Sri Lanka Telecom PLC
Annual Report
2020

Financial reports

Independent auditors’ report

To the Shareholders of Sri Lanka Telecom PLC

Report on the audit of the Financial Statements

Opinion

We have audited the financial statements of Sri Lanka Telecom PLC (“the Company”) and the consolidated financial statements of the Company and its subsidiaries (“the Group”), which comprise the statement of financial position as at 31 December 2020, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements of the Company and the Group give a true and fair view of the financial position of the Company and the Group as at 31 December 2020, and of their financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Basis for opinion

We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the Code of Ethics issued by CA Sri Lanka (Code of Ethics) and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial statements.

Key audit matter	How our audit addressed the key audit matter
Revenue recognition of fixed telephony and mobile communication services The Group recognised revenue of LKR 89,004 Mn. from the provision of fixed telephony and mobile communication services for the year ended 31 December 2020. Recognition of revenue from the provision of fixed telephony and mobile communication services was a key focus of our audit due to the following: — Provision of telecommunication services to customers involve frequent changes in rate structures and arrangements with multiple features. It comprises a large volume of transactions which arise from sales of different combinations of hardware and services that are captured, processed and recorded by the Group using multiple IT systems. — Accounting for revenue transactions including timing of revenue recognition and allocation of the transaction price in bundled products and services in accordance with SLFRS 15 Revenue from Contracts with Customers is complex and requires exercise of management judgement.	Our audit procedures included the following amongst others; We involved our internal specialised resources to assist us with: Evaluating the design, implementation and operating effectiveness of IT general controls and application controls of IT systems connected with revenue recognition understanding and evaluating the effectiveness of design and implementation of the security monitoring procedures over IT systems We evaluated the design, implementation and operating effectiveness of IT dependent manual controls and manual controls including performing re-computations and testing end-to-end reconciliations, as relevant. We assessed appropriateness of the timing of revenue recognition and allocation of the transaction price in bundled products and services of major revenue streams, based on the respective terms and conditions of customer contracts. We also assessed the adequacy of related disclosures reflected in Note 3 (k) and Note 6 (a) of the Consolidated Financial Statements.
Capital work-in-progress – Network equipment As at 31 December 2020, Group’s capital work-in-progress of Network equipment balance accounted for 10% of the consolidated total assets. Capital work in progress of network equipment was a key focus for our audit due to the: Importance of timeliness in transferring amounts from capital work-in-progress of network equipment to the relevant class of property, plant and equipment, when such items have been commissioned for use. Degree of judgement involved, and assumptions used when assessing impairment of amounts of capital work-in-progress relevant to projects of an extended duration. Materiality of the amount recognised The Group’s disclosures on capital work-in-progress are included in Notes 3 (d) (iv) and 14 to the Consolidated Financial Statements.	Our audit procedures included the following amongst others; By discussion with the respective project managers and inspection of relevant documentation, we checked the current status of completion of those projects in relation to budgeted project duration and whether amounts related to network equipment commissioned for use have been appropriately transferred out of capital work–in-progress and recognised under the relevant class of property, plant and equipment, on a timely basis We evaluated whether management has identified possible indicators of impairment for any project related to network equipment which have not been commissioned for a prolonged period including evaluating the reasonableness of management judgements applied and assumptions used based on our knowledge of the business and industry. We also assessed the adequacy of related disclosures made in the Financial Statements.

Key audit matter

How our audit addressed the key audit matter

Revenue recognition of fixed telephony and mobile communication services The Group recognised revenue of LKR 89,004 Mn. from the provision of fixed telephony and mobile communication services for the year ended 31 December 2020. Recognition of revenue from the provision of fixed telephony and mobile communication services was a key focus of our audit due to the following:

— Provision of telecommunication services to customers involve frequent changes in rate structures and arrangements with multiple features. It comprises a large volume of transactions which arise from sales of different combinations of hardware and services that are captured, processed and recorded by the Group using multiple IT systems.

— Accounting for revenue transactions including timing of revenue recognition and allocation of the transaction price in bundled products and services in accordance with SLFRS 15 Revenue from Contracts with Customers is complex and requires exercise of management judgement.

Our audit procedures included the following amongst others;

We involved our internal specialised resources to assist us with:
- Evaluating the design, implementation and operating effectiveness of IT general controls and application controls of IT systems connected with revenue recognition
- understanding and evaluating the effectiveness of design and implementation of the security monitoring procedures over IT systems
We evaluated the design, implementation and operating effectiveness of IT dependent manual controls and manual controls including performing re-computations and testing end-to-end reconciliations, as relevant.
We assessed appropriateness of the timing of revenue recognition and allocation of the transaction price in bundled products and services of major revenue streams, based on the respective terms and conditions of customer contracts.
We also assessed the adequacy of related disclosures reflected in Note 3 (k) and Note 6 (a) of the Consolidated Financial Statements.

Capital work-in-progress – Network equipment As at 31 December 2020, Group’s capital work-in-progress
of Network equipment balance accounted for 10% of the consolidated total assets. Capital work in progress of network equipment was a key
focus for our audit due to the:

Importance of timeliness in transferring amounts from capital work-in-progress of network equipment to the relevant class of property, plant and equipment, when such items have been commissioned for use.
Degree of judgement involved, and assumptions used when assessing impairment of amounts of capital work-in-progress relevant to projects of an extended duration.
Materiality of the amount recognised

The Group’s disclosures on capital work-in-progress are included in Notes 3 (d) (iv) and 14 to the Consolidated Financial Statements.

Our audit procedures included the following amongst others;

By discussion with the respective project managers and inspection of relevant documentation, we
- checked the current status of completion of those projects in relation to budgeted project duration and
- whether amounts related to network equipment commissioned for use have been appropriately transferred out of capital work–in-progress and recognised under the relevant class of property, plant and equipment, on a timely basis
We evaluated whether management has identified possible indicators of impairment for any project related to network equipment which have not been commissioned for a prolonged period including evaluating the reasonableness of management judgements applied and assumptions used based on our knowledge of the business and industry.
We also assessed the adequacy of related disclosures made in the Financial Statements.

Other information included in the 2020 Annual Report

Other information consists of the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. Management is responsible for the other information.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the management and those charged with governance

Management is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s and the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with SLAuSs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal controls of the Company and the Group.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

As required by Section 163 (2) of the Companies Act No. 07 of 2007, we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company.

CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditor’s report is 1420.

24 March 2021

Colombo