Notes to the Financial Statements

1Reporting Entity

DFCC Bank PLC (‘Bank’) is a limited liability public company incorporated and domiciled in Sri Lanka. It is a licensed specialised bank regulated under the Banking Act No. 30 of 1988 and amendments thereto.

The Bank was incorporated in 1955 under DFCC Bank Act No. 35 of 1955 as a limited liability public company and the ordinary shares of the Bank were listed in the Colombo Stock Exchange.

Consequent to the enactment of the DFCC Bank (Repeal and Consequential Provisions) Act No. 39 of 2014, the DFCC Bank Act No. 35 of 1955 was repealed and the Bank was incorporated under the Companies Act No. 07 of 2007 as a public limited company listed in the Colombo Stock Exchange with the name ‘DFCC Bank PLC’ with effect from 6 January 2015.

The registered office of the Bank is at 73/5, Galle Road, Colombo 3.

The Bank does not have a Parent Company.

The Bank’s Group comprises of subsidiary companies viz, DFCC Consulting (Pvt) Limited, DFCC Vardhana Bank PLC, Lanka Industrial Estates Limited and Synapsys Limited.

A joint venture company, Acuity Partners (Pvt) Limited which is equally owned by the Bank and Hatton National Bank PLC.

The Bank has one Associate Company viz, National Asset Management Limited.

Total employee population of the Bank and the Group on 31 March 2015 was 495 and 1,611 respectively (31 March 2014 - 477 and 1,576 respectively).

A summary of principal activities of DFCC Bank PLC (Bank), its subsidiary companies, associate company and joint venture company is as follows:

DFCC Bank PLC

Financial products and services to industrial, agricultural and commercial enterprises in Sri Lanka.

DFCC Consulting (Pvt) Limited

Technical, financial and other professional consultancy services in Sri Lanka and abroad.

DFCC Vardhana Bank PLC

Commercial banking.

Lanka Industrial Estates Limited

Leasing of land and buildings to industrial enterprises.

Synapsys Limited

Information technology services and information technology enabled services.

National Asset Management Limited

Fund management.

Acuity Partners (Pvt) Limited

Investment banking related financial services.

There were no significant changes in the nature of the principal activities of the Bank and the Group during the financial year under review.

2Basis of Preparation

2.1 Statement of Compliance

The consolidated financial statements of the Bank (Group) and the separate financial statements of the Bank (Bank) have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs and LKASs) issued by The Institute of Chartered Accountants of Sri Lanka (ICASL) and in compliance with the requirements of the Companies Act No. 7 of 2007 and the Banking Act No. 30 of 1988 and amendments thereto.

2.2 Approval of Financial Statements by Directors

The financial statements are authorised for issue by the Board of Directors on 15 May 2015.

2.3 Consolidated and Separate Financial Statements

DFCC Bank PLC as the parent of subsidiaries under its control is required to present only the consolidated financial statements as per Sri Lanka Accounting Standard LKAS 27 - ‘Consolidated and Separate Financial Statements’. However, in addition to the consolidated financial statements, separate financial statements are also presented as per Banking Act No. 30 of 1988.

2.4 Basis of Measurement

The consolidated and separate financial statements of the Bank are presented in Sri Lanka Rupees (LKR) being the, functional and presentation currency, rounded to the nearest thousand and, unless otherwise stated, have been prepared on the historical cost basis except for the following material items in the statement of financial position:

1. Assets held for trading are measured at fair value.
2. Derivative assets and derivative liabilities held for risk management are measured at fair value.
3. The liability/asset for defined benefit pension obligations is recognised as the present value of the defined benefit pension obligation less the net total of the pension assets maintained in DFCC Bank Pension Fund, a trust separate from the Bank.
4. The liability for defined benefit statutory end of service gratuity obligations is recognised as the present value of the defined benefit gratuity obligation.
5. Financial assets available-for-sale are measured at fair value.

The Bank has not designated any financial instrument at fair value which is an option under LKAS 39 - ‘Sri Lanka Accounting Standard - Financial Instruments: Recognition and Measurement’, since it does not have any embedded derivative and the Bank considers that currently there are no significant accounting mismatches due to recognition or measurement inconsistency between financial assets and financial liabilities.

2.5 Materiality and Aggregation

Each material class of similar items is presented separately in the financial statements. Items of a dissimilar nature or function are presented separately unless they are immaterial.

2.6 Critical Accounting Estimates and Judgments

2.6.1 General

In the preparation of separate financial statements and consolidated financial statements, the Bank makes judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses.

Management discusses with the Board Audit Committee the development, selection and disclosure of critical accounting policies and their application, and assumptions made relating to major estimation uncertainties.

The use of available information and application of judgment are inherent in the formation of estimates; actual results in the future may differ from estimates upon which financial information is prepared.

Estimates and underlying assumptions are reviewed on an ongoing basis. Changes to estimates in a subsequent financial year, if any, are recognised prospectively.

