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Notes to the Financial Statement
 
(All amounts in Sri Lanka Rupees millions)
1. REVENUE
The significant categories under which revenue is recognised are as follows:

  Group Company
  2005 2004 2005 2004
         
Release of deferred connection charges (Note 18) 896 833 896 833
Rental income 7,687 7,069 6,992 6,497
Domestic call revenue 12,221 11,481 10,096 9,668
Receipts from other network operators - domestic 215 343 304 373
International call revenue 2,430 2,514 2,275 2,306
Receipts from other network operators - international 291 280 351 329
International settlements (in payments) 5,207 4,794 5,207 4,794
Telex, data transmission and other telephony services 3,005 2,202 2,598 1,881
CDMA revenue 563 – 563 –
  32,515 29,516 29,282 26,681
 
2. OPERATING COSTS
The following items have been included in arriving at operating profit:

  Group Company
  2005 2004 2005 2004
         
Staff costs (Note 3) 4,144 3,619 3,857 3,395
Directors emoluments 32 25 30 25
Payments to international network operators 1,755 1,750 1,755 1,750
Payments to other network operators - international 688 664 662 661
Payments to other network operators - domestic 146 316 237 316
Auditors’ remuneration        
– Audit fees 4 4 3 3
– Non-Audit fees – 2 – 2
Repairs and maintenance 2,024 1,420 1,801 1,342
Provision for doubtful debts 849 2,563 577 1,904
Provision for fall in value of inventories 290 90 109 40
Net foreign exchange losses/(gains) on operating 46 (86) 69 (200)
Amortisation of goodwill (Note 10) 78 78 – –
Other operating expenditure 5,067 3,956 3,493 2,363
CDMA expenditure 305 – 305 –
Write off of inventories 84 84 – –
  15,512 14,485 12,898 11,601
 
3. STAFF COSTS
  Group Company
  2005 2004 2005 2004
         
Salaries, wages, allowances and benefits 3,547 3,226 3,298 3,031
Retirement costs        
– defined contribution plans 349 315 318 293
– defined benefit plans (Note 20) 248 78 241 71
  4,144 3,619 3,857 3,395
Number of employees at the end of the period 7,995 7,879 7,311 7,174
 
4. INTERNATIONAL TELECOMMUNICATION OPERATORS' LEVY
  Group Company
  2005 2004 2005 2004
         
Charge for the year/period 1,691 2,474 1,690 2,469
Over provision in respect of previous period (141) – (141) –
Charge to income statement 1,550 2,474 1,549 2,469

According to Finance Act No. 11 of 2004, International Telecommunications Operators are required to make a contribution to the Govenment at the rate of US$ 0.038 per international incoming traffic minute w.e.f. 3 March 2003. The total amount of the levy in respect of SLTL from 1 January 2005 to 31 December 2005 has been estimated at Rs. 1,690 million (2004 - Rs. 2,469 million) and has been recognised as an expense in the current financial year. The corresponding liability has been recognised in the balance sheet.

The Gazette notification of 31 March 2005 provides that each domestic PSTN operator may claim two thirds of the Telecommunications Development Charge (TDC) funds, for the development of their telecommunications network in unserved and underserved areas of Sri Lanka as may be determined by the Telecommunications Regulatory Commission (TRC) within a period of three years.

The documentation supporting the Network roll out in unserved and underserved areas has been submitted to the TRC. The estimated refund of Rs. 2,020 million as at 31 December 2005 has not been recognised in the income statement, since TRC's determination of the refund is yet awaited.
 
5. FINANCE COSTS
  Group Company
  2005 2004 2005 2004
         
Interest expense and related charges        
Rupee loans (long term) 944 1,631 344 1,236
Foreign currency loans 193 255 155 229
US$ 100 million notes 691 60 691 60
Debenture interest 12 66 12 66
Amortisation of deferred costs 97 114 87 48
Other charges [Note (a)] (65) (274) (76) (290)
Total interest payable 1,872 1,852 1,213 1,349
Interest capitalised (11) (76) – (13)
Total interest charged 1,861 1,776 1,213 1,336
Foreign exchange loss (Note 25) 224 476 224 476
Aggregate value of finance costs 2,085 2,252 1,437 1,812

(a) Other charges include exchange gain from US$ 100 million Bond and other exchange gains and losses on foreign currency deposits, etc.
 
