Notes to the Financial Statements

(All amounts in Sri Lanka rupees million)

1. Reporting entity

Sri Lanka Telecom PLC (the “Company”) is a company domiciled in Sri Lanka. The address of the Company’s registered office is Lotus Road, Colombo 1. The separate Financial Statements relates to Sri Lanka Telecom PLC. The Consolidated Financial Statements of the Company as at and for the year ended December 2017 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Financial Statements of all companies within the Group are prepared for a common financial year which ends on 31 December 2017.

The Group primarily is involved in providing broad portfolio of telecommunication services across Sri Lanka. In addition, the range of services provided by the Group include, inter alia, internet services, data services, domestic and international leased circuits, broadband, satellite uplink, maritime transmission, IPTV service, directory publishing and provision of manpower. The Company is a quoted public Company which is listed on the Colombo Stock Exchange.

Parent enterprise and ultimate parent enterprise

Sri Lanka Telecom PLC does not have an identifiable parent of its own.

2. Basis of preparation

(a) Statement of compliance

The Financial Statements of the Group and the Company which comprises the Statement of Financial Position, Statement of Profit or Loss and Other Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows have been prepared in accordance with Sri Lanka Accounting Standards (SLFRS and LKAS) as laid down by The Institute of Chartered Accountants of Sri Lanka (ICASL) and the requirements of the Companies Act No. 07 of 2007.

(b) Approval of Financial Statements by Directors

The Financial Statements were authorised for issue by the Board of Directors in accordance with the resolution of the Directors on 29 March 2018.

(c) Basis of measurement

The Financial Statements have been prepared on the historical cost basis applied consistently with no adjustments being made for inflationary factors affecting the Financial Statements except for the following item:

• The liability for defined benefit obligation recognised are actuarially valued and recognised at the present value of the defined benefit obligation.

The Financial Statements have been prepared on a going concern basis.

(d) Functional and presentation currency

These Financial Statements are presented in Sri Lankan Rupees, which is the Company’s functional currency and the Group’s presentation currency. All financial information presented in rupees has been rounded to the nearest million, unless otherwise indicated.

(e) Use of estimates and judgements

The preparation of Financial Statements in conformity with Sri Lanka Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the Financial Statements is included in the following Notes:

• Note 13 – Property, plant and equipment
• Note 14 – Intangible assets
• Note 20 – Trade and other receivables
• Note 32 – Provisions and contingencies
• Note 23 – Deferred tax
• Note 24 – Deferred income
• Note 26 – Employee benefits

(f) Changes in accounting policies

No changes in accounting policies have taken place during the year ended 31 December 2017.

3. Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in Financial Statements, and have been applied consistently by the Group entities.

Where applicable, except the following:

(a) Basis of consolidation

(i) Business combinations

The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain or bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities.

The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.

Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss.

(ii) Subsidiaries

Subsidiaries are entities that are controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Financial Statements from the date on which control commences until the date on which control ceases.

(ii-a) Critical judgements in applying the entity’s

accounting policies

The Directors have concluded that the Group controls all subsidiaries as it has majority control and voting rights over its subsidiaries as depicted in Note (ii-b), below:

(ii-b) Interest in subsidiaries

Set out below are the Group’s subsidiaries as at 31 December 2017:

Name of entity	Place of business/ country of incorporation	Percentage of ownership	Principal activities
Mobitel (Private) Limited	Colombo/Sri Lanka	100.00%	Mobile service provider
Sri Lanka Telecom (Services) Limited	Colombo/Sri Lanka	99.99%	Providing network solutions for corporate customers and small business
SLT VisionCom (Private) Limited	Colombo/Sri Lanka	100.00%	Providing IPTV support service
SLT Digital Services (Private) Limited	Colombo/Sri Lanka	100.00%	Directory information, event management & activation and digital services
SLT Human Capital Solutions (Private) Limited	Colombo/Sri Lanka	100.00%	Providing workforce solutions
Sky Network (Private) Limited	Colombo/Sri Lanka	99.94%	Wireless broadband operations
SLT Property Management (Private) Limited	Colombo/Sri Lanka	100.00%	Managing SLT real estate resource
SLT Campus (Private) Limited	Colombo/Sri Lanka	100.00%	Higher education services and business management
Galle Submarine Cable depot (Private) Limited	Colombo/Sri Lanka	40.00%	Maintenance of Marine Cables

(iii) Non-controlling interest (NCI)

NCI are measured at their proportionate share of acquiree’s identifiable net assets at the date of acquisition. Changes in the Group interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

(iv) Loss of control

When the Group loses control over a subsidiary, it derecognises the asset and liabilities of the subsidiary and any related NCI (if applicable) and other components of equity. Any resulting gain or loss is recognised in profit

or loss. Any interest in the former subsidiary is measured at fair value when control is lost.

(v) Transactions eliminated on consolidation

Intra-group balances and transactions and any unrealised income and expenses arising from intra-group transactions, are eliminated.

(b) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated into the respective functional currencies of Group companies at the exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value was determined. Foreign currency differences are generally recognised in Statement of Profit or Loss and Other Comprehensive Income. Non-monetary items that are measured based on historical cost in a foreign currency are not translated.

(c) Financial instruments

The Group classifies non-derivative financial assets into the following categories: held-to-maturity financial assets, loans and receivables and available-for-sale financial assets.

The Group classifies non-derivative financial liabilities into the other financial liabilities category.

(i) Non-derivative financial assets and financial liabilities – Recognition and derecognition

The Group initially recognises loans and receivables and debt securities issued on the date when they are originated. All other financial assets and financial liabilities are initially recognised on the trade date.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred or it neither transfers nor retains substantially all risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

(i-i) Non-derivative financial assets – Measurement

Held-to-maturity financial assets	These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method.
Loans and receivables	These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method. Loans and receivables comprise cash and cash equivalents, staff loans, and trade and other receivables, including related party receivables.
Available-for-sale financial assets	These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, are recognised in other comprehensive income and accumulated in the fair value reserve. When these assets are derecognised, the gain or loss accumulated in equity is reclassified to Statement of Profit or Loss and Other Comprehensive Income.

(i-ii) Non-derivative financial liabilities – Measurement

Non-derivative financial liabilities are initially recognised at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method.

(i-iii) Fair value measurement

SLFRS 13 defines fair value as the price that would be received to sell and an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

A fair value measurement requires an entity to determine the following:

1. The particular asset or liability that is the subject of the measurement.
2. For a non-financial asset, the valuation premise that is appropriate for the measurement (consistently with its highest and best use).
3. The principal (or most advantageous) market for the asset or liability.
4. The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e., an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss on an appropriate basis over the life of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out.

Determination of fair values

The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumption and other risks affecting the specific instrument.

• Level 1
  Fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2
  Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
• Level 3
  Fair value measurements using inputs for the asset or liability that are not based on observable market data (i.e., unobservable inputs).

Amortised cost

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

(i-iv) Reclassifications

Reclassifications of financial assets, other than as set out below or of financial liabilities between measurement categories are not permitted following initial recognition.

Held-for-trading non-derivative financial assets are transferred out of the held at fair value through profit or loss category in the following circumstances: to the available-for-sale category, where, in rare circumstances, they are no longer held for the purpose of selling or repurchasing in the near term; or to the loan and receivables category, where they are no longer held for the purpose of selling or repurchasing in the near term and they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity.

Financial assets are transferred out of the available-for-sale category to the loan and receivables category where they would have met the definition of a loan and receivable at the date of reclassification and the Group has the intent and ability to hold the assets for the foreseeable future or until maturity.

Held-to-maturity assets are reclassified to the available-for-sale category if the portfolio becomes tainted following the sale of other than an insignificant amount of held-to-maturity assets prior to their maturity.

Financial assets are reclassified at their fair value on the date of reclassification. For financial assets reclassified out of the available-for-sale category into loans and receivables, any gain or loss on those assets recognised in shareholders’ equity prior to the date of reclassification is amortised to the profit or loss over the remaining life of the financial asset, using the effective interest method.

(i-v) Impairment

Non-derivative financial assets

Financial assets not classified at fair value through profit or loss, are assessed at each reporting date to determine whether there is objective evidence of impairment.

Objective evidence that financial assets are impaired includes –

• default or delinquency by a debtor;
• restructuring of an amount due to the Group on terms that the Group would not consider otherwise;
• indications that a debtor or issuer will enter bankruptcy;
• adverse changes in the payment status of borrowers or issuers;
• the disappearance of an active market for a security; or
• observable data indicating that there is a measurable decrease in the expected cash flows from a group of financial assets.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

Financial assets measured at amortised cost

The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through the Statement of Profit or Loss and Other Comprehensive Income.

Available-for-sale financial assets

Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve to the Statement of Profit or Loss and Other Comprehensive Income. The amount reclassified is the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair value, less any impairment loss previously recognised in Statement of Profit or Loss and Other Comprehensive Income. If the fair value of an impaired available-for-sale debt security subsequently increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed through Statement of Profit or Loss; otherwise, it is reversed through OCI.

Non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than, investment property, inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment.

For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs.

Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.

An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount.

Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in CGU on pro rata-basis.

An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(d) Property, plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

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

Purchased software that is integral to the functionality of the related equipment is capitalised as part of that asset.

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

(ii) Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss.

(iii) Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset or other amount substituted for cost, less its residual value. Depreciation is recognised profit or loss on a straight-line basis over the estimated useful life of each part of an item of property, plant and equipment. In the year of acquisition, depreciation is computed on proportionate basis from the month the asset is put into use and no depreciation will be charged to the month in which the particular asset was disposed. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

Depreciation method, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. The estimated useful lives for the current and comparative periods are as follows:

Freehold buildings	5-40 years
Ducts, cables and other outside plant	5-12.5 years
Submarine cables	19-25 years
Telephone exchanges	8-12.5 years
Transmission equipment and towers	12.5-40 years
Motor vehicles	5 years
CDMA handsets	3 years
PABX system	1-6 years
Other fixed assets	4-10 years

(iv) Capital work in progress

Capital work in progress is stated at cost. These are expenses of a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting capitalisation.

Major spare parts and project-related inventory qualify as property, plant and equipment when the entity expects to use them during more than one period and are used in connection with specific items of property, plant and equipment.

(v) Derecognition

The carrying amount of an item of property, plant and equipment is derecognised on disposal. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognised net within “other income” in the Statement of Profit or Loss and Other Comprehensive Income.

When replacement costs are recognised in the carrying amount of an item of property, plant and equipment, the remaining carrying amount of the replaced part is derecognised. Major inspection costs are capitalised. At each such capitalisation, the remaining carrying amount of the previous cost of inspections is derecognised.

(vi) Borrowing cost

Borrowing cost directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as a part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

(e) Intangible assets

(i) Goodwill

Goodwill arises on the acquisition of subsidiaries.

Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets. For measurement of goodwill at initial recognition, see Note 3 (a) (i).

Subsequent measurement

Goodwill is measured at cost less accumulated impairment losses.

(ii) Other intangible assets

Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses.

(iii) Licenses

Separately acquired licences are shown at historical cost. Expenditures on license fees that is deemed to benefit or relate to more than one financial year is classified as license fee and is being amortised over the license period on a straight line basis.

(iv) Subsequent expenditure

Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally-generated goodwill is recognised in profit or loss as incurred.

(v) Amortisation

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows:

Software	2-10 years
License and spectrum fees	2-10 years

(f) Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

For operating leases, the leased assets are not recognised on the Group’s Statement of Financial Position.

(g) Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average cost principle. Value of inventories includes expenditure incurred in acquiring, conversion costs and other costs incurred in bringing them to their existing location and condition.

(h) Share capital

Ordinary share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

(i) Government grants

Government grants are recognised initially at fair value when there is reasonable assurance that they will be received and the Group will comply with the conditions associated with the grant. Grants that compensate the Group for expenses incurred are recognised in the Statement of Profit or Loss and Other Comprehensive Income as other income on a systematic basis in the same periods in which the expenses are recognised. Grants that compensate the Group for the cost of an asset are recognised in the profit or loss on a systematic basis over the useful life of the asset.