Management believes that Bank’s critical accounting policies where judgment is necessarily applied are those which relate to impairment of loans and advances, financial leases and goodwill, the valuation of financial instruments, deferred tax assets and provisions for liabilities.

Further information about key assumptions concerning the future and other key sources of estimated uncertainty are set out in the notes to the financial statements.

2.6.2. Change in accounting estimate

The Bank re-examined the impairment assessment processes in the light of experience gained over the past two years in particular the methodology adopted with regard to the collective impairment assessment process.

The change in accounting estimate has been applied prospectively as per Sri Lanka Accounting Standard LKAS 8 - ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

2.6.3 Loan Losses

The assessment of loan loss as set out in Note 31.2 involves considerable judgment and estimation. Judgment is required firstly to determine whether there are indications that a loss may already have been incurred in individually significant loans and secondly to determine the recoverable amount.

2.6.4 Pension Liability

The estimation of this liability determined by an independent, qualified actuary, necessarily involves long-term assumptions on future changes to salaries, future income derived from pension assets, life expectancy of covered employees, etc. Key assumptions are disclosed in Note 49.1.3.8.

The pension scheme is closed to new entrants recruited on or after 1 May 2004 and the basic pension and the survivor pension amount is frozen on the date of cessation of tenured employment. These risk mitigation strategies together with annual actuarial valuation and review of key assumptions tend to reduce the probability that the actual results will be significantly different from the estimate.

2.6.5 End of Service Gratuity Liability

The estimation of this liability, which is not funded, determined by an independent qualified actuary necessarily involves long-term assumptions on future changes to salaries, resignations prior to the normal retirement age and mortality of covered employees.

Key assumptions are disclosed in Note 49.1.3.8.

2.6.6 Current Tax

The estimation of income tax liability includes interpretation of tax law and judgment on the allowance for losses on loans. The estimation process by the Bank includes seeking expert advice where appropriate and the payment of the current tax liability is on self-assessment basis. In the event, an additional assessment is issued the additional income tax and deferred tax adjustment, will be recognised in the period in which the assessment is issued if so warranted.

2.6.7 Impairment of Tangible and Intangible Assets

The assessment of impairment in tangible and intangible assets includes the estimation of the value in use of the asset computed at the present value of the best estimates of future cash flows generated by the asset adjusted for associated risks. This estimation has inherent uncertainties. Impairment losses, if any, are charged to income statement immediately.

2.7 Changes in Accounting Policies

Except for the changes below, the Group has consistently applied the accounting policies for all periods presented in these consolidated and separate financial statements.

The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 April 2014.

SLFRS 10	-	Consolidated Financial Statements
SLFRS 11	-	Joint Arrangements
SLFRS 12	-	Disclosure of Interests in Other Entities
SLFRS 13	-	Fair Value Measurement
Disclosures	-	Offsetting Financial Assets and Financial Liabilities

3 Basis of Consolidation

3.1 General

The consolidated financial statements are the financial statements of the Group, prepared by consistent application of consolidation procedures, which include amalgamation of the financial statements of the parent and subsidiaries and accounting for the investments in associate company and joint venture company on the basis of reported results and net assets of the investee instead of the direct equity interest.

Thus, the consolidated financial statements present financial information about the Group as a single economic entity distinguishing the equity attributable to the parent (controlling interest) and attributable to minority shareholders with non-controlling interest.

3.2 Transactions Eliminated on Consolidation

Intra-group balances and transactions, including income, expenses and dividend are eliminated in full.

3.3 Financial Statements of Subsidiaries, Associate Company and Joint Venture Company included in the Consolidated Financial Statements

Audited financial statements are used for consolidation. Financial statements of DFCC Consulting (Pvt) Limited and Lanka Industrial Estates Limited included in the consolidation have financial years ending 31 March in common with the Bank. The financial statements of Acuity Partners (Pvt) Limited, DFCC Vardhana Bank PLC, Synapsys Limited and National Asset Management Limited included in the consolidation have financial years ending on 31 December.

3.4 Significant Events and Transactions during the period between date of Financial Statements of the Subsidiaries, Associate Company and Joint Venture Company and the date of Financial Statements of the Bank

No adjustments to the results of subsidiaries, associate company and joint venture company have been made as they were not significant.

3.5 Financial Statements used for Computation of Goodwill or Negative Goodwill on date of Acquisition

This is based on unaudited financial statements proximate to the date of acquisition.

3.6 Taxes on the Undistributed Earnings of Subsidiaries, Associate Company and Joint Venture Company

The distribution of the undistributed earnings of the subsidiaries, associate company and joint venture company is remote in the foreseeable future. As such, 10% withholding tax applicable on the distribution has not been recognised as a tax expense in the financial statements of the Group.

4Scope of Consolidation

All subsidiaries have been consolidated.

4.1 Subsidiary Companies

‘Subsidiaries’ are investees controlled by the Group. The Group ‘controls’ an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases.