6. TAX
The charge for taxation is made up as follows:
  Group Company
  2005 2004 2005 2004
         
Income tax charge 3,195 798 3,170 798
Tax saving on brought forward losses and investment tax allowances – 2,994 – 2,994
Release of deferred tax liability (Note 17) (1,476) (2,982) (1,476) (2,982)
Change in estimation in the amortisation of deferred tax asset – (662) – (662)
  1,719 148 1,694 148

The tax on the Company’s and Group's profit before tax differs from the theoretical amount that would arise using the
basic tax rate of the Company and Group as follows:
  Group Company
  2005 2004 2005 2004
Profit before tax 4,812 1,441 6,045 2,769
Tax calculated at a tax rate of 30% (2004 - 30%) 1,444 432 6,045 831
Tax effect of income not subject to tax (1,240) (911) (153) (21)
Expenses not deductible for tax purposes 1,515 1,289 34 –
Change in estimation in the amortisation of deferred tax asset – (662) – (662)
Tax charge 1,719 148 1,694 148
 
7. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year.

  Group Company
  2005 2004 2005 2004
         
Net profit attributable to shareholders (Rs. million) 3,093 1,293 4,351 2,621
Weighted average number of ordinary shares in issue (million) 1,805 1,805 1,805 1,805
Basic earnings per share (Rs.) 1.71 0.72 2.41 1.45
All ordinary shares are at a par value of Rs. 10.        
 
8. DIVIDENDS PER SHARE
In respect of 2004, a first and final dividend of 5% per share amounting to a total of Rs. 902,430,000 has been paid in the current year. (In respect of 2003, a first and final dividend of 5% per share amounting to a total of Rs. 902,430,000 was paid during 2004).
 
9. PROPERTY, PLANT & EQUIPMENT
  Freehold land Ducts, cables Telephone Transmission Other fixed Contract Total
(a) and and other exchanges equipment assets work- in-  
  inbuildings outside plant       progress  
               
Year ended 31 December 2004              
Opening net book amount 1,740 27,769 8,920 8,190 1,799 7,355 55,773
Additions – 4 7 126 884 1,060 5,511 7,628
Transfers from work-in-progress 9 9 2,226 434 4,229 1,360 (8,348) –
Adjustment – – – (46) – (59) (105)
Accumulated depreciation – – – 1 6 – – 1 6
Disposals – – – – (8) – (8)
Accumulated depreciation on disposal – – – – 8 – 8
Depreciation charge (38) (5,126) (1,227) (1,798) (763) – (8,952)
Closing net book amount 1,801 24,916 8,253 11,475 3,456 4,459 54,360
               
At 31 December 2004              
Cost 2,064 61,547 16,845 20,412 6,962 4,459 112,289
Accumulated depreciation (263) (36,631) (8,592) (8,937) (3,506) – (57,929)
Net book amount 1,801 24,916 8,253 11,475 3,456 4,459 54,360
               
Year ended 31 December 2005              
Opening net book amount 1,801 24,916 8,253 11,475 3,456 4,459 54,360
Additions 2 272 2 8 2,590 853 7,794 11,539
Transfers from work-in-progress 31 4,401 1,588 2,086 859 (8,965) –
Disposals – – – – (26) – (26)
Adjustment (107) (14) – 1 101 – (19)
Accumulated depreciation on disposal – – – – 2 6 – 2 6
Write off (4) (44) (227) (83) (5) – (363)
Depreciation charge (41) (4,779) (1,267) (2,115) (1,164) – (9,366)
Closing net book amount 1,682 24,752 8,375 13,954 4,100 3,288 56,151
               
At 31 December 2005              
Cost 1,982 66,008 17,996 24,828 8,744 3,288 122,846
Accumulated depreciation (300) (41,256) (9,621) (10,874) (4,644) – (66,695)
Net book amount 1,682 24,752 8,375 13,954 4,100 3,288 56,151


