rs. Mn Rs. Mn
Ordinary share capital 171 171 Statutory reserve 86 75 Retained earnings 869 658 Other negative reserve (AFS) (2.4) (0.4) Tier I capital 1,124 904 Approved Subordinated Term Debt 88 33 Tier II capital 1,212 937 Total capital 1,212 937
3.32. Financial assets and liabilities 3.32.1. Accounting classifications and carrying value
As at 31 March 2017 Fair value – Fair value Amortized cost Total carrying Fair value Fair value derivatives through other - Loans and amount hierarchy comprehensive receivable income – available for sale Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Cash and cash equivalents - - 88 88 88 - Investment securities -Measured at fair value - 532 - 532 532 Level II ( Level II) -Measured at fair value (Level III) - 0.011 - 0.011 0.011 Level III -Measured at amortized cost - - 575 575 575 - Finance lease receivables and hire purchases - - 109 109 149 - Advances and other loans - - 11,015 11,015 11,286 Level -III Trade and other current - - 83 83 83 - assets Total financial assets - 532.011 11,870 12,402.011 12,713.011 Bank overdrafts - - 414 414 414 - Deposit from customers - - 2813 2,813 2,813 - Interest bearing borrowings - - 2,050 2,050 2,050 - Trade and other payables - - 6,357 6,357 6,357 - Total Financial liabilities - - 11,634 11,634 11,634
73 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
3.32. Financial assets and liabilities (Contd.) 3.32.1. Accounting classifications and carrying value (Contd.)
As at 31 March 2016 Fair value – Fair value Amortized cost Total carrying Fair value Fair value derivatives through other - Loans and amount hierarchy comprehensive receivable income – available for sale Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn Rs. Mn
Cash and cash equivalents - - 594 594 594 - Investment securities -Measured at fair value ( Level II) - 3 - 3 3 Level - II -Measured at fair value (Level III) - - - - 9 - -Measured at amortized cost - - 850 850 850 - Finance lease receivables and hire purchases - - 90 90 99 Level - III Advances and other loans - - 7,812 7,812 7,655 - Trade and other current 80 80 80 assets - - Total financial assets - 3 9,426 9,429 9,281 - Bank overdrafts - - 424 424 424 - Deposit from customers - - 417 417 421 - Interest bearing borrowings - - 1,936 1,936 1,936 - Trade and other payables - - 5,670 5,670 5,670 Total Financial liabilities - - 8,447 8,447 8,451
3.32.2. Valuation Technique Level 2 fair value – market comparison technique - Government securities - fair value is based on bid prices of government securities at the year-end published by the Central Bank of Sri Lanka. - Derivative assets and liabilities / Forward exchange contracts – fair value is based on broker quotes of similar contracts and the quotes reflect the actual transaction in similar instrument
74 BRAC Lanka Finance PLC Annual Report 2016/17
4. Interest income For the year ended 31 March 2017 2016 Rs. Rs.
Interest on loans & advances 3,224,739,047 1,812,522,414 Interest on hire purchases 962,086 9,471,391 Interest on leases 23,961,692 13,788,958 Interest on overdue rentals and others 18,855,899 2,888,361 Interest income on government securities and deposits with banks (Note 4.1) 117,411,272 24,507,857 3,385,929,995 1,863,178,981
4.1 Notional credit for withholding tax on government securities on secondary market transactions Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a company which derives interest income from the secondary market transactions in government securities be entitled to a notional tax credit (being one ninth of the net interest income), provided such interest income forms part of the statutory income of the company for that year of assessment.
For the year ended 31 March 2017 2016 Rs. Rs.
5. Interest expense Interest on customer deposits 81,425,227 39,922,791 Interest on borrowings 287,874,210 102,907,199 Interest on related party loans 914,279,026 438,331,472 1,283,578,463 581,161,462
6. Other operating income Profit on sale of property plant and equipment / investment property - 1,470,000 Documentation and arrangement fees 3,255,687 8,437,771 Other income from micro finance 4,799,034 - Rent income - 148,104 Commissions received on insurance 8,343 121,213 Loss on sale of re-processed assets - (1,318,994) Exchange gain 419,672 1,014,476 Dividend received 64,350 59,400 Sundry income 536,385 3,123,109 9,083,471 13,055,079
7. Allowance for impairment & write offs Impairment (reversal)/provision for lease rental receivable (note 16.2) (2,846,422) 11,774,322 Impairment (reversal)/provision for hire purchase rental receivable (note (11,520,429) 49,861 15.2) Impairment provision for loan rental receivable (note 17.1 ) 126,074,944 40,189,488 Impairment provision for terminated contracts - 12,744,155 Impairment reversal for re-possessed assets (2,652,063) - Loans and advances write offs 229,838,264 - 338,894,294 64,757,825
75 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
8 Value Added Tax and NBT For the year ended 31 March 2017 2016 Rs. Rs.
Value added tax on financial services 103,112,718 70,008,865 Nation Building tax on financial services 20,759,684 19,421,919 123,872,402 89,430,784
The value base for Value Added Tax for the Company is the adjusted accounting profit before tax and emoluments paid to employees. The adjustment to the accounting profit before tax is for economic depreciation computed on prescribed rates, instead of the rates adopted in the financial statements. The tax rate of 11% commencing from 25th October 2014 was increased to 15%.
For the year ended 31 March 2017 2016 Rs. Rs.
9 Profit before income tax Profit Before Tax is stated after charging all the expenses including the fol- lowing, Directors' Emoluments 1,792,522 10,405,501 Auditors' Remuneration - Statutory Audit 660,000 600,000 - Audit related services 550,000 561,500 Donations 127,870 56,795 Depreciation & Amortization 14,975,538 10,365,728 Inventory provision (2,652,063) 3,570,578
Staff related cost; Salaries, Wages and Bonus 441,800,395 302,523,786 Defined Contribution Plan Cost -EPF/ETF 28,481,047 23,263,524 Defined Benefit Plan Cost - Employee Benefits 3,089,818 4,311,599 Staff Welfare 29,372,086 17,054,884
10 Income Tax Expense The major components of income tax expense for the year ended 31 March are as follows: Current tax 120,825,721 109,933,296 Current tax (Note 10.1) 120,825,721 109,933,296
Deferred tax Deferred tax reversal (Note 28.1) 12,039,664 (1,069,082) Income tax expense reported in statement of profit or loss 132,865,385 108,864,214
76 BRAC Lanka Finance PLC Annual Report 2016/17
10.1 Numerical reconciliation of accounting profits to income tax expense, For the year ended 31 March 2017 2016 Rs. Rs.
Accounting profit before income tax expense 352,792,395 260,384,975 (+)Disallowable expenses 220,540,472 205,115,324 (-)Allowable expenses (88,402,214) (55,687,277) (-) Tax exempt income (38,496,801) (21,641,900) (-)Tax losses utilized (6,264,905) - (+)Taxable profit/ (loss) of sale of free hold asset (311,882) 2,024,040 (-) Loss on termination/ expiries/ transfers of lease assets (8,336,636) 2,423,752 Taxable income 431,520,429 392,618,913
Income tax at 28 % 120,825,721 109,933,296 Current income tax expense 120,825,721 109,933,296
11 Basic and Diluted Earnings per Share The calculation of earnings per share is based on the profit attributable to ordinary shareholders for the year divided by the weighted average number of ordinary shares outstanding during the year and is calculated as follows;
For the year ended 31 March 2017 2016 Rs. Rs.