Acquisition method of accounting is used when subsidiaries are acquired by the Bank. Cost of acquisition is measured at the fair value of the consideration, including contingent consideration, given at the date of exchange. Acquisition related costs are recognised as an amount of the expense in the profit or loss in the period of which they are incurred. The acquirees identifiable assets, liabilities and contingent liabilities are generally measured at their fair value at the date of acquisition.

Goodwill is measured as the excess of the aggregate consideration transferred, the amount of non-controlling interest and the fair value of banks previously held equity interest if any, over the net of the amount of the identifiable assets acquired and the liabilities assumed.

The amount of non-controlling interest is measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

In a business combination achieved in stages, the previously held equity interest is remeasured at the acquisition date fair value with a resulting gain or loss recognised in the profit or loss.

Changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control are treated as transactions between equity holders and are reported in equity.

Note 34 contains the financial information relating to subsidiaries.

4.2 Associate Company

Associate company are those enterprises over which the Bank has significant influence that is neither a subsidiary nor an interest in a joint venture. The Bank has only one associate company, National Asset Management Limited. The consolidated financial statements include the Bank’s share of the total comprehensive income of the associate company, on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.

Note 35 contains financial information relating to associate company.

4.3 Joint Venture Company

Joint venture company is an incorporated enterprise in which the Bank owns 50% of the voting shares with a contractual arrangement with the other company, who owns the balance 50% of the voting shares, in terms of which both parties have joint control over that enterprise. The results of the joint venture company are consolidated using equity method.

Note 36 contains the financial information relating to joint venture company.

5Principal Accounting Policies

Accounting policies are the specific principles, bases, conventions, rules and practices applied consistently by the Bank in presenting and preparing the financial statements. Changes in accounting policies are made only if the Sri Lanka Accounting Standards require such changes or when a change results in providing more relevant information. New policies are formulated as appropriate to new products and services provided by the Bank or new obligations incurred by the Bank.

5.1 Revenue and Expense Recognition

5.1.1 Interest Income and Expense

Interest income and expense for all interest-bearing financial instruments are recognised in ‘Interest Income’ and ‘Interest Expense’ in the income statement using the effective interest rate of the financial assets or financial liabilities to which they relate.

The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments earned or paid on a financial asset or financial liability through its expected life (or, where appropriate, a shorter period) to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, bank estimates future cash flows considering all contractual terms of the financial instruments but not future credit losses.

The calculation of the effective interest includes all transaction cost, premiums or discounts and fees paid or received by the Bank that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability.

Interest income on individually significant impaired financial assets (viz, loans and advances, and held-to-maturity debt instruments listed in the Colombo Stock Exchange) whose impairment is assessed individually, is calculated by applying the original effective interest rate of the financial asset to the carrying amount as reduced by any allowance for impairment. Thus changes in impairment allowances assessed individually and attributable to time value are reflected as a component of interest income.

Interest income includes income from finance leases, dividend from preference shares and notional tax credit on interest income from Treasury Bills and Bonds.

Finance lease income is recognised on a pattern reflecting a constant periodic rate of return on the Bank’s net investment in the finance lease.

5.1.2 Fees and Commission

Fee and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period.

Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received.

5.1.3 Net Gain/(Loss) from Trading

This comprises all gains less losses from changes in fair value of financial assets held-for-trading (both realised and unrealised) together with related dividend and foreign exchange differences.

5.1.4 Net Gain/(Loss) from Financial Instruments at Fair Value Through Profit or Loss

Bank has not chosen the option to designate financial instruments at fair value through profit or loss as a compensatory mechanism for accounting mismatches that would otherwise arise from measuring assets or liabilities or recognising gains or losses on them on different bases.

The Bank however, has non-trading derivatives held for risk management purposes (e.g., forward foreign exchange purchase or sale contracts) that do not form part of qualifying hedge relationship, that are mandatorily fair valued through profit or loss. In respect of such financial instruments all realised and unrealised fair value changes and foreign exchange differences are included.

5.1.5 Net Gain/(Loss) from Financial Investments

This includes realised gain or loss on sale of available-for-sale securities (e.g., Treasury Bills and Bonds, ordinary shares - both listed in the Colombo Stock Exchange and unlisted) and dividend income from ordinary shares classified as available-for-sale.

Where the dividend clearly represents a recovery of part of the cost of the investment it is presented in other comprehensive income.

Dividend income is recognised when the right to receive payment is established. Dividend income are presented in net gains/(loss) from trading and net gains/(loss) from financial investment, based on underlying classification of the equity investment.

5.1.6 Foreign Exchange Gain/(Loss)

Items included in the financial statements of the Bank are measured in Sri Lankan Rupees denoted as LKR which is the currency of the primary economic environment in which the Bank operates (‘the functional currency’) as well as the presentation currency.