Company
  Freehold land Ducts, cables Telephone Transmission Other fixed Contract Total
  and and other exchanges equipment assets work- in-  
  buildings outside plant       progress  
               
Year ended 31 December 2004              
Opening net book amount 1,740 27,664 8,920 7,330 1,702 3,897 51,253
Additions – 4 7 126 1 0 1,014 3,874 5,071
Transfers from work-in-progress 9 9 2,226 434 247 1,246 (4,252) –
Disposals – – – – (7) – (7)
Accumulated depreciation on disposal – – – – 7 – 7
Depreciation charge (38) (5,111) (1,227) (1,032) (706) – (8,114)
Closing net book amount 1,801 24,826 8,253 6,555 3,256 3,519 48,210
               
At 31 December 2004              
Cost 2,064 61,397 16,845 13,455 6,462 3,519 103,742
Accumulated depreciation (263) (36,571) (8,592) (6,900) (3,206) – (55,532)
Net book amount 1,801 24,826 8,253 6,555 3,256 3,519 48,210
               
Year ended 31 December 2005              
Opening net book amount 1,801 24,826 8,253 6,555 3,256 3,519 48,210
Additions 2 272 2 8 8 4 838 6,698 7,922
Transfers from work-in-progress 31 4,401 1,588 475 824 (7,319) –
Disposals – – – – (25) – (25)
Adjustment (107) (14) – 1 102 – (18)
Accumulated depreciation on disposal – – – – 2 5 – 2 5
Write off (4) (44) (227) (83) (5) – (363)
Depreciation charge (41) (4,707) (1,267) (1,025) (1,104) – (8,144)
Closing net book amount 1,682 24,734 8,375 6,007 3,911 2,898 47,607
               
At 31 December 2005              
Cost 1,982 65,858 17,996 13,754 8,196 2,898 110,684
Accumulated depreciation (300) (41,124) (9,621) (7,747) (4,285) – (63,077)
Net book amount 1,682 24,734 8,375 6,007 3,911 2,898 47,607
 
  1. On 1 September 1991 the Department of Telecommunications (DOT) transferred its entire telecommunications business and related assets and liabilities to SLT. A valuation was performed by the Government of the assets and liabilities transferred to SLT. The net amount of those assets and liabilities represents SLT's Contributed Capital on incorporation, and those values were used as the opening cost of fixed assets at 1 September 1991 in the first statutory accounts of SLT.

    Further, SLT was converted into a public limited company, Sri Lanka Telecom Limited (SLTL), on 25 September 1996 and on that date all of the business and the related assets and liabilities of SLT were transferred to SLTL as part of the privatisation process.

  2. The cost of fully depreciated assets as at 31 December 2005 is Rs. 16,118 million (2004 - Rs. 10,143 million).

  3. Borrowing costs capitalised during the year to 31 December 2005 was Nil (2004 - Rs. 13 million).

  4. No assets have been mortgaged or pledged as security by SLTL.

  5. The Directors believe SLTL has freehold title to land and buildings transferred from SLT on incorporation (Conversion of SLT to SLTL on 25 September 1996), although it is uncertain whether vesting orders specifying all the demarcations and extents of such land and buildings were issued.

  6. The property, plant & equipment is not insured except for third party motor vehicle insurance. An insurance reserve has been created together with a sinking fund investment to meet any future loss with regard to uninsured property, plant & equipment. At the balance sheet date, Rs. 166 million (2004 - Rs. 100 million) stood to the credit of the reserve (Note 21).The sinking fund investment of that amount is included under cash and cash equivalents [Note 15 (a)].

