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| A. |
BASIS OF PREPARATION
The consolidated financial statements are prepared in
accordance with and comply with Sri Lanka Accounting Standards.
The consolidated financial statements are prepared under
the historical cost convention. Where any item is not
covered by Sri Lanka Accounting Standards (SLAS), International
Accounting Standards (IAS) are followed.
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| B. |
GROUP ACCOUNTING
- Subsidiary undertakings
Subsidiary undertakings, which are those entities
in which the Group, directly or indirectly, has an
interest of more than one half of the voting rights
or otherwise has power to exercise control over the
operations, have been consolidated. Consolidated financial
statements are prepared from the date on which effective
control is transferred to the Group and are no longer
consolidated from the date of cessation of such control
through disposal or otherwise. All intercompany transactions,
balances and unrealised surpluses and deficits on
transactions between group companies have been eliminated.
The accounting policies of the subsidiary are the
same as those of the Company. No disclosure of minority
interest is made as the subsidiary is wholly owned.
The Group repoting dates are set out in Note 22.
- Associated undertakings
Investments in associated undertakings are accounted
for by the equity method of accounting. These are
undertakings over which the Group has between 20%
and 50% of the voting rights, and over which the Group
exercises significant influence, but which it does
not control.
Equity accounting involves recognising in the Income
Statement the Group’s share of the associates’
profit or loss for the year. The Group’s interest
in the associate is carried in the Balance Sheet at
an amount that reflects its share of the net assets
of the associate. The Group’s principal associated
undertaking is shown in Note 11.
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| C. |
FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions in Group companies are accounted
for at the exchange rates prevailing at the date of the
transactions: gains and losses resulting from the settlement
of such transactions and from the translation of monetary
assets and liabilities denominated in foreign currencies,
are recognised in the Income Statement. Such balances
are translated at year-end exchange rates unless hedged
by forward foreign exchange contracts, in which case the
rates specified in such forward contracts are used. All
other gains and losses are recognised in the Income Statement
to the extent that they are regarded as an adjustment
to borrowing cost.
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| D. |
GOODWILL
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group’s shares of the
net assets of the acquired subsidiary undertakings at
the date of acquisition and is written off in equal amounts,
over a period of five years commencing from the date of
acquisition.
The carrying amount of goodwill is reviewed annually and
written down for permanent impairment where it is considered
necessary.
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| E. |
PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment is carried at cost less
accumulated depreciation, less a provision for any permanent
diminution in value.
Cost includes all costs directly attributable to bringing
an asset to working condition for its intended use. Cost
in the case of the network comprises all expenditure up
to and including the cabling within customers’ premises,
undersea cables, contractors’ charges and payments
on account of materials, customs duty and borrowing costs.
Significant renovations are capitalised if they extend
the life of the asset beyond its originally estimated
useful life or increase its recoverable value. Maintenance,
repairs and minor renewals are charged to income as incurred.
The cost of property, plant & equipment that are disposed
of are eliminated from the Balance Sheet, along with the
corresponding accumulated depreciation. Any gain or loss
resulting from such disposal is included in current income.
Gains and losses on disposal of property, plant &
equipment are determined by reference to their carrying
amount and are taken into account in determining operating
profit.
The basis of valuation used on the transfer of assets
from SLT to SLTL is explained in Note 9 to the financial
statements.
Depreciation is calculated using the most appropriate
method to write off the cost of each asset to their residual
values over their estimated useful lives. The depreciation
methods and useful lives are shown in Note 9 to the financial
statements.
Where the carrying amount of an asset is greater than
its estimated recoverable amount, it is written down immediately
to its recoverable amount.
Interest costs on borrowings to finance the construction
of property, plant & equipment are capitalised, during
the period of time that is required to complete and prepare
the property for its intended use, as part of the cost
of the asset.
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| F. |
INVESTMENTS
Long-term investments are shown at cost and provision
is only made where, in the opinion of the Directors, there
is a permanent diminution in value. Where there has been
a permanent diminution in the value of an investment,
it is recognised as an expense in the period in which
the diminution is identified. On disposal of an investment,
the difference between the net disposal proceeds and the
carrying amount is charged or credited to the Income Statement.
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| G. |
INVENTORIES
All inventories are held to be used by the Company in
providing its services. Inventories are stated at the
lower of cost and net realisable value. For this purpose,
the cost of inventories is based on the standard cost,
which is reduced by the corresponding price variance at
the year end. Cost is calculated on a first in first out
basis. Provision is made for slow-moving and obsolete
inventories, which are not expected to be used internally.
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| H. |
TRADE RECEIVABLES
Trade receivables are carried at original invoice amount
less an estimate made for doubtful receivables based on
a review of all outstanding amounts at the year end. Bad
debts are written off once decided as irrecoverable after
due recovery procedures.
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| I. |
CASH & CASH EQUIVALENTS
For the purpose of the Cash Flow Statement, cash &
cash equivalents comprise cash in hand, deposits held
at call with banks, other short-term highly liquid investments.
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| J. |
SHARE CAPITAL
Dividends on ordinary shares are recognised in equity
in the period in which they are declared.