(j) Employee benefits

(i) Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which contributions are made into a separate fund and the entity will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plan are recognised as an employee benefit expense in profit or loss in the periods during services is rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

Employees’ Provident Fund

All employees of the Company are members of the Sri Lanka Telecom Provident Fund to which the Company contributes 15% of such employees’ basic salary and allowances.

All employees of subsidiaries of the Group are members of Employees’ Provident Fund (EPF), to which the respective subsidiaries contribute 12% of such employees’ basic salary and allowances. Employees of Sri Lanka Telecom (Services) Limited are members of Employees’ Provident Fund (EPF), where the Company contribute 15% of such employees’ basic salary and allowances.

Employees’ Trust Fund

The Company and other subsidiaries contribute 3% of the salary of each employee to the Employees’ Trust Fund.

(ii) Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The defined benefit is calculated by an independent actuary using Projected Unit Credit Method as recommended by LKAS 19 – “Employee Benefits”. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the yield on Government Bonds at the reporting date and have maturity dates approximating to the terms of the Company’s obligations.

The Group recognises actuarial gains and losses that arise in calculating the Group’s obligation in respect of a plan in other comprehensive income.

The present value of the defined benefit obligation depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Key assumptions used in determining the defined retirement benefit obligations are given in Note 26. Any changes in these assumptions will impact the carrying amount of defined benefit obligations.

Provision has been made for retirement gratuities from the first year of service for all employees, in conformity with LKAS 19 – “Employee Benefits”. However, under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of five years of continued service.

(iii) Termination benefits

Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted,and the number of acceptances can be estimated reliably.

(iv) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognised for the amount expected to be paid under short-term cash bonus or leave encashment plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(k) Trade and other payables

Trade and other payables are stated at their amortised cost.

(l) Commitments and contingencies

All discernible risks are accounted for in determining the amount of all known liabilities. The Company’s share of any contingencies and capital commitments and of its subsidiaries for which the Company is also liable severally or otherwise are also included with appropriate disclosures.

(m) Revenue

(i) Goods

Revenue from the sale of goods in the course of ordinary activities is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates.

Equipment sale

Revenue from sales of telecommunications equipment is recognised when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably.

If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised. The total consideration on arrangements with multiple revenue-generating activities (generally the sale of telecommunications equipment and ongoing service) is allocated to those components that are separable based on the estimated fair value of the components.

The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale.

Sale of directories

Revenue from publication sales relating to advertising revenue is recognised on publishing the advertisement on the telephone directory and a copy delivered to the subscriber on a percentage of completion method.

(ii) Services

Revenue from services is recognised as the services are provided. Revenue from service contracts that cover periods of greater than 12 months is recognised in the profit and loss in proportion to the services delivered at the reporting date. In respect of services invoiced in advance, amounts are deferred until provision of the service.

Domestic and international call revenue and rental income

Fixed line

Revenue for call time usage by customers is recognised as revenue as services are performed on accrual basis. Fixed rental is recognised as income on a monthly basis in relation to the period of services rendered.

Mobile revenue

Mobile revenue comprises amounts charged to customers in respect of monthly access charges, airtime usage, messaging, and the provision of other mobile telecommunications services. Mobile monthly access charges are invoiced and recorded as part of a periodic billing cycle. Air time, either from contract customers as part of the invoiced amount or from prepaid customers through the sale of prepaid cards, is recorded in the period in which the customer uses the service.

Revenue from other network operators and

international settlements

The revenue received from other network operators, local and international, for the use of the Group's telecommunication network are recognised, net of taxes, based on usage taking the traffic minutes/per second rates stipulated in the relevant agreements and regulations and based on the terms of the lease agreements for fixed rentals.

Revenue arising from the interconnection of voice and data traffic between other telecommunications operators is recognised at the time of transit across the Group’s network and presented on gross basis. The relevant revenue accrued is recognised under income in the Income Statement and interconnection expenses recognised under operating costs in profit or loss.

Revenue from broadband

Revenue from Data services and IPTV services is recognised on usage and the fixed rental on a monthly basis when it is earned net of taxes, rebates and discounts.

Revenue from other ICT services

The revenue from other telephone services are recognised on an accrual basis based on fixed rental contracts entered between the Group and subscribers.

Deferred income

The connection fees relating to Public Switch Telephone Network (PSTN) are deferred over a period of 15 years. Revenue is recognised on an annual basis irrespective of the date of connection.

IRU revenue relating to leasing of SEA-ME-WE 4 cable capacity are recognised on a straight line basis over the period of the contracts. Amounts received in advance for any services are recorded as deferred revenue. In the event, that a customer terminates an IRU prior to the expiry of the contract and releases the Company from the obligation to provide future services, the remaining unamortised deferred revenue is recognised in the period the contract is terminated.

Backhauling revenue which is leasing of SEA-ME-WE 3 cable capacity is recognised on a straight line basis over the period of contracts. Amounts received in advance for any services are recorded as deferred revenue.

Revenue from the sale of prepaid CDMA cards is deferred until such time as the customer uses the call time, downloadable quota or the credit expires.

Sale of mobile recharge cards and reloads for prepaid subscribers are initially recognised as deferred revenue until such time as the subscribers use the services or credit period expires.

CDMA revenue

The connection fees relating to Code Divisional Multiple Access (CDMA) connections are recognised as revenue at the point the connection is activated.

(n) Expenditure

The expenses are recognised on an accrual basis. All expenses incurred in the ordinary course of business and in maintaining property, plant and equipment in a state of efficiency is charged against income in arriving at the profit for the year.

(o) Lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed determining whether an arrangement contains a lease.

At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfilment of the arrangement is dependent on the use of that specific asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset.

(p) Finance income and expenses

The Group’s finance income and finance cost include:

• Interest income from repurchase agreements
• Interest income from fixed deposits
• Staff loan interest income
• Interest expense from borrowings
• Interest expense arising from leases
• Foreign exchange gains or losses

Interest income or expense is recognised using the effective interest method. Dividend income is recognised in profit or loss on the date on which the Group’s right to receive payment is established.

(q) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or other comprehensive income.

(i) Current taxation

Income tax expense comprises current and deferred tax. Income tax expense is recognised or profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or other comprehensive income.

Provisions for taxation is based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto.

(ii) Deferred taxation

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss and differences relating to investments in nor taxable profit or loss and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets liabilities will be realised simultaneously.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax is not recognised for the undistributed profits of subsidiaries as the Parent Company has control over the dividend policy of its subsidiaries and distribution of those profits. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

No deferred taxation is provided for Mobitel (Private) Limited due to the fact that the income taxes are computed and paid at 2% on revenue.

(iii) Economic Service Charge (ESC)

ESC is payable on the liable turnover at specified rates. As per the provision of the Economic Service Charge Act No. 13 of 2006 and subsequent amendments thereto, ESC is deductible from the income tax liability. Any unclaimed payment can be carried forward and set-off against the income tax payable as per the relevant provision in the Act.

(iv) Sales tax

Revenue, expenses and assets are recognised net of the amount of sale tax, except: where sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of expense item as applicable.

(r) Earnings per share

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

Diluted EPS is determinated by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(s) Insurance reserve

The Company transfers annually from the retained earnings an amount equal to 0.1% of additions to property, plant and equipment to an insurance reserve. An equal amount is invested in a sinking fund to meet any funding requirements for potential losses from uninsured property, plant and equipment. The insurance reserve is maintained to recover any losses arising from damage to property, plant and equipment, except for motor vehicles, that are not insured with a third-party insurer.

(t) Dividend distribution

Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s Financial Statements in the period in which the dividends are approved by the Company’s shareholders.

Provision for final dividends is recognised at the time the dividend recommended and declared by the Board of Directors, is approved by the shareholders.

(u) Comparatives

Except when a standard permits or requires otherwise, comparative information is disclosed in respect of the previous period. Where the presentation or classification of items in the Financial Statements are amended, comparative amounts are reclassified unless it is impracticable.

(v) Statement of cash flow

The Cash Flow Statement has been prepared using the ‘indirect method’ of preparing cash flows in accordance with the Sri Lanka Accounting Standard LKAS 07 – “Statement of Cash Flows”. Cash and cash equivalents comprise short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value. The cash and cash equivalent include cash in hand, balances with banks, placements with banks, money at call and short notice.

(w) Events after the reporting period

All material events after the reporting date have been considered and where appropriate, adjustments or disclosures have been made in respective Notes to the Financial Statements.

(x) Directors’ Responsibility Statement

The Board of Directors of the Company is responsible for these Financial Statements.

(y) Critical accounting estimates, assumptions and judgements

In the preparation of these Financial Statements, a number of estimates and assumptions have been made relating to the performance and the financial position of the Group. Results may differ significantly from those estimates under different assumptions and conditions. The Directors consider that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the presentation of its financial performance and position. These particular policies require subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are uncertain.

(i) Depreciation of property, plant and equipment

The Company assigns useful lives and residual values to property, plant and equipment based on periodic studies of actual asset lives and the intended use for those assets. Changes in circumstances such as technological advances, prospective economic utilisation and physical condition of the assets concerned could result in the actual useful lives or residual values differing from initial estimates.

Where the Company determines that the useful life of property, plant and equipment should be shortened or residual value reduced, it depreciates the net carrying amount in excess of the residual value over the revised remaining useful life, thereby increasing depreciation expense. Any change in an asset's life or residual value is reflected in the Company's Financial Statements when the change in estimate is determined.

(ii) Impairment of property, plant and equipment and intangible assets

The Company assesses the impairment of property, plant and equipment and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable or otherwise as required by accounting standards. Factors that are considered important and which could trigger an impairment review include the following:

1. obsolescence or physical damage;
2. significant changes in technology and regulatory environments;
3. significant under-performance relative to expected historical or projected future operating results;
4. significant changes in the use of its assets or the strategy for its overall business.

The identification of impairment indicators, the estimation of future cash flows and the determination of the recoverable amount for assets or cash-generating units require significant judgement.

(iii) Revenue recognition

Judgement is required in assessing the application of the principles of revenue recognition in respect of revenues. This includes presentation of revenue as principal or as agent in respect of income received from transmission of content provided by third parties.

(iv) Valuation of receivables

The provision for impairment losses for trade and other receivables reflects the Company's estimates of losses arising from the failure or inability of customers to make required payments. The provision is based on the ageing of customer accounts, customer credit worthiness and the Company’s historical write-off experience etc. Changes to the provision may be required if the financial condition of its customers improves or deteriorates. An improvement in financial condition may result in lower actual write-offs.

(z) New accounting standards issued but not

effective as at reporting date

The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standards which will become applicable for the financial periods beginning on or after 1 January 2018. The Group has not assessed the potential impact on its Financial Statements resulting from their application.

SLFRS 9 – Financial Instruments: Classification and Measurement

The objective of this SLFRS is to establish principles for the financial reporting of financial assets and liabilities that will present relevant and useful information to users of Financial Statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows. This standard will be effective for financial periods beginning on or after

1 January 2018.

SLFRS 15 – Revenue from contract with customers

Establishes the principles that an entity shall apply report useful information to users of Financial Statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. This standard will be effective for financial period beginning on or after 1 January 2018.

A preliminary evaluation of the existing contracts which are categorised as revenue of the Group has been performed in relation to the adoption of SLFRS 15. The Group is currently in the process of evaluating and quantifying the accounting impact, any impacts on the current systems and processes will be modified where necessary. The Group will reflect the cumulative impact of SLFRS 15 in equity on the date of adoption.

SLFRS 16 – Leases

SLFRS 16 provides a single lessee accounting model, requiring leases to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value even though lessor accounting remains similar to current practice. This supersedes: LKAS 17 – “Leases”, IFRIC 4 determining whether an arrangement contains a lease, SIC 15 – “Operating Leases” –Incentives; and SIC 27 evaluating the substance of transactions involving the legal form of a lease. Earlier application is permitted for entities that apply SLFRS – 15 “Revenue from Contracts with Customers”.

SLFRS 16 also requires lessees and lessors to make more extensive disclosures than under LKAS 17.

SLFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies SLFRS 15. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard’s transition provisions permit certain reliefs.

The Group will continue to assess the potential effect of SLFRS 16 on its Consolidated Financial Statements and the impact on the implementation of the above standard has not been quantified yet.