  7. Additions include an asset received as a grant amounting to Rs. 79 million.
 
10. INTANGIBLE ASSETS
  Group
  Goodwill
 
Year ended 31 December 2005  
Opening net book amount 219
Amortisation charge (Note 2) (78)
Closing net book amount 141
   
At 31 December 2005  
Cost 388
Accumulated amortisation (247)
Net book amount 141
 
11. INVESTMENTS
  Group Company
  2005 2004 2005 2004
         
Investment in subsidiary [Note (a)] – – 25 25
Investment in subsidiary        
At 1 January – – 1,972 1,972
Additions [Note (b)] – – 1,500 –
At 31 December – – 3,472 1,972
         
Investment in others [Note (c)]        
At 1 January 710 710 710 710
Disposal (710) – (710) –
At 31 December – 710 – 710
Aggregate cost of investments at 31 December – 710 3,497 2,707
  1. The investment in the subsidiary company consists of 2,500,000 ordinary shares, representing a 100% holding in the issued share capital of Sri Lanka Telecom (Services) Limited.
  2. Additions comprise investment in 150,000,000 redeemable preference shares of Rs 10 each in Mobitel (Private) Limited.
  3. The investment in others Nil (2004 - Rs. 710 million) comprised unlisted investments in Intelsat Limited.
 
12. NON-CURRENT RECEIVABLES

  Group Company
  2005 2004 2005 2004
         
Licence fee 82 92 – –
Employee loans [Note (a)] 962 846 962 846
Deferred expenses (prepaid Insurance Premium) [Note (b)] 341 501 36 123
Loan to subsidiary [Note (c)] – – 2,500 –
Amounts due after one year 1,385 1,439 3,498 969
  1. Employee loans are repayable in equal monthly instalments over five years. The amount shown as a non-current receivable represents staff loan instalments falling due for payment after 1 January 2007.
  2. As explained in Accounting Policy L, insurance premium paid by the Company to secure foreign loans under the 150K Project Scheme has been deferred on the grounds that the benefit of this expenditure is not exhausted in the period in which it is incurred and will be written off to the Income Statement over the repayment period of the loans.
  3. During the year the Company granted a loan of Rs. 2.5 billion to its wholly owned subsidiary Mobitel (Private) Limited at an interest rate of 12% repayable over 3 years commencing 2008.
 
13. INVENTORIES
Inventories consist of engineering stores and consumables, office equipment and hardware, shown net of provisions for slow moving and obsolete items.
 
14. RECEIVABLES AND PREPAYMENTS
  Group Company
  2005 2004 2005 2004
         
Domestic trade receivables 6,474 8,174 5,916 7,565
Foreign trade receivables 1,078 1,208 1,078 1,208
Amount due from related parties [Refer Note 29 (c)]     372  
Advances and prepayments [Note (a)] 180 198 136 89
Employee loans 250 198 250 198
Deferred expenses (prepaid insurance premium) 48 48 48 48
Other receivables [Note (b)] 501 161 106 49
Amounts due within one year 8,531 9,987 7,906 9,157

  1. Advances and prepayments mainly consist of advances on purchases Rs. 51 million (2004 - Rs. 53 million) and payments for software maintenance Rs. 65 million (2004 - Nil).
  2. Other receivables mainly consist of returned cheques Rs. 20 million (2004 - Rs. 18 million), interest receivable on investments Rs. 22 million (2004 - Rs. 8 million), interest receivable on sinking fund maintained for the redemption of the US $ 100 million Bond Rs. 25 million (2004 - Nil) and deposit with Ceylon Electricity Board Rs. 13 million (2004 - Rs. 13 million).
 
15. CASH AND CASH EQUIVALENTS
  Group Company
  2005 2004 2005 2004
         
Cash at bank and in hand 756 667 351 367
Restricted at bank [Note (a)] 2,205 149 2,205 149
Short term deposits [Note (b)] 11,507 10,029 10,179 10,220
  14,468 10,845 12,735 10,736
  1. The restricted cash balance is a bank deposit of Rs. 164 million (2004 - Rs. 149 million) with the People's Bank which represents the sinking fund investment for the insurance reserve. It also includes a sinking fund maintained to redeem the US $ 100 million Bond in 2009 amounting to Rs. 2,041 million (2004 - Nil). The restrictions on these balances are self-imposed.
  2. These deposits are interest-bearing on commercial terms.
For the purpose of the cash flow statement, the year-end cash and cash equivalents comprise the following:

  Group Company
  2005 2004 2005 2004
         
Cash and cash equivalents 14,468 10,845 12,735 10,736
Bank overdrafts (Note 16) (40) (141) – –
Cash and cash equivalents as previously reported 14,428 10,704 12,735 10,736
Effect of exchange rate changes – (219) – (219)
Cash and cash equivalents as restated 14,428 10,485 12,735 10,517
 
16. BORROWINGS
  Group Company
  2005 2004 2005 2004
         
Current (due within one year)        
Bank overdrafts 40 141 – –
Government borrowings 696 769 696 769
Bank borrowings and others 2,965 3,180 1,138 1,263
Debentures – 375 – 375
  3,701 4,465 1,834 2,407


  Group Company
  2005 2004 2005 2004
         
Non-current (due after one year)        
Government borrowings 2,690 3,386 2,690 3,386
Bank borrowings and others 6,244 7,049 953 2,250
US$ 100 million Notes 10,205 10,470 10,205 10,470
  19,139 20,905 13,848 16,106
  22,840 25,370 15,682 18,513
  1. The interest rate exposure of the borrowings of the Group and Company were as follows:
  Group Company
  2005 2004 2005 2004
         
Total borrowings        
- at fixed rates 12,327 14,610 12,327 14,469
- at floating rates 10,513 10,760 3,355 4,044
  22,840 25,370 15,682 18,513

The currency exposure of the borrowings of the Group and Company at the Balance Sheet date was as follows:

  Group Company
  2005 2004 2005 2004
         
Foreign currency 13,182 15,092 12,296 13,984
Local currency 9,658 10,278 3,386 4,529
  22,840 25,370 15,682 18,513
 
      Group/Company
      2005 2004
         
Average effective interest rates        
- Bank overdrafts     11.18% 11%
- Domestic bank borrowings     – 8.28%
- Foreign bank borrowings     6.11% 5.17%
- Government borrowings     9.96% 11.59%
         
Debentures        
- Fixed (annually)     14.50% 14.50%
- Fixed (quarterly)     14.00% 14.00%
- Floating     13%-16% 13% - 16%
- US$ 100 million Notes     6.875% 6.875%
 
Maturity of non-current borrowings
  Group Company
  2005 2004 2005 2004
         
Between 1 and 2 years 3,758 6,466 2,241 3,412
Between 3 and 5 years 15,373 13,795 11,599 12,050
Over 5 years 8 644 8 644
  19,139 20,905 13,848 16,106
  2. The Government borrows amounts in foreign currencies to fund the development of SLTL's network. These amounts have been re-lent to SLTL with shorter repayment periods than the underlying loan. The loan balance as at 31 December 2005 is Rs. 3,386 million (2004 - Rs. 4,155 million). Exchange fluctuations on repayments of these loans are borne by the Government.
  3. The Government has guaranteed third party loans of SLTL amounting to Rs. 2,091 million (2004 - Rs. 3,473 million). Total value of borrowings that has neither been guaranteed nor secured is Rs. 10,205 million (2004 - Rs. 10,511 million).
  4. The majority of the loans require SLTL and Mobitel (Private) Limited to submit audited financial statements among other matters to the lenders within the stated periods of the calendar year end, and to maintain adequate accounting records in accordance with generally accepted accounting principles.
  5. The Directors believe the Company will have sufficient finances available to meet its present commitments.
 
17. DEFERRED INCOME TAXES

(a) Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 30% (2004 - 30%).
The movement in the deferred income tax account is as follows:

  Group Company
  2005 2004 2005 2004
         
At beginning of year 7,489 8,139 7,489 8,139
Income statement release (Note 6) (1,476) (2,982) (1,476) (2,982)
Change in estimation in the amortisation of
deferred tax asset [Note 17(c)]		 – (662) – (662)
Amortisation of the tax asset on account of brought forward
losses and investment tax allowances [Note 17 (c)]		 – 2,994 – 2,994
At end of year 6,013 7,489 6,013 7,489

(b) The amounts shown in the balance sheet represent the following:
  Group Company
  2005 2004 2005 2004
         
Deferred tax asset [Note 17(c)] – – – –
Deferred tax liabilities 6,013 7,489 6,013 7,489
  6,013 7,489 6,013 7,489

(c) As at 31 December 2005 (2004 - Nil) deferred tax asset has been fully utilised as follows:
    Group/Company
      2005 2004
         
Balance as at 1 January [Note 17 (a)]     – 2,332
Change in estimation in the amortisation of
deferred tax asset [Note 17 (a)]		     – 662
        2,994
Amortised to the income statement     – (2,994)
As at 31 December     – –
 
18. DEFERRED INCOME
Deferred income represents the new connection charges, net of amounts amortised to the Income Statement. Connection charges are initially recognised as deferred income and amortised over a period of 15 years as stated in Accounting Policy R.