Net profit attributable to the ordinary shareholders for the year (Rs.) 219,927,010 151,520,761 Weighted average number of ordinary shares outstanding during the year 105,752,566 105,752,566 Earnings per share (Rs.) 2.08 1.43
12 Cash and Cash Equivalents As at 31 March 2017 2016 Rs. Rs.
Favourable balance Cash at bank 75,082,551 527,282,807 Cash in hand 12,488,226 66,955,233 87,570,777 594,238,040 Unfavourable balance Bank overdraft (414,237,336) (424,109,313) Cash and cash equivalents for the purpose of statement of cash flow (326,666,559) 170,128,728
13 Investment in government securities Financial instruments classified as loans and receivables (Note 13.1) 575,000,000 850,000,000 Financial instruments classified as available for sale - carried at fair value (Note 13.2) 532,390,343 2,809,992 1,107,390,343 852,809,992
77 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
13.1 Financial instruments classified as loans and receivables 2017 2016 As at 31 March Carrying value Fair value Carrying value Fair value Rs. Rs. Rs. Rs.
Investment in government standing Deposit 575,000,000 575,000,000 850,000,000 850,000,000 facilities (REPO’s) 575,000,000 575,000,000 850,000,000 850,000,000
13.2 Financial instruments classified as available for sale - carried at fair value Treasury bills 90,072,643 90,072,643 - - Treasury bond 442,317,700 442,317,700 2,809,992 2,809,992 532,390,343 532,390,343 2,809,992 2,809,992
13.3 Fair value adjustments recognized in other comprehensive income As at 31 March 2017 2016 Rs. Rs.
Treasury bills and treasury bonds (1,961,799) (242,523)
14 Investment securities - unquoted 110 shares of Rs.100/- each in credit investment bureau of Sri Lanka 11,000 11,000 20,000 shares of Rs.10/- each in finance houses consortium (Pvt) Ltd 200,000 200,000 211,000 211,000 Less :- impairment provision 20,000 shares of Rs.10/- each in finance houses consortium (Pvt) Ltd (200,000) (200,000) 11,000 11,000
15 Receivable on Hire - Purchase Rentals Receivable 20,034,158 40,445,663 Less : Un-earned Finance Income (1,645,602) (4,006,967) Net rentals receivable (Note 15.1) 18,388,556 36,438,696 Allowance for impairment (Note 15.2) (8,865,681) (20,386,110) Total Receivable 9,522,875 16,052,586
15.1 Net Rentals Receivable Receivable from one to five years 2,017,818 14,144,493 Rentals receivable (233,166) (3,619,719) Unearned income 1,784,652 10,524,774
Receivable within one year Rentals receivable 12,481,013 8,682,313 Unearned income (1,412,436) (387,248) 11,068,577 8,295,065 Overdue Rentals receivable 5,535,327 17,618,857 5,535,327 17,618,857 18,388,556 36,438,696
78 BRAC Lanka Finance PLC Annual Report 2016/17
15.2 Individually non significant impairment (Collective impairment) As at 31 March 2017 2016 Rs. Rs.
Balance as at 1st of April 20,386,110 20,336,249 Provision/ (reversal) for the year (11,520,429) 49,861 Balance as at 31st March 8,865,681 20,386,110
16 Receivable on Lease Rentals Receivable 184,099,087 140,202,859 Less : un-earned finance income (53,502,408) (41,831,813) Net rentals receivable (Note 16.1) 130,596,679 98,371,046 Deposits received from lessees (12,449,937) (2,427,128) Allowance for impairment (Note 16.2) (19,142,760) (21,989,182) Total receivable 99,003,982 73,954,736
16.1 Net rentals receivable Receivable from one to five years Rentals receivable 77,394,310 107,336,646 Unearned income (24,729,036) (41,321,032) 52,665,274 66,015,614 Receivable within one year Rentals receivable 95,936,699 14,080,999 Unearned income (28,773,372) (510,781) 67,163,327 13,570,218 Overdue Rentals receivable 10,768,078 18,785,214 10,768,078 18,785,214 130,596,679 98,371,046
16.2 Individually non significant impairment (Collective impairment) Balance as at 1st of April 21,989,182 10,214,860 Provision/ (reversal) for the year (2,846,422) 11,774,322 Balance as at 31st March 19,142,760 21,989,182
79 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
17 Loan and Advances Receivable on Advances & Loan As at 31 March 2017 2016 Rs. Rs.
Rentals Receivable 12,897,222,540 8,090,455,977 Less : Un-earned Finance Income (1,897,430,033) (778,588,573) Overdue Rent Receivable 196,005,638 554,472,483 Allowance for Non Significant Impairment (Note 17.2) (100,636,160) (54,498,916) Allowance for Significant Impairment (Note 17.3) (79,937,700) - Total Receivable 11,015,224,285 7,811,840,971
17.1 Impairment provision for the year Individually non significant impairment 46,137,244 40,189,488 Individually significant impairment 79,937,700 - 126,074,944 40,189,488
17.2 Individually non significant impairment (Collective impairment) Balance as at 1st of April 54,498,916 14,309,428 Provision for the year 46,137,244 40,189,488 Balance as at 31st March 100,636,160 54,498,916
17.3 Individually significant impairment (specific impairment) Balance as at 1st of April - - Provision for the year 79,937,700 - Balance as at 31st March 79,937,700 -
18 Amount due from related companies LOLC Motors Limited - 143,825 Browns & Company PLC 4,189,200 - 4,189,200 143,825
19 Other receivables Value Added Tax recoverable - 58,043,978 Notional tax receivable 7,925,008 - Shop rent receivable - 1,003,521 Interest receivable on treasury bond/treasury bills & repo 12,365,262 24,129 Interest receivable on fixed deposits 2,327,183 - Advances paid for fixed assets 20,326,410 1,719,254 Others 921,666 557,981 Rent paid in advance 33,515,506 13,952,987 Other prepayments 6,069,038 4,828,467 83,450,073 80,130,318
20 Inventory Re-possessed assets 5,737,993 7,461,436 Less: provision for decrease in value (5,737,993) (7,461,436) - -
80 BRAC Lanka Finance PLC Annual Report 2016/17
21 Property, Plant and Equipment 21.1 Cost For the year ended 31 March Balance as at Additions Disposals/ Balance as at 1-Apr- 2016 during the year transfer/ 31- Mar-2017 write off during the Year Rs. Rs. Rs. Rs.
Motor vehicles - freehold 8,824,973 - - 8,824,973 Furniture and fittings 28,379,758 3,858,167 (367,001) 31,870,924 Office equipments 61,662,916 72,071,009 (152,802) 133,581,123 Plant and machinery 2,186,033 9,721,752 - 11,907,785 Total Cost 101,053,680 85,650,928 (519,803) 186,184,805
21.2 Accumulated Depreciation For the year ended 31 March Balance as at Charge for the Disposals/ Balance as at 1-Apr-16 year transfer/ 31-Mar-17 write off during the year Rs. Rs. Rs. Rs.
Motor vehicles - freehold 5,098,237 1,422,375 - 6,520,612 Furniture and fittings 9,652,677 2,793,733 (73,400) 12,373,010 Office equipments 10,121,357 9,692,379 (30,560) 19,783,176 Plant and machinery 2,186,033 1,067,051 - 3,253,084 Total Accumulated Depreciation 27,058,305 14,975,538 (103,960) 41,929,882
Carrying Value 73,995,375 144,254,924
Property, plant and equipment pledged as security for liabilities There were no property, plant and equipment pledge as a security for liabilities of the Company as at 31st March 2017 and 31st March 2016.
Temporarily idle property, plant and equipment There were no property, plant and equipment idle as at 31st March 2017 and 31st March 2016.
Fully depreciated property, plant and equipment There were property, plant and equipment, cost of Rs. 8,564,831 fully depreciated as at 31st March 2017. (Rs. 43,566,861 in 2016)
Written off property, plant and equipment There were property,plant and equipment, net book value amounting to Rs.415,842 (cost-Rs.519,803,accumulated depreciation-Rs.103,961) written off as at 31st March 2017 and no written off as at 31st March 2016.
