Observations made on review of financial statements during 2018

1. Undertakings obtained to make the required corrections

   Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) obtained undertakings from five specified business enterprises (SBEs) to make corrections in the financial statements. These undertakings resulted in corrections to net profits/equity amounting to Rs. 1.1 billion.

   Further, a direction was issued to a Licensed Commercial Bank to make certain adjustments with the implementation of SLFRS 9 and to disclose the said fact in the interim financial statements with the object of presenting a true and fair view.

   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.

   • Failure to make adequate allowances for impairment of the investment in associate when impairment indicators exist (Reference; LKAS 36 paragraph 8 and)
   • Failure to make adequate allowances for impairment of financial assets when impairment indicators exist (Reference; LKAS 39 paragraphs 59 and 63)
   • Incorrect recognition of income tax liability and corresponding deferred tax asset in relation to loans written off which had been fully claimed when recognizing deferred tax liabilities (Reference; LKAS 12 paragraph 5 and LKAS 37 paragraph 10)
   • Failure to recognise biological assets and measure at fair value. (Reference; LKAS 41 paragraph 12)
   • Failure to measure investment properties at fair values by considering restrictions/characteristics specific to such investment properties (Reference; LKAS 40 paragraph 40)

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 Specified Business Enterprises (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 make adequate disclosure 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 value – in 61 SBEs (Reference; SLFRS 13 paragraphs 91 and 93)
   • Failure to make adequate disclosure at the end of the reporting period, on the nature and extent of risks arising from financial instruments to which, the entity is exposed – in 29 SBEs (Reference; SLFRS 7 paragraphs 31, 36 and 37)
   • Failure to recognise adequate impairment allowances when objective evidence exist at the end of each reporting period on impairment of a financial asset or group of financial assets – in 23 SBEs (Reference; LKAS 36 paragraph 8 and LKAS 39 paragraphs 58 and 63)
   • Failure to make adequate disclosure relating to the nature of the related party relationships as well as information about the transactions with related parties – in 21 SBEs (Reference; LKAS 24 paragraph 18)
   • Failure to consider all taxable temporary differences when recognizing deferred tax liabilities – in 18 SBEs (Reference; LKAS 12 paragraphs 15 and 24)
   • Failure to make adequate disclosure in relation to the significant accounting policies which comprise of the measurement base and other accounting policies that are relevant for an understanding of the financial statements – in 16 SBEs (Reference; LKAS 1 paragraph 117)
   • Failure to adequately disclose the relationship between tax expense and accounting profit and evidence to support recognition of deferred tax on tax losses – in 15 SBEs (Reference; LKAS 12 paragraph 81)
   • Failure to make adequate disclosure on the effects of changes in the assumptions used to measure insurance assets and liabilities, that had a material effect on the financial statements – in 11 SBEs (Reference; SLFRS 4 paragraphs 37)
   • Failure to perform regular revaluations when the fair values of revalued assets differ materially from the carrying amounts – in 8 SBEs (Reference; LKAS 16 paragraphs 31 and 34)