Observations made on review of financial statements during 2020

1. Undertakings obtained from SBEs to make the required corrections

   Based on the materiality of the deviations from Sri Lanka Accounting Standards, SLAASMB obtained undertakings from two SBEs to make corrections in the preparation and presentation of financial statements.

   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 correctly identify the amounts by which financial statement line items are affected in the current reporting period due to the application of SLFRS 15 as compared
   with LKAS 18. (Reference; SLFRS 15 paragraph C3 (b) of Appendix C)
   • Failure to use possible multiple fair value techniques, in assessing the recoverable value of investment in associate using fair value less cost to sell method prescribed in LKAS 36. (Reference; SLFRS 13 paragraph B40)

   Details of the undertakings obtained during the year 2020 are given in page < page no>.

2. Communication of Improvements to enhance compliance with standards

   Departures from Sri Lanka Accounting Standards detected, which were not material as to require the use of procedures using statutory provisions, were informed to SBEs, as improvements, by letters, without extensive inquiries, so that the SBEs could, where necessary, improve on the compliance, on their own.

   The main findings relating to which improvements were communicated to SBEs in the form of letters of assistance are set out below;

   • Not making adequate disclosures at the end of the reporting period, on the nature and extent of risks arising from financial instruments to which, the entity is exposed and of quantitative and qualitative information about the amounts arising from expected credit losses – in 83 SBEs (Reference; SLFRS 7 paragraphs 31 to 42)
   • Not making adequate disclosures relating to the nature of the related party relationships as well as information about the transactions with related parties – in 76 SBEs including 18 in SME sector (Reference; LKAS 24 paragraph 18 and SME Section 33 paragraph 33.9)
   • Not adequately disclosing the relationship between tax expense and accounting profit and of evidence to support recognition of deferred tax assets on tax losses –in 68 SBEs including 25 in SME sector (Reference; LKAS 12 paragraph 81and SME Section 29 paragraph 29.32)
   • Not making 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 value – in 65 SBEs (Reference; SLFRS 13 paragraphs 91 and 93)
   • Not considering all taxable temporary differences when recognizing deferred tax liabilities or, recognizing deferred tax assets in relation to carried forward tax losses irrespective of the extent of availability of future taxable profits to utilize such unused tax losses – in 40 SBEs including 13 in SME sector (Reference; LKAS 12 paragraphs 15, 24,34 and 48 and SME Section 29 paragraph 29.12)
   • Not making adequate disclosures in relation to the basis of preparation of the financial statements and the specific accounting policies and/or significant accounting policies which comprise of the measurement bases and other accounting policies, that are relevant for an understanding of the financial statements– in 35 SBEs (Reference; LKAS 1 paragraphs 112 and 117)
   • Not recognizing a loss allowance for expected credit losses on a Financial asset that is measured at amortized cost when impairment indicators exist or not recognizing impairment losses at the end of each reporting period when there are objective evidence of impairment in respect of a financial asset or group of financial assets – in 17 SBEs including 5 in SME sector (Reference; SLFRS 9 paragraph 5.5.1 and SME Section 11 paragraph 11.21)
   • Not measuring the expected credit losses of a financial instrument to reflect the time value of money – in 16 SBEs (Reference; SLFRS 9 paragraph 5.5.17)
   • Not disclosing all relevant information relating to revaluation of property plant and equipment – in 28 SBEs including 13 in SME sector (Reference; LKAS 16 paragraphs 77 and SME Section 17 paragraph 17.33)
   • Not performing regular revaluations when fair values of revalued assets differ materially from the carrying amounts – in 10 SBEs (Reference; LKAS 16 paragraphs 31)
   • Not estimating the recoverable amount of an asset when indication of impairment exist at the end of the reporting period – in 9 SBEs including 2 in SME sector (Reference; LKAS 36 paragraph 8 and 9 and SME Section 27 paragraph 27.5)
   • Not recognizing depreciation of an asset from the time the asset has been available for use or the depreciation method being used not reflecting the pattern in which the asset’s future economic benefits are expected to be consumed by the entity – in 9 SBEs (Reference; LKAS 16 paragraphs 55 and 60)
   • Not preparing financial statements in compliance with Sri Lanka Accounting Standards and not taking all necessary measures to ensure the financial statements are audited in accordance with Sri Lanka Auditing Standards, with the object of presenting a true and fair view of the financial performance and financial condition – in 8 SBEs (Reference; Act No 15 of 1995 Section 6 (1))