81 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
22 Deposits from Customers As at 31 March 2017 2016 Rs. Rs.
Fixed Deposits 1,742,930,222 392,190,753 Add: Interest accrued - Fixed Deposit 11,196,556 24,450,535 Savings - Loan Security Deposit 1,059,195,573 764,375,162 2,813,322,351 1,181,016,450
22.1 Deposits based on maturity Deposits maturing within one year 2,637,286,561 1,061,235,876 Deposits maturing after one year 176,035,790 119,780,574 2,813,322,351 1,181,016,450
23 Interest Bearing Loans and Borrowings 23.1 Long-term borrowings Balance at the beginning of the year 1,932,052,416 1,202,788,040 Add: Loans obtained during the year 200,000,000 2,234,118,997 Add: Loans interest payable 9,508,157 1,722,958 2,141,560,573 3,438,629,995 Less: Loans repaid during the year (90,108,666) (1,501,129,079) Less: Unamortised finance cost (1,312,734) (3,725,542) Balance at the end of the year 2,050,139,173 1,932,052,416
Long-term borrowings - current 2,050,139,173 501,722,958 Long-term borrowings - non-current (Note 23.2) - 1,430,329,458 2,050,139,173 1,932,052,416
23.2 Analysis of non-current portion of long-term borrowings Repayable within 1-3 years - 430,329,458 Repayable after 3 years - 1,000,000,000 - 1,430,329,458
24 Income Tax Payable Tax Payable as at 1st April 124,447,948 35,182,652 Current tax expense for the year (note 10) 120,825,721 109,933,296 Tax paid during the year (138,161,317) (20,668,000) Tax payable as at 31st March 107,112,352 124,447,948
82 BRAC Lanka Finance PLC Annual Report 2016/17
A reconciliation between tax expense and the product of accounting profit multiplied by the statutory tax rate is as follows:
As at 31 March 2017 2016 % Rs. % Rs.
Profit before Income tax 352,792,395 260,384,975
Tax effect at the statutory income tax rate of 28% 28% 98,781,870 28% 72,907,793 Tax effect of other allowable credits -11% (39,707,482) -8% (21,652,170) Tax effect of non deductible expenses 18% 61,751,333 23% 58,677,672 Income tax expense 34% 120,825,721 42% 109,933,296
25 Amount due to Related Companies As at 31 March 2017 2016 Rs. Rs.
Commercial Leasing & Finance PLC 1,000,000,000 1,000,000,000 Lanka Orix Leasing Company PLC 1,714,342,538 318,897,267 LOLC Life Insurance Limited 12,240,344 - LOLC Factors Limited 3,224,240,314 3,231,808,924 LOLC Micro Credit Limited 191,990 18,667 Lanka Orix Finance PLC 32,884,957 3,400 Lanka ORIX Information Technology Services Limited 290,430,677 283,163,265 LOLC Corporate Services (Private) Limited 1,051,335 - LOLC Motors Limited 45,226 - 6,275,427,381 4,833,891,523
26 Accrued Charges and Other Payables BRAC Lanka (Guarantee ) Limited 27,724,962 27,724,962 Bonus Provision - 32,034,513 Rent Received in Advance 18,775 1,022,296 Stamp Duty Payable 430,768 534,118 VAT Payable on Financial services 270,428 - Payable to suppliers 1,467,800 3,796,945 NBT Payable 767,719 767,719 Other Payables 48,609,482 18,376,248 Withholding Tax payable 1,887,975 934,338 81,177,909 85,191,138
83 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
27 Employee Benefits 27.1 Defined benefit plan 27.1.1 Movement in the present value of the defined benefit Obligation
As at 31 March 2017 2016 Rs. Rs.
Balance as at 1st April 20,755,104 6,269,771 Current Service Cost (Note 27.1.2) 3,771,999 3,684,622 Interest Cost (Note 27.1.2) 2,283,061 626,977 Actuarial (Gains)/ Losses (Note 27.1.3) (2,965,243) 13,311,338 23,844,921 23,892,708 Benefits paid (249,704) (3,137,604) Liability for Defined benefit obligation as at 31st March 23,595,217 20,755,104
27.1.2 Expense recognized in Profit or Loss Current service cost 3,771,999 3,684,622 Interest cost 2,283,061 626,977 6,055,060 4,311,599
27.1.3 Expense recognized in Statement of Other Comprehensive Income Actuarial (gains) (2,965,243) 13,311,338 (2,965,243) 13,311,338
The employee benefit liability as at 31 March 2017 amounting to Rs.23,595,217 (2016- Rs.20,755,104) is made based on actuarial valuation carried out by a professionally qualified actuary of Actuarial and Management Consultants (Pvt) Ltd . As recommended by the Sri Lanka Accounting Standards (LKAS 19) - Employee benefit, “the Project Unit Credit (PUC)” method has been used in this valuation.
The principal assumption used are :
As at 31 March 2017 2016 Rs. Rs.
(i) Discount Rate (per annum) 12% 11% (ii) Rate of Salary Increase (per annum) 9% 10% (iii) Age of Retirement (years) 55 55 (iv) Staff Turnover Factor (per annum) (%) 18% 19%
Assumptions regarding future mortality are based on published statistics and mortality tables. The liability is not externally funded.
84 BRAC Lanka Finance PLC Annual Report 2016/17
27.1.4 Sensitivity analysis of the defined benefit obligation Reasonable possible changes at the reporting date, 31st March 2017 to one of relevant actuarial assumptions, holding other assumptions constant, would have affected the defined retirement obligation as shown below;
As at 31 March 1% Increase 1% Decrease Rs. Rs.
Discount rate (891,604) 970,798 Future salary growth 1,095,091 (1,021,287)
27.1.5 Distribution of present value of defined benefit obligation in future years (Rs.) (Maturity Profile of Defined Benefit Obligation)-Present Value of Expected benefit Payments
As at 31 March 2017 Rs.
Within the next 12 months 4,952,355 Between 1 and 2 years 6,465,120 Between 2 and 5 years 6,032,351 Between 5 and 10 years 4,304,356 Beyond next 10 years 1,841,035 23,595,217
28 Deferred Tax Assets Deferred Tax is provided using the Liability Method, for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes at the rate of 28%.
As at 31 March 2017 2016 Rs. Rs.
Balance at the beginning of the Year 2,048,359 979,277 Origination/ (reversal) during the year (12,869,932) 1,069,082 Balance at the end of the year asset/(liability) (10,821,573) 2,048,359
28.1 Origination/ (reversal) during the year Recognized in; Profit or loss (12,039,664) 1,069,082 Other comprehensive income (830,268) - (12,869,932) 1,069,082
85 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
Deferred tax asset as at the year end is made up as follows,
2017 2016 As at 31 March Temporary Tax Effect on Temporary Tax Effect on Difference Temporary Difference Temporary Difference Difference Rs. Rs. Rs. Rs.
On Property, Plant & Equipment (60,419,888) (16,917,569) 24,757,436 6,932,082 On Leased Assets (1,823,804) (510,665) 3,313,235 927,706 On Employee benefits 23,595,217 6,606,661 (20,755,104) (5,811,429) (38,648,475) (10,821,573) 7,315,567 2,048,359
29 Stated capital As at 31 March 2017 2016 Rs. Rs.
Balance at the beginning of the year (105,752,566 no. of Ordinary Shares) 171,180,454 171,180,454 Balance at the end of the year (105,752,566 no. of Ordinary Shares) 171,180,454 171,180,454
29.1 Rights, preference and restrictions of classes of capital The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to have one vote per individual present at meetings of the shareholders or one vote per share in case of a poll. They are entitled to participate in any surplus assets of the Company in winding up. There are no preferences or restrictions on Ordinary Shares.
30 Reserves As at 31 March 2017 2016 Rs. Rs.
Statutory reserve (Note 30.1) 85,647,971 74,651,620 Available for sale investment reserve (Note 30.2) (2,351,269) (389,470) Total 83,296,702 74,262,150
30.1 Statutory reserve Balance at the beginning of the year 74,651,620 67,075,582 Transferred during the year 10,996,351 7,576,038 Balance at the end of the year 85,647,971 74,651,620
The reserve is created according to Direction No.1 of 2003 issued under the Finance Business Act No.42 of 2011. The Company transferred 5% (2015/16 - 5%) of its annual net profit after tax to this reserve in compliance with this direction.
