Notes to the financial statements

(All amounts in Sri Lankan 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 of the Company relates to Sri Lanka Telecom PLC. The consolidated financial statements of the Company as at and for the year ended 31 December 2014 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. 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, interalia, internet services, data services, domestic and international leased circuits, broadband, satellite uplink, maritime transmission, IPTV service and directory publishing. The Company is a quoted public Company which has its listing on the Colombo Stock Exchange.

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 & 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 statement by Directors

The consolidated and Company financial statements were authorised for issue by the Board of Directors in accordance with the resolution of the Directors on 27 February 2015.

(c) Basis of measurement

The financial statements have been prepared on the historical cost basis and 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 is 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 Sri Lankan Rupees has been rounded to the nearest million, unless otherwise indicated.

(e) Use of estimates and judgments

The preparation of financial statements in conformity with Sri Lanka Accounting Standards requires management to make judgments, 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 judgments 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 & equipment
  • Note 14 - Intangible assets
  • Note 20 - Trade and other receivables
  • 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 2014 other than those disclosed in Note 3 (ii-a).

3 Significant accounting policies

The accounting policies set out below have been applied consistently to all periods presented in these financial statements, unless otherwise indicated. The accounting policies of the Company have been consistently applied by the Group entities where applicable and deviations, if any, have been disclosed in Note 34.

(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 on 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 re-measured 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 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 of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

(ii-a) Changes in accounting policies

SLFRS 10 which is effective for financial periods beginning on or after 1 January 2014, replaces the guidance on control and consolidation in LKAS 27 - ‘Consolidated and Separate Financial Statements’ and in SIC 12 ‘Consideration - Special Purpose Entities’.

The Group has reviewed its investments in other entities to assess whether the conclusion to consolidate is different under SLFRS 10 than under LKAS 27. No differences were found for any of the investments.

(ii -b) Critical judgments 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-c), below:

(ii-c) Interest in subsidiaries

Set out below are the Group’s principal subsidiaries as at 31 December 2014.

Name of entity Place of business/
country of incorporation
Percentage of ownership
interest held by the Group
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 businesses
SLT VisionCom (Private) Limited Colombo/Sri Lanka 100.00% Providing IPTV support services
SLT Publications (Private) Limited Colombo/Sri Lanka 100.00% Directory information and publication 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’s real estate resources
SLT Campus (Private) Limited Colombo/Sri Lanka 100.00% Higher education services of ICT and Business Management

(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: financial assets at fair value through profit or loss, 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.

(a) 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.

(a-i) Non-derivative financial assets – Measurement
Financial assets at fair value through profit or loss A financial asset is classified as fair value through profit or loss if it is classified as held-for-trading or is designated as such on initial recognition. Directly attributable transaction costs are recognised in the statement of profit or loss and other comprehensive income as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, including any interest or dividend income, are recognised in the statement of profit or loss and other comprehensive income.
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.

* Cash and cash equivalents

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand form an integral part of the Group’s cash management, are included as a component of cash and cash equivalents for the purpose of the statement of cash flow.

** Trade and other receivables

Trade and other receivables are stated at their estimated realisable amount.

(a-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.

(a-iii) Fair value measurement

SLFRS 13 defines fair value as the price that would be received to sell and asset or paid to transfer a liability in an orderly transactions 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 a price for an identical asset or liability is not observable, an entity measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. Because fair value is a market-based measurement, it is measured using the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant when measuring fair value.

When an asset is acquired or a liability is assumed in an exchange transaction for that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (an entry price). In contrast, the fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability (an exit price).

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 judgment 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.

(a-iv) Reclassification

Reclassifications of financial assets, other than as set out below or of financial liabilities between measurements 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.

(a-v) Derivative financial instruments

The Group holds derivative financial instruments to hedge its interest rate risk exposure.

Derivatives are initially recognised at fair value; any directly attributable transaction costs are recognised in the statement of profit or loss and other comprehensive income as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are generally recognised in profit or loss.

(b) Impairment

(b-i) 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.
(b-ii) 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 the CGU on a 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 & equipment

(i) Recognition and measurement

Items of property, plant & 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 & equipment have different useful lives, they are accounted for as separate items (major components) of property, plant & equipment.

(ii) Subsequent costs

The cost of replacing part of an item of property, plant & 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 & 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 in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant & 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 assets 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 and transmission equipment 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 & equipment when the entity expects to use them during more than one period and are used in connection with specific items of property, plant & equipment.

(v) Derecognition

The carrying amount of an item of property, plant & equipment is derecognised on disposal. Gains and losses on disposal of an item of property, plant & equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant & 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 & 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 costs 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 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 3-5 years

(f) Leased assets

Leases in terms of which the Group assumes substantially all 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) Stated 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 statement of profit or loss and other comprehensive income 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 respective subsidiaries contribute 12% of such employees’ basic salary and allowances. Employees of SLT Services (Private) 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 Company’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 5 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) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

(l) Trade and other payables

Trade and other payables are stated at their cost.

(m) 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.

(n) Revenue

Revenue from services rendered in the course of ordinary activities is measured at fair value of the consideration received or receivable net of trade discounts, volume rebates and after eliminating the sales within the Group.

Revenue is recognised when persuasive evidence exist, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable 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 revenue is recognised as follows:

(i) Domestic and international call revenue, rental income

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.

(ii) 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 and interconnection expenses recognised under operating costs in profit or loss.

(iii) 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.

(iv) Revenue from other telephony services

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

(v) 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.

(vi) CDMA revenue

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

(vii) Equipment sales

Revenue from sale of equipment is recognised, net of taxes, once the equipment is delivered.

(viii) Sales 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.

(o) Expenditure

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

(p) 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.

(q) 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.

(r) 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 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.

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 at the rates specified in Note 11.

(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 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 and 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.

(iii) Economic Service Charge (ESC)

Economic Service Charge (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.

(s) 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.

(t) Insurance reserve

The Company transfers annually from the retained earnings an amount equal to 0.1% of additions to property, plant & 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 & equipment. The insurance reserve is maintained to recover any losses arising from damage to property, plant & equipment, except for motor vehicles, that are not insured with a third-party insurer.

(u) 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.

(v) 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.

(w) Cash flow statement

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 changes in value. The cash and cash equivalent include cash in hand, balances with banks, placements with banks, money at call and short notice.

(x) 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.

(y) Directors’ responsibility statement

The Board of Directors of the Company is responsible for the preparation and presentation of these financial statements.

(z) New accounting standards issued but not effective as at the reporting date

The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standards. However, these standards have not been applied in preparing these financial statements:

New or amended standards Summary of requirements Possible impact on consolidated financial statements
SLFRS 9 - Financial Instruments The objective of this SLFRS is to establish principles for the financial reporting of financial assets and financial 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. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of SLFRS 9.
SLFRS 15 - Revenue from Contract with Customers Establishes the principles that an entity shall apply to 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 periods beginning on or after 1 January 2017. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of SLFRS 15.
Agriculture: Bearer Plants (Amendments to LKAS 16 and
LKAS 41)
These amendments require a bearer plant, defined as a living plant, to be accounted for as property, plant & equipment and included in the scope of LKAS 16 - ’Property, plant & equipment’, instead of LKAS 41 - ‘Agriculture’. The amendments are effective for annual reporting periods beginning on or after 1 January 2016. None. The Group does not have any bearer plants.
SLFRS 14 - Regulatory Deferral Accounts The Objective of this standard is to specify the financial reporting requirements of regulatory deferral account balances that arise when an entity provides goods or services to customers at a price or rate that is subject to rate regulations.

The amendments are effective for annual reporting periods beginning on or after 1 January 2016.

The Group is assessing the potential impact on its consolidated financial statements resulting from the application of SLFRS 14.

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 counter party 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 has 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 subject to auto disconnection when they reach the threshold limit. Credit control actions and recovery actions are taken for overdue customers and defaulted customers to minimise the credit risk. High revenue-generated customers including corporate customers are monitored individually.