Transactions in foreign currencies are recorded in the functional currency at the average exchange rate on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the average exchange rate ruling at the reporting date (viz. date of the Statement of Financial Position). The average exchange rate used is the middle rate of the commercial bank’s rates quoted for purchase or sale of the relevant foreign currency.

The Bank does not have any non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency.

Foreign exchange income recognised in the income statement is presented as follows based on the underlying classification:

1. Foreign exchange gain/(loss) which is part of a trading activity comprising profit or loss from the sale and purchase of foreign currencies for spot exchange is included as net gain/(loss) from trading.
2. Foreign exchange income or loss on derivatives held-for-risk management purposes and mandatorily measured at fair value through profit or loss is recognised as net gain/(loss) from financial instruments at fair value through profit or loss (Note 15).

The Bank does not have any foreign operation that is a subsidiary, associate, joint venture or a branch and therefore, there is no exchange differences recognised in other comprehensive income.

5.1.7 Premises Rental Income

Rent expenses are accounted on a straight-line basis over the entire period of the tenancy incorporating predetermined rent escalation during the period of the tenancy.

5.1.8 Value Added Tax on Financial Services (VAT)

VAT on financial services is calculated in accordance with Value added Tax Act No. 14 of 2002 and subsequent amendments thereto.

The value base for computation of VAT is the operating profit before value added tax and nation building tax on financial services adjusted for emoluments of employees and depreciation computed as per prescribed rates.

5.1.9 Nation Building Tax on Financial Services (NBT)

NBT on financial services is calculated in accordance with Nation Building Tax (Amendment). Act No. 10 of 2014. NBT is chargeable on the same base used for calculation of VAT on financial services as explained in Note 5.1.8 above.

5.1.10 Withholding Tax on Dividend Distributed by Subsidiaries, Associate Company and Joint Venture Company

Dividend distributed out of the taxable profit of the subsidiaries, associate company and joint venture company suffers a 10% deduction at source and is not available for set off against the tax liability of the Bank. Thus, the withholding tax deducted at source is added to the tax expense of the subsidiary companies, the associate company and joint venture company in the Group financial statements as a consolidation adjustment.

5.1.11 Tax Expense

Tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in the income statement except to the extent that they relate to items recognised directly in equity and other comprehensive income.

Current tax is the amount of income tax payable on the taxable profit for the financial year calculated using tax rates enacted or substantially enacted at the Reporting date, and any adjustment to tax payable in respect of previous years.

5.2 Financial Assets

5.2.1 Recognition and Measurement

The financial asset is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction cost that are directly attributable to its acquisition.

Loans and advances are initially recognised on the date at which they are originated at fair value which is usually the loan amount granted and subsequent measurement is at amortised cost.

The amortised cost of a financial asset is the amount at which the financial asset 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.

All other financial assets are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument.

5.2.2 Classification

At the inception, a financial asset is classified and measured at amortised cost or fair value:

• Loans and receivables - at amortised cost.
• Held-to-maturity – non-derivative financial assets with fixed or determinable payments and fixed maturity (for example, bonds, debentures and debt instruments listed in the Colombo Stock Exchange) that the Bank has the positive intent and ability to hold to maturity are measured at amortised cost.
• Held-for-trade – financial assets held-for-trade measured at fair value with changes in fair value recognised in the income statement.
• Designated at fair value – this is an option to deal with accounting mismatches and currently the Bank has not exercised this option.
• Available-for-sale – this is measured at fair value and is the residual classification with fair value changes recognised in other comprehensive income.
• Derivative assets - are mandatorily measured at fair value with fair value changes recognised in the income statement.

5.2.3 Reclassification

Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial recognition) may be reclassified out of the fair value through profit or loss category in the following circumstances:

• Financial assets that would have met the definition of loans and receivables at initial recognition (if the financial asset had not been required to be classified as held-for-trading) may be reclassified out of the fair value through profit or loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and
• Financial assets except financial assets that would have met the definition of loans and receivables at initial recognition may be reclassified out of the fair value through profit or loss category and into another category in rare circumstances.

5.2.4 Derecognition of Financial Assets

Financial assets are derecognised when the contractual right to receive cash flows from the asset has expired; or when Bank has transferred its contractual right to receive the cash flows of the financial assets, and either:

• Substantially all the risks and rewards of ownership have been transferred; or
• Bank has neither retained nor transferred substantially all the risks and rewards, but has not retained control of the financial asset.

5.2.5 Fair Value Measurement

‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk.

When available, the Bank measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted price in an active market, then the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out.

If an asset or a liability measured at fair value has a bid price and an ask price, then the Bank measures assets and long positions at a bid price and liabilities and short positions at an ask price.

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid.

The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

In accordance with the transitional provisions of SLFRS 13, the above measurement policy has been applied by the Bank prospectively. The Bank has applied the fair value measurement requirements in accordance with LKAS 39 for the comparative information presented in these financial statements.

5.2.6 Identification and Measurement of Impairment

At each Reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s) that can be estimated reliably.