86 BRAC Lanka Finance PLC Annual Report 2016/17
30.2 Available for Sale Investment Reserve As at 31 March 2017 2016 Rs. Rs.
Balance at the beginning of the year (389,470) (146,947) Fair value changes during the year - increase / (decrease) (Note 13.3) (1,961,799) (242,523) Balance at the end of the year (2,351,269) (389,470)
This reserve is maintained to recognize the fair value changes of Available for Sale Financial Assets.
31 Retained Earnings As at 31 March 2017 2016 Rs. Rs.
Balance brought forward 658,318,706 527,685,321 Transfers to statutory reserves (10,996,351) (7,576,038) Net profit for the year 219,927,010 151,520,761 Other comprehensive income 2,965,243 (13,311,338) Tax on other comprehensive income (830,268) - Balance at the end of the year 869,384,340 658,318,706
The carrying amount of the retained earnings represent the undistributed earnings held by the Company. This could be used to absorb future losses and dividend declaration.
32 Capital Commitments There are no material capital commitments which would require adjustments to or disclosures in the Financial Statements.
33 Contingent Liabilities and Litigations and claims There are no material contingent liabilities which would require adjustments or disclosures in the Financial Statements.
There were no material litigations or claims to be disclosed as at the reporting date.
34 Events Occurring After The Reporting Period Right issue of ordinary shares after reporting date Subsequent to the reporting date the Company has issued ordinary shares by a way of a Right Issue of shares,entitlement for 5 new ordinary shares for every 4 ordinary shares held at a price of Rs.10.00 per share. For this Right Issue Lanka Orix Leasing Company PLC (LOLC) has subscribed fully. Accordingly LOLC will become the immediate parent of the company from May 2017. After the rights issue the stated capital has increased by Rs.1,321,907,080/- and the number of shares increased to 237,943,274.
No circumstance have arisen since the reporting date which would require adjustments or disclosures in the Financial Statements other than disclosed.
87 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
35 Comparative Information The presentation and classification of the following items in these Financial Statements are amended to ensure the comparability with the current year.
General & Premises, Deposits from Accrued Administration Equipment Customers charges and Expenses and other Establishment payables Expenses
As previously reported in the published financial statements for the year ended 31 March 2016 (495,104,014) (27,875,479) 416,641,288 849,566,300 Adjustment made on loan security deposit (27,875,479) 27,875,479 764,375,162 (764,375,162) Adjusted balance in the published financial statements for the year ended 31 March 2017 (522,979,493) - 1,181,016,450 85,191,138
36 Assets pledged The following assets have been pledged as security for liabilities.
Nature of Assets Nature of Carrying Carrying Liability Amount Amount Pledged Pledged 2017 2016 Rs. Rs.
Investment in Fixed Deposits Short term borrowing 349,077,329 -
These financial assets are pledged against the borrowings made. The lender has the right over the term deposits in the event of non payment.
37 Related Party Disclosures 37.1 Parent and Ultimate Controlling Party The Company’s immediate parent is Commercial Leasing & Finance PLC and ultimate controlling party is Lanka Orix Leasing Company PLC.
37.2 Transactions with Key Management Personnel Key Management Personnel (KMP) are those persons having authority and responsibility for planning, directing and controlling the activities directly or indirectly. Accordingly the KMP include members of the Board of Directors and identified senior management personnel of the Company and its ultimate Parent Company Lanka ORIX Leasing Co. PLC . Close Family Members (CFM) of a KMP are those family members who may be expected to influence, or be influenced by, that KMP in their dealings with the Company.
(i) Loans to Directors No loans have been given to the Directors of the company.
88 BRAC Lanka Finance PLC Annual Report 2016/17
(ii) Key Management Personnel Compensation The following are the details of Key Management Personnel compensation.
For the year ended 31 March 2017 2016 Rs. Rs.
Directors Emoluments Salary - - Directors Fees 1,792,522 10,405,501
37.3 Transactions with Related Parties Name of the Company Relationship Nature of Amount Transaction 2017 2016 Rs. Rs.
Commercial Leasing & Parent Interest on Loan 148,833,370 12,671,233 Finance PLC Company Loan received - 1,128,204,535 Loan settlement - 140,875,768 Loan Payable 1,000,000,000 1,000,000,000 Lanka Orix Leasing Ultimate Interest on Loan 335,591,238 152,240,403 Company PLC parent Fund transfers in 10,677,000,000 3,760,660,000 Fund transfers out 9,947,735,100 5,718,609,536 Guarantee fee 15,000,000 - Expense reimbursements 208,602,417 1,255,679,675 LOLC Factors Limited Fellow Interest on Loan 429,854,418 273,419,836 subsidiary Loan received - 2,709,500,000 Loan Payable 3,209,500,000 3,209,500,000 Interest Payable 14,740,314 18,701,221 Lanka ORIX Information Fellow IT Service Fee 35,513,133 39,960,000 Technology Services Limited subsidiary System Implementation Fee - 283,163,265 LOLC Life Insurance Limited Fellow Insurance premium payment 187,174,061 - subsidiary LOLC Motors Limited Fellow Balance receivable/ (Pay- 45,226 143,825 subsidiary able) Lottery Collection Income - 6,646,250 Lanka ORIX Finance PLC Fellow FD investment - 600,000,000 subsidiary Interest Expense - 2,441,096 FD withdrawal - 602,441,096 Settlement of expenses 32,884,957 3,400 LOLC Micro Credit Limited Fellow Transfer of funds - 69,079 subsidiary Settlement of expenses 191,990 87,745
All of the above transactions (including borrowing and lending transactions) with related parties are on arms length basis and are on terms that are generic to non related parties.
89 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
37 Related Party Disclosures (Contd.) (iv) Receivable from Related party
For the year ended 31 March 2017 2016 Rs. Rs.
Amount due from Related party (Rs.) 4,189,200 143,825 Amount due from as a Percentage from capital Fund 0.46% 0.02%
37.4 Transactions, arrangements & agreements involving Key Management Personnel (KMP) and their close family members (CFM) CFMs of a KMP are those family members who may be expected to influence or be influenced by that KMP in their dealing with the entity. That may include; KMP’s domestic partner and children and dependants of the KMP or the KMP’s domestic partner. The transactions are carried out on an arm’s length basis. There were no such transactions have been taken place during the year.
38 Segment Reporting For the year ended Advances & Finance Hire Others Total 31 March 2017 Other Loans Lease Purchase Rs. Rs. Rs. Rs. Rs.
Revenue 3,251,649,668 23,961,692 962,086 1,028,750 3,277,602,195 Investment Income - - - 117,411,272 117,411,272 3,251,649,668 23,961,692 962,086 118,440,022 3,395,013,467 Percentage 95.78% 0.74% 0.03% 3.49% 100%
Expenditure Interest Expenses 1,229,375,826 9,059,378 363,743 44,779,516 1,283,578,463 Depreciation - - - 14,975,538 14,975,538 Unallocated Expenses - - - 1,280,900,373 1,280,900,373 Allowance for impairment & write offs 351,236,272 (13,554,433) 1,212,455 - 338,894,294 Total Expenses 1,580,612,098 (4,495,055) 1,576,198 1,340,655,428 2,918,348,669 Profit Before Tax 1,671,037,570 28,456,746 (614,112) (1,222,215,406) 476,664,798
VAT on FS (123,872,402) Profit on Ordinary Activities before Income Tax 352,792,395
Income Tax on Profit on Ordinary Activities (132,865,385) Profit After Income Tax 219,927,010
Total assets 11,015,224,285 99,003,983 9,522,875 1,775,943,646 12,899,694,788 Total liabilities 10,055,543,716 90,378,448 8,693,212 1,621,217,915 11,775,833,292
90 BRAC Lanka Finance PLC Annual Report 2016/17
For the year ended Advances & Finance Hire Others Total 31 March 2016 Other Loans Lease Purchase Rs. Rs. Rs. Rs. Rs.