As at 31 December 2014, the maximum exposure to credit risk for trade by geographic region was as follows:

Group Company
Rs. million 2014 2013 2014 2013
Sri Lanka 13,900 12,359 10,602 9,610
Middle East 405 265 382 258
Asia 548 626 327 318
Europe 1,427 1,017 1,097 897
Australia 40 58 25 21
America 134 273 134 273
Other 62 48 3 5
Total Trade Receivables 16,516 14,646 12,570 11,382

As at 31 December 2014, the maximum exposure to credit risk for trade receivables by type of counterparty was as follows:

Group Company
Rs. million 2014 2013 2014 2013
Wholesale customers 4,000 3,793 3,813 3,594
Retail customers 10,252 9,073 7,486 6,692
Other network operators 1,134 958 1,134 958
Other 1,130 822 137 138
16,516 14,646 12,570 11,382

As at 31 December the Group’s most significant customer was Saudi Arabia Telecom which accounted for Rs. 283 million of trade receivables (2013 - Rs. 84 million).

Impairment

As at 31 December 2014, the aging of trade receivables that were not impaired was as follows:

Group Company
Rs. million 2014 2013 2014 2013
Past due 1 Year 82 81 378 16
Past due 2 Years and above 9 18 28 59
91 99 406 75

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.

Out of the above not impaired balance, Mobitel (Private) Limited value amounts to Rs. 365 million (2013 - Rs. Nil).

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 2013 4,863 3,946
- Impairment loss recognised 799 540
- Amounts written-off
Balance as at December 2013 5,662 4,486
- Impairment loss recognised 898 591
- Amounts written-off
Balance as at 31 December 2014 6,560 5,077

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. 4,695 million as at 31 December 2014 (2013 - Rs. 3,459 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 undiscounted:

Rs. million Carrying
Value
Up to 1
Years
Up to 2
Years
Up to 5
Years
Over 5
Years
Group
As at 31 December 2014
Bank overdrafts 921 921
Bank borrowings and others 18,011 5,356 4,414 8,241
Vendor financing 7,874 2,777 2,899 2,198
Lease liabilities 316 82 91 143
27,122 9,136 7,404 10,582
As at 31 December 2013
Bank overdrafts 1,265 1,265
Bank borrowings and others 9,025 4,385 4,640
Vendor financing 10,091 2,587 5,376 2,128
Lease liabilities 309 75 58 176
20,690 8,312 10,074 2,304
Rs. million Carrying
Value
Up to 1
Years
Up to 2
Years
Up to 5
Years
Over 5
Years
Company
As at 31 December 2014
Bank overdrafts
Bank borrowings and others 15,837 4,299 3,297 8,241
Vendor financing
Lease liabilities 222 60 162
16,059 4,359 3,459 8,241
As at 31 December 2013
Bank overdrafts 740 740
Bank borrowings and others 4,922 2,468 2,454
Vendor financing
Lease liabilities 268 60 52 156
5,930 3,268 2,506 156

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 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 December 2014
Foreign trade receivables 21
Secured bank loans (15)
Unsecured loans (120)
Trade payables (2)
Net statement of financial position exposure (116)
As at December 2013
Foreign Trade receivables 18
Secured Bank Loans (23)
Unsecured Loans (38)
Trade Payables (3)
Net statement of financial position exposure (46)
Company
USD million
As at December 2014
Foreign trade receivables 16
Secured bank loans
Unsecured loans (120)
Trade payables (1)
Net statement of financial position exposure (105)
As at December 2013
Foreign Trade receivables 14
Secured Bank Loans
Unsecured Loans (38)
Trade Payables (1)
Net statement of financial position exposure (25)

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

Average rate Year end spot rate
2014 2013 2014 2013
USD 130.56 129.11 131.87 130.89
EUR 173.47 171.51 160.51 180.44
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
2014 December
USD (10%)
(1,777) 1,777 (1,777) 1,777
2013 December
USD (10%)
(788) 788 (788) 788
Company
2014 December
USD (10%)
(1,579) 1,579 (1,579) 1,579
2013 December
USD (10%)
(492) 492 (492) 492

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 interest rates.

Foreign currency borrowing at variable interest rate with a cap minimises any adverse impact due to an upward movement of USD interest rate in the market. Further, the Company has obtained an interest rate SWAP to minimise the impact of variable interest rate borrowing.

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 using the floor interest rate (minimum) of 4.75% and cap interest rate (maximum) of 6.75% 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 Decrease
Group
2014 December
Variable rate instruments (100) 76
2013 December
Variable rate instruments (137) 116
Company
2014 December
Variable rate instruments (38) 14
2013 December
Variable rate instruments (52) 31

4.4 Analysis of financial Instruments by measurement basis

The fair value of financial assets and liabilities, together with carrying amounts shown in the statement of financial position are as follows:

Financial assets:
Type of the Financial Instrument (2014) Note Fair value through profit or loss
Group/Company
Available-for-sale
Group/Company
Loans and Receivables
(Note 4.4.1)
Held-to-maturity
Group/Company
Group Company
Trade and other receivables 20 & 18 16,124 15,517
Other Investments 17 6,750 6,397
Total 22,874 21,914
Type of the Financial Instrument (2013)
Trade and other receivables 20 & 18 14,062 13,603
Other Investments 17 3,393 3,203
Total 17,455 16,806
Financial liabilities:
Type of the Financial Instrument (2014) Note Fair value through profit or loss Other financial liabilities (Note 4.4.1)
Group/Company Group Company
Trade and other payables 25 19,462 14,828
Borrowings 22 27,122 16,059
Total 46,584 30,887
Type of the Financial Instrument (2013)
Trade and other payables 25 16,920 12,066
Borrowings 22 20,690 5,930
Total 37,610 17,996

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 2014 and 2013 were as follows:

Group Company
2014 2013 2014 2013
Total borrowings 27,122 20,690 16,059 5,930
Total equity 63,900 59,789 58,577 57,103
Total capital 91,022 80,479 74,636 63,033
Gearing ratio (%) 29.8 25.7 21.5 9.4

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 Telephony operations includes supply of fixed telecommunication services.
  • Mobile Telephony 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 2014 or 2013.

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

(All amounts in Sri Lankan Rupees million)

Information about reportable segments

Fixed telephony operations Mobile operations Other segments operations Total
2014 2013 2014 2013 2014 2013 2014 2013
External revenues 35,708 33,804 28,325 26,105 1,007 235 65,040 60,144
Inter-segment revenue 3,242 2,977 2,275 1,377 1,706 1,588 7,223 5,942
Reportable segment revenue 38,950 36,781 30,600 27,482 2,713 1,823 72,263 66,086
Reportable segment profit before tax 4,859 5,014 3,500 3,040 322 (170) 8,681 7,884
Interest revenue 708 872 177 219 25 31 910 1,122
Interest expenses (49) (371) (140) (352) (9) (13) (198) (736)
Depreciation and amortisation (7,164) (6,804) (5,817) (5,546) (80) (85) (13,061) (12,435)
Reportable segment assets 99,017 83,090 41,591 41,714 1,684 1,472 142,292 126,276
Capital expenditure 16,440 10,666 3,800 10,037 13 11 20,253 20,714
Reportable segment liabilities 40,440 25,987 23,177 25,457 1,290 1,358 64,907 52,802
2014 2013
Revenues
Total revenue for reportable segments 69,550 64,263
Revenue for other segments 2,713 1,823
72,263 66,086
Elimination of inter-segment revenue (7,223) (5,942)
Consolidated revenue 65,040 60,144
Profit or loss
Total Profit or loss for reportable segments 8,359 8,054
Profit or loss for other segments 322 (170)
8,681 7,884
Elimination of inter-segment profits (430) (519)
Consolidated profit from continuing operations before tax 8,251 7,365
Assets
Total assets for reportable segments 140,608 124,804
Assets for other segments 1,684 1,472
142,292 126,276
Elimination of inter-segment assets (19,688) (18,229)
Consolidated total assets 122,604 108,047
Liabilities
Total liabilities for reportable segments 63,617 51,444
Liabilities for other segments 1,290 1,358
64,907 52,802
Elimination of inter-segment liabilities (6,203) (4,544)
Consolidated total liabilities 58,704 48,258
Reportable
segment totals
Adjustments Consolidated
totals
Other material items (2014)
Interest revenue 910 910
Interest expense (198) (198)
Capital expenditure 20,253 20,253
Depreciation and amortisation (13,061) (13,061)
Other material items (2013)
Interest revenue 1,122 1,122
Interest expense (736) (736)
Capital expenditure 20,714 20,714
Depreciation and amortisation (12,435) (12,435)