5.2.6.1 Loans and Advances and Held-to-Maturity Investment Securities

Objective evidence that loans and advances and held-to-maturity investment securities (e.g., debt instruments quoted in the Colombo Stock Exchange, Treasury Bills and Bonds) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the Group or economic conditions that correlate with defaults in the Group.

The Bank considers evidence of impairment for loans and advances and held-to-maturity investment securities at both a specific and collective level.

5.2.6.1.1 Individually Assessed Loans and Advances and Held-to-Maturity Debt Instruments

These are exposures where evidence of impairment exists and those that are individually significant meriting individual assessment for objective evidence of impairment and computation of impairment allowance. The factors considered in determining that the exposures are individually significant include:

• the size of the loan; and
• the number of loans in the portfolio.

Loans considered as individually significant are typically to corporate and commercial customers and are for larger amounts.

For all loans and held-to-maturity debt instruments that are considered individually significant Bank assesses on a case by case basis whether there is any objective evidence of impairment. The criteria used by the Bank to determine that there is such objective evident include:

• contractual payments for either principal or interest being past due for a prolonged period;
• the probability that the borrower will enter bankruptcy or other financial realisation;
• a concession granted to the borrower for economic or legal reasons relating to the borrower’s financial difficulty that results in forgiveness or postponement of principal, interest or fees, where the concession is not insignificant; and
• there has been deterioration in the financial condition or outlook of the borrower such that its ability to repay is considered doubtful.

For those loans and held to maturity investment securities where objective evidence of impairment exists, impairment losses are determined considering the following factors:

• Bank’s aggregate exposure to the customer;
• the viability of the customer’s business model and their capacity to trade successfully out of financial difficulties and generate sufficient cash flow to service debt obligations;
• the amount and timing of expected receipts and recoveries;
• the likely dividend available on liquidation or bankruptcy;
• the extent of other creditors’ commitments ranking ahead of or pari passu with, the Bank and the likelihood of other creditors continuity to support the Company;
• the realisable value of security (or other credit mitigants) and likelihood of successful repossession or enforcement of security;
• the likely deduction of any costs involved in recovery of amounts outstanding.

5.2.6.1.2 Collective Assessment

This includes:

For the Bank -

All loans and advances of smaller value where there is no evidence of impairment and those individually assessed for which no evidence of impairment has been specifically identified on an individual basis.

For DFCC Vardhana Bank PLC -

• Import loans
• Export loans
• Corporate term loans
• Overdraft
• Personal loans
• Finance leases

These loans and advances are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective impairment.

In assessing collective impairment, the Bank uses statistical modelling of historical trends of the default rates, the timing of recoveries and the amount of loss incurred, adjusted for experience adjustment by the management where current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.

Default rates, loss rates and the expected timing of future recoveries will be regularly benchmarked against actual outcomes to ensure that they remain appropriate.

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective impairment. This reflects impairment losses that Bank has incurred as a result of events occurring before the reporting date which the Bank is not able to identify on an individual basis and that can be reliably estimated. These losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans and held-to-maturity investment securities within the Group, these are removed from the Group and assessed on an individual basis for impairment. The collective impairment allowance is based on historical loss experience adjusted by management’s experience judgment.

Impairment allowance on loans and advances and held-to-maturity investment securities measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.

5.2.6.1.3 Reversals of Impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written-back by reducing the loan impairment allowance accordingly. The write-back is recognised in the income statement.

5.2.6.1.4 Renegotiated Loan

Loans subject to collective impairment assessment whose terms have been renegotiated are no longer considered past due, but are treated as up-to-date loans for measurement purposes once a minimum number of payments required have been received.

Loans subject to individual impairment assessment, whose terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying amounts of loans that have been classified as renegotiated retain this classification until maturity or de recognition.

5.2.6.1.5 Write-off of Loans and Advances

Loans (and the related impairment allowance) are normally written- off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write-off may be earlier.

5.2.6.1.6 Asset-Backed-Securities

These are included in loans and advances. When assessing for objective evidence of impairment, Bank considers the performance of underlying collateral.

5.2.6.2 Available-for-Sale Financial Assets

At each date of statement of financial position an assessment is made of whether there is any objective evidence of impairment in the value of a financial asset. Impairment losses are recognised if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated.

If the available-for-sale financial asset is impaired, the difference between the financial asset’s acquisition cost (net of any principal repayments and amortisation) and the current fair value, less any previous impairment loss recognised in the income statement, is removed from other comprehensive income and recognised in the income statement.

5.2.6.3 Available-for-Sale Debt Securities

When assessing available-for-sale debt securities for objective evidence of impairment at the Reporting date, Bank considers all available evidence, including observable data or information about events specifically relating to the securities which may result in a shortfall in recovery of future cash flows. These events may include a significant financial difficulty of the issuer, a breach of contract such as a default, bankruptcy or other financial recognition, or the disappearance of an active market for the debt security.