Revenue 1,812,522,414 13,788,958 9,471,391 2,888,361 1,838,671,124 Investment Income - - - 37,562,936 37,562,936 1,812,522,414 13,788,958 9,471,391 40,451,296 1,876,234,060 Percentage 96.60% 0.74% 0.50% 2.16% 100%
Expenditure Interest Expenses 561,426,849 4,271,115 2,933,753 12,529,745 581,161,462 Depreciation - - - 10,365,728 10,365,728 Unallocated Expenses - - - 870,133,286 870,133,286 Allowance for impairment & write offs 52,933,643 11,774,322 49,861 - 64,757,825 Total Expenses 614,360,492 16,045,436 2,983,614 893,028,759 1,526,418,301 Profit Before Tax 1,198,161,923 (2,256,478) 6,487,777 (852,577,462) 349,815,759
VAT on FS (89,430,784) Profit on Ordinary Activities before Income Tax 260,384,975
Income Tax on Profit on Ordinary Activities (108,864,214) Profit After Income Tax 151,520,761
Total assets 7,811,840,971 73,954,736 16,052,586 1,603,376,909 9,505,225,202 Total liabilities 7,069,087,435 66,923,085 14,526,299 1,450,927,074 8,601,463,892
91 BRAC Lanka Finance PLC Annual Report 2016/17
Notes to the Financial Statements
39 Maturity of Assets and Liabilities An analysis of the total assets employed and total liabilities as at the year end, based on the remaining period at the reporting date to the respective contractual maturity dates are given below.
As at 31 March Less than 3 - 12 1 - 3 Over Total Total 3 Months Months Years 3 Years 2017 2016 Rs. Rs. Rs. Rs. Rs. Rs.
Assets Cash and Cash Equivalents 87,570,777 - - - 87,570,777 594,238,040 Fixed Deposits with banks 349,077,329 - - 349,077,329 - Investment in Government Securities 575,000,000 529,603,414 2,786,929 - 1,107,390,343 852,809,992 Investment Securities - unquoted - - - 11,000 11,000 11,000 Rental Receivable on Hire- Purchase 5,688,336 2,049,887 1,784,652 - 9,522,875 16,052,586 Rentals Receivable on Lease 35,578,444 10,760,263 39,777,400 12,887,875 99,003,982 73,954,736 Rentals Receivable on Advances & Loans 4,103,731,957 5,296,765,597 1,612,262,340 2,464,391 11,015,224,285 7,811,840,971 Other Receivables - 43,865,529 - - 43,865,529 61,348,864 Deposits and Prepayments - 39,584,544 - - 39,584,544 18,781,454 Property, Plant and Equipment - - - 144,254,924 144,254,924 73,995,375 Amount due from related Companies - - - 4,189,200 4,189,200 143,825 4,807,569,514 6,271,706,563 1,656,611,321 163,807,390 12,899,694,788 9,505,225,202
Liabilities Bank Overdraft 414,237,336 - - - 414,237,336 424,109,313 Deposits from Customers 2,024,748,398 612,601,185 175,010,973 961,796 2,813,322,352 1,181,016,450 Interest Bearing Loans and Borrowings 1,705,598,048 344,541,125 - - 2,050,139,173 1,932,052,416 Amount due to related Companies 2,065,927,381 1,000,000,000 3,209,500,000 - 6,275,427,381 4,833,891,523 Accrued Charges and Other Payables - 53,452,947 - - 53,452,947 57,466,176 Retirement Benefit Obligations - 4,952,355 6,465,120 12,177,742 23,595,217 20,755,104 Trade Payables 27,724,962 - - - 27,724,962 27,724,962 Income Tax Payable 107,112,351 - - - 107,112,351 124,447,948 6,345,348,476 2,015,547,612 3,390,976,092 13,139,539 11,765,011,719 8,601,463,892
92 BRAC Lanka Finance PLC Annual Report 2016/17 Shareholders’ Information
1) Shareholdings The 20 largest shareholders of the Company as at 31st March 2017 were as follows:
2017 Name of the Shareholder No. of shares %
1. COMMERCIAL LEASING & FINANCE PLC 105,499,048 99.76 2. FIRST CAPITAL MARKETS LTD/ MR.N.A. SELLAHEWA 104,698 0.10 3. S. MANNANAYAKE 50,000 0.05 4. MR. N.A. SELLAHEWA (DECEASED) 29,640 0.03 5. MR. F.J.P. RAJ 26,200 0.02 6. K.P.C. ABEYRATNA 15,000 0.01 7. MR. D.G.W. KUMARA 4,600 - 8. D.P. FERNANDO 2,730 - 9. MR. A.P.N. JAYAWARDENA 2,000 - 10. S.M.S. SAMARAWEERA 1,890 - 11. S.M. SAMARAWEERA 1,890 - 12. S.M.S. SAMARAWEERA 1,890 - 13. S.M.V. SAMARAWEERA 1,890 - 14. S.M. SAMARAWEERA 1,890 - 15. MR. C.K.L. GUNEWARDENA 1,158 - 16. MR. W.K.J.D. SILVA 1,000 - 17. MR. H.T.U.R. SIRIWARDANA 1,000 - 18. MR. M.F. SAMSUDEEN 1,000 - 19. MR. P.P.U. ANANDASIRI 1,000 - 20. M. WEERASEKARA 500 - 105,749,024 99.97 OTHERS 3,542 0.03 Total 105,752,566 100
2) Public Shareholding As at 31st March 2017, 0.24% of the issued ordinary shares were held by 38 shareholders.
93 BRAC Lanka Finance PLC Annual Report 2016/17
Shareholders’ Information
3) Shareholding Summary as at 31st March 2017 No of No of shares % of shares shareholders
1 - 1,000 24 8,042 0.01 1,001 - 10,000 9 19,938 0.02 10,001 - 100,000 4 120,840 0.11 100,001 - 1,000,000 1 104,698 0.1 Over 1,000,000 Shares 1 105,499,048 99.76 Total 39 105,752,566 100
4) Categories of Shareholders 2017 No of No of shares % of shares shareholders
Local Individuals 37 148,820 0.14 Local institutions 2 105,603,746 99.86 Foreign Individuals - - - Foreign institutions - - - 39 105,752,566 100.00
5) Market Information on Ordinary Shares of the Company 2017 2016 Rs. Rs.