4. Financial Risk Management

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management processes are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management systems are reviewed regularly to reflect changes in market conditions and the Group activities.

The Audit Committee oversees how management monitors compliance with the Group’s risk management processes/guidelines and procedures, and reviews the adequacy of the risk management framework in relation to the risks. The Audit Committee is assisted in its oversight role by internal reviews of risk management controls and procedures. The results of which are reported to the Audit Committee.

The Group has exposure to the following risks from its use of financial instruments:

• Credit risk
• Liquidity risk
• Market risk

This Note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Further quantitative disclosures are included throughout these Financial Statements.

4.1 Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligation, and arise principally from the Group’s receivables from customers.

Carrying amount of financial assets represents the maximum credit exposure.

4.1.1 Trade receivables

The Group having a very well-established credit policy for both International Interconnect Customers and Domestic Customers to minimise the credit risk. A separate committee has been established to evaluate and recommend the credit worthiness for the International Interconnect Customer. Further, prepaid sales are used as a means of mitigating credit risk.

Domestic service is offered to a new customer only after scrutinising through a internal blacklisted data base. The Group has a well-established credit control policy and process to minimise the credit risk. Customers are categorised according to the segments and credit limit has been fixed as per their average monthly bill value. Customer usage and bill payments are monitored as per the credit limit. Credit limit will be periodically revised as per the past monthly bill value. High risk voice customers are subjected to auto disconnection when they reached the threshold limit. Credit control actions and recovery actions are taken for the overdue customers and defaulted customers to minimise the credit risk. High revenue-generated customers including corporate customers are monitored individually.

As at 31 December 2017, the maximum exposure to credit risk for trade by geographic region was as follows:

	Group		Company
Rs. million	2017	2016	2017	2016
Sri Lanka	20,225	18,278	14,500	12,853
Middle East	285	499	223	263
Asia	1,268	1,449	799	654
Europe	1,164	1,433	1,007	1,339
Australia	66	173	54	102
Other	262	161	180	125
Total trade receivables	23,270	21,993	16,763	15,336

As at 31 December 2017, the maximum exposure to credit risk for trade receivables by type of counterparty was as follows:

	Group		Company
Rs. million	2017	2016	2017	2016
Wholesale customers	3,582	4,390	3,468	3,795
Retail customers	17,107	14,439	12,597	10,945
Others	2,581	3,164	698	596
	23,270	21,993	16,763	15,336

As at 31 December the Group’s most significant customer was Lanka Government Information Infrastructure (Private) Limited which accounted for Rs. 421 million of trade receivables (2016 – Rs. 256 million).

Impairment

As at 31 December 2017, the aging of trade receivables that were not impaired was as follows:

	Group		Company
Rs. million	2017	2016	2017	2016
Past due 1 year	171	104	73	25
Past due 2 years and above	96	51	96	51
	267	155	169	76

Management believes that the unimpaired amounts that are past due more than 2 years are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk.

The movement in the allowance for impairment in respect of trade receivables during the year is as follows:

Rs. million	Group impairment	Company impairment
Balance as at 1 January 2015	7,565	5,780
– Impairment loss recognised	1,358	871
– Amounts written off	(1,254)	(1,254)
Balance as at December 2016	7,669	5,397
– Impairment loss recognised	1,653	1,086
– Amounts written off	(1)	–
Balance as at 31 December 2017	9,321	6,483

4.1.2 Other investments

The Group limits its exposure to credit risk by investing only in Government Debt Securities, Repos and in short-term deposits with selected bankers with Board approval.

4.1.3 Cash and cash equivalents

The Group held cash and cash equivalents of Rs. 4,277 million as at 31 December 2017 (2016 – Rs. 6,682 million).

4.1.4 Employee loans

The Group limits its exposure to credit risk by ensuring the loan balance are recovered from the employees monthly salary, or if the employee leaves such amounts are recovered from the employees’ EPF balance.

4.2 Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group ensures its liquidity is maintained by investing in short, medium and long-term financial instruments to support operational and other funding requirements. The Group determines its liquidity requirements by the use of both short and long-term cash forecasts. These forecasts are supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 12-month period and the same is reviewed on an annual basis.

Short and medium-term requirements are regularly reviewed and managed by the treasury division.

The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and discounted:

Rs. million	Carrying value	Up to 1 year	Up to 2 years	Up to 5 years	Over 5 years
Group
As at 31 December 2017
Bank overdrafts	13,323	13,323	–	–	–
Bank borrowings and others	26,525	12,036	6,285	6,564	1,640
Vendor financing	1,803	1,432	268	103	–
Lease liabilities	160	100	34	26	–
	41,811	26,891	6,587	6,693	1,640
As at 31 December 2016
Bank overdrafts	7,298	7,298	–	–	–
Bank borrowings and others	21,883	8,136	6,948	6,799	–
Vendor financing	3,583	2,564	678	341	–
Lease liabilities	176	83	87	6	–
	32,940	18,081	7,713	7,146	–

Rs. million	Carrying value	Up to 1 year	Up to 2 years	Up to 5 years	Over 5 years
Company
As at 31 December 2017
Bank overdrafts	12,406	12,406	–	–	–
Bank borrowings and others	26,502	12,013	6,285	6,564	1,640
Lease liabilities	70	67	3	–	–
	38,978	24,486	6,288	6,564	1,640
As at 31 December 2016
Bank overdrafts	6,548	6,548	–	–	–
Bank borrowings and others	21,862	8,115	6,948	6,799	–
Lease liabilities	125	63	62	–	–
	28,535	14,726	7,010	6,799	–

4.3 Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices which will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

4.3.1 Currency risk

The Group is exposed to currency risk on services provided, services received and borrowings that are denominated in a currency other than the Sri Lankan Rupees (LKR).

The Group manages its currency risk by a natural hedging mechanism to a certain extent by matching currency outflows for repayments of foreign currency loans and services with currency inflows for services settled in foreign currencies.

The summary of quantitative data about the Group’s exposure to foreign currency was as follows:

	Group
	USD million
As at 31 December 2017
Foreign trade receivables	20
Secured bank loans	(12)
Unsecured loans	(103)
Trade payables	(13)
Net statement of financial position exposure	(108)
As at 31 December 2016
Foreign trade receivables	26
Secured bank loans	(24)
Unsecured loans	(129)
Trade payables	(11)
Net statement of financial position exposure	(138)

	Company
	USD million
As at 31 December 2017
Foreign trade receivables	15
Secured bank loans	–
Unsecured loans	(103)
Trade payables	(8)
Net statement of financial position exposure	(96)
As at 31 December 2016
Foreign trade receivables	18
Secured bank loans	–
Unsecured loans	(129)
Trade payables	(4)
Net statement of financial position exposure	(115)

The following significant exchange rates have been applied during the year:

	Average rate		Year end spot rate
Rs.	2017	2016	2017	2016
USD	152.40	145.60	153.23	149.75
EUR	171.73	161.16	191.18	157.93

Sensitivity analysis

A reasonable possible strengthening (weakening) USD would have an impact on the Group's borrowings. This analysis assumes that all other variables, in particular interest rates remain constant.

	Profit or loss		Balance sheet
Rs. million	Strengthening	Weakening	Strengthening	Weakening
Group
2017 December USD (10%)	(2,064)	2,064	(2,064)	(2,064)
2016 December USD (10%)	(2,543)	2,543	(2,543)	(2,543)
Company
2017 December USD (10%)	1,581	(1,581)	1,581	(1,581)
2016 December USD (10%)	(1,937)	1,937	(1,937)	1,937

4.3.2 Interest rate risk

Interest rate risk mainly arises as a result of Group having interest sensitive assets and liabilities, which are directly, impacted by changes in the interest rates. The Group’s borrowings and investments are maintained in a mix of fixed and variable interest rate instruments and periodical maturity gap analysis is carried out to take timely action and to mitigate possible adverse impact due to volatility of the interest rates.

To minimise the adverse impact of variable interest rate borrowings due to an upward movement of USD interest rates in the market, the Company has obtained an interest rate SWAP and arrangements are being made to obtain an interest rate CAP.

Short-term interest rate management is delegated to the treasury operations while long-term interest rate management decisions require approval from the Board of Directors.

Interest rate sensitivity of the Company was computed within the floor interest rate (Minimum) of 2.5% as stipulated in the loan agreement. The Group interest rate sensitivity was computed based on a 100 basis point increase or decrease. This analysis assumes that all other variables, in particular, foreign currency exchange rates, remain constant. The sensitivity of interest rate movement is shown below:

	Profit or loss
Rs. million	Increase in interest rate	Decrease in interest rate
Group
2017 December Variable rate instruments	-181	181
2016 December Variable rate instruments	(115)	111
Company
2017 December Variable rate instruments	(18)	18
2016 December Variable rate instruments	(80)	75

4.4 Analysis of financial instruments by measurement basis

Financial liabilities

Type of the Financial Instrument (2017)	Note	Loans and receivables (Note 4.4.1)
		Group	Company
Trade and other payables	25	30,894	23,033
Borrowings	22	41,811	38,978
Total		72,705	62,011
Type of the Financial Instrument (2016)
Trade and other payables	25	28,040	19,209
Borrowings	22	32,940	28,535
Total		60,980	47,744

4.4.1 These financial instruments are carried at amortised cost in the Financial Statements. The Company does not anticipate the fair value of these instruments to be significantly different to their carrying values and considers the impact as not material for disclosure.

4.5 Capital management

The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Capital consists of stated capital and reserves. The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders.

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The gearing ratios at 31 December 2017 and 2016 were as follows:

	Group		Company
	2017	2016	2017	2016
Total borrowings	41,811	32,940	38,978	28,535
Total equity	71,309	68,587	59,220	59,000
Total capital	113,120	101,527	98,198	87,535
Gearing ratio (%)	37.0	32.4	39.7	32.6

5. Operating segments

The Group has three reportable segments, as described below, which are the Group’s strategic divisions. The strategic divisions offer different products and services, and are managed separately because they require different technology and marketing strategies. For each of the strategic divisions, the Board of Directors, (the Chief Operating Decision Maker – CODM) reviews internal management reports on at least quarterly basis. The following summary describes the operations in each of the Group’s reportable segments:

• Fixed ICT operations includes supply of fixed telecommunication services.
• Mobile ICT operations includes supply of mobile telecommunication services.
• Other segment operations includes Directory publication and support services. None of these segments meet the quantitative thresholds for determining reportable segments in 2017 or 2016.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before tax. As included in the internal management reports that are reviewed by the Board of Directors (BOD). Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

Segmental reporting – For the year ended 31 December 2017

(All amounts in Sri Lanka rupees million)

Information about reportable segments

	Fixed ICT operations		Mobile ICT operations		Other segments operations		Total
	2017	2016	2017	2016	2017	2016	2017	2016
External revenues	40,616	39,766	34,037	33,556	1,088	479	75,741	73,801
Inter-segment revenue	3,921	3,365	2,462	2,401	2,352	2,383	8,735	8,149
Reportable segment revenue	44,537	43,131	36,499	35,957	3,440	2,862	84,476	81,950
Reportable segment
Profit before tax	2,129	2,643	4,113	4,909	135	(206)	6,377	7,346
Interest revenue	562	448	439	529	39	35	1,040	1,012
Interest expenses	(12)	(25)	(121)	(206)	(26)	(19)	(159)	(250)
Depreciation and amortisation	(11,121)	(8,736)	(6,077)	(5,581)	(89)	(83)	(17,287)	(14,400)
Reportable segment assets	133,574	118,117	43,601	45,464	2,173	1,868	179,348	165,449
Capital expenditure	18,440	20,632	8,531	4,492	39	39	27,010	25,163
Reportable segment liabilities	74,354	59,117	17,948	22,335	1,846	1,617	94,148	83,069