6. Revenue

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

Group Company
2014 2013 2014 2013
Release of deferred connection charges (Note 24) 586 679 586 679
Rental income 6,588 6,308 4,911 4,787
Domestic call revenue 22,314 21,047 5,098 5,245
Receipts from other network operators - Domestic 1,767 1,740 755 821
International call revenue 2,291 2,229 921 1,013
Receipts from other network operators - International 96 122 13 37
International settlements 10,826 9,372 6,864 6,476
CDMA revenue 1,481 1,742 1,481 1,742
Broadband revenue 8,232 7,233 6,199 5,441
Data and other services 10,859 9,672 12,122 10,540
65,040 60,144 38,950 36,781

7. Operating costs

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

Group Company
2014 2013 2014 2013
Staff costs (Note 7.1) 14,150 13,058 10,322 9,771
Directors’ emoluments 20 19 17 16
Payments to international network operators 1,499 1,607 1,499 1,607
Payments to other network operators
- International 2,761 2,060 1,982 1,503
- Domestic 2,016 2,011 822 841
Int’l Telecommunication Operators Levy (Note 8) 2,186 2,329 1,297 1,588
Auditors‘ remuneration
Audit
- KPMG 11 9 9 8
- Other auditors 4 3
Non-audit
- KPMG 8 7 8 7
- Other auditors 6 3 6 2
Repairs and maintenance expenditure 3,419 2,979 2,696 2,284
Provision for impairment of debtors 937 781 630 522
Impairments/(reversals) of inventory 13 88 13 77
Impairment of property, plant & equipment (Note 13) 518 149 518 149
Other operating expenditure 18,720 16,115 9,740 8,446
46,268 41,218 29,559 26,821

7.1 Staff costs

Group Company
2014 2013 2014 2013
Salaries, wages, allowances and other benefits 12,545 11,569 9,059 8,595
Post employment benefits
- Defined contribution plans 1,087 1,003 814 755
- Defined benefit obligations (Note 26) 518 486 449 421
14,150 13,058 10,322 9,771
Average number of persons employed 9,985 9,767 5,786 5,950

8. Refunds on Telecommunication Development Charge (TDC)

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 2/3rd of the TDC against the costs of network development charges.

First revision to this regulation was introduced with effect from 15 July 2010 with a TDC rate change from US cents 3.80 to US cents 1.50. Through the same revision, the disbursement process was removed from the regulation. The revised rates prevailed until such time the rate was again revised to US cents 3.0 per minute with effect from January 2012, in accordance with the Budget Proposal for 2012.

Total TDC refunds claimed are as follows:

Group Company
2014 2013 2014 2013
TDC refund 1,259 607 937 367

The refunds claimed during the year by the Company and the Group were for periods between April 2009 to July 2010. This will be the final refund the Company and Group will receive from the Telecommunication Regulatory Commission (TRC).

International Telecommunicaton Operators Levy (ITL) recognised as expense for the period is as follows:

Group Company
2014 2013 2014 2013
ITL 2,186 2,329 1,297 1,588

9. Interest expense and finance costs

Group Company
2014 2013 2014 2013
Rupee loans [see Note (a) below] 53 198
Foreign currency loans [see Note (a) below] 824 622 481 348
Other charges [see Note (b) below] 68 38 49 23
Total Interest and finance cost 945 858 530 371
Interest Capitalised (747) (122) (481)
Net total interest and finance cost 198 736 49 371

(a) Interest cost of the Company relates to the USD loans. Interest cost of the Group related to Rupee loans, USD loans and vendor financing.

(b) Other charges mainly include interest cost of finance leases and overdraft facilities.

9. a Foreign exchange (loss)/gain

Group Company
2014 2013 2014 2013
Net foreign exchange (loss)/gain (13) (441) 14 18

(a) Foreign currency (loss) or gain of the company mainly includes,

  1. Exchange gain of Rs. 129 million (2013 - Rs. 220 million) arising from revaluation of fixed deposits and bank balances maintained in USD.
  2. Exchange loss - Nil on payment to foreign suppliers (2013 - Rs. 31 million).
  3. Exchange loss of Rs. 115 million (2013 - Rs. 171 million) arising from revaluation of USD syndicate loan.

(b) Foreign currency (loss) or gain of the group mainly includes,

  1. i. Exchange gain of Rs. 129 million (2013 - of Rs. 220 million) arising from revaluation of the fixed deposits and bank balances maintained in USD.
  2. ii. Exchange loss of Rs. 5 million on payment to foreign suppliers (2013 - Rs. 391 million).
  3. iii. Exchange loss of Rs. 137 million (2013 - Rs. 270 million) arising from revaluation of USD syndicate loan and other term loans.

10. Interest income

Group Company
2014 2013 2014 2013
Interest income from:
Treasury Bond 5 5
Repurchase agreement - Repos 187 132 28 42
Fixed Deposits 271 549 228 389
Staff Loan Interest 452 436 452 436
910 1,122 708 872

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

  1. The weighted average interest rates on bank deposits in LKR including restricted deposits and USD were 8.96% (2013 - 15.23%) and 3.65% (2013 - 5.28%) respectively.
  2. The weighted average interest rate on investments in Government Securities was 6.05% (2013 - 8.64%).
  3. The weighted average interest rates on staff loans are between 12% and 14% (2013 - 15%).
  4. According to 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 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, the Company has accounted for Rs. 3 million as notional tax credit for the year 2014. (2013 - Rs. 5 million).

11. Income tax expenses

Tax recognised in statement of profit or loss

Group Company
2014 2013 2014 2013
Current tax expense
Current year 1,061 987 358 387
Adjustment for prior years 5 5
1,061 992 358 392
Deferred tax expense
Origination and reversal of temporary differences (Note 23) 1,189 954 1,177 987
1,189 954 1,177 987
Tax expense 2,250 1,946 1,535 1,379

Tax recognised in other comprehensive income - Group

2014 2013
Before
tax
Tax (expenses)
benefit
Net of
tax
Before
tax
Tax (expenses)
benefit
Net of
Tax
Defined benefit plan actuarial gains/(losses) (478) 122 (356) (103) 21 (82)
(478) 122 (356) (103) 21 (82)

Tax recognised in other comprehensive income - Company

2014 2013
Before
tax
Tax (expenses)
benefit
Net of
tax
Before
tax
Tax (expenses)
benefit
Net of
Tax
Defined benefit plan actuarial gains/(losses) (438) 122 (316) (76) 21 (55)
(438) 122 (316) (76) 21 (55)
Reconciliation of effective tax rate Group/2014 Group/2013
% %
Profit before tax 8,251 7,365
Tax using the Company’s domestic tax rate 28.00 2,310 28.00 2,062
Effect of different Tax rates [Note (a) & (b) below] (4.08) (337) (3.56) (262)
Non-deductible expenses 6.47 534 6.57 484
Income not subject to tax (3.10) (257) (4.59) (338)
27.27 2,250 26.42 1,946
Reconciliation of effective tax rate Company/2014 Company/2013
% %
Profit before tax 4,859 5,014
Tax using the company’s domestic tax rate 28.00 1,361 28.00 1,404
Non-deductible expenses 8.20 398 6.16 309
Income not subject to tax (4.6) (224) (6.66) (334)
31.60 1,535 27.50 1,379