Market price per share as at the last trading date - - Highest during the year - - Lowest during the year - - Earnings per share 2.08 1.43 Net asset per share 10.63 8.55 Dividend payout ratio - -
94 BRAC Lanka Finance PLC Annual Report 2016/17 Financial Information for Last 10 Years Statement of Financial Position - - - Rs. 211,000 912,950 264,209 1,878,480 3,181,768 3,916,093 1,969,119 8,266,856 7,678,224 5,804,552 22,052,317 16,542,908 49,540,685 24,528,180 82,734,725 45,465,829 31.03.2008 252,309,894 276,838,074 175,040,413 326,378,758 326,378,758 - - Rs. 211,000 913,966 1,464,423 7,643,154 5,850,921 1,774,379 5,884,479 5,492,056 1,399,365 1,437,917 31,921,135 16,563,443 65,217,455 24,528,180 14,704,016 67,994,771 31.03.2009 308,726,237 333,254,417 104,188,528 196,245,774 398,471,872 398,471,872 - Rs. 922,235 211,000 456,110 4,109,287 7,710,681 5,001,796 2,000,617 6,573,845 6,144,172 3,699,305 1,365,419 42,469,307 16,822,181 79,036,104 45,513,180 15,962,296 76,977,101 31.03.2010 316,984,156 129,958,493 200,185,699 362,497,336 441,533,440 441,533,440 ------Rs. 251,902 211,000 540,302 225,565 3,205,064 6,327,932 6,334,660 3,499,634 4,329,363 3,100,269 1,292,921 40,214,199 11,552,460 71,385,851 56,629,498 13,191,087 42,443,402 82,344,627 31.03.2011 125,857,930 110,050,345 249,394,366 485,302,641 123,630,508 228,749,950 556,688,492 556,688,492 ------Rs. 454,324 816,131 211,000 3,897,724 3,337,522 4,631,346 8,585,523 1,376,641 1,220,417 12,025,097 92,090,906 12,922,800 35,080,267 82,697,913 88,320,840 57,642,145 13,917,963 31.03.2012 125,857,930 119,896,396 254,988,334 500,742,660 122,649,114 235,137,706 592,833,567 592,833,567 ------Rs. 211,000 1,880,386 3,540,285 9,442,517 5,210,741 4,222,255 1,677,223 2,515,008 2,242,222 1,145,338 18,508,393 38,548,526 48,622,160 86,675,376 84,827,594 31.03.2013 137,686,295 133,746,869 104,314,714 125,857,930 271,233,509 530,838,308 153,639,556 238,987,604 668,524,603 668,524,603 - - - - - Rs. 211,000 1,819,076 2,583,200 6,745,767 6,686,489 1,471,190 1,072,834 49,868,105 19,034,751 18,230,163 90,961,055 14,796,665 71,741,189 13,256,155 99,855,538 31.03.2014 667,218,582 111,660,087 481,988,829 171,180,454 192,014,017 225,233,485 588,427,956 396,358,574 106,136,939 908,737,176 236,291,712 1,359,148,560 1,947,576,516
1,947,576,516 ------Rs. 11,000 979,277 6,269,771 2,800,000 6,438,318 15,643,977 93,458,629 35,237,139 25,242,962 66,928,635 35,336,718 55,056,542 41,254,298 12,370,168 28,364,924 31.03.2015 247,067,610 171,180,454 527,685,321 765,794,410 107,203,689 527,190,508 1,202,788,040 1,376,641,448 3,002,349,576 2,951,138,544 3,768,143,986 3,768,143,986 ------Rs. 11,000 143,825 2,048,359 27,724,962 20,755,104 74,262,150 31.03.2016 16,052,586 73,954,736 61,348,864 18,781,454 73,995,375 416,641,288 124,447,948 821,841,338 171,180,454 658,318,706 903,761,310 424,109,313 594,238,040 852,809,992 1,932,052,416 4,833,891,523 8,601,463,892 9,505,225,202 7,811,840,971 9,505,225,202 Rs. 11,000 9,522,875 4,189,200 31.03.2017 81,177,909 23,595,217 10,821,573 83,296,702 87,570,777 99,003,982 83,450,073 414,237,336 107,112,352 171,180,454 869,384,340 349,077,329 144,254,924 1,123,861,496 2,813,322,351 2,050,139,173 6,275,427,381 1,107,390,343 11,775,833,293 12,899,694,788 11,015,224,285 12,899,694,788 2011 - 2017 Statement of Financial Position is prepared based on LKAS/SLFRS. Prior periods are prepared based on SLAS’s. prepared Prior periods are based on LKAS/SLFRS. is prepared 2011 - 2017 Statement of Financial Position LIABILITIES Bank overdraft customers Deposits from Obligation under finance lease bearing loans and borrowings Interest Income tax payable companies Amount due to related Payables Trade and other payables charges Accrued finance fund account MICRO benefits Employee tax liabilities Deferred liabilities Total SHAREHOLDER'S FUNDS Stated capital Reserves reserves Revenue equity Total liabilities and equity Total As at 31 March ASSETS equivalentsCash and cash institutions financial other and banks with Deposits securities in government Investment securities - unquotedInvestment on hire-purchase Receivable on leaseReceivable Loan and advances companies related Amount due from Other receivables Deposits and prepayments Income tax receivable Inventory tax assets Deferred plant and equipment Property, Intangible assets property Investment assets Total
95 BRAC Lanka Finance PLC Annual Report 2016/17
Statement of Profit or Loss Rs. (244,902) 4,881,560 7,709,428 3,147,383 (3,478,782) (6,383,073) (1,639,525) (9,757,872) (2,528,324) (4,562,045) 26,860,346 23,381,564 28,263,124 31.03.2008 10,482,654 (17,780,470) Rs. (47,882) (2,870,969) (6,957,907) (1,849,199) (9,785,555) (3,822,246) (7,301,105) 35,472,681 32,601,712 26,806,186 59,407,898 31.03.2009 40,815,237 36,945,109 29,644,004 (18,592,661) - - Rs. (7,141,758) (6,657,154) (2,397,082) (3,737,522) (2,806,070) (7,917,355) 35,501,586 11,056,962 46,558,548 42,643,344 31.03.2010 25,734,895 19,191,303 11,273,948 (11,769,417) (20,823,653) - - - Rs. 678,468 5,490,928 4,465,365 (6,775,352) (9,318,485) (5,290,950) (4,457,371) (9,439,235) (2,449,557) 48,111,537 41,336,185 28,564,251 79,856,729 31.03.2011 51,350,688 48,901,131 49,579,599 (28,506,041) - - - Rs. 754,660 6,387,756 4,691,124 (5,991,070) (5,856,126) (4,712,887) (8,287,012) (7,064,476) (2,422,716) 54,889,526 48,898,456 60,731,996 31.03.2012 28,968,080 21,903,604 19,480,888 (12,907,891) (31,763,916) - - - - Rs. 3,849,898 1,029,286 4,838,365 (6,632,072) (5,341,682) 55,827,431 70,251,102 68,878,504 10,573,773 31.03.2013 29,013,576 30,042,862 34,881,227 (13,051,073) (15,697,863) (13,565,909) (41,237,526) - - - Rs. 1,507,808 (6,254,241) (4,634,790) (5,009,542) (4,265,711) (7,854,953) 80,567,333 10,392,565 92,467,706 31.03.2014 26,037,022 21,771,311 13,916,358 (20,328,870) (26,673,589) (23,858,522) (66,430,685) 100,896,204 - - - - Rs. (1,331,205) 31.03.2015 (37,263,345) (32,193,883) (88,645,651) (30,957,079) (18,181,631) 359,337,948 210,282,640 569,620,588 521,883,406 226,733,987 195,776,908 177,595,277 (162,545,458) (183,452,517) (342,886,601) - - - - Rs. 13,055,079 31.03.2016 (27,875,479) (10,365,728) (64,757,825) (89,430,784) 349,815,759 260,384,975 151,520,761 (581,161,462) (347,153,793) (495,104,014) (945,256,870) (108,864,214) 1,282,017,519 1,295,072,629 1,863,178,981 - - Rs. 9,083,471 31.03.2017 -14,975,538 476,664,797 352,792,394 219,927,009 -510,089,816 -338,894,294 -770,810,558 -123,872,402 -132,865,385 3,385,929,995 2,102,351,532 2,111,435,002 -1,283,578,463 -1,634,770,206 For the year ended the year For income Interest expense Interest income Net Interest property of investment Change in fair value Income Rent Other income Staff cost equipment and establishment expenses Premises, Establishment expenses and amortizationDepreciation losses on loans and for / Reversal (Provision) inventory expenses & administration General operations from Profit added tax on financial services and NBT Value losses on loans and for Reversal (Provision)/ advances tax before Profit tax expenseIncome year for the Profit are determined in line with SLAS’s. prior to that Profits determined based on LKAS/SLFRS. are 2012-2017 Profits