These types of specific events and other factors such as information about the issuers’ liquidity, business and financial risk exposures, levels of and trends in default for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees may be considered individually, or in combination, to determine if there is objective evidence of impairment of a debt security.

5.2.6.4 Available-for-Sale Equity Securities

Objective evidence of impairment for available-for-sale equity securities may include specific information about the issuer and information about significant changes in technology, markets, economics or the law that provide evidence that the cost of the equity securities may not be recovered.

A significant or prolonged decline in the fair value of the asset below its cost is also objective evidence of impairment. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the period in which the fair value of the asset has been below its original cost at initial recognition.

Once an impairment loss has been recognised on an available-for- sale financial asset, the subsequent accounting treatment for changes in the fair value of that asset differs depending on the nature of the available-for-sale financial asset concerned:

• For an available-for-sale debt security, a subsequent decline in the fair value of the instrument is recognised in the income statement when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the financial asset. Where there is no further objective evidence of impairment, a decline in the fair value of the financial asset is recognised in other comprehensive income. If the fair value of a debt security increases in a subsequent period, and the increase can be objectively related to an event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. If there is no longer objective evidence that the debt security is impaired, the impairment loss is also reversed through the income statement.
• For an available-for-sale equity security, all subsequent increases in the fair value of the instrument are treated as a revaluation and are recognised in other comprehensive income. Impairment losses recognised on the equity security are not reversed through the income statement. Subsequent decreases in the fair value of the available- for-sale equity security are recognised in the income statement, to the extent that further cumulative impairment losses have been incurred in relation to the acquisition cost of the equity security.

5.2.6.5 Impairment of Intangible Assets - Computer Application Software and Goodwill on Consolidation

The Bank reviews on the date of the statement of financial position whether the carrying amount of computer application software is lower than the recoverable amount. In such event, the carrying amount is reduced to the recoverable amount and the reduction being an impairment loss is recognised immediately in the income statement. The recoverable amount is the value in use.

Similar criterion is used to assess impairment in goodwill on consolidation.

5.2.7 Offsetting

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under SLAS or for gains and losses arising from a group of similar transaction.

5.2.8 Cash and Cash Equivalents

For the purpose of the statement of cash flows, cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Such investments are normally those with three months or less than three months’ maturity from the date of acquisition.

Cash and cash equivalents include cash and short-term Treasury Bills with maximum three months’ maturity from date of acquisition.

5.2.9 Derivative Financial Instruments Held for Risk Management Purposes

Derivative assets held-for-risk management purposes include all derivative assets that are not classified as trading assets and are measured at fair value in the statement of financial position.

Bank has not designated any derivative held-for-risk management purposes as a qualifying hedge relationship and therefore the Bank has not adopted hedge accounting.

Derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are with the same counterparty, a legal right of offset exists, and the parties intend to settle the cash flows on a net basis.

5.2.10 Government Grant Receivable

Government grants are recognised initially as deferred income at fair value when there is a reasonable assurance that they will be received and Group will comply with the conditions associated with the grant, and are then recognised in profit or loss as other income on a systematic basis in the period in which the expenses (losses) are recognised.

5.2.11 Loans and Advances to Banks and Customers

Loans and advances to banks and customers include loans and advances and finance lease receivables originated by the Bank.

The carrying amount includes interest receivable from the customers and banks on these loans. This also includes investment by the Bank in any debentures, bonds, commercial paper or any other debt instrument which is not listed in the Colombo Stock Exchange or in any recognised market. The amount includes the principal amount and interest due and/or accrued on the date of the statement of financial position.

Principal amount of loans and advances (for example, over drawn balances in current account) are recognised when cash is advanced to a borrower. They are derecognised when either the borrower repays its obligations, or the loans are written-off, or substantially all the risks and rewards of ownership are transferred. They are initially recorded at fair value plus any directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest method, less any reduction for impairment or un collectibility.

When the Bank is the lessor in a lease agreement that transfers substantially all of the risk and rewards incidental to the ownership of the asset to the lessee the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised and presented within loans and advances.

5.2.12 Financial Investments – Available-for-Sale

Available-for-sale investments are non-derivative investments that were designated as available-for-sale or not classified as another category of financial assets. These include Treasury Bills, Bonds, debt securities and unquoted and quoted equity securities. They are carried at fair value except for unquoted equity securities whose fair value cannot reliably be measured and therefore carried at cost.

Interest income is recognised in profit or loss using the effective interest method. Dividend income was recognised in profit or loss when the Bank become entitled to the dividend.

Fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are reclassified to profit or loss as a reclassification adjustment.

5.2.13 Financial Investments – Held-to-Maturity

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that Bank positively intends, and is able, to hold to maturity. Held-to-maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method, less any impairment losses.

A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all investment securities as available-for-sale for the current and the subsequent two financial years.