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

Group Company
2014 2013 2014 2013
Sri Lanka Telecom PLC 358 387 358 387
Mobitel (Private) Limited 644 587
Sri Lanka Telecom (Services) Limited 14 4
SLT Human Capital Solutions (Private) Limited (1) 1
SLT Publications (Private) Limited 43 4
SLT VisionCom (Private) Limited 3 2
Sky Network (Private) Limited 2
SLT Property Management (Private) Limited
SLT Campus (Private) Limited
1,061 987 358 387
  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 2014/2015, 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 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
2014 2013 2014 2013
Net profit attributable to equity holders (Rs. million) 6,001 5,419 3,324 3,635
Weighted average number of ordinary shares in issue (million) 1,805 1,805 1,805 1,805
Basic earnings per share (Rs.) 3.32 3.00 1.84 2.01

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 & 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 2013 356 2,893 83,447 19,488 67,548 29,283 10,127 213,142
Additions at cost 177 62 2,645 1,166 14,913 18,963
Transfers from capital work-in-progress 114 2,910 1,286 6,696 1,391 (12,397)
Disposals (739) (1,128) (79) (1,946)
Adjustments (4) (48) (7) (78) (137)
As at 31 December 2013 356 3,007 85,791 19,660 76,882 31,683 12,643 230,022
Accumulated depreciation
As at 1 January 2013 (1,663) (67,413) (14,880) (32,496) (23,088) (139,540)
Disposals 721 1,128 78 1,928
Impairments loss (149) (149)
Depreciation charge (71) (2,483) (949) (5,864) (2,388) (11,755)
As at 31 December 2013 (1,734) (69,175) (14,849) (38,360) (25,398) (149,516)
Carrying value as at
31 December 2013
356 1,273 16,616 4,811 38,522 6,285 12,643 80,506
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 2014 356 3,007 85,791 19,660 76,882 31,683 12,643 230,022
Additions at cost 1 912 101 1,736 1,196 19,933 23,879
Transfers from capital work-in-progress 81 4,845 2,423 3,586 2,856 (13,791)
Disposals (24) (164) (9,833) (379) (10,400)
Adjustments (9) 9
As at 31 December 2014 357 3,079 91,524 22,020 72,371 35,365 18,785 243,501
Accumulated depreciation
As at 1 January 2014 (1,734) (69,175) (14,849) (38,360) (25,398) (149,516)
Disposals 24 164 9,231 374 9,793
Impairments loss (435) (83) (518)
Depreciation charge (97) (2,707) (932) (6,102) (2,487) (12,325)
As at 31 December 2014 (1,831) (71,858) (16,052) (35,231) (27,594) (152,566)
Carrying value as at
31 December 2014
357 1,248 19,666 5,968 37,140 7,771 18,785 90,935
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 2013 356 2,866 82,675 19,510 20,383 28,027 9,123 162,940
Additions at cost 177 46 92 668 9,459 10,442
Transfers from capital work-in-progress 114 2,910 1,286 715 1,391 (6,416)
Disposals (739) (1,112) (60) (1,911)
Adjustments (4) (48) (7) (78) (137)
As at 31 December 2013 356 2,980 85,019 19,682 21,183 29,948 12,166 171,334
Accumulated depreciation
As at 1 January 2013 (1,663) (66,962) (14,901) (13,256) (22,243) (119,025)
Disposals 721 1,112 60 1,894
Impairments loss (149) (149)
Depreciation charge (71) (2,420) (936) (912) (2,166) (6,505)
As at 31 December 2013 (1,734) (68,661) (14,874) (14,168) (24,348) (123,785)
Carrying value as at
31 December 2013
356 1,246 16,358 4,808 7,015 5,600 12,166 47,549
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 2014 356 2,980 85,019 19,682 21,183 29,948 12,166 171,334
Additions at cost 1 912 101 74 799 18,181 20,068
Transfers from capital work-in-progress 81 4,845 2,423 1,907 2,856 (12,112)
Disposals (24) (164) (106) (330) (624)
Adjustments (9) 9
As at 31 December 2014 357 3,052 90,752 22,042 23,058 33,282 18,235 190,778
Accumulated depreciation
As at 1 January 2014 (1,734) (68,661) (14,874) (14,168) (24,348) (123,785)
Disposals 24 164 106 327 621
Impairments loss (435) (83) (518)
Depreciation charge (97) (2,643) (932) (1,009) (2,194) (6,875)
As at 31 December 2014 (1,831) (71,280) (16,077) (15,071) (26,298) (130,557)
Carrying value as at
31 December 2014
357 1,221 19,472 5,965 7,987 6,984 18,235 60,221
  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 & equipment as determined by the Government of Sri Lanka. Valuers were used as 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 2014 was Rs. 49,285 million (2013 - Rs. 90,030 million). The cost of fully depreciated assets still in use in the Group as at 31 December 2014 was Rs. 59,385 million (2013 - Rs. 93,476 million).
  3. No assets have been mortgaged or pledged as security for borrowings of the Company. However, Mobitel (Private) Limited, a subsidiary of the Company, has pledged its assets at a value of Rs. Nil as at 31 December 2014 (2013 - Rs. 9.7 billion).
  4. The Directors believe that the Company has freehold title to land and buildings transferred on incorporation (conversion of SLT into a public limited company on 25 September 1996), although the vesting orders specifying all demarcations and extents of such land and buildings could not be traced. The Company has initiated action to transfer legal title documentations.
  5. The property, plant & equipment is not insured except for buildings and equipment situated at SLT headquarters and Welikada premises. Further 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 un insured property, plant & equipment. At the reporting date, the insurance reserve amounted to Rs. 560 million (2013 - Rs. 500 million) (Note 27).
  6. Impairment of assets mainly consists of the carrying value of switches, Rs. 29 million, that were impaired as a result of implementation of Next Generation Network (NGN) (2013 - Rs. 149 million). Further a provision of Rs.489 million has been made in 2014 for switches and IPTV Equipment.
  7. Additions include assets costing Rs. 11 million (2013 - Rs. 224 million) obtained under finance leases (where the Company is the lessee) and the additions of the Group includes assets costing Rs. 78 million obtained under finance leases (2013 - Rs. 249 million) where the Group is the lessee.
  8. The Company capitalised borrowing costs amounting to Rs. 481 million during the year (2013 - Rs. Nil). Borrowing cost capitalised from a Group perspective amounted to Rs. 747 million (2013 - Rs. 122 million).
  9. The property, plant & equipment includes assets acquired under finance leases, the net book value of which is made up as follows:
Group Company
2014 2013 2014 2013
Cost 557 479 440 429
Accumulated depreciation (286) (195) (247) (173)
Carrying value 271 284 193 256

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

Group/Company
2014 2013
Cost 6,304 6,304
Accumulated depreciation at 1 January (4,711) (4,550)
Depreciation charge for the year (176) (161)
Carrying amount 1,417 1,593

14. Intangible assets

Group

Goodwill Licences Software Others Total
Cost
Balance as at 1 January 2013 394 1,978 2,643 330 5,345
- Acquisitions 2,081 82 2,163
- Adjustment (23) (23)
Balance as at 31 December 2013 394 4,059 2,702 330 7,485
Balance as at 1 January 2014 394 4,059 2,702 330 7,485
- Acquisitions 2 73 75
Balance as at 31 December 2014 394 4,061 2,775 330 7,560
Accumulated amortisation
Balance as at 1 January 2013 253 618 1,725 330 2,926
- Amortisation 275 308 583
Balance as at 31 December 2013 253 893 2,033 330 3,509
Balance as at 1 January 2014 253 893 2,033 330 3,509
- Amortisation 386 253 639
Balance as at 31 December 2014 253 1,279 2,286 330 4,148
Carrying Amounts
31 December 2014 141 2,782 489 3,412
31 December 2013 141 3,166 669 3,976

The goodwill of the Group consists of goodwill arising on acquisition of Mobitel (Private) Limited.

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

2014 2013
Mobitel (Private) Limited 141 141
Total 141 141

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:

2014
%
2013
%
Growth rate 8 - 12 10 - 12
Discount rate 10.22 10.50

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 2014 for the above CGU (2013 - Rs. Nil).