96 BRAC Lanka Finance PLC Annual Report 2016/17 Quarterly Financial Statements Statement of Financial Position ------Rs. 11,000 143,825 2,048,359 16,052,586 73,954,736 51,158,105 73,995,375 31.03.2016 27,724,962 20,755,104 74,262,150 18,781,454 594,238,040 852,809,992 124,447,948 807,925,037 903,761,310 416,641,288 171,180,454 658,318,706 424,109,313 7,811,840,971 9,495,034,443 9,495,034,443 1,935,777,958 4,833,891,523 8,591,273,133 ------Rs. 979000 5,310,000 8,800,000 11,000.00 80,466,000 29,692,000 55,007,000 31.12.2015 66,906,000 821053000 548,776,000 760,029,000 106,208,000 492,051,000 171,180,000 792,133,000 413,846,000 7,925,905,000 9,406,175,000 9,406,176,000 5,403,304,000 1,130,695,000 1,030,219,000 8,375,957,000 2016 ------Rs. 11,000 620,000 979,000 1,940,000 8,282,000 66862000 14,670,000 19,056,000 51,988,000 30.09.2015 77,496,000 48,571,000 417,539,000 700,000,000 124,442,000 911,862,000 171,180,000 673,820,000 6,405,829,000 6,961,203,000 6,961,203,000 4,116,756,000 1,022,365,000 6,049,341,000 ------Rs. 11,000 13,324 7,936,792 7,624,960 2,800,000 14,566,701 30,227,555 17,731,673 30.06.2015 50,683,245 67,065,260 35,129,914 84,545,740 49,535,790 263,703,242 401,811,252 819,669,438 171,180,454 581,423,724 4,545,880,712 2,403,175,420 4,967,523,379 4,147,853,941 4,967,523,379 1,200,000,`000 Rs. 9,522,875 31.03.2017 87,570,777 75,993,657 23,595,217 10,821,573 83,296,235 99,003,982 107,112,351 351,404,511 171,180,454 869,384,479 144,254,923 414,237,336 1,116,719,555 6,340,552,348 2,066,192,221 1,123,861,168 2,813,322,352 11,775,833,398 11,015,224,287 12,899,694,567 12,899,694,567 Rs. 9,357,576 31.12.2016 25,654,794 11,729,559 74,608,614 73,046,681 123,395,985 141,646,400 113,828,596 332,652,015 171,180,454 854,012,986 127,557,211 346,611,832 1,188,651,675 7,582,000,348 3,067,304,158 1,099,802,054 1,180,864,566 12,327,993,854 11,431,488,365 13,427,795,908 13,427,795,908 2017 Rs. 8,804,531 4,851,436 30.09.2016 23,985,972 11,972,944 74,319,590 73,798,486 93,068,861 734,905,867 235,491,740 178,039,625 435,907,073 171,180,454 825,727,754 1,118,296,099 6,429,554,990 1,071,227,798 2,958,892,259 1,374,324,313 1,101,116,971 10,443,990,776 13,149,114,869 12,077,887,073 13,149,114,869 Rs. 4,960,936 30.06.2016 11,139,266 87,905,344 22,346,511 74,234,216 75,106,533 77,782,965 -11,972,944 878,877,721 177,448,798 171,180,454 774,001,253 1,065,294,989 1,108,674,680 9,086,435,629 4,409,707,396 2,961,694,355 1,019,415,923 2,035,836,693 11,505,327,398 10,485,911,475 11,505,327,398 Income tax payable companies Amount due to related Payables Trade and other payables charges Accrued finance fund account MICRO benefits Employee liabilities and equity Total Obligation under finance lease tax liabilities Deferred Reserves equity Total As at ASSETS equivalentsCash and cash and other financial institutions Deposits with banks securities in government Investment securities - unquoted Investment on hire-purchase Receivable on lease Receivable customers Deposits from bearing loans and borrowings Interest liabilities Total EQUITY Stated capital reserves Revenue Loan and advances companies related Amount due from Other receivables Deposits and prepayments Income tax receivable Inventory tax assets Deferred plant and equipment Property, Intangible assets property Investment assets Total LIABILITIES Bank overdraft
97 BRAC Lanka Finance PLC Annual Report 2016/17 Quarterly Financial Statements Statement of Comprehensive Income Rs. -219,459 -3,167,356 -2,098,226 31.03.2016 12,262,313 88,708,072 76,671,703 74,573,477 61,042,680 -26,398,045 -96,246,835 -12,036,369 -13,311,338 -13,530,797 408,228,143 420,490,456 618,122,629 -209,894,486 -205,970,149 - Rs. 44,000 44,000 -2,459,731 31.12.2015 14,733,451 -12,161,353 -87,435,395 -72,642,003 -33,171,058 -46,784,645 372,966,905 358,233,454 198,268,423 549,782,042 165,097,364 118,312,719 118,356,719 -191,548,588 2016 - Rs. -66,755 -66,755 -436,944 6,643,807 -2,412,761 30.09.2015 92,259,535 92,192,780 -83,315,169 -47,799,596 -31,906,498 -44,480,809 302,611,311 295,967,504 168,646,842 408,079,467 136,740,344 -112,111,963 - Rs. 136,625 136,625 3,958,115 -6,377,961 -2,325,880 30.06.2015 84,241,137 69,238,937 53,738,403 53,875,028 -64,376,488 -80,156,395 -29,167,669 -15,002,200 -15,500,534 198,310,927 202,269,042 262,687,415 Rs. 173,176 31.03.2017 -830,268.04 476,665,068 352,792,666 219,927,282 220,100,458 2,965,243.44 -1,961,799.00 2,111,435,274 1,984,940,532 -14,975,538.11 126,494,742.32 -338,894,294.25 -510,089,815.55 -770,810,557.86 -123,872,402.48 -132,865,383.96 3,268,518,995.35 -1,283,578,463.65 - Rs. 346,000 31.12.2016 346,000.00 372,909,242 306,043,489 195,694,281 196,040,281 1,548,626,395 1,463,808,078 84,818,317.00 -66,865,753.00 -11,265,900.00 -297,943,457.89 -919,722,198.00 -348,436,384.75 -518,071,410.00 -110,349,208.27 2,383,530,275.89 2017 - Rs. 57,440 57,440.00 30.09.2016 949,622,406 305,625,134 259,934,589 167,409,048 167,466,488 -6,290,174.00 1,007,898,346 58,275,940.00 -45,690,545.00 -92,525,541.00 -127,128,575.31 -226,664,130.00 -342,190,333.00 -541,068,984.00 1,490,691,390.31 - Rs. -27,934 30.06.2016 -3,754,637 -27,933.75 18,163,011 -44,015,726 -99,686,111 -95,522,924 -31,335,328 -77,060,928 467,058,200 688,272,774 448,895,189 224,078,802 192,743,474 115,682,546 115,654,612 -239,377,585 Other Operating Income Other Operating Income Total Expenses Operating doubtful debts & write-offs for Provision Net Interest Income Net Interest Expenses Personnel expenses & Administration General operations from Profit added tax on financial services Value Quarter Ended Income Interest Expenses Interest Depreciation expenses tax income before Profit Income tax expenses for the period Profit Income Other Comprehensive Defined benefit plan actuarial gain/lose Income tax recognised in other comprehensive income in other comprehensive Income tax recognised Available-for-sale financial assets : Available-for-sale Net change in fair value Income Comprehensive Total
98 BRAC Lanka Finance PLC Annual Report 2016/17 Investor Information
Statement of value added 2017 2016 Rs. % Rs. %
Value added Income 3,385,929,995 1,863,178,981 Other income 9,083,471 13,055,079 Cost of borrowings (1,283,578,463) (581,161,462) General & administration expenses (770,810,558) (522,979,493) Allowance for impairment & write-offs (338,894,294) (64,757,825) 1,001,730,152 707,335,280
Distribution of Value added To Employees 510,089,816 51 347,153,793 49 Remuneration and other benefits 510,089,816 347,153,793 To Government 256,737,788 26 198,294,998 28 Indirect taxes 123,872,402 89,430,784 Direct taxes 132,865,385 108,864,214 To Expansion and Growth 234,902,548 23 161,886,489 23 Retained profits 219,927,010 151,520,761 Depreciation and amortisation 14,975,538 10,365,728 1,001,730,152 100 707,335,280 100