	2017	2016
Revenue
Total revenue for reportable segments	81,036	79,088
Revenue for other segments	3,440	2,862
Reportable segment revenue	84,476	81,950
Elimination of inter-segment revenue	(8,735)	(8,149)
Consolidated revenue	75,741	73,801
Profit or loss
Total profit or loss for reportable segments	6,242	7,552
Profit or loss for other segments	135	(206)
Reportable segment profit before tax	6,377	7,346
Elimination of inter-segment profits	(849)	(849)
Consolidated profit before tax	5,528	6,497
Assets
Total assets for reportable segments	177,175	163,581
Assets for other segments	2,173	1,868
	179,348	165,449
Elimination of inter-segment assets	(20,142)	(22,539)
Consolidated total assets	159,206	142,910
Liabilities
Total liabilities for reportable segments	92,302	81,452
Liabilities for other segment	1,846	1,617
	94,148	83,069
Elimination of inter-segment liabilities	(6,346)	(8,837)
Consolidated total liabilities	87,802	74,232

	Reportable segment totals	Adjustments	Consolidated totals
Other material items (2017)
Interest revenue	1,040	–	1,040
Interest expense	(159)	–	(159)
Capital expenditure	27,010	–	27,010
Depreciation and amortisation	(17,287)	–	(17,287)
Other material items (2016)
Interest revenue	1,012	–	1,012
Interest expense	(250)	–	(250)
Capital expenditure	25,163	–	25,163
Depreciation and amortisation	(14,400)	–	(14,400)

6. Revenue

The significant categories under which revenue is recognised are as follows:

	Group		Company
	2017	2016	2017	2016
Release of deferred connection charges	434	480	434	480
Rental income	7,194	6,746	4,852	5,000
Domestic call revenue	23,706	24,585	4,485	4,684
Receipts from other network operators – Domestic	1,896	1,802	597	683
International call revenue	960	1,477	403	563
Receipts from other network operators – International	112	100	–	–
International settlements (in-payments)	8,305	10,233	5,879	7,162
CDMA revenue	912	1,075	912	1,075
Broadband revenue	16,497	12,753	9,297	7,235
Data and other services	15,725	14,550	17,678	16,249
	75,741	73,801	44,537	43,131

7. Operating costs

The following items have been included in arriving at operating profit before depreciation and amortisation:

	Group		Company
	2017	2016	2017	2016
Staff costs (Note 7.1)	17,117	17,398	11,864	12,232
Directors’ emoluments	31	31	12	18
Payments to international network operators	1,119	1,515	1,119	1,515
Payments to other network operators
– International	1,323	2,051	1,247	1,827
– Domestic	2,675	2,507	936	847
International Telecommunication Operators Levy (Note 8)	2,157	2,807	1,129	1,599
Auditors’ remuneration
Audit
– Ernst & Young	11	5	7	–
– Other Auditors	2	12	2	11
Non-audit
– Ernst & Young	3	2	3	2
– Other Auditors	5	13	5	13
Repairs and maintenance expenditure	6,134	4,387	4,446	3,142
Provision for doubtful debts	1,767	1,417	1,266	912
Impairments/(reversals) of inventory	97	370	68	325
Impairment of property, plant and equipment (Note 13)	100	137	100	137
Other operating expenditure	21,995	21,023	10,954	10,648
	54,536	53,675	33,158	33,228

7.1 Staff costs

	Group		Company
	2017	2016	2017	2016
Salaries, wages, allowances and other benefits	15,064	15,456	10,283	10,727
Post-employment benefits
– Defined contribution plans	1,371	1,266	988	941
– Defined benefit obligations (Note 26)	682	676	593	564
	17,117	17,398	11,864	12,232
Average number of persons employed	9,632	9,775	5,576	5,734

8. International Telecommunication Operators Levy (ITOL)

In accordance with the Finance Act No. 11 of 2004, all Telecommunication Gateway Operators are required to pay a levy defined as the Telecommunication Development Charge (TDC) to the Government of Sri Lanka, based on international call minutes terminated in the country. This levy was made effective from 3 March 2003, where initially the levy was defined in such a way that operators were allowed to claim the 2/3rd of the TDC against the costs of network development charges.

The TDC refund received in 2014 corresponds to the period from April 2009 to July 2010 which was the last claim obtained under the respective regulation. As the said regulation was received with effect from July 2010 while eliminating the reimbursement process, the final claim requested from TRC applicable for the above period was received on year 2014.

First revision to this regulation was introduced with effect from 15 July 2010 with an International Telecommunication Operators Levy (ITOL) TDC rate change from USD cents 3.80 to USD cents 1.50. Through the same revision, the disbursement process of TDC was removed from the regulation. As stated above the revised ITOL rate prevailed until such time the rate was revised to USD cents 3.00 per minute with effect from January 2012, in accordance with the Budget Proposal for 2012 and ITOL rate was further revised again to USD cents 6.00 per minute with effect from January 2016 in accordance with the Budget Proposal for 2016.

Mobitel (Private) Limited Recognises Telecommunications Development Charge (TDC) in profit or loss on a straight-line basis over 10 years, as disclosed in Note 34.

9. Interest expense and finance costs

	Group		Company
	2017	2016	2017	2016
Rupee loans [see Note (a) below]	1,058	165	1,038	148
Foreign currency loans [see Note (a) below]	904	1,010	790	812
Other charges [see Note (b) below]	847	314	834	304
Total interest and finance cost	2,809	1,489	2,662	1,264
Interest capitalised	(2,650)	(1,239)	(2,650)	(1,239)
Net total interest and finance cost	159	250	12	25

1. Interest cost of the Company relates to the USD loans and Rupee loans. Interest cost of the Group relates to Rupee loans, USD loans and vendor financing.
2. Other charges mainly include interest cost of finance leases and overdraft facilities.

9. a Foreign exchange (loss)/gain

	Group		Company
	2017	2016	2017	2016
Net foreign exchange (loss)/gain	(478)	(979)	(471)	(570)

(a) Foreign currency (loss) or gain of the Company

mainly includes –

1. Exchange gain of Rs. 17 million (2016 – Rs. 132 million) arising from revaluation of receivables, fixed deposits and bank balances maintained in USD.
2. Exchange loss of Rs. 33 million on payment to foreign suppliers (2016 – gain Rs. 41 million).
3. Exchange loss of Rs. 455 million (2016 – Rs. 702 million) arising from revaluation of USD syndicate loan.

(b) Foreign currency (loss) or gain of the Group

mainly includes –

1. Exchange gain of Rs. 63 million (2016 – of Rs. 139 million) arising from revaluation of the receivables, fixed deposits and bank balances maintained in USD.
2. Exchange loss of Rs. 70 million on payment to foreign suppliers (2016 – Rs. 147 million).
3. Exchange loss of Rs. 471 million (2016 – Rs. 971 million) arising from revaluation of USD syndicate loan and other term loans.

10. Interest income

	Group		Company
	2017	2016	2017	2016
Interest income from:
Treasury Bonds	1	–	–	–
Treasury Bills	–	1	–	–
Repurchase agreement – Repos	404	527	3	13
Fixed deposits	183	98	108	52
Staff loan interest	452	386	451	383
	1,040	1,012	562	448

The interest income on bank deposits reflect the prevailing rates on the date of respective investments.

1. The weighted average interest rates on restricted funds in bank deposits and Government Securities in Sri Lankan Rupees were 12.33% and 8.65% (2016 – 9.07% and 7.12%) and USD was 2.86% (2016 – 2.76%).
2. The weighted average interest rates on investments in Government Securities were Nil (2016 – 6.16%).
3. The weighted average interest rates on staff loans are between 12% and 14% (2016 – 12% and 14%).
4. According to the Section 137 of the Inland Revenue Act No. 10 of 2006, any person who derives income from the secondary market transactions in Government Securities is entitled to a notional tax credit in relation to the tax payable by such a person. Notional tax credit would be determined by grossing up of the income from the secondary market transactions to an amount equal to 1/9th. Accordingly, Company has accounted for Rs. 0.3 million as notional tax credit for the year 2017(2016 – Rs. 1 million). The Group has accounted for Rs. 1 million as notional tax credit for the year 2017 (2016 – Rs. 1 million).

11. Income tax expenses

Tax recognised in statement of profit or loss

Current tax expense	Group		Company
	2017	2016	2017	2016
Current year	966	881	73	75
	966	881	73	75
Tax losses	(636)	(1,706)	(655)	(1,706)
Deferred tax expense
Origination and reversal of temporary differences	1,258	2,532	1,283	2,549
Tax expense	1,588	1,707	701	918

Tax recognised in other comprehensive income – Group

	2017			2016
	Before tax	Tax (expense) benefit	Net of tax	Before tax	Tax (expense) benefit	Net of tax
Defined benefit plan actuarial (loss)/gain	543	(155)	388	233	(70)	163
	543	(155)	388	233	(70)	163

Tax recognised in other comprehensive income – Company

	2017			2016
	Before tax	Tax (expense) benefit	Net of tax	Before tax	Tax (expense) benefit	Net of tax
Defined benefit plan actuarial (loss)/gain	553	(155)	398	249	(70)	179
	553	(155)	398	249	(70)	179

Reconciliation of effective tax rate	Group/2017		Group/2016
	%		%
Profit before tax	–	5,528	–	6,497
Tax using the Company’s domestic tax rate	28.00	1,548	28.00	1,819
Effect of different tax rates [Notes (a) and (b) below]	-5.59	(309)	-8.93	(580)
Non-deductible expenses	12.41	686	11.84	769
Income not subject to tax	-6.10	(337)	-4.65	(301)
	28.72	1,588	26.26	1,707

Reconciliation of effective tax rate	Company/2017		Company/2016
	%		%
Profit before tax	–	2,129	–	2,643
Tax using the Company’s domestic tax rate	28.00	596	28.00	740
Non-deductible expenses	19.21	409	17.52	463
Income not subject to tax	-14.28	(304)	-10.78	(285)
	32.93	701	34.73	918

Current income tax charge of the Group/Company is made up as follows:

	Group		Company
	2017	2016	2017	2016
Sri Lanka Telecom PLC	73	75	73	75
Mobitel (Private) Limited	844	800	–	–
Sri Lanka Telecom (Services) Limited	5	–	–	–
SLT Human Capital Solutions (Private) Limited	4	4	–	–
SLT Digital Services (Private) Limited	17	–	–	–
SLT VisionCom (Private) Limited	23	2	–	–
Sky Network (Private) Limited	–	–	–	–
SLT Property Management (Private) Limited	–	–	–	–
SLT Campus (Private) Limited	–	–	–	–
	966	881	73	75

1. Pursuant to agreements dated 15 January 1993 and 26 February 2001, entered into with the Board of Investment of Sri Lanka under Section 17 of the Board of Investment Act No. 4 of 1978, 15 years tax exemption period granted to Mobitel (Private) Limited expired on 30 June 2009 and as per the agreement, Mobitel (Private) Limited opted for the turnover based tax option in which 2% was charged on the turnover for a further period of 15 years commencing from 1 July 2009.
2. As per the amendment to Inland Revenue Act No. 22 of 2011, for the year of assessment 2016/17, SLT Human Capital Solutions (Private) Limited is liable for income taxes at the rate of 10% on their taxable income.
3. As per the agreement with the Board of Investment of Sri Lanka (BOI) dated 19 November 2009, under Section 17 of BOI Act No. 4 of 1978, the Sky Network (Private) Limited is exempt from income tax for a period of 6 years. For the above purpose, the year of assessment shall be reckoned from the year in which the Company commences to make profits or any year of assessment not later than two years reckoned from the date on which the Company commences commercial operation, whichever is earlier as may be specified in a certificate issued by the Board. In view of the above, the Company is not liable to income tax on business profit.

12. Earnings per share

The basic earnings per share is calculated by dividing the net profit attributable to equity holders by the weighted average number of ordinary shares in issue during the year.

	Group		Company
	2017	2016	2017	2016
Net profit attributable to equity holders (Rs. million)	3,940	4,790	1,428	1,725
Weighted average number of ordinary shares in issue (million)	1,805	1,805	1,805	1,805
Basic earnings per share (Rs.)	2.18	2.65	0.79	0.96

Diluted EPS is the same as computed above, as the Company does not have any instrument that will potentially dilute the shareholdings.