Company

Licences Software Others Total
Cost
Balance as at 1 January 2013 816 1,724 330 2,870
Acquisitions 612 12 624
Adjustment (38) (38)
Balance as at 31 December 2013 1,428 1,698 330 3,456
Balance as at 1 January 2014 1,428 1,698 330 3,456
Acquisitions 2 2
Balance as at 31 December 2014 1,430 1,698 330 3,458
Accumulated amortisation
Balance as at 1 January 2013 75 1,139 330 1,544
Amortisation 97 202 299
Balance as at 31 December 2013 172 1,341 330 1,843
Balance as at 1 January 2014 172 1,341 330 1,843
Amortisation 146 143 289
Balance as at 31 December 2014 318 1,484 330 2,132
Carrying Amounts
31 December 2014 1,112 214 1,326
31 December 2013 1,256 357 1,613

15. Financial prepayments

Group
2014 2013
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 823 726
Amortisation for the year 97 97
As at 31 December 920 823
Carrying amount – Current 98 98
Carrying amount – Non-current 79 176
As at 31 December 177 274

16. Investments in subsidiaries

2014 2013
Opening net book amount 14,156 14,192
Impairment of investment
Additions/(Disposals) 33 (36)
Closing net book amount 14,189 14,156

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

2014 2013
Investment
Company
holding %
Investment
Company
holding %
Mobitel (Private) Limited [See Note (b) below] 13,980 100 13,980 100
SLT VisionCom (Private) Limited [See Note (e) below] 100 100 100 100
SLT Publications (Private) Limited [See Note (c) below] 50 100 50 100
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 1 100
Sky Network (Private) Limited [See Note (f) below] 99.94 99.94
SLT Property Management (Private) Limited [See Note (g) below] 8 100
SLT Campus (Private) Limited [See Note (h) below] 25 100
14,189 14,156

The Directors believe that the fair values 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 Publications (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.
    At 31 December 2014, preference dividends amounting to Rs. 44 million (2013 - Rs. 37 million) has not been recognised in the financial statements.
  7. This investment in subsidiary consists of 850,001 shares representing entire stated capital of SLT Property Management (Private) Limited.
  8. This investment in subsidiary consists of 2,500,001 shares representing entire stated capital of SLT Campus (Private) Limited.

All the subsidiaries except for Mobitel (Private) Limited are audited by KPMG.

17. Other investments

Group Company
2014 2013 2014 2013
Current investments
Fixed deposits 6,750 3,393 6,397 3,203
6,750 3,393 6,397 3,203

Fixed deposits are classified as loans and receivables and measured at amortised cost. Fixed deposits with a carrying value of Rs. 568 million (2013 - Rs. 515 million) are restricted at bank.

Interest rates of other investments are as follows:

Group Company
2014
%
2013
%
2014
%
2013
%
Fixed deposits – Restricted at bank 8.96 15.28 8.96 15.28
Fixed deposits – Rs. 6.00 - 7.00 7.00 Nil Nil
Fixed deposits – USD 3.65 5.28 3.65 5.28
Repurchase agreement – Repo 6.05 8.64 6.05 8.64

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
2014 2013 2014 2013
Non-current 2,789 2,733 2,789 2,733
Current 695 676 686 667
3484 3,409 3,475 3,400
Employee loans 2,947 2,769 2,938 2,760
Prepaid staff cost 537 640 537 640
3,484 3,409 3,475 3,400
Prepaid staff cost 1 January 640 661 640 661
Additions 180 255 180 255
Amortisation (283) (276) (283) (276)
Prepaid staff cost at 31December 537 640 537 640

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 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
2014 2013 2014 2013
CDMA equipment 370 937 370 937
Cable and networks 293 2,048 293 2,048
Other consumables 414 690 182 397
1,077 3,675 845 3,382
Provision for change in carrying value of inventories (602) (1,501) (563) (1,464)
475 2,174 282 1,918
  1. Inventories includes 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
2014 2013 2014 2013
Domestic trade receivables 13,900 12,359 10,602 9,610
Foreign trade receivables 2,616 2,287 1,968 1,772
16,516 14,646 12,570 11,382
Less: Provision for bad and doubtful receivables (6,560) (5,662) (5,077) (4,486)
Less: Interest/revenue in suspense (19) (19)
Trade receivables - Net 9,937 8,965 7,493 6,896
Amount due from subsidiaries [Note 33. 1 (j)] 3,871 2,865
Amount due from related companies [Note 33.2 (f)] 272 123 272 123
Advances and prepayments [See Note (a) below] 1,908 927 260 167
Employee loans (Note 18) 695 676 686 667
Other receivables [See Note (b) below] 523 638 146 152
Amounts due within one year 13,335 11,329 12,728 10,870
  1. Advances and prepayments of the Company mainly consist of advances on building rent of Rs. 9 million (2013 - Rs. 11 million), payments for software maintenance of Rs. 186 million (2013 - Rs. 120 million) prepaid frequency charges Rs. 40 million (2013 - Rs. 49 million) and purchase advance of Rs. 4 million (2013 - Rs. 4 million). Advances and prepayments of the Group mainly consist of advances on building rent purchases of Rs. 139 million (2013 - Rs. 127 million), payments for software maintenance of Rs. 186 million (2013 - Rs. 120 million), prepayment for advertising hoardings Rs. Nil (2013 - Rs. 15 million), prepaid TRC frequency Rs. 952 million (2013 - Rs. 191 million) and current portion of financial prepayment Rs. 98 million (2013 - Rs. 98 million).
  2. Other receivables of the Company consist of refundable deposits of Rs. 99 million (2013 - Rs. 98 million). Other receivables of the Group mainly consist of refundable deposits of Rs. 99 million (2013 - Rs. 190 million), receivables from sales agents Rs. 53 million (2013 - Rs. 105 million) and site rentals receivables from other operators Rs. 214 million (2013 - Rs. 315 million).

21. Cash and cash equivalents

Group Company
2014 2013 2014 2013
Cash at bank and in hand 1,123 852 369 471
Call Deposits 400 352 398 352
Fixed deposits 14 22
Repurchase agreements - Repo 3,158 2,233 235
4,695 3,459 1,002 823

a. For cash flow purpose

Cash and cash equivalents

Group Company
2014 2013 2014 2013
Cash and cash equivalents 4,695 3,459 1,002 823
Bank overdrafts (921) (1,265) (740)
3,774 2,194 1,002 83

22. Borrowings

Group Company
2014 2013 2014 2013
Current (due within one year)
Bank overdrafts 921 1,265 740
Bank borrowings and others [See Note 22 (e) below] 5,356 4,385 4,299 2,468
Vendor financing 2,777 2,587
Lease liabilities 82 75 60 60
9,136 8,312 4,359 3,268
Non-current (due after one year)
Bank borrowings and others [See Note 22 (e) below] 12,656 4,640 11,538 2,454
Vendor financing 5,096 7,504
Lease liabilities 234 234 162 208
17,986 12,378 11,700 2,662
Total borrowings 27,122 20,690 16,059 5,930

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

Group Company
2014 2013 2014 2013
Total borrowings
- at fixed rates 14,622 1,574 13,580 1,008
- at floating rates 12,500 19,116 2,479 4,922
27,122 20,690 16,059 5,930

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

Group Company
2014 2013 2014 2013
Foreign currency 25,807 19,116 15,837 4,922
Local currency 1,315 1,574 222 1,008
27,122 20,690 16,059 5,930

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

Group Company
2014
%
2013
%
2014
%
2013
%
Average effective interest rates:
- Bank overdrafts 6.10 - 10.00 10.80 7.39 10.80
- Foreign bank borrowings 1.20 - 2.24 1.24 - 2.52
- Bank borrowings (USD loan) 4.98 5.29 4.98 5.29
- Bank borrowings 7.34 - 8.25 12 .1 - 15.2
- Lease liabilities 8.00 - 16.00 8.00 - 16.00 8.00 - 10.00 8.00 - 10.00
- Vendor financing 1.95 - 4.15 1.95 - 4.15

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

Group Company
2014 2013 2014 2013
Maturity of non-current borrowings: (excluding finance lease liabilities)
- Between 1 and 2 years 7,664 10,016 3,297 2,454
- Between 3 and 5 years 10,088 2,128 8,241
- Over 5 years
17,752 12,144 11,538 2,454

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

Group Company
2014 2013 2014 2013
Finance lease liabilities - minimum lease payments
- Not later than 1 year 122 106 88 97
- Later than 1 year and not later than 5 years 289 309 198 268
411 415 286 365
Less: future finance charges on finance leases (95) (106) (64) (97)
Present value of finance lease liabilities 316 309 222 268
Representing lease liabilities:
- Current 82 75 60 60
- Non-current 234 234 162 208

(e) During the year the Company obtained a term loan of USD 100 million (equivalent to Rs. 13,092 million) which was drawn in 4 instalments. This loan was obtained on a floating rate and converted to a fixed rate term loan through an Interest Rate Swap (IRS).