However, sales and reclassifications in any of the following circumstances would not trigger a reclassification:

• Sales or reclassifications that are so close to maturity that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value;
• Sales or reclassifications after the Bank has collected substantially all of the asset’s original principal; and
• Sales or reclassifications attributable to non-recurring isolated events beyond the Group’s control that could not have been reasonably anticipated.

5.2.14 Subsidiaries, Associates and Joint Ventures

Bank’s investments in subsidiaries are stated at cost less impairment losses. Reversals of impairment losses are recognised in the income statement if there has been a change in the estimates used to determine the recoverable amount of the investment.

Investments in associate and joint venture are recognised using the equity method, initially stated at cost, including attributable goodwill, and are adjusted thereafter for the post-acquisition change in Bank’s share of net assets.

Unrealised gains on transactions between Bank and its associates and joint ventures are eliminated to the extent of Bank’s interest in the respective associate or joint venture. Unrealised losses are also eliminated to the extent of Bank’s interest in the associate or joint venture.

5.2.15 Property, Plant and Equipment

5.2.15.1 Recognition and Measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset.

Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in the income statement.

5.2.15.2 Subsequent Costs

Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Bank. Ongoing repairs and maintenance costs are expensed as incurred.

5.2.15.3 Depreciation

Items of property, plant and equipment are depreciated from the month they are available-for-use. Depreciation is calculated to write-off the cost of items of property, plant and equipment less their estimated residual values using the straight-line basis over their estimated useful lives. Land is not depreciated.

The estimated useful lives for the current and comparative periods of significant items of property, plant and equipment are as follows.

		Years
Buildings		20
Office equipment and motor vehicles		5
Fixtures and fittings		10

5.2.16 Investment Properties

Investment property of the Group (held by Subsidiary Lanka Industrial Estates Limited) is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business. The Group has chosen the cost model instead of fair value model and therefore investment property is measured at cost. Cost includes expenditure that is directly attributable to the acquisition of the investment property.

Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in the income statement.

5.2.17 Goodwill or Negative Goodwill on Consolidation

Goodwill arises on the acquisition of subsidiaries, when the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquiree exceed the amount of the identifiable assets and liabilities acquired. If the amount of the identifiable assets and liabilities acquired is greater, the difference is recognised immediately in the income statement. Goodwill arises on the acquisition of interests in joint ventures and associates when the cost of investment exceeds Bank’s share of the net fair value of the associate’s or joint venture’s identifiable assets and liabilities.

5.2.18 Intangible Assets - Computer Application Software

All software licensed for use by the Bank, not constituting an integral part of related hardware are included in the statement of financial position under the category intangible assets and carried at cost less cumulative amortisation and any impairment losses.

The initial acquisition cost comprises licence fee paid at the inception, import duties, non-refundable taxes and levies, cost of customising the software to meet the specific requirements of the Bank and other directly attributable expenditure in preparing the asset for its intended use.

The initial cost is enhanced by subsequent expenditure incurred by further customisation to meet ancillary transaction processing and reporting requirements tailor-made for the use of the Bank constituting an improvement to the software.

The cost is amortised using the straight-line method, at the rate of 20% per annum commencing from the date the application software is available-for-use. The amortised amount is based on the best estimate of its useful life, such that the cost is amortised fully at the end of the useful life during which the Bank has legal right of use. The amortisation cost is recognised as an expense.

5.3 Financial liabilities

5.3.1 Recognition and Initial Measurement

Deposits, borrowing from foreign multilateral, bilateral sources and domestic sources, debt securities issued and subordinated liabilities are initially recognised on the date at which they are originated.

A financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue.

Subsequent measurement of financial liability is at amortised cost. The amortised cost of a financial liability is the amount at which the financial 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.

5.3.2 Derecognition of Financial Liabilities

Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired.

5.3.3 Due to Banks, Customers, Debt Securities Issued and Other Borrowing

Financial liabilities are recognised when Group enters into the contractual provisions of the arrangements with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of financial liabilities is at amortised cost, using the effective interest method to amortise the difference between proceeds received, net of directly attributable transaction costs incurred, and the redemption amount over the expected life of the instrument.

5.3.4. Deferred Tax Liabilities/Assets

Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised.

Deferred income tax assets are recognised for tax losses carry-forwards, unused withholding tax credits and impairment allowances that exceed 1% of the loans and advances on date of the statement of financial position only to the extent that the realisation of related tax benefit through future taxable profits is probable.

5.3.5 Pension Liability Arising from Defined Benefit Obligations

5.3.5.1 Description of the Plan and Employee Groups Covered

The Bank established a trust fund in May 1989, for payment of pension which operates the pension scheme approved by the Commissioner General of Inland Revenue. The fund of the scheme is managed by trustees appointed by the Bank and is separate from the Bank. The scheme provides for payment of pension to retirees, spouse and minor children of deceased retirees based on pre-retirement salary. All members of the permanent staff who joined prior to 1 May 2004 are covered by this funded pension scheme subject to fulfilment of eligibility conditions prescribed by the Bank.