    Company
      2005 2004
         
Balance at 1 January     7,272 7,214
Connection fees for the year     1,170 891
Amount amortised during the year (Note 1)     (896) (833)
Balance at 31 December     7,546 7,272
 
19. TRADE AND OTHER PAYABLES
  Group Company
  2005 2004 2005 2004
         
Amounts due within one year        
Domestic trade payables 893 846 170 302
Foreign trade payables 116 196 116 196
Amount due to related parties [Note 29 (c)] – – 2 33
Capital expenditure payables [Note (a)] 2,391 1,045 2,254 901
Deferred revenue 141 89 – –
Social security and other taxes [Note (b)] 162 234 162 234
Interest payable 218 237 170 237
Other payables [Note (c)] 3,493 3,969 3,389 3,753
  7,414 6,616 6,263 5,656
         
Amounts due after one year        
International Direct Dialling deposits 236 233 236 233
Prepayments on VOIP services 61 1 61 1
  297 234 297 234

  1. Capital expenditure payables mainly consist of contractors' payables Rs. 1,594 million (2004 - Rs. 351 million).
  2. Social security and other taxes mainly consist of Value Added Tax Rs. 91 million (2004 - Rs. 135 million).
  3. Other payables mainly consist of Rs. 239 million (2004 - Rs. 238 million) dividend payable to Government Treasury, Rs. 22 million (2004 - Rs. 300 million) as provision for Tsunami losses, Rs. 2,317 million (2004 - Rs. 2,469 million) as International Telecommunication Operators' Levy and Rs. 168 million as cess (2004 - Rs. 139 million) payable to Director General of Telecommunication.

20. RETIREMENT BENEFIT OBLIGATIONS
Movement in the liability recognised in the Balance Sheet:

  Group Company
  2005 2004 2005 2004
         
At beginning of year 520 493 497 475
Current service cost (Note 3) 248 78 241 71
Contributions paid        
- VRS employees – (30) – (30)
- Other employees (17) (21) (17) (19)
At the end of year 751 520 721 497

As stated in Accounting Policy O, an actuarial valuation was carried out by an independent actuary in respect of all
employees of SLTL as at 31 December 2005.
The principal actuarial assumptions used were as follows:

    Company
      2005 2004
         
Discount rate     10% 11%
Future salary increases     9% 9%

In addition to the above, demographic assumptions such as mortality, withdrawal, retirement age were considered for the actuarial valuation. In 2005 1967/70 Mortality Table issued by the Institute of Actuaries London (2004 - 1949/52 Mortality Table) was taken as the base for the valuation.
 
21. INSURANCE RESERVE
    Company
      2005 2004
         
At beginning of year     100 95
Income Statement charge     10 5
Interest income on deposit (sinking fund)     56 –
At end of year     166 100
 
22. GROUP REPORTING DATES
The financial statements of Sri Lanka Telecom (Services) Limited (SLTSL) and Mobitel (Private) Limited, wholly-owned subsidiaries, are prepared to 31 December each year.
 
23. ORDINARY SHARES

    Company
      2005 2004
     
Authorised    
10,000,000,000 (2004 - 10,000,000,000) ordinary shares of Rs. 10/- each 100,000 100,000
Issued and Fully Paid    
1,804,860,000 ordinary shares of Rs. 10/- each 18,049 18,049

The issued and fully paid share capital is held as follows:
  2005 2004
  Holding % No. of Shares Holding % No. of Shares
         
Government of Sri Lanka (GOSL) 49.50 893,405,700 49.50 893,405,700
NTT Communications Corporation (NTT Com) 35.20 635,076,318 35.20 635,076,318
Employees and others 15.30 276,377,982 15.30 276,377,982
    1,804,860,000   1,804,860,000
 
24. CAPITAL RESERVE
Capital reserve includes capital reserve arising on the acquisition in 1996, of 15,170,640 shares in Mobitel (Private) Limited, a wholly-owned cellular telephony company.
 