(f) 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.

(g) The Directors believe that the Company and the Group will have sufficient funds available to meet its present loan commitments.

(h) Lease liabilities of the Company and the Group are effectively secured by the lessor against the rights to the title of the asset.

(i) Bank borrowings and supplier credits of Mobitel (Private) Limited, a subsidiary of the Company, are secured, interalia, by corporate guarantees given by the Company.

(j) Mobitel (Private) Limited has borrowed Rs. 296 million during the year for the purpose of Capital Expansion Projects.

(k) Guarantee facilities amounting to Rs. 26 million (2013 - Rs. 26 million) were provided to Sri Lanka Telecom (Services) Limited to obtain facilities for working capital requirements.

23. Deferred tax

Recognised deferred tax (assets)/liabilities

Deferred 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 tax is provided under the liability method using a principal tax rate of 28% (for the year 2013 - 28%).

The amount shown in the statement of financial position represents the following:

Group Company
2014 2013 2014 2013
Deferred tax liabilities 2,805 1,750 2,801 1,746
Deferred tax assets (46) (58)
2,759 1,692 2,801 1,746

The movement in the deferred tax account is as follows:

Group Company
2014 2013 2014 2013
At beginning of year 1,692 759 1,746 780
Release to comprehensive income (Note 11) 1,189 954 1,177 987
Release to other comprehensive income (Note 11) (122) (21) (122) (21)
At end of year 2,759 1,692 2,801 1,746

The taxable and deductible temporary differences mainly arise from property, plant & equipment, deferred income, provision for defined benefit obligations and other provisions.

The movement in deferred tax assets and liabilities of the Group during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

Assets Liabilities Net
2014 2013 2014 2013 2014 2013
Property, plant & equipment 6,453 4,934 6,453 4,934
Defined benefit obligations (987) (765) (987) (765)
Provisions (1,841) (1,508) (1,841) (1,508)
Deferred income (856) (937) (856) (937)
Tax losses (10) (32) (10) (32)
Tax (assets) liabilities before set off (3,694) (3,242) 6,453 4,934 2,759 1,692
Set off of tax 3,694 3,242 (3,694) (3,242)
Net tax (assets) liabilities 2,759 1,692 2,759 1,692

Movement in deferred tax balances during the year – Group

Balance
1 January 2013
Recognised in
profit or Loss
Recognised
in other
comprehensive
income
Balance
31 December
2013
Recognised in
profit or Loss
Recognised
in other
comprehensive
income
Balance
31 December
2014
Property, plant & equipment 3,770 1,164 4,934 1519 6,453
Defined benefit obligations (646) (98) (21) (765) (100) (122) (987)
Provisions (1,312) (196) (1,508) (333) (1,841)
Deferred income (1,053) 116 (937) 81 (856)
Tax losses (32) (32) 22 (10)
759 954 (21) 1,692 1,189 (122) 2,759

Movement in deferred tax balances during the year – Company

Assets Liabilities Net
In Rs. million 2014 2013 2014 2013 2014 2013
Property, plant & equipment 6,450 4,932 6,450 4,932
Defined benefit obligations (983) (763) (983) (763)
Provisions (1,810) (1,486) (1,810) (1,486)
Deferred income (856) (937) (856) (937)
Tax (assets) liabilities before set off (3,649) (3,186) 6,450 4,932 2,801 1,746
Set off of tax 3,649 3,186 (3,649) (3,186)
Net tax (assets) liabilities 2,801 1,746 2,801 1,746

Movement in deferred tax balances during the year – Company

Balance
1 January 2013
Recognised in
profit or Loss
Recognised
in other
comprehensive
income
Balance
31 December
2013
Recognised in
profit or Loss
Recognised
in other
comprehensive
income
Balance
31 December
2014
Property, plant & equipment 3,771 1,161 4,932 1518 6,450
Defined benefit obligations (644) (98) (21) (763) (98) (122) (983)
Provisions (1,294) (192) (1,486) (324) (1,810)
Deferred income (1,053) 116 (937) 81 (856)
780 987 (21) 1,746 1,177 (122) 2,801

Unrecognised deferred tax (assets) and liabilities

Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the group can utilise the benefit therefrom. The Group did not recognise deferred tax assets in respect of tax losses of subsidiaries amounting to Rs. 195 million (2013 - Rs. 200 million) that can be carried forward against future taxable income.

Adjusted tax losses available for
carry forward as at 31 December
2014 2013
SKY Network (Private) Limited 52 52
SLT VisionCom (Private) Limited 143 148
195 200

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 on CDMA, 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 contract. 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 (n) (viii).

IRU revenue relating to leasing of SEA-ME-WE 4 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
2014 2013 2014 2013
At beginning of year 5,508 5,664 3,492 3,926
Additions
Connection fees for the year 315 283 315 283
Pre-paid card revenue 25,706 19,882 271 240
Backhauling charges 69 86 69 86
Deferred directory income 64 280
Total Additions 26,154 20,531 655 609
Release
Connection charges (Note 6) (586) (679) (586) (679)
Pre-paid card revenue (25,800) (19,777) (268) (246)
Backhauling charges (55) (97) (55) (97)
Directory income (214) (101)
IRU Sales (20) (21) (20) (21)
Network equipment cost (11) (12)
Total Release (26,686) (20,687) (929) (1,043)
At end of year 4,976 5,508 3,218 3,492
Representing deferred income
Current 2,398 2,683 706 745
Non-current 2,578 2,825 2,512 2,747
4,976 5,508 3,218 3,492

25. Trade and other payables

Group Company
2014 2013 2014 2013
Amounts due within one year
Domestic trade payables 1,524 1,808 499 566
Foreign trade payables 214 323 95 84
Amount due to subsidiaries [Note 33.1 (j)] 2,028 1,376
Amount due to related companies [Note 33.2 (f)] 47 51 47 51
Capital expenditure payables [See Note (a) below] 7,693 6,347 7,245 5,760
Social security and other taxes [See Note (b) below] 796 1,209 763 666
Interest payable 489 184
Other payables [See Note (c) below] 6,292 5,250 3,901 3,293
17,055 15,172 14,578 11,796
Amounts due after one year
International direct dialling deposits 232 232 232 232
PSTN guarantee deposits 18 38 18 38
Domestic trade payables 614 566
Capital expenditure payables 1,543 912
2,407 1,748 250 270
  1. Capital expenditure payables of the Company mainly consist of contractors’ payable and retention of Rs. 6,104 million (2013 - Rs. 5,010 million) and advances on network restoration after road works of Rs. 1,132 million (2013 - Rs. 901 million). Capital expenditure payables of the Group mainly consist of contractors’ payable and retention of Rs. 6,551 million (2013 - Rs. 5,318 million) and advances on network restoration after road works of Rs. 1,132 million (2013 - Rs. 901 million).
  2. Social security and other taxes of the Company mainly consist of Telecommunication Levy (TL) of Rs. 445 million (2013 - Rs. 344 million), Cess Rs. 67 million (2013 - Rs. 63 million), IDD Levy of Rs. 16 million (2013 - Rs. 18 million ) and EPF payable of Rs. 86 million (2013 - Rs. 90 million). Social security and other taxes of the Group mainly consist of Telecommunication Levy (TL) of Rs. 633 million (2013 - Rs. 714 million ), Cess of Rs. 127 million (2013 - Rs. 116 million) and IDD Levy payable of Rs. 36 million (2013 - Rs. 38 million).
  3. Other payables of the Company mainly consist of dividend payable to the Government of Sri Lanka of Rs. 244 million (2013 - Rs. 244 million), payable for unpaid supplies of Rs. 1,242 million (2013 - Rs. 440 million), International Telecommunication Operators’ Levy payable of Rs. 206 million (2013 - Rs. 227 million) and accrued expenses and other payables of Rs. 1,201 million (2013 - Rs. 1,252 million). Other payables of the Group mainly consist of dividend payable to the Government of Sri Lanka of Rs. 244 million (2013 - Rs. 244 million), payable for unpaid supplies of Rs. 1,242 million (2013 - Rs. 440 million), International Telecommunication Operators’ Levy payable (without netting off TDC refunds) of Rs. 231 million (2013 - Rs. 252 million) and accrued expenses and other payables of Rs. 3,661 million (2013 - Rs. 2,877 million).

