Observations made on review of financial statements during 2017

1. Undertakings obtained to make the required corrections

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) obtained undertakings from seven specified business enterprises (SBEs) to make corrections in the financial statements. These undertakings resulted in corrections to net profits/ equity amounting to Rs. 2.2 billion.

Further, a direction was issued to a Government Corporation to prepare financial statements in compliance with Sri Lanka Accounting Standards with the object of presenting a true and fair view. In addition, one direction was issued to a SBE to re-audit and re-publish its financial statements due to failure by its auditor to conduct the audit in accordance with the auditing standards.

Types of items for which the undertakings were obtained along with reference to the Sri Lanka Accounting Standards (Prefixed SLFRS/ LKAS) not complied with by the SBEs are as follows.

• Incorrect recognition of a related party arrangement between a parent and a subsidiary as a notional asset. (Reference; LKAS 39 paragraph 9 and LKAS 24 paragraphs 18 and 19)
• Failure to make adequate allowances for impairment of financial assets when impairment indicators exist (Reference; LKAS 39 paragraph 58)
• Failure to recognize biological assets and to measure at fair value. (Reference; LKAS 41 paragraphs 5 and 12)
• Failure to reflect the change in parent’s ownership interest in a subsidiary in equity. (Reference; SLFRS 10 paragraph 23)
• Failure to recognize insurance contracts appropriately and to perform liability adequacy test.(Reference; SLFRS 4 appendix A and paragraph 18(g) of appendix B).
• Failure to recognize liabilities for retirement benefit obligations (Reference; LKAS 19 paragraphs 67,71 and 72 , Section 28 of SLFRS for SMEs paragraph 28.15)
• Failure to apply the percentage of completion method in recognition of revenue, cost of sales and inventory in relation to construction contracts. (Reference; Section 23 of SLFRS for SMEs paragraphs 23.21 – 23.27)

2. Letters of Assistance

Departures from Sri Lanka Accounting Standards detected, which were material, but not significant as to require the use of procedure using statutory provisions, were informed to the SBEs, by letter, without extensive inquiries, so that the SBEs could, where necessary, take corrective action on their own. Such letters not being directions issued by SLAASMB, are intended to be letters of assistance.

The main findings relating to which letters of assistance were sent to the SBEs are set out below.

• Failure to recognize adequate impairment allowance at the end of each reporting period when objective evidence exist as to a financial asset or group of financial assets has been impaired – in 34 SBEs. (Reference; LKAS 39 paragraphs 58)
• Failure to make adequate disclosures relating to the nature of the related party relationships as well as information about transactions with related parties – in 29 SBEs including 3 in SME sector. (Reference; LKAS 24 paragraph 18; SME section 33 paragraphs 33.9 and 33.10)
• Failure to make adequate disclosures relating to valuation techniques used, inputs to the valuation techniques, quantitative information about significant unobservable inputs used, significant adjustments made to the inputs and the fair value hierarchy for each class of assets and liabilities measured at fair values – in 25 SBEs (Reference; SLFRS 13 paragraphs 91 and 93)
• Failure to make adequate disclosures on the nature and extent of risks arising from financial instruments to which the entity is exposed, at the end of the reporting period – in 16 SBEs. (Reference; SLFRS 7 paragraphs 31,36 and 37)
• Failure to consider all taxable temporary differences in recognizing deferred tax liabilities – in 15 SBEs including 2 in SME sector (Reference; LKAS 12 paragraphs 15, 20 and 24 and SME Section 29 paragraph 29.15)
• Failure to make adequate disclosures relating to the effective date of revaluation, method and significant assumptions used in the valuation and carrying value of property plant and equipment that would have been recognised had the asset been carried under the cost model – in 9 SBEs (Reference; LKAS 16 paragraph 77)
• Failure to perform regular revaluations when the fair values of the revalued assets differ materially from its carrying amounts – in 9 SBEs. (Reference; LKAS 16 paragraphs 34)