13. Property, plant and equipment

Group	Freehold land	Freehold buildings	Ducts, cables and other outside plant	Telephone exchanges	Transmission equipment	Other fixed assets	Capital work-in- progress	Total
Cost
As at 1 January 2016	357	3,303	95,319	22,640	76,696	38,445	28,165	264,925
Additions at cost	–	–	416	33	34	2,231	20,571	23,285
Transfers from capital work-in-progress	–	193	9,051	3,966	5,211	10,288	(28,709)	–
Disposals	–	–	(184)	–	(65)	(80)	–	(329)
As at 31 December 2016	357	3,496	104,602	26,639	81,876	50,884	20,027	287,881
Accumulated depreciation
As at 1 January 2016	–	(1,930)	(74,763)	(16,978)	(41,571)	(30,400)	–	(165,642)
Disposals	–	–	181	–	64	78	–	323
Impairment loss	–	(1)	(9)	(83)	–	(44)	–	(137)
Depreciation charge	–	(95)	(3,141)	(1,340)	(6,008)	(3,192)	–	(13,776)
As at 31 December 2016	–	(2,026)	(77,732)	(18,401)	(47,515)	(33,558)	–	(179,232)
Carrying value as at 31 December 2016	357	1,470	26,870	8,238	34,361	17,326	20,027	108,649

Group	Freehold land	Freehold buildings	Ducts, cables and other outside plant	Telephone exchanges	Transmission equipment	Other fixed assets	Capital work-in- progress	Total
Cost
As at 1 January 2017	357	3,496	104,602	26,639	81,876	50,884	20,027	287,881
Additions at cost	–	–	546	1,925	1,854	5,567	15,064	24,956
Transfers from capital work-in-progress	–	229	4,317	134	1,629	4,450	(10,759)	–
Disposals	–	(2)	(770)	(114)	(33)	(232)	–	(1,151)
As at 31 December 2017	357	3,723	108,695	28,584	85,326	60,669	24,332	311,686
Accumulated depreciation
As at 1 January 2017	–	(2,026)	(77,732)	(18,401)	(47,515)	(33,558)	–	(179,232)
Disposals	–	2	770	114	27	229	–	1,142
Impairment loss	–	–	(62)	(28)	(10)	–	–	(100)
Depreciation charge	–	(99)	(3,726)	(1,499)	(6,208)	(4,929)	–	(16,461)
As at 31 December 2017	–	(2,123)	(80,750)	(19,814)	(53,706)	(38,258)	–	(194,651)
Carrying value as at 31 December 2017	357	1,600	27,945	8,770	31,620	22,411	24,332	117,035

Company	Freehold land	Freehold buildings	Ducts, cables and other outside plant	Telephone exchanges	Transmission equipment	Other fixed assets	Capital work-in- progress	Total
Cost
As at 1 January 2016	357	3,276	94,547	22,662	24,430	36,083	26,741	208,096
Additions at cost	–	–	416	33	34	1,827	17,781	20,091
Transfers from capital work-in-progress	–	193	9,051	3,966	2,552	10,031	(25,793)	–
Disposals	–	–	(184)	–	–	(16)	–	(200)
As at 31 December 2016	357	3,469	103,830	26,661	27,016	47,925	18,729	227,987
Accumulated depreciation
As at 1 January 2016	–	(1,930)	(74,121)	(17,004)	(16,126)	(28,834)	–	(138,015)
Accumulated depreciation on disposals	–	–	182	–	–	16	–	198
Impairment loss	–	(1)	(9)	(83)	–	(44)	–	(137)
Depreciation charge	–	(95)	(3,079)	(1,340)	(1,173)	(2,822)	–	(8,509)
As at 31 December 2016	–	(2,026)	(77,027)	(18,427)	(17,299)	(31,684)	–	(146,463)
Carrying value as at 31 December 2016	357	1,443	26,803	8,234	9,717	16,241	18,729	81,524

Company	Freehold land	Freehold buildings	Ducts, cables and other outside plant	Telephone exchanges	Transmission equipment	Other fixed assets	Capital work-in- progress	Total
Cost
As at 1 January 2017	357	3,469	103,830	26,661	27,016	47,925	18,729	227,987
Additions at cost	–	–	546	1,925	428	4,678	13,380	20,957
Transfers from capital work-in-progress	–	229	4,317	134	91	4,450	(9,221)	–
Disposals	–	(2)	(770)	(114)	(1)	(154)	–	(1,041)
As at 31 December 2017	357	3,696	107,923	28,606	27,534	56,899	22,888	247,903
Accumulated depreciation
As at 1 January 2017	–	(2,026)	(77,027)	(18,427)	(17,299)	(31,684)	–	(146,463)
Accumulated depreciation on disposals	–	2	770	114	–	153	–	1,039
Impairment loss	–	–	(62)	(28)	(10)	–	–	(100)
Depreciation charge	–	(99)	(3,663)	(1,499)	(1,281)	(4,384)	–	(10,926)
As at 31 December 2017	–	(2,123)	(79,982)	(19,840)	(18,590)	(35,915)	–	(156,450)
Carrying value as at 31 December 2017	357	1,573	27,941	8,766	8,944	20,984	22,888	91,453

1. On 1 September 1991, the Department of Telecommunications (DoT) transferred its entire telecommunications business and related assets and liabilities to SLT. A valuation of the assets and liabilities transferred to SLT was performed by the Government of Sri Lanka. The net amount of those assets and liabilities represents SLT’s Contributed Capital on incorporation and the value of property, plant and equipment as determined by the Government of Sri Lanka. Valuers were used to determine the opening cost of fixed assets on 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 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 still in use in the Company as at 31 December 2017 was Rs. 69,661 million (2016 – Rs. 58,346 million). The cost of fully-depreciated assets still in use in the Group as at 31 December 2017 was Rs. 78,715 million (2016 – Rs. 64,027 million).
3. No assets have been mortgaged or pledged as security for borrowings of the Group.
4. The Directors believe, pertaining to lands and buildings which were vested from the corporation to the Company, that the Company has freehold title to land and buildings transferred at incorporation of the Company (to take over the assets and liabilities of the Corporation at the Conversion of SLT into a public limited company on 25 September 1996), by operation of law, although no specific title documents are available for each of such lands. The Company has initiated a process to obtain a title document from the Government authorities, in order to confirm the list of lands so vested with the Company.
5. All the motor vehicles have been insured. An insurance reserve has been created together with a sinking fund investment to meet any potential losses with regard to uninsured property, plant and equipment. At the reporting date, the insurance reserve amounted to Rs. 691 million (2016 – Rs. 680 million) (Note 27). Further, all the motor vehicles have been insured.
6. Impairment of assets of Group consist of the carrying value of Next Generation Network (NGN) Rs. 28 million (2016 – 83 million), PSTN CPE Rs. 18 million (2016 – Nil), Cable NetWork Beyond DP Rs. 44 million (2016 – Nil) and National Transmission Equipment 10 million (2016-Nil) were impaired due to the flood. Impairment provision for pay phones Rs. Nil (2016 – 9 million) and IPTV CPE Rs. Nil (2016 – Rs. 44 million).
7. The Company capitalised borrowing costs amounting to Rs. 2,650 million during the year (2016 – Rs. 1,239 million). Borrowing cost capitalised from a Group perspective amounted to Rs. 2,650 million (2016 – Rs. 1,239 million).
8. The property, plant and equipment includes assets acquired under finance leases, the net book value of which is made up as follows:

	Group		Company
	2017	2016	2017	2016
Cost	667	557	440	440
Accumulated depreciation	(493)	(423)	(396)	(349)
Carrying value	174	134	44	91

(i) Property, plant and equipment include submarine cables. The total cost and accumulated depreciation of all cables under this category are as follows:

	Group/Company
	2017	2016
Cost	11,873	11,189
Accumulated depreciation as at 1 January	(5,197)	(5,045)
Depreciation charge for the year	(363)	(152)
Carrying amount	6,313	5,992

14. Intangible assets

Group

	Goodwill	Licences	Software	Others	Total
Cost
Balance as at 1 January 2016	394	4,061	2,775	367	7,597
– Acquisitions	410	22	813	118	1,363
Balance as at 31 December 2016	804	4,083	3,588	485	8,960
Balance as at 1 January 2017	804	4,083	3,588	485	8,960
– Acquisitions	–	4,822	152	–	4,974
Balance as at 31 December 2017	804	8,905	3,740	485	13,934
Accumulated amortisation
Balance as at 1 January 2016	253	1,659	2,464	330	4,706
– Amortisation	–	381	157	3	541
Balance as at 31 December 2016	253	2,040	2,621	333	5,247
Balance as at 1 January 2017	253	2,040	2,621	333	5,247
– Amortisation	–	727	99	–	826
Balance as at 31 December 2017	253	2,767	2,720	333	6,073
Carrying Amounts
December 2017	551	6,138	1,020	152	7,861
December 2016	551	2,043	967	152	3,713

The goodwill in the Group consists of goodwill arising on acquisition of Mobitel (Private) Limited and eChannelling PLC.

Goodwill is allocated to the Group’s Cash-Generating Units (CGUs). A summary of the goodwill allocation is presented below:

	2017	2016
Mobitel (Private) Limited	141	141
eChannelling PLC	410	410
Total	551	551

The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections, based on financial budgets approved by Management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates.

The key assumptions used for value-in-use calculations are as follows:

	2017 %	2016 %
Growth rate	2 – 7	8 – 10
Discount rate	12	12

Management determined budgeted gross margin based on past performance and its expectations of market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant operating segments. No impairment charge has been recognised for the year ended 31 December 2017 for the above CGU (2016 – Nil).

Company

	Licences	Software	Others	Total
Cost
Balance as at 1 January 2016	1,430	1,705	330	3,465
– Acquisitions	–	22	–	22
Balance as at 31 December 2016	1,430	1,727	330	3,487
Balance as at 1 January 2017	1,430	1,727	330	3,487
– Acquisitions	383	–	–	383
Balance as at 31 December 2017	1,813	1,727	330	3,870
Accumulated amortisation
Balance as at 1 January 2016	460	1,591	330	2,381
– Amortisation	143	84	–	227
Balance as at 31 December 2016	603	1,675	330	2,608
Balance as at 1 January 2017	603	1,675	330	2,608
– Amortisation	195	–	–	195
Balance as at 31 December 2017	798	1,675	330	2,803
Carrying amounts
December 2017	1,015	52	–	1,067
December 2016	827	52	–	879

14.a Financial Prepayments

	Group
	2017	2016
As at 1 January	1,097	1,097
Acquired/Incurred during the period	–	–
As at 31 December	1,097	1,097
Amortisation
As at 1 January	1,097	1014
Amortisation for the year	–	83
As at 31 December	1,097	1,097
Carrying amount – Current	–	–
Carrying amount – Non-current	–	–
As at 31 December	–	–

15. Investments in associates

The Company has a 40% interest in Galle Submarine Cable Depot (Private) Limited situated at Galle, which is involved in maintenance of marine cables. The Company’s interest in Galle Submarine Cable Depot (Private) Limited is accounted for using the equity method in the Company’s Financial Statements. The Company did not have operations during the financial year.

16. Investments in subsidiaries

	2017	2016
Opening net book amount	14,220	14,220
Impairment of investment	14	–
Additions	–	–
Closing net book amount	14,206	14,220

Details of the subsidiary companies in which the Company had control as at 31 December are set out below:

	2017		2016
Name of the Company	Investment Rs. million	Company holding %	Investment Rs. million	Company holding %
Mobitel (Private) Limited [See Note (b) below]	13,980	100.00	13,980	100.00
SLT VisionCom (Private) Limited [See Note (e) below]	100	100.00	100	100.00
SLT Digital Services (Private) Limited [See Note (c) below]	50	100.00	50	100.00
Sri Lanka Telecom (Services) Limited [See Note (a) below]	25	99.99	25	99.99
SLT Human Capital Solutions (Private) Limited [See Note (d) below]	1	100.00	1	100.00
Sky Network (Private) Limited [See Note (f) below]	–	99.94	–	99.94
SLT Property Management (Private) Limited [See Note (g) below]	–	100.00	14	100.00
SLT Campus (Private) Limited [See Note (h) below]	50	100.00	50	100.00
	14,206		14,220
Sub-subsidiaries
eChannelling PLC [see Note (i) below]	642	87.59	642	87.59

The Directors believe that the fair value of each of the companies listed above do not differ significantly from their book values.