26. Employee benefits

Group Company
2014 2013 2014 2013
Total employee benefit liability at 1 January 3,003 2,495 2,725 2,300
Movement in present value of employee benefit liabilities
Current service cost 205 181 162 145
Interest cost 313 299 287 276
Actuarial losses/(gains) 478 103 438 76
Transitional assets recognised 6
Gratuity paid during the year (124) (81) (100) (72)
Balance as at 31 December 3,875 3,003 3,512 2,725
The expenses recognised in the income statement
Current service cost 205 181 162 145
Interest cost 313 299 287 276
Transitional assets recognised 6
518 486 449 421
Recognised in other comprehensive income
Actuarial (Gain)/Loss 478 103 438 76
478 103 438 76

The principal actuarial assumptions used were as follows:

Group Company
2014
%
2013
%
2014
%
2013
%
Discount rate (long-term) 9.5 - 10.0 10.5 10.0 10.5
Future salary increases 8.5 8.5 - 9.0 8.5 8.5

In addition to above, demographic assumptions such as mortality, withdrawal, retirement age were considered for the actuarial valuation. In 2014, 1967/70 Mortality Table issued by the Institute of Actuaries London (2012 - 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 Limited, SLT Publications (Private) Limited and Mobitel (Private) Limited are actuarially valued by Messrs Actuarial and Management Consultants (Private) Limited and Messrs Piyal S. Goonetilake 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

The Following demonstrates the sensitivity of the material subsidiaries to a reasonable possible change in the key assumptions employed with all other variables held constant in the employee benefit liability measurement.

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 below:

Sri Lanka Telecom PLC

2014 Effect on charge to the statement of
profit or loss and other comprehensive income
Effect on Net defined benefit liability
Increase Decrease Increase Decrease
Discount rate
(Change by 1%)
(172) 193 (172) 193
Salary increment rate
(Change by 1%)
211 (191) 211 (191)
2013 Effect on charge to the statement of profit or loss and other comprehensive income Effect on Net defined benefit liability
Increase Decrease Increase Decrease
Discount rate
(Change by 1%)
(147) 164 (147) 164
Salary increment rate
(Change by 1%)
180 (163) 180 (163)

Mobitel (Private) Limited

2014 Effect on charge to the statement of profit or loss and other comprehensive income Effect on Net defined benefit liability
Increase Decrease Increase Decrease
Discount rate
(Change by 1%)
(19) 22 (19) 22
Salary increment rate
(Change by 1%)
21 (19) 21 (19)
2013 Effect on charge to the statement of profit or loss and other comprehensive income Effect on Net defined benefit liability
Increase Decrease Increase Decrease
Discount rate
(Change by 1%)
(9) 10 (9) 10
Salary increment rate
(Change by 1%)
12 (11) 12 (11)

27. Insurance reserve

Group/Company
2014 2013
As at 1 January 500 435
Transferred from retained earnings 60 65
As at 31 December 560 500

As stated in Accounting Policy 3(t) the Company transfers annually from the retained earnings an amount equal to 0.1% of additions to property, plant & 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 & equipment.

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

28. Grants

Group Company
2014 2013 2014 2013
Balance at 1 January 28 35 28 35
Grant credited to profit or loss (6) (7) (6) (7)
Balance at 31 December 22 28 22 28

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

29. Stated capital

Company
2014 2013
1,804,860,000 ordinary shares 18,049 18,049

The stated capital is made up as follows:

2014 2013
Holding
%
Number
of shares
Holding
%
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 shareholding 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
2014 2013 2014 2013
Profit before tax 8,251 7,365 4,859 5,014
Adjustments for:
Depreciation (Note 13) 12,325 11,755 6,875 6,505
Grant received less amortisation (Note 28) (6) (7) (6) (7)
Amortisation of intangible assets (Note 14) 639 583 289 299
Amortisation of financial prepayments (Note 15) 97 97
Provision/write off of bad and doubtful debts 937 781 630 522
Provision for fall in value of inventories 13 88 13 77
Interest expense and finance costs (Note 9) 198 736 49 371
Foreign exchange (loss)/Gain (Note 9.a) 13 441 (14) (18)
Interest income (Note 10) (910) (1,122) (708) (872)
Connection fees less amortisation (532) (156) (274) (434)
Profit on sale of property, plant & equipment 528 (69) (64) (69)
Impairment of assets (Note 13) 518 149 518 149
Gain on SLT Hong Kong Investment (15)
Provision for retirement benefit obligations (Note 26) 518 486 449 421
22,589 21,127 12,616 11,943
Changes in working capital
- Receivables and prepayments (2,999) (946) (2,544) 544
- Inventories (1,450) 339 (1,513) 401
- Payables 2,215 (4,730) 2,763 (3,264)
Cash generated from operations 20,355 15,790 11,322 9,624

31. Capital commitments

The Group and the Company have purchase commitments in the ordinary course of business as at 31 December is as follows:

Group Company
2014 2013 2014 2013
Property, plant & equipment
- approved but not contracted 33,829 29,125 33,829 29,125
- approved and contracted 15,069 8,344 12,371 5,944
48,898 37,469 46,200 35,069
Operating lease and other commitments
The future minimum lease payments under operating leases are as follows:
- Not later than 1 year 141 88 118 88
- Later than 1 year and not later than 5 years 221 91 153 91
362 179 271 179

Letter of Credit Commitments

Outstanding Letter of Credit commitments of the Company and the Group as at 31 December 2014 amounted to Rs. 409 million and Rs. 721 million respectively.

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 require separate disclosures.

32. Contingencies

(a) Global Electroteks Limited initiated legal action under High Court Case No. 20/2006 claiming damages of USD 12 million from SLT for alleged unlawful disconnection of interconnection services.

Further trial on 27 March 2015

(b) SC (CHC) 31/2010 - Directories Lanka (Private) Limited (DLPL)

Appeal Case filed by 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 appeal proceedings have still not commenced in the Supreme Court.

(c) 12/2008 CBCU - An Inquiry started by Sri Lanka Customs - A consignment of CDMA equipment was detained in October 2008 by the Customs Authority. Subsequently, the equipment were cleared pending inquiry, based on a cash deposit and bank guarantee submitted by SLT for the total value of Rs. 122,189,514/-. Order was delivered on 17 October 2014 imposing a mitigated forfeiture of Rs. 1,820,502,062/- on SLT.

SLT has filed case CA/writ/387/2014 against this order. Next date is on 6 May 2015 for support.

(d) 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 on or about 14 May 2009. Subsequently, the equipment was cleared on 18 July 2009. Pending inquiry, based on a Bank Guarantee placed by SLT to the value of Rs. 35,000,000/-. The customs inquiry against SLT is pending.

No date given. Awaiting the NC Committee decision which was re-sent for re-confirmation.

(e) Ahmedabad City Civil Court - 802/2014 - Bhuwal Industries have initiated legal action on 11 April 2014 against SLT in Ahmedabad City Civil Court, India claiming for damages of Indian Rs. 161,521,447.00 for malicious prosecution. The case is proceeding and SLT to file the written statement by 18 April 2015.