99 BRAC Lanka Finance PLC Annual Report 2016/17 Other Disclosures 0% 1% 1% 3% 3% 0% 13% 89% 19% 38% 17% 30% 950% 885% % of Net Assets” “Value of the related of the related “Value party transactions as a party transactions - - 45,226 191,990 15,000,000 14,740,314 35,513,133 32,884,957 148,833,370 208,602,417 429,854,418 187,174,061 335,591,238 1,000,000,000 financial year”financial 9,947,735,100 10,677,000,000 transactions entered into during the entered transactions “Aggregate value of the related party of the related value “Aggregate Nature of the Transaction of the Nature on Loan Interest Loan Payable on Loan Interest in transfers Fund out transfers Fund fee Guarantee Expense reimbursements on Loan Interest Payable Interest Service Fee IT payment premium Insurance (Payable) Balance receivable/ Income Lottery Collection Settlement of expenses of funds Transfer Settlement of expenses Relationship Company Parent Ultimate parent subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow
Non recurrent Related Party Transactions Party Related Non recurrent year. took place during the financial the threshold exceeding transactions No non recurrent Transactions Party Related Recurrent Name of the Company Leasing & Finance PLC Commercial PLC Orix Leasing Company Lanka Limited Factors LOLC Technology ORIX Information Lanka Services Limited Limited Insurance Life LOLC Limited Motors LOLC ORIX Finance PLC Lanka Limited Credit Micro LOLC
100 BRAC Lanka Finance PLC Annual Report 2016/17 Notes
101 BRAC Lanka Finance PLC Annual Report 2016/17 Notice of Meeting
NOTICE IS HEREBY GIVEN THAT THE FIFTY SIXTH ANNUAL GENERAL MEETING of the Company will be held on Wednesday, 20th September 2017 at 11.30 a.m. at the LOLC Auditorium, 100/1, Sri Jayawardenapura Mawatha, Rajagiriya for the following purposes:
1. To receive and consider the Report of the Directors and Statement of Accounts for the year ended 31st March, 2017 with the Report of the Auditors thereon. 2. To re-elect as a Director Mr. I. C. Nanayakkara who retires by rotation in terms of Article 74 of the Articles of Association of the Company. 3. To re-elect as a Director Mr. R. D. Tissera who retires by rotation in terms of Article 74 of the Articles of Association of the Company. 4. To re-elect as a Director Mr. W. A. R. Kumara who retires by rotation in terms of Article 69 of the Articles of Association of the Company. 5. To re-appoint as auditors KPMG, Chartered Accountants at a remuneration to be agreed by the Directors.
By order of the Board BRAC Lanka Finance PLC
Miss Chrishanthi Emmanuel Director - LOLC Corporate Services (Pvt) Ltd Secretaries
25th August 2017 Rajagiriya (in the greater Colombo)
NOTE:
1) A member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and vote instead of him/her. A Proxy need not be a member of the Company. 2) The completed Form of Proxy should be received by the Company at its registered office, 100/1 Sri Jayawardenapura Mawatha Rajagiriya, not later than 11.30 a.m. on 18th September 2017. 3) A Form of Proxy accompanies this Notice.
102 BRAC Lanka Finance PLC Annual Report 2016/17 Form of Proxy
I/We...... ………………………………....……………………..……………………………………………………………………………….………………………...... of ..……………..…………………………………………………………………………………………………………………….……………………………………...... …...... … being a member/members of the above named Company hereby appoint ………………………………………………………………………………… .…..……………………………………………………………………………………………………………..…….………………………...... ………...of ………………………………………………………………………………………………………...... whom failing;
Ishara Chinthaka Nanayakkara of Colombo or failing him Waduthantri Dharshan Kapila Jayawardena of Colombo or failing him Ravindra Dhammika Tissera of Colombo or failing him Annakkarage Jayantha Luxman Peiris of Colombo or failing him Wijesingha Rajapaksha Arachchige Dharmaratne of Colombo or failing him Wanni Achchige Rohana Kumara of Colombo as my/our proxy to represent me/us and vote on my/our behalf at the Fifty Sixth Annual General Meeting of the Company to be held on Wednesday, 20th September 2017 and at any adjournment thereof and at every poll which may be taken in consequence of the aforesaid Meeting.
For Against 1 To re-elect as a Director Mr. I. C. Nanayakkara who retires by rotation in terms of Articles 74 of the Article of Association of the Company.
2 To re-elect as a Director Mr. R. D. Tissera who retires by rotation in terms of Articles 74 of the Article of Association of the Company.
3 To re-elect as a Director Mr. W. A. R. Kumara who retires by rotation in terms of Articles 69 of the Articles of Association of the Company
4 To re-appoint as auditors KPMG, Chartered Accountants at a remuneration to be fixed by the Directors.
dated this …………………. day of ………………………..2017
………………………………....……… Signature of Shareholder
NOTE: 1) a proxy need not be a member of the company 2) Instruction as to completion appear on the reverse hereof
103 BRAC Lanka Finance PLC Annual Report 2016/17
INSTRUCTIONS AS TO COMPLETION 1 Please return the completed Form of Proxy after filling in legibly your full name and address, signing on the space provided and filling in the date of signature. 2 The completed Form of Proxy should be deposited at the registered office of the Company, 100/1, Sri Jayawardenapura Mawatha, Rajagiriya not less than 48 hours before the time appointed for the holding of the Meeting.
104 Corporate Information
Name of the Company : Brac Lanka Finance PLC
Date of Incorporation : 13th January 1961
Legal Form : A Public Quoted Company with limited liability
Company Registration No. : PB 263 PQ
Stock Exchange Listing : The Ordinary shares of the Company are listed on the Colombo Stock Exchange
Directors I. C. Nanayakkara - Non-Executive Chairman W. D. K. Jayawardena - Non-Executive Director R. D. Tissera - Non-Executive Director A. J. L. Peiris - Independent Director W. R. A. Dharmaratne - Independent Director W. A. R. Kumara - Executive Director/CEO (Appointed Director w.e.f. 26 July 2017)
Audit Committee W. D. K. Jayawardena - Non-Executive Director, Committee Chairman A. J. L. Peiris - Independent Director W. R. A. Dharmaratne - Independent Director
Remuneration Committee W. R. A. Dharmaratne - Independent Director, Committee Chairman A. J. L. Peiris - Independent Director W. D. K. Jayawardena - Non-Executive Director
Related Party Transactions Review Committee A. J. L. Peiris - Independent Director, Committee Chairman W. R. A. Dharmaratne - Independent Director W. D. K. Jayawardena - Non-Executive Director
Integrated Risk Management Committee R. D. Tissera - Non-Executive Director, Committee Chairman W. A. R. Kumara - Executive Director/CEO Mrs. S Wickremasekera - Group Chief Risk Officer L Pieris - Head of IT G. Herath - Assistant Manager - Finance/ Compliance Office (from 20 October 2016) C. Wijewarnasooriya - Chief Manager, Channels H. Senarathne* - Head of Treasury Operations C. Karunathilaka* - Chief Manager - Credit Risk Management S. Perera* - Manager, Collection & Recoveries
Registered Office : No. 100/1, Sri Jayawardenapura Mawatha Rajagiriya, Sri Lanka Tel: +94 11 5880880 Fax: +94 11 2865606
Business Address : No. 481, T B Jayah Mawatha, Colombo 10 Tel: +94 11 5889300 Fax: +94 11 2662875
Company Secretaries : LOLC Corporate Services (Pvt) Ltd
Auditors : KPMG, Chartered Accountants
Registrars : SSP Corporate Services (Pvt) Ltd
Bankers : Commercial Bank of Ceylon PLC People’s Bank Seylan Bank PLC Hatton National Bank PLC Bank of Ceylon Designed & produced by * Appointed to the Committee 21 April 2017
Printed by Printage (Pvt) Ltd BRAC Lanka Finance PLC Annual Report 2016/17