1. This investment in subsidiary company consists of 2,500,000 shares representing 99.99% of stated capital of Sri Lanka Telecom (Services) Limited.
2. The Company owns 1,320,013,240 shares representing 100% of the entire ordinary share capital of Mobitel (Private) Limited.
3. This investment in subsidiary company consists of 5,000,000 shares representing the entire stated capital of SLT Digital Services (Private) Limited.
4. This investment in subsidiary company consists of 50,000 shares representing the entire stated capital of SLT Human Capital Solutions (Private) Limited.
5. This investment in subsidiary company consists of 10,000,000 shares representing the entire stated capital of SLT VisionCom (Private) Limited.
6. This investment in subsidiary company consists of 42,071,251 shares representing a 99.94% holding of the issued stated capital and 6,000,000 12% cumulative and redeemable preference shares of Sky Network (Private) Limited. The investment is fully impaired.
7. This investment in subsidiary Company consists of 1,500,001 shares representing the entire stated capital of SLT Property Management (Private) Limited. The investment is fully impaired.
8. This investment in subsidiary company consists of 5,000,001 shares representing the entire stated capital of SLT Campus (Private) Limited. Rs. 10 million was impaired from the investment during the year.
9. This investment in subsidiary Company consists of 106,974,618 shares representing the 87.59% holding of the issued Share Capital of eChannelling PLC.

All the subsidiaries are audited by M/s Ernst & Young except for echannelling PLC audited by KPMG.

17. Other investments

Current investments

	Group		Company
	2017	2016	2017	2016
Fixed deposits/Repo	1,842	762	1,780	705
Investment in equity shares	2	2	–	–
	1,844	764	1,780	705

Fixed deposits and Repo are classified as loans and receivables and measured at amortised cost. Fixed deposits of foreign currency with carrying value of Rs. 1,111 million (2016 – Nil) and Fixed deposits and Repo with a carrying value of Rs. 669 million (2016 – Rs. 705 million) are restricted at bank.

Investment in equity shares comprises of investment made by eChanelling PLC in other companies.

Interest rates of other investments are as follows:

	Group		Company
	2017 %	2016 %	2017 %	2016 %
Fixed deposits – Restricted at bank	12.33	9.07	12.33	9.07
Repurchase agreement – Restricted at bank	8.65	7.12	8.65	7.12
Fixed deposits – LKR	–	10.00-12.00	–	Nil
Fixed deposits – USD	2.86	2.00-2.76	2.86	2.76
Repurchase agreement – Repo	–	6.00- 10.75	–	6.16

The Group’s exposure to credit and market risk and fair value information related to other investment are disclosed in Note 4.

18. Other receivables

	Group		Company
	2017	2016	2017	2016
Non-current	3,150	3,033	3,127	3,021
Current	677	701	676	700
	3,827	3,734	3,803	3,721
Employee loans	3,355	3,247	3,331	3,234
Prepaid staff cost	472	487	472	487
	3,827	3,734	3,803	3,721
Prepaid staff cost 1 January	487	531	487	531
Additions	186	199	186	199
Amortisation	(201)	(243)	(201)	(243)
Prepaid staff cost at 31 December	472	487	472	487

The Group provides loans to employees at concessionary rates. These employee loans are fair valued at initial recognition using Level 2 inputs. The fair value of the employee loans are determined by discounting expected future cash flows using market-related rates for the similar loans.

The difference between the cost and fair value of employee loans is recognised as prepaid staff cost.

The employee loans are classified as loans and receivable and subsequently measured at amortised cost.

19. Inventories

	Group		Company
	2017	2016	2017	2016
CDMA equipment	20	69	20	69
Cable and networks	393	468	393	468
Other consumables	3,915	2,118	2,868	1,594
	4,328	2,655	3,281	2,131
Provision for change in carrying value of inventories	(1,167)	(1,070)	(1,053)	(985)
	3,161	1,585	2,228	1,146

(a) Inventories include telecommunication hardware, CDMA handsets, consumables and office stationery. Inventory is stated net of provisions for slow-moving and obsolete items.

20. Trade and other receivables

	Group		Company
	2017	2016	2017	2016
Domestic trade receivables	20,196	18,265	14,471	12,840
Foreign trade receivables	3,074	3,728	2,292	2,496
	23,270	21,993	16,763	15,336
Less: Provision for bad and doubtful receivables	(9,321)	(7,669)	(6,483)	(5,397)
Less: Interest/revenue in suspense	(19)	(19)	–	–
Trade receivables – Net	13,930	14,305	10,280	9,939
Amount due from subsidiaries [Note 33. 1 (k)]	–	–	3,460	4,441
Amount due from related companies [Note 33.2 (b)]	38	103	38	103
Advances and prepayments [See Note (a) below]	5,101	1,833	3,266	610
Employee loans (Note 18)	677	701	676	700
Other receivables [See Note (b) below]	985	1,345	134	369
Amounts due within one year	20,731	18,287	17,854	16,162

1. Advances and prepayments of the Company mainly consist of advances on foreign and local suppliers advances Rs. 2,843 million (2016 – Nil) , payments for software maintenance of Rs. 341 million (2016 – Rs. 457 million). Advances and prepayments of the Group mainly consist of advances on foreign and local suppliers advances Rs. 3,393 million (2016 – Nil), payments for software maintenance of Rs. 341 million (2016 – Rs. 457 million advances), on building and tower rent of Rs. 107 million (2016 – Rs. 133 million), prepaid TRC Frequency Rs. 246 million (2016 – Rs. 216 million) and free phone offer Rs. 249 million (2016 – Rs. 144 million).
2. Other receivables of the Company consist of refundable deposits of Rs. 125 million (2016 – Rs. 132 million). Other receivables of the Group mainly consist of refundable deposits of Rs. 125 million (2016 – Rs. 132 million), receivables from sales agents Rs. 128 million (2016 – Rs. 127 million) and site rentals receivables from other operators Rs. 302 million (2016 – Rs. 457 million).

21. Cash and cash equivalents

	Group		Company
	2017	2016	2017	2016
Cash at bank and in hand	1,973	909	796	314
Call deposits	–	–	–	–
Fixed deposits	258	244	–	–
Repurchase agreements – Repo	2,046	5,529	–	–
	4,277	6,682	796	314

21 a. For cash flow purpose

Cash and cash equivalents

	Group		Company
	2017	2016	2017	2016
Cash and cash equivalents	4,277	6,682	796	314
Bank overdrafts	(13,323)	(7,298)	(12,406)	(6,548)
	(9,046)	(616)	(11,610)	(6,234)

22. Borrowings

	Group		Company
	2017	2016	2017	2016
Current (due within one year)
Bank overdrafts	13,323	7,298	12,406	6,548
Bank borrowings and others [See Note 22 (e) below]	12,036	8,136	12,013	8,115
Vendor financing	1,432	2,564	–	–
Lease liabilities	100	83	67	63
	26,891	18,081	24,486	14,726
Non-current (due after one year)
Bank borrowings and others [See Note 22 (e) below]	14,489	13,747	14,489	13,747
Vendor financing	371	1,019	–	–
Lease liabilities	60	93	3	62
	14,920	14,859	14,492	13,809
Total borrowings	41,811	32,940	38,978	28,535

(a) The interest rate exposure of the borrowings of the Group and the Company were as follows:

	Group		Company
	2017	2016	2017	2016
Total borrowings
– At fixed rates	23,097	18,774	23,008	18,726
– At floating rates	18,714	14,166	15,970	9,809
	41,811	32,940	38,978	28,535

The currency exposure of the borrowings of the Group and the Company as at the reporting date were as follows:

	Group		Company
	2017	2016	2017	2016
Foreign currency	17,613	22,950	15,811	19,367
Local currency	24,198	9,990	23,167	9,168
	41,811	32,940	38,978	28,535

(b) Effective interest rates of the Group and the Company are as follows:

	Group		Company
	2017 %	2016 %	2017 %	2016 %
Average effective interest rates:
– Bank overdrafts	10.00 – 14.00	10.00 – 13.23	11.88	11.37
– Bank borrowings (USD loan)	4.30	1.24 – 4.22	4.30	4.22
– Bank borrowings	12.22	7.65 – 10.93	12.22	10.93
– Lease liabilities	8.00 – 16.00	8.00 – 16.00	8.00 – 10.00	8.00 – 10.00
– Vendor financing	5.51 – 5.85	3.21 – 3.81	–	–

(c) Maturity analysis of the Group and the Company is as follows:

	Group		Company
	2017	2016	2017	2016
Maturity of non-current borrowings (excluding finance lease liabilities):
– Between 1 and 2 years	6,553	7,626	6,285	6,948
– Between 3 and 5 years	8,307	7,140	8,204	6,799
– Over 5 years	–	–	–	–
	14,860	14,766	14,489	13,747

(d) Analysis of the finance lease liabilities of the Group and the Company as follows:

	Group		Company
	2017	2016	2017	2016
Finance lease liabilities – minimum lease payments
– Not later than 1 year	115	103	72	74
– Later than 1 year and not later than 5 years	73	99	3	67
	188	202	75	141
Less: future finance charges on finance leases	(28)	(26)	(5)	(16)
Present value of finance lease liabilities	160	176	70	125
Representing lease liabilities:
– Current	99	83	67	63
– Non-current	61	93	3	62

5. During the year, the Company drew down USD 10 million (equivalent to Rs. 1,518 million) from the term loan of USD 75 million.
6. The loan covenants include submission of Audited Financial Statements to the lenders within a specified period from the financial year end, maintenance of covenant ratios and to maintain adequate accounting records in accordance with Sri Lanka Accounting Standards.
7. The Directors believe that the Company and the Group will have sufficient funds available to meet its present loan commitments.
8. Lease liabilities of the Company and the Group are effectively secured by the lessor against the rights to the title of the asset.
9. Bank borrowings and supplier credits of Mobitel (Private) Limited, a subsidiary of the Company, are secured, inter alia, by corporate guarantees given by the Company.
10. Mobitel (Private) Limited has borrowed Rs. 2,444 million during the year for the purpose of Capital Expansion Projects.
11. Guarantee facilities amounting to Rs. 26 million (2016 – Rs. 26 million) were provided to Sri Lanka Telecom (Services) Limited to obtain facilities for working capital requirements.

23. Deferred income tax liabilities and assets

Recognised deferred income tax (assets) and liabilities

Deferred income tax (assets) and liabilities are calculated on all taxable and deductible temporary differences arising from differences between accounting bases and tax bases of assets and liabilities. Deferred income tax is provided under the liability method using the principal tax rate of 28% (for the year 2016 – 28%).