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| K. |
DEFERRED INSURANCE PREMIUM
Insurance premium paid by the Company to secure foreign
loans under the 150K Project Scheme has been deferred
on the grounds that the benefit of this expenditure is
not exhausted in the period in which it is incurred and
will be written off to the Income Statement over the repayment
period of the loans.
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| L. |
BORROWING COSTS
Borrowing costs are written off to the Income Statement
as incurred, unless they relate to borrowings which fund
significant capital projects, in which case they are capitalised
with the relevant qualifying asset up to the date of commissioning,
and written off to the Income Statement over the period
during which the asset is depreciated. Borrowing costs
include interest charged, commitment fees, guarantee premium
and exchange differences on foreign loans to the extent
that they are regarded as an adjustment to interest costs.
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| M. |
TAXATION
Taxes on income are accounted for using the liability
method. Under this method the expected tax effect of temporary
differences between the figures used for financial reporting
and income tax reporting purposes are recorded as deferred
taxes at the rates that are expected to apply when the
temporary differences reverse.
Deferred income tax is provided, using the liability method,
for all temporary differences arising between the tax
bases of assets and liabilities and their carrying values
for financial reporting purposes. Currently enacted tax
rates are used to determine deferred income tax.
Under this method the Group is required to make provision
for deferred income taxes on revaluations, if any, of
non current assets and, in relation to an acquisition,
on the difference between the fair values of the net assets
acquired and their tax base. Provision for taxes, mainly
withholding taxes, which could arise on the remittance
of retained earnings, principally relating to subsidiaries,
is only made where there is a current intention to remit
such earnings.
The principal temporary differences arise from depreciation
on property, plant & equipment, revaluations of certain
non-current assets, provisions for retirement benefits
and tax losses carried forward. Deferred tax assets relating
to the carry forward of unused tax losses are recognised
to the extent that it is probable that future taxable
profit will be available against which the deferred tax
assets can be utilised.
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| N. |
DEFINED BENEFIT PLAN
SLTL as a matter of policy obtains an actuarial valuation
of the retirement benefit liability once in three years.
An actuarial valuation was carried out by an independent
professional valuer to ascertain the full liability arising
in terms of the Payment of Gratuity Act No. 12 of 1983,
in respect of all employees of SLTL as at 31 December
2003. The valuation was made adopting the Projected Unit
Credit Method as recommended by the Sri Lanka Accounting
Standards No. 16, Retirement Benefit Costs.
The assumptions based on which the results of the actuarial
valuation was determined, are included in Note 20 to the
financial statements. The liability is not funded externally.
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| O. |
DEFINED CONTRIBUTION PLAN
All employees of the Company are members of the Employees’
Provident Fund of SLTL and the Employees’ Trust
Fund to which SLTL contributes 15% and 3% respectively
of such employees’ basic salary and allowances.
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| P. |
PROVISIONS
Provisions are recognised when the Group has a present
legal or constructive obligation as a result of past events,
it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation,
and a reliable estimate of the amount of the obligation
can be made.
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| Q. |
REVENUE RECOGNITION
Revenue is recognised on an accrual basis when it is probable
that the economic benefits will flow to the Company and
the revenue and associated costs can be reliably measured.
Revenue is measured at the amount of consideration net
of discounts and taxes.
The specific criteria used for recognition of revenue
are as follows:
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- Domestic and international call
revenue and rental income
The customers are billed for calls and rental on monthly
cycle based on the calendar months. Customers are
charged Government taxes at the applicable rates but
accounted for as a liability. Revenue is recognised
net of such taxes based on the amounts billed.
- Revenue from other network operators and
international settlements
Revenue is received from other network operators,
local and international, for the use of SLTL network
for completing connections. These revenues are recognised,
net of taxes, based on traffic minutes and stipulated
rates.
- Revenue from other telephony services
Revenue is recognised on an accrual basis based on
the usage of these services.
- Connection fees
These are initially recognised as deferred income
and subsequently recognised as revenue by amortising
over a period of 15 years.
- Equipment sales
Revenue on equipment sales is recognised, net of taxes,
on completion of sales transaction.
- Interest income
Interest income is derived from short-term investments
of excess funds and is recognised on an accrual basis.
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| R. |
EXPENDITURE
Expenses are recognised on accrual basis. All expenditure
incurred in the running of the business and in maintaining
property, plant & equipment in a state of efficiency
has been charged to income in arriving at the profit for
the period.
For the purpose of presentation of the Income Statement
information nature of expense method is used.
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| S. |
FOREIGN EXCHANGE RISK
The Company hedges a portion of exchange risks of loans
obtained in foreign currency using future net foreign
earnings.
The Company hedges between 50% to 75% of anticipated net
foreign earnings for 5 years. Approximately 75% (2002
- 75%) of projected net foreign earnings qualified as
‘highly probable' for which hedge accounting was
used in 2003.
The Company documents at the inception of the transaction
the relationship between hedging instruments and hedged
items, as well as its risk management objective and strategies
for undertaking various hedge transactions. This process
includes linking all derivatives designated as hedges
to forecast transactions. The Company also documents its
assessment, both at the hedge inception and on an on going
basis, of whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes
in cash flows of hedged items.
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| T. |
COMPARATIVES
Where necessary, comparative figures have been adjusted
to conform with changes in presentation in the current
year. |
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