(f) Labour Tribunal Colombo Case Nos. 08/760/2014, 08/820/2014, 08/821/2014 and 08/819/2019 - Former employees of SLT Human Capital Solutions (Private) Limited (HCS) filed legal action against SLT and HCS at Labour Tribunal Colombo against termination of their employment by HCS, on 6 January 2014. Proceedings stayed until the determination of revision application in High Court Colombo.

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 is 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.

(i) Facilities amounting to Rs. Nil (2013 - Rs. 5,750 million) and US$ 194.2 million (2013 - US$ 191.2 million) for Mobitel (Private) Limited for the GSM roll-out stage, 4, 5, 6 and 7.

(ii) Facilities amounting to Rs. 26 million (2013 - Rs. 26 million) for Sri Lanka Telecom (Services) Limited to obtain facilities for working Capital requirement.

(iii)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 2014.

33. Related party transactions

33.1 The Company had following transactions with its subsidiaries during the year under review:

Company
2014 2013
(a) Mobitel (Private) Limited
Sale of goods and services
Provision of E1 links 1,747 1,462
Leased line 975 976
Interconnection charges 325 350
TDM, VOIP Platform and Transit 173 166
3,220 2,954
Purchase of goods and services
Call charges on official mobile phones 47 39
Interconnection charges 1,658 881
Antenna tower space 565 449
Building rent 3 3
E1 link 1
2,274 1,372

As per the TRC approval dated 19 May 2014, Mobitel is entitled to receive discounts if the Company uses more than 3500 E 1 links. Further, Mobitel receives discounts on infrastructure services provided by Sri Lanka Telecom PLC.

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

Facilities amounting to Rs. Nil (2013 - Rs. 5,750 million) and US$ 194.2 million (2013 - US$ 191.2 million) for Mobitel (Private) Limited for the GSM roll-out stage 4, 5, 6 and 7.

Company
2014 2013
(b) Sky Network (Private) Limited
Sale of goods and services
Supply of services
Purchase of goods and services
Service provisioning
(c) SLT Publications (Private) Limited
Sale of goods and services
Supply of services 4 4
Purchase of goods and services
Directory distribution

SLT Publications provides event management services to SLT PLC. As per the agreement SLT Publications is entitled to receive a retainer for the service provided.

Impairment of related party receivable amounting to Rs. 9.7 million was made during the year.

Company
2014 2013
(d) Sri Lanka Telecom (Services) Limited
Sale of goods and services
Supply of services 4 4
Purchase of goods and services
Project-related services 112 179

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

Facilities amounting to Rs. 26 million (2013 - Rs. 26 million) for Sri Lanka Telecom (Services) Limited to obtain facilities for working capital requirements.

Impairment of related party receivable amounting to Rs. 10.4 million was made during the year.

Company
2014 2013
(e) SLT Human Capital Solutions (Private) Limited
Sale of goods and services
Supply of services 6 5
Purchase of goods and services
Provision of manpower service 1,181 1,247
(f) SLT VisionCom (Private) Limited
Sale of goods and services
Supply of services 8 10
Purchase of goods and services
Service provisioning 122 110

Ad-Insertion revenue

SLT received an ad-insertion revenue from SLT VisionCom (Private) Limited amounting to Rs. 3.3 million. SLT’s share of revenue is based on the following percentages.

Advertisement on PEO TV - EPG - 34%

Channel advertisement - 17%

Service Fee

SLT PLC pays SLT VisionCom (Private) Limited the total cost incurred plus a 5% margin which amounted to Rs. 122 million in 2014.

Impairment to related party receivable amounting to Rs. 12.2 million was made during the year.

Company
2014 2013
(g) SLT Property Management (Private) Limited
Sale of goods and services
Supply of services
Purchase of goods and services
Service provisioning 5
(h) SLT Campus (Private) Limited
Sale of goods and services
Supply of services
Purchase of goods and services
Service provisioning
(i) Fees for secondment of personnel and services provided to/by SLT PLC
SLT Publications (Private) Limited 36 36
SLT Human Capital Solutions (Private) Limited 10 9
46 45
(j) Outstanding balances arising from sale/purchase of services
Receivable from subsidiaries
Mobitel (Private) Limited 3,317 2,342
SLT Publications (Private) Limited 223 185
SLT Human Capital Solutions (Private) Limited 146 137
SLT VisionCom (Private) Limited 41 50
Sri Lanka Telecom (Services) Limited 19 31
Sky Network (Private) Limited 120 120
SLT Property Management (Private) Limited 5
3,871 2,865
Payable to subsidiaries
Mobitel (Private) Limited 1,569 973
SLT Publications (Private) Limited 67 32
SLT Human Capital Solutions (Private) Limited 225 217
Sri Lanka Telecom (Services) Limited 166 153
Sky Network (Private) Limited 1 1
2,028 1,376

33.2 Transactions with other related parties

Group Company
2014 2013 2014 2013
(a) Maxis Communications Berhad and its subsidiaries
Sale of goods and services
Sale of SEA-ME-WE 3 cable capacity 10 10 10 10
International incoming traffic 243 186 241 147
253 196 251 157
Purchase of goods and services
International outgoing traffic 85 75 85 73
(b) Upali Group of Companies
Sale of goods and services
Providing Voice & Data services 10 11 9 11
(c) Nawaloka Group
Sale of goods and services
Providing Voice & Data services 6 5 6 5
Purchase of goods and services
Medical services 10 18 9 17
(d) SriLankan Airlines Limited
Sale of goods and services
Providing Voice, Data & Infrastructure services 221 81 220 81
(e) Sri Lanka Cricket
Sale of goods and services
Providing Voice and Data services 1 3 1 3
Cricket Team and umpire sponsorship 7 2
(f) Outstanding balances arising from sale/purchase of services
Receivable from related companies
Upali Group of Companies 2 5 2 5
Nawaloka Group 1 1 1 1
SriLankan Airlines Limited 144 57 144 57
Sri Lanka Cricket 3 5 3 5
Maxis Communications Berhad and its subsidiaries 122 55 122 55
272 123 272 123
Payable to related company
Maxis Communications Berhad and its subsidiaries 47 51 47 51

(g) Government-related key institutions

The Government of Sri Lanka holds 49.5% of the voting rights of the Company as at 31 December 2014 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 Disclosures.

During the year ended 31 December 2014, 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 2014 amounted to Rs. 4,450 million (2013 - Rs. 3,632 million) and credit receivables as at 31 December 2014 amounted to Rs. 784 million (2013 - Rs. 609 million).
  2. Deposits, repurchase agreements (Repo) and Borrowings of the Group at/from Government banks amounted to Rs. 7,020 million (2013 - Rs. 3,555 million) and Rs. 2,479 million (2013 - Rs. 4,921 million.
  3. Dividend payable to the Government amounted to Rs. 244 million (2013 - 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
2014 2013 2014 2013
Short-term benefits 238 212 189 174
Post-employment benefits 24 19 20 17
Salaries and other benefits 262 231 209 191

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.

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 Publications (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

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 entity

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
2014 2013

Reversal of deferred revenue recognised in statement of profit or loss and other comprehensive income by Mobitel (Private) Limited

(92) (79)

Other comprehensive income by Mobitel (Private) Limited

Receipt of refund during the year from TDC recognised in the consolidated financial statements

322 240

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 (2013 - Rs. 0.85 per share) on voting shares of the Company to be paid by way of cash dividend for the financial year ended 31 December 2014.

Further, this dividend is to be approved at the Annual General Meeting to be held on 13 May 2015. This proposed final dividend has not been recognised as a liability as at 31 December 2014. 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 27 February 2015 has been audited by Messrs KPMG.

The 2015 interim budget was presented by the Government of Sri Lanka (GoSL) on 29 January 2015 and approved by the Parliament of Sri Lanka on 7 February 2015. The GoSL is working towards enacting legislation pertaining to the budget proposals which would in turn bring the said proposals into force and also provide clarity with respect to applicability and execution considerations. Therefore, pending legislation and lucidity at this point of time, the consolidated financial results for the year ended 31 December 2014 excludes any and all impacts from the interim budget pertaining to the super-gain tax, levy on license mobile telephone operators and the discontinuation from charging the 25% telecommunication levy from prepaid card subscribers.

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.