The movement in the deferred income tax account is as follows:

	Group		Company
	2017	2016	2017	2016
At beginning of the year	4,459	3,563	4,507	3,594
Release to Statement of Comprehensive Income	1,258	826	1,283	843
Release to Statement of Other Comprehensive Income	155	70	155	70
(Over)/under provision of DT relevant to previous years	–	–	–	–
At end of year	5,872	4,459	5,945	4,507

The amounts shown in the Statement of Financial Position represents the following:

	Group		Company
	2017	2016	2017	2016
Deferred tax liabilities	5,956	4,517	5,945	4,507
Deferred tax assets	(84)	(51)	–	–
	5,872	4,459	5,945	4,507

The taxable and deductible temporary differences mainly arise from property, plant and equipment, deferred income, provision for defined benefit obligations and other provisions. Deferred tax assets and liabilities of the Group are attributable to the following:

Group	Assets		Liabilities		Net
	2017	2016	2017	2016	2017	2016
Property, plant and equipment	–	–	10,466	10,012	10,485	10,012
Defined benefit obligations	(670)	(982)	–	–	(670)	(982)
Provisions	(2,552)	(2,094)	–	–	(2,552)	(2,094)
Deferred income	(736)	(771)	–	–	(736)	(771)
Tax losses	–	–	(636)	(1,706)	(655)	(1,706)
Tax (assets) liabilities before set-off	(3,958)	(3,847)	9,830	8,306	5,872	4,459
Set-off of tax	3,958	3,847	(3,958)	(3,847)	–	–
Net tax (assets) liabilities	–	–	5,872	4,459	5,872	4,459

Movement in deferred tax balances during the year – Group

	Balance 1 January 2016	Recognised in comprehensive income	Recognised in other comprehensive income	Recognised directly in equity	Balance 31 December 2016	Recognised in profit or loss	Recognised in other comprehensive income	Balance 31 December 2017
Property, plant and equipment	7,626	680	–	–	10,012	1,524	–	10,485
Defined benefit obligations	(1,096)	44	70	–	(982)	157	155	(670)
Provisions	(2,181)	87	–	–	(2,094)	(458)	–	(2,552)
Deferred income	(786)	15	–	–	(771)	35	–	(736)
Tax losses	–	–	–	–	(1,706)	–	–	(655)
	3,563	826	70	–	4,459	1,258	155	5,872

Deferred tax assets and liabilities of the Company are attributable to the following:

Company	Assets		Liabilities		Net
	2017	2016	2017	2016	2017	2016
Property, plant and equipment	–	–	10,479	10,006	10,479	10,006
Defined benefit obligations	(663)	(975)	–	–	(663)	(975)
Provisions	(2,479)	(2,046)	–	–	(2,479)	(2,046)
Deferred income	(737)	(772)	–	–	(737)	(772)
Tax loss	–	–	(655)	(1,706)	(655)	(1,706)
Tax (assets) liabilities before set-off	(3,879)	(3,793)	9,824	8,300	5,945	4,507
Set-off of tax	3,879	3,793	(3,879)	(3,793)	–	–
Net tax (assets) liabilities	–	–	5,945	4,507	5,945	4,507

Movement in deferred tax balances during the year – Company

	Balance 1 January 2016	Recognised in comprehensive income	Recognised in other comprehensive income	Recognised directly in equity	Balance 31 December 2016	Recognised in profit or loss	Recognised in other comprehensive income	Balance 31 December 2017
Property, plant and equipment	7,620	680	–	–	10,006	1,524	–	10,479
Defined benefit obligations	(1,089)	44	70	–	(975)	157	155	(663)
Provisions	(2,150)	104	–	–	(2,046)	(433)	–	(2,479)
Deferred income	(787)	15	–	–	(772)	35	–	(737)
Tax losses	–	–	–	–	(1,706)	–	–	(655)
	3,594	843	70	–	4,507	1,283	155	5,945

24. Deferred Income

• The connection fees relating to Public Switch Telephone Network (PSTN) are deferred over a period of 15 years. Revenue is recognised on an annual basis irrespective of the date of connection.
• Revenue from the sale of prepaid credit, Internet is deferred until such time as the customer uses the call time, downloadable quota or the credit expires.
• Backhauling revenue which is leasing of SEA-ME-WE 3 cable capacity is recognised on a straight-line basis over the period of the contracts. Amounts received in advance for any services are recorded as deferred revenue.
• Directory income includes amounts collected for directories not yet printed. Such income will be recognised as income depending on the percentage of directories distributed to the end customer as described in accounting policy (m) (i).
• IRU revenue relating to leasing of SEA-ME-WE 4 cable, Dhiraagu cable capacity is recognised on a straight-line basis over the period of the contracts. Amounts received in advance for any services are recorded as deferred revenue. In the event that a customer terminates an IRU prior to the expiry of the contract and releases the Company from the obligation to provide future services, the remaining unamortised deferred revenue is recognised in the period the contract is terminated.

	Group		Company
	2017	2016	2017	2016
At end of year
Representing deferred income – Current	2,143	1,435	468	576
Representing deferred income – Non-current	2,239	2,340	2,208	2,297
	4,382	3,775	2,676	2,873

25. Trade and other payables

	Group		Company
	2017	2016	2017	2016
Amounts due within one year
Domestic trade payables	2,841	2,743	508	307
Foreign trade payables	1,990	1,562	1,175	480
Amount due to subsidiaries [Note 33.1 (k)]	–	–	2,540	3,954
Amount due to related companies [Note 33.2 (b)]	32	87	32	87
Capital expenditure payables [See Note (a) below]	9,345	10,462	7,249	7,749
Social security and other taxes [See Note (b) below]	1,511	1,090	602	1,062
Interest payable	33	210	–	–
Other payables [See Note (c) below]	12,698	9,143	10,395	5,318
	28,450	25,297	22,501	18,957
Amounts due after one year
International direct dialling deposits	232	232	232	232
PSTN guarantee deposits	20	20	20	20
Advances on LGN project	280	–	280	–
Domestic trade payables	848	794	–	–
Capital expenditure payables	1,064	1,697	–	–
	2,444	2,743	532	252

1. Capital expenditure payables of the Company mainly consist of contractors’ payables and retention of Rs. 6,218 million (2016 – Rs. 6,743 million) and advances on network restoration after road works of Rs. 1,019 million (2016 – Rs. 1,017 million). Capital expenditure payables of the Group mainly consist of contractors' payable and retention of Rs. 8,178 million (2016 – Rs. 11,163 million) and advances on network restoration after road works of Rs. 1,017 million (2016 – Rs. 1,017 million).
2. Social security and other taxes of the Company mainly consist of Telecommunication Levy (TL) of Rs. 417 million (2016 – Rs. 498 million), Cess Rs. 64 million (2016 – Rs. 74 million), IDD Levy of Rs. 7 million (2016 – Rs. 8 million), EPF payable of Rs. 112 million (2016 – Rs. 117 million). Social security and other taxes of the Group mainly consist of Telecommunication Levy (TL) of Rs. 792 million (2016 – Rs. 913 million), Cess of Rs. 150 million (2016 – Rs. 146 million ). IDD Levy payable of Rs. 9 million (2016 – Rs. 8 million), EPF payable of Rs. 112 million (2016 – Rs. 117 million) and NBT payable Rs. 119 million (2016 – Rs. 120 million)
3. Other payables of the Company mainly consist of dividend payable to the Government of Sri Lanka of Rs. 244 million (2016 – Rs. 244 million), payable for unpaid supplies of Rs. 7,570 million (2016 – Rs. 2,169 million), International Telecommunication Operators’ Levy payable of Rs. 148 million (2016 – Rs. 207 million) and accrued expenses and other payables of Rs. 214 million (2016 – Rs. 1,217 million). Other payables of the Group mainly consist of dividend payable to the Government of Sri Lanka of Rs. 244 million (2016 – Rs. 244 million), payable for unpaid supplies of Rs. 7,570 million (2016 – Rs. 2,169 million), International Telecommunication Operators’ Levy payable of Rs. 148 million (2016 – Rs. 207 million), and accrued expenses and other payables of Rs. 1,739 million (2016 – Rs. 3,662 million).

26. Employee benefits

	Group		Company
	2017	2016	2017	2016
Total employee benefit liability as at 1 January	4,538	4,353	3,984	3,892
Movement in present value of employee benefit liabilities
Current service cost	461	455	438	389
Interest cost	221	221	155	175
Actuarial loss/(gain)	(543)	(233)	(553)	(249)
Benefit paid during the year	(322)	(258)	(305)	(223)
Balance as at 31 December	4,355	4,538	3,719	3,984
Expenses recognised in the Income Statement
Current service cost	461	455	438	389
Interest cost	221	221	155	175
	682	676	593	564
Recognised in Other Comprehensive Income
Actuarial (gain)/loss	(543)	(233)	(553)	(249)
	(543)	(233)	(553)	(249)

The principal actuarial assumptions used were as follows:

	Group		Company
	2017 %	2016 %	2017 %	2016 %
Discount rate (long-term)	10.0 – 10.4	10.0 – 12.0	10.4	11.0
Future salary increases	8.5 – 10.0	8.5 – 9.5	8.5	8.5

In addition to above, demographic assumptions such as mortality, withdrawal, retirement age were considered for the actuarial valuation. In 2017, 1967/70 Mortality Table issued by the Institute of Actuaries (2016 – 1967/70 Mortality Table) was taken as the base for the valuation.

The provisions for defined obligations of Sri Lanka Telecom PLC, SLT Human Capital Solution (Private) Limited, SLT Digital Services (Private) Limited, Sri Lanka Telecom (Services) Limited and Mobitel (Private) Limited are actuarially valued by Messrs Actuarial and Management Consultants (Private) Limited and Messrs Piyal S Goonetilleke and Associates respectively. The employee benefit liability of all other companies in the Group are based on gratuity formula.

The provision for defined benefit obligations is not externally funded.

Sensitivity analysis

Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions consultant, would have affected the defined benefit obligation by the amount shown below.

The sensitivity of the Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position is the effect of the assumed changes in discount rate and salary increment rate as depicted in the given table.

Sri Lanka Telecom PLC

	Effect on charge to the Statement of Profit or Loss and Other Comprehensive Income		Effect on net defined benefit liability
	Increase	Decrease	Increase	Decrease
2017
Discount rate (Change by 1%)	(132)	144	(132)	144
Salary increment rate (Change by 1%)	167	(156)	167	(156)
2016
Discount rate (Change by 1%)	(168)	186	(168)	186
Salary increment rate (Change by 1%)	208	(191)	208	(191)

Mobitel (Private) Limited

	Effect on charge to the Statement of Profit or Loss and Other Comprehensive Income		Effect on net defined benefit liability
	Increase	Decrease	Increase	Decrease
2017
Discount rate (Change by 1%)	(31)	35	(31)	35
Salary increment rate (Change by 1%)	37	(33)	37	(33)
2016
Discount rate (Change by 1%)	(24)	27	(24)	27
Salary increment rate (Change by 1%)	27	(24)	27	(24)

27. Insurance reserve

	Group/Company
	2017	2016
As at 1 January	680	605
Transferred from retained earnings	11	75
As at 31 December	691	680

As stated in Accounting Policy 3 (s) the Company transfers annually from the retained earnings an amount equal to 0.1% of additions to property, plant and equipment to an insurance reserve. An equal amount is invested in a sinking fund to meet any funding requirements for potential losses from uninsured property, plant and equipment.

Management regularly monitors the charges made against the insurance reserve and the adequacy of the provision made.

28. Grants

	Group		Company
	2017	2016	2017	2016
Balance at 1 January	9	16	9	16
Grant credited to profit or loss	(6)	(7)	(6)	(7)
Balance at 31 December	3	9	3	9

Grant in Company and Group consists of exchange equipment received from Alcatel CIT France in 2005.

29. Stated capital

	Company
Issued and fully paid	2017	2016
1,804,860,000 ordinary shares	18,049	18,049

The stated capital is made up as follows:

	2017		2016
	Holding Percentage	Number of shares	Holding Percentage	Number of shares
Government of Sri Lanka	49.50	893,405,709	49.50	893,405,709
Global Telecommunications Holdings N.V.	44.98	811,757,869	44.98	811,757,869
Public shareholders	5.52	99,696,422	5.52	99,696,422
	100.00	1,804,860,000	100.00	1,804,860,000

30. Cash generated from operations

Reconciliation of profit before tax to cash generated from operations:

	Group		Company
	2017	2016	2017	2016
Profit before tax	5,528	6,497	2,129	2,643
Adjustments for:
Depreciation (Note 13)	16,461	13,776	10,926	8,509
Grant received less amortisation (Note 28)	(6)	(7)	(6)	(7)
Amortisation of intangible assets (Note 14)	826	541	195	227
Amortisation of financial prepayments (Note 14 a)	–	83	–	–
Provision/write-off of bad and doubtful debts	1,767	1,417	1,266	912
Provision for falling value of inventories	97	370	68	325
Interest expense and finance costs (Note 9)	159	250	12	25
Foreign exchange (loss)/gain ( Note 9.a)	478	979	471	570
Interest income (Note 10)	(1,040)	(1,012)	(562)	(448)
Connection fees less amortisation	607	(622)	(197)	(103)
Profit on sale of property, plant and equipment	(681)	(404)	(677)	(388)
Impairment of assets (Note 13)	100	137	100	137
Impairment of investment (Note 16)	14	–	14	–
Provision for Retirement benefit obligations (Note 26)	682	676	593	564
	24,992	22,681	14,332	12,966
Changes in working capital
– Receivables and prepayments	(4,318)	(5,796)	(3,064)	(4,096)
– Inventories	(1,923)	679	(1,400)	850
– Payables	2,983	3,705	3,825	1,516
Cash generated from operations	21,734	21,269	13,693	11,236

31. Capital commitments

The Group and the Company have purchases commitments in the ordinary course of business as at 31 December 2017 are as follows:

	Group		Company
	2017	2016	2017	2016
Property, plant and equipment
– Approved but not contracted	25,984	19,261	25,984	19,261
– Approved and contracted	1,774	13,229	1,400	12,863
	27,758	32,490	27,384	32,124
Operating lease commitments
The future minimum lease payments and other commitment payments are as follows:
– Not later than 1 year	93	116	93	116
– Later than 1 year and not later than 5 years	160	191	160	191
	253	307	253	307

Other financial commitments

Except for any regular maintenance contracts entered into with third parties in the normal course of business, there are no other material financial commitments that requires separate disclosures.