25. HEDGING RESERVE
      Company
      2005 2004
         
At beginning of year     (677) (745)
Cash flow hedges        
- Foreign currency translation difference     245 (408)
- Income Statement charge (Note 5)     224 476
At end of year     (208) (677)
  1. The Company's risk management objective is to minimise losses on foreign currency translation relating to the repayment of loans denominated in foreign currency. This is accounted for as a cash flow hedge.
  2. The policy for hedging each type of forecast transaction is stated in Accounting Policy T.
  3. The future transactions are forecasted for a period of five years.
 
26. CASH GENERATED FROM OPERATIONS
Reconciliation of profit before tax to cash generated from operations:
  Group Company
  2005 2004 2005 2004
         
Profit before tax 4,812 1,441 6,045 2,769
Adjustments for        
Depreciation (Note 9) 9,366 8,952 8,144 8,114
Amortisation of deferred costs (Note 5) 166 48 87 48
Net exchange loss on financing activities (Note 5) 125 458 148 458
Interest expense and related charges 1,937 2,066 1,289 1,626
Interest income (648) (202) (633) (190)
Connection fees less amortisation (Note 18) 274 58 274 58
Profit on sale of property, plant & equipment (12) (12) (12) (12)
Provision for insurance reserve (Note 21) 66 5 66 5
Amortisation of goodwill (Note 10) 78 78 – –
Retirement benefits (Note 20) 231 22 224 22
Profit on sale of investment (52) – (52) –
Write off of property, plant & equipment 103 – 103 –
Write off of inventories 84 84 – –
  16,530 12,998 15,683 12,898
Changes in working capital        
- receivables and prepayments 1,471 (1,650) 1,261 (629)
- inventories 384 (527) 77 (271)
- payables 1,283 2,224 1,028 1,475
Cash generated from operations 19,668 13,045 18,049 13,473
 
27. COMMITMENTS
Capital Commitments
The Group/Company has purchase commitments incidental to ordinary course of business as at 31 December 2004 as follows:

  Group Company
  2005 2004 2005 2004
         
Property, plant and equipment        
- approved but not contracted 766 2,723 766 2,723
- approved and contracted 23,355 9,915 20,326 7,741
  24,121 12,638 21,092 10,464

Lease Commitments
The future minimum lease payments under non-cancellable operating leases are as follows:

  Group Company
  2005 2004 2005 2004
  299 142 299 142

Financial Commitments
Except for the regular maintenance contracts entered into with third parties within the normal course of business there are no other material financial commitments which should require separate disclosure.
 

28. CONTINGENCIES

  1. Directories Lanka (Private) Limited has instituted legal action against SLT claiming a sum of Rs. 164 million as damages, in relation to alleged breach of contract in publishing directories.
  2. An organisation, styling itself "The Consumer Association of Lanka", initiated legal action in the Court of Appeal seeking a writ of Certiorari to quash the approval granted by the Minister of Telecommunications (the Minister) and the Telecommunication Regulatory Commission (TRC) of Sri Lanka for tariff revision implemented by Sri Lanka Telecom Limited (SLTL) in September 2003, in which the TRC, the Minister, the Secretary to the Treasury and SLTL were cited as the respondents to the case.

    The judgement delivered in July 2005 by the Court of Appeal granted the writ of Certiorari quashing the approval granted for the tariff revision by the Minister and the TRC. SLTL filed its application seeking special leave to appeal to the Supreme Court. The matter was taken up on 7 November 2005 and the Supreme Court granted special leave to appeal against the Court of Appeal order. Pending the outcome of the appeal, no adjustment has been made in the financial statements up to 31 December 2005.
  3. Employees and third parties have filed action against SLT claiming damages. In the opinion of the Directors none of these actions is likely to result in a material liability to the Company.
 