32. Contingencies

1. Global Electroteks Limited initiated legal action under High Court Case No. 20/2006 claiming damages of USD 12 million from Sri Lanka Telecom PLC (“SLT”) for alleged unlawful disconnection of interconnection services. Further trial will be held on 22 June 2018.
2. Appeal Case filed by Directories Lanka (Private) Limited (DLPL) against SLT against the dismissal of CHC 2/2006(3) claimed damages of Rs. 250 million, for alleged unfair competition with regard to artwork on the cover page of the Directory by SLT. The proceedings have not commenced. DLPL appealed against the above order.
3. 12/2008 CBCU, an inquiry by Sri Lanka Customs –A consignment of CDMA equipment was detained in October 2008 by the Customs Authority. Subsequently the equipment were cleared pending the inquiry, based on a cash deposit and bank guarantee submitted by SLT. The Order was delivered in October 2014 imposing a mitigated forfeiture of Rs. 1,820,502,062 on SLT. SLT has filed Case in Court of Appeal under CA/writ/387/2014 against this Order and interim order was issued by court on 09 March 2016, precluding Respondents from enforcing order dated 17 October 2014. Next date of the case is 22 June 2018.
4. Customs Case No. ADP/031/2009 – Goods valued at USD 996,785.65, which was imported under the last consignment of equipment for NGN Phase II expansion project, was detained by the Customs in May 2009. Subsequently, the equipment was cleared in July 2009. Pending the Inquiry. Presently awaiting the decision of the Sri Lanka Customs Department.
5. Debt Recovery Officers who were attached to SLT had filed legal proceedings in Labour Department (Labour Commissioner) and Labour Tribunal and number of proceeding initiated under each forum are 47 and 21 respectively. The relief claimed includes EPF, ETF and compensation with regard to proceedings initiated before the Labour Commissioner and includes reinstatement or compensation under the proceedings before Labour Tribunal. An appeal is pending (WR232/2015) filed against the proceeding before Labour Commission. Appeals filed in high court in regard to the proceedings before Labour Tribunal.
6. On 18 July 2017 DBN filed a case against SLT under Case Number HC/Civil/23/2017 in the Commercial High Court regarding alleged violation of Intellectual Property Rights, on the basis that SLT used an RFP floated by Dialog. An ex-parte interim injunction was obtained from court by DBN on 19 July 2017 requiring SLT to disclose the source/party who revealed the RFP and to furnish the original under the provisions of Intellectual Property Act. Further permanent injunction and a claim of damages of Rs. 7, 800,000,000 was made under the petition by DBN. SLT filed revocation paper on 10 August 2017. This case is coming up on 16 May 2018 for objection of SLT and fixed for inquiry in to interim measure on 16 May 2018.
   
   In addition to the above referred cases there are other claims by employees and third parties for damages and other relief. In the opinion of the Directors' none of these actions are likely to result in a material liability to the Company and its subsidiaries.
   
   The Company has provided guarantees on behalf of its subsidiaries for following credit and trade finance facilities.

1. USD 102 million (2016 – USD 102 million) for Mobitel (Private) Limited for the GSM rollout stages 6 and 7
2. Facilities amounting to Rs. 26 million (2016 – 26 million) for Sri Lanka Telecom (Services) Limited to obtain facilities for working Capital requirement. With regard to cases detailed above, pending the outcome of the appeals and hearings, no provisions have been recognised in the Financial Statements up to 31 December 2017.

33. Related party 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.

33.1

	Company
	2017	2016
(a) Mobitel (Private) Limited
Sale of goods and services
Provision of E1 links	3,572	2,910
Interconnection charges	282	295
TDM, VOIP platform and transit	27	129
	3,881	3,334
Purchase of goods and services
Call charges on official mobile phone	97	87
Interconnection charges	1,243	1,479
Antenna tower space	846	798
Building rent	4	4
Commission on bill collection	6	6
	2,196	2,374

As per the TRC approval dated 19 May 2014, Mobitel is entitled to receive discounts if the Company uses more than 3,500 E1 Links.

Further, Mobitel receives discounts on infrastructure services provided by Sri Lanka Telecom PLC.

The Company has provided guarantees on behalf of Mobitel for the following loans and obligations:

USD 102 million (2016 – USD 102 million) for Mobitel (Private) Limited for the GSM rollout stages 6 and 7.

	Company
	2017	2016
(b) SLT Digital Services (Private) Limited
Sale of goods and services
Supply of services	6	5
Purchase of goods and services
Directory distribution and other services	8	–

SLT Digital Services (Private) Limited provides event management services to SLT PLC. As per the agreement, SLT Digital Services (Private) Limited entitle to receive a retainer for the services provided.

	Company
	2017	2016
(c) Sri Lanka Telecom (Services) Limited
Sale of goods and services
Supply of services	5	5
Purchase of goods and services
Project-related services	190	150

The Company has provided guarantees on behalf of Sri Lanka Telecom (Services) Limited for the following loans and obligations:

Facilities amounting to Rs. 26 million (2016 – Rs. 26 million) for Sri Lanka Telecom (Services) Limited to obtain facilities for working capital requirements.

	Company
	2017	2016
(d) SLT Human Capital Solutions (Private) Limited
Sale of goods and services
Supply of services	4	3
Purchase of goods and services
Provision of manpower service	1,650	1,791
(e) SLT VisionCom (Private) Limited
Sale of goods and services
Supply of services	10	5
Purchase of goods and services
Service provisioning	330	139

Ad-insertion revenue

Sri Lanka Telecom received an ad-insertion revenue from SLT VisionCom (Private) Limited amounting to Rs. 10 million. SLT’s share of revenue is based on the following percentages:

Advertisement on PEO TV – EPG	34%
Channel advertisement	17%

Service Fee

Sri Lanka Telecom PLC pays VisionCom (Private) Limited a unit rate based fee computed at the rate of Rs. 65/- per cumulative billable subscriber which amounted to Rs. 254 million in 2017. (Total cost incurred plus a 5% margin in 2016)

	Company
	2017	2016
(f) SLT Campus (Private) Limited
Sale of goods and services
Supply of services	15	13
Purchase of goods and services
Service provisioning	–	11
(g) Fees for secondment of personnel and services provided to/by SLT PLC
SLT Digital Services (Private) Limited	46	45
	46	45

	Company
	2017	2016
(h) Outstanding balances arising from sale/purchase of services
Receivable from subsidiaries
Mobitel (Private) Limited	2,684	3,861
SLT Digital Services (Private) Limited	136	167
SLT Human Capital Solutions (Private) Limited	157	152
SLT VisionCom (Private) Limited	–	18
Sri Lanka Telecom (Services) Limited	150	41
Sky Network (Private) Limited	11	6
SLT Property Management (Private) Limited	38	23
SLT Campus (Private) Limited	284	173
	3,460	4,441
Payable to subsidiaries
Mobitel (Private) Limited	1,681	3,389
SLT Digital Services (Private) Limited	212	119
SLT Human Capital Solutions (Private) Limited	306	373
SLT VisionCom (Private) Limited	130	–
Sri Lanka Telecom (Services) Limited	190	52
Sky Network (Private) Limited	1	1
SLT Campus (Private) Limited	20	20
	2,540	3,954

33.2 Transactions with other related parties

	Group		Company
	2017	2016	2017	2016
(a) Maxis Communications Berhad and its subsidiaries
Sale of goods and services
Sale of SEA-ME-WE 3 cable capacity	16	11	16	11
International incoming traffic	42	74	38	74
	58	85	54	85
Purchase of goods and services
International outgoing traffic	33	40	33	40
(b) Outstanding balances arising from sale/purchase of services
Receivable from related companies
Maxis Communications Berhad and its subsidiaries	38	103	38	103
Payable to related company
Maxis Communications Berhad and its subsidiaries	32	87	32	87

(c) Government-related key institutions

The Government of Sri Lanka holds 49.5% of the voting rights of the Company as at 31 December 2017 through the Secretary to the Treasury and those have significant influence over the financial and operating policies of the Company. Accordingly, the Company has considered the Government of Sri Lanka as a related party according to LKAS – 24 “Related Party Disclosure”.

During the year ended 31 December 2017, the Company has carried out transactions with the Government of Sri Lanka and other Government-related entities in the ordinary course of business.

The Company identified individually significant transactions with Key Government related entities as given below:

1. Revenue from provision of telecommunication services during the year ended 31 December 2017 amounted to Rs. 3,769 million (2016 – Rs. 3,845 million) and credit receivables as at 31 December 2017 amounted to Rs. 1,606 million (2016 – Rs. 1,695 million).
2. Deposits, repurchase agreements (Repo) and Borrowings of the Group at/from Government banks amounted to Rs. 1,790 million (2016 – Rs. 5,666 million ) and Rs. 11,532 million (2016 – Rs. 3,532 million) as at 31 December 2017.
3. Dividend payable to the Government amounting to Rs. 244 million (2016 – Rs. 244 million).

33.3 Transactions with key management personnel

Key Management Personnel comprise the Directors and Chief Officers of the Company and the Group.

	Group		Company
	2017	2016	2017	2016
Short-term benefits	268	234	227	209
Post-employment benefits	26	22	22	21
Salaries and other benefits	294	256	249	230

All transactions during the year and balances as at the reporting date between the following companies have been eliminated in preparing the Consolidated Financial Statements:

Mobitel (Private) Limited
Sri Lanka Telecom (Services) Limited
SLT Digital Services (Private) Limited
SLT Human Capital Solutions (Private) Limited
SLT VisionCom (Private) Limited
Sky Network (Private) Limited
SLT Property Management (Private) Limited
SLT Campus (Private) Limited
Galle Submarine Cables Depot (Private) Limited
eChannelling PLC

Related party transactions disclosed above should be read in conjunction with Note 16 to the Financial Statements.

34. Non-uniform accounting policies

The impact of non-uniform accounting policies adopted by the subsidiary company has been adjusted in the Consolidated Financial Statements as set out below:

Adjustment due to different accounting policies of the Parent and the Group entities

Sri Lanka Telecom PLC accounts for refunds on Telecommunication Development Charge (TDC) on cash basis when the payment is received whereas Mobitel (Private) Limited recognises it in the Statement of Profit or Loss and Other Comprehensive Income on a straight-line basis.

Therefore, the recognition of the refund by Mobitel (Private) Limited was eliminated and is recognised on cash basis in the consolidated accounts.

	Group impact
	2017	2016
Reversal of deferred revenue recognised in the Statement of Profit or Loss and Other Comprehensive Income by Mobitel (Private) Limited	(98)	(100)

35. Events after the reporting date

The Board of Directors of the Company has recommended a first and final dividend of Rs. 0.89 per share (2016 – Rs. 0.89 per share) on voting shares of the Company to be paid by way of cash dividend for the financial year ended 31 December 2017.

Further, this dividend is to be approved at the Annual General Meeting to be held on 9 May 2018. This proposed final dividend has not been recognised as a liability as at 31 December 2017. Under the Inland Revenue Act No. 10 of 2006, a WHT of 10% has been imposed on dividend declared. Final dividend proposed for the year amounts to Rs. 1,606,325,400, in compliance with Sections 56 and 57 of Companies Act No. 07 of 2007.

As required by Section 56 of the Companies Act No. 07 of 2007, the Board of Directors of the Company satisfied the Solvency Test in accordance with the Section 57, prior to recommending the final dividend. A statement of solvency completed and duly signed by the Directors on 29 March 2018 has been audited by M/s Ernst & Young.

Except as disclosed above, no other events have arisen since the Statement of Financial Position date which require changes to, or disclosure in the Financial Statements.