29. DIRECTORS’ INTERESTS IN CONTRACTS

  1. A Director is considered to have a direct interest in a contract with the Company, if the Director himself is involved in a contract with the Company. A Director has an indirect interest in a contract with the Company, if the Director, through his common Directorships or his dependent family members is involved in a contract with the Company.

    The Directors of Sri Lanka Telecom Limited held Directorship in the following organisations during the year:

    Director Company Position
    Mr. Anil Obeyesekere Mobitel (Private) Limited Director
      Sri Lanka Telecom (Services) Limited Director
    Mr. Lalith De Mel Hemas Holdings Limited Director
      Serendib Hotels Limited Director
      Delmege Forsyth and Company Limited Director
      Associated Hotels Company Limited Director
      Serendib Leisure Management Limited Director
      Demchi (Private) Limited Director
      Mobitel (Private) Limited Director
    Mr. Nigel Hatch Mobitel (Private) Limited Director
    Mr. Sadao Maki NTT Europe Limited Director
      Philippine Long Distance Telephone Company Director
      NTT Investment Singapore Pte. Limited Director
      NTT America, Inc. Director
      NTT Communications Corporation Director
    Mr. Tadashi Imachi NTT Korea Company Limited Director
      NTT Communications India (Pvt) Limited Director
    Mr Shoji Takahashi NTT Com Asia Limited Director
      HK Net Co. Limited Director
    NTT Com Asia Network Systems Limited  
    (Guang Zhou) Limited Director

    SLTL had the following transactions with the above companies during the year under review:
  2. Mobitel (Private) Limited
    Payments amounting to Rs. 19 million (2004 - Rs. 10 million) have been made during the year on call charges relating to cellular phones purchased for SLTL employees. Further, cellular phones amounting to Rs. 2 million (2004 - Rs. 1 million) were purchased from Mobitel (Private) Limited during the year.

    Number of new GSM connections granted (special packages with no monthly rental) in 2005 amounted to 7,783 (2004 - 922).

    Mobitel (Private) Limited has obtained several E1 links from SLTL for which Rs. 41 million (2004 - Rs. 71 million) was paid during the year.

    The Company has guaranteed the following on behalf of Mobitel (Private) Limited:
    1. Loans amounting to Rs. 7,211 million (2004 - Rs. 8,427 million) and USD 8.7 million (2004 - USD 11 million) for GSM roll out and operational expenses.
    2. To obtain an investment commitment guarantee amounting to Rs. 250 million (2004 - Rs. 250 million) issued by banks in favour of TRC for bidding for a slot in the 1800 MHz band for the GSM roll out.
  3. Outstanding balances arising from sale/purchase of services

      2005 2004
         
    Receivable from related party    
    Mobitel (Private) Limited - Interconnection charges rental and interest on loan 564 83
         
    Payable to related parties    
    Mobitel (Private) Limited - Interconnection charges and mobile phone charges 191 97
    Sri Lanka Telecom (Services) Limited 2 11
      193 108

    NTT Communications Corporation
    As per the shareholders’ agreement with NTT Com, which owns 35.2% of the issued share capital of SLTL, the following charges have been borne by the Company:

      2005 2004
         
    Fees for secondment of personnel from NTT Com 40 39
    Expenditure for personnel from NTT Com 7 8
 
30. RELATED PARTY RELATIONSHIPS AND TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. A related party transaction takes place with a transfer of resources or obligations between related parties, regardless of whether a price is charged.

Accordingly, Sri Lanka Telecom (Services) Limited is a related party of SLTL where SLTL has the ability to control. All transactions during the year and balances as at the balance sheet date between the two companies have been eliminated in preparing consolidated financial statements.

Mobitel (Private) Limited, is a related party of SLTL where SLTL has the ability to control. All transactions during the year and balances as at the balance sheet date between the two companies have been eliminated in preparing consolidated financial statements.

Related party transactions disclosed above should be read in conjunction with Note 29 to the financial statements.
 
31. POST BALANCE SHEET EVENTS
No events have arisen since the balance sheet date which would require adjustments to, or disclosure in, the financial statements.