The scheme was amended on 31 August 1998 and the amended plan will apply to all members of the permanent staff who joined the Bank on or after this date and prior to 1 May 2004. The amendment reduced the scope of the benefit in the interest of long-term sustainability of the pension plan as advised by the independent actuary.

The defined benefit pension plan does not permit any post-retirement increases in pension nor any other benefit (e.g. medical expenses reimbursement).

5.3.5.2 Funding Arrangement

The Bank’s contributions to the trust fund are made annually based on the recommendation of an independent actuary. The employees make no contributions to qualify for the basic pension, which is therefore a non-contributory benefit to the employees. Eligible employees who desire to provide for the payment of pension to spouse and minor children, who survive them are however, required to contribute monthly, an amount based on a percentage of gross emoluments, excluding bonus, if they joined the Bank on or after 31 August 1998 and prior to 1 May 2004.

5.3.5.3 Recognition of Actuarial Gains and Losses

The net actuarial gains or losses arising in a financial year is due to increases or decreases in either the present value of the promised pension benefit obligation or the fair value of pension assets. The causes for such gains or losses include changes in the discount rate, differences between the actual return and the expected return on pension assets and changes in the estimates of actual employee turnover, mortality rates and increases in salary.

The Bank recognises the total actuarial gains and losses that arise in calculating the Bank’s obligation in respect of the plan in other comprehensive income and the expense under personnel expenses in the income statement during the period in which it occurs.

5.3.5.4 Recognition of Past Service Cost

Past service cost arises when a defined benefit plan is introduced for the first time or subsequent changes are made to the benefits payable under an existing defined benefit plan. Bank will recognise past service cost as an expense on a straight-line basis over the average period until the benefits become vested. To the extent the benefits are already vested following the introduction of or changes to a defined benefit plan, the Bank will recognise past service cost immediately.

5.3.6 Provision for End of Service Gratuity Liability under a Defined Benefit Plan

5.3.6.1 Description of the Plan and Employee Groups Covered

Bank provides for the gratuity payable under the Payment of Gratuity Act No. 12 of 1983 for all employees who do not qualify under the pension scheme. Therefore, this applies to employees recruited to the permanent cadre on or after 1 May 2004 on tenured or fixed term contract employment in the Bank. The subsidiary companies, which do not have a non-contributory pension scheme provide for the gratuity payable under the Payment of Gratuity Act No. 12 of 1983 for all employees. The promised benefit is half a month pre-termination salary for each completed year of service provided a minimum qualifying period of 5 years is served prior to termination of employment. The Bank however, recognises the liability by way of a provision for all employees in tenured employment from the date they joined the permanent cadre, while fixed term employees liability is recognised only if the fixed term contract of service provides for unbroken service of 5 years or more either singly or together with consecutive contracts.

5.3.6.2 Funding Arrangement

The Bank and the subsidiaries adopt a pay-as-you-go method whereby the employer makes a lump sum payment only on termination of employment by resignation, retirement at the age of 55 years or death.

5.3.6.3 Recognition of Actuarial Gains and Losses

The Bank recognises the total actuarial gains and losses in the other comprehensive income during the period in which it occurs.

5.3.6.4 Recognition of Past Service Cost

Since end of service gratuity defined benefit is a statutory benefit, the recognition of past service cost will arise only if the Payment of Gratuity Act No. 12 of 1983 is amended in future to increase the promised benefit on termination of employment. In such event, the Bank will adopt the accounting policy currently used for defined benefit pension plan.

5.3.7 Defined Contribution Plans

This provides for a lump sum payment on termination of employment by resignation, retirement at the age of 55 years or death while in service.

Lump sum payment is by an outside agency to which contributions are made.

All employees of the Bank are members of the Mercantile Service Provident Society and the Employees’ Trust Fund to which the Bank contributes 15% and 3% respectively of such employee’s consolidated salary.

Contributions to defined contribution plans are recognised as an expense in the income statement as incurred.

5.3.8 Provisions

Provisions are recognised when it is probable that an outflow of economic benefits will be required to settle a current legal or constructive obligation, which has arisen as a result of past events, and for which a reliable estimate can be made of the amount of the obligation.

5.3.9 Contingent Liabilities and Commitments

Contingent liabilities, which include guarantees are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of Bank; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the financial statements but are disclosed unless the probability of settlement is remote.

5.3.9.1 Financial Guarantees

Liabilities under financial guarantee contracts are recorded initially at their fair value, which is generally the fee received or receivable. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure required to settle the obligations.

5.3.10 Sale and Repurchase Agreements

When securities are sold subject to a commitment to repurchase them at a predetermined price (‘repos’), they remain on the statement of financial position and a liability is recorded in respect of the consideration received.

Securities purchased under commitments to sell (‘reverse repos’) are not recognised on the statement of financial position and the consideration paid is recorded in ‘loans and advances to banks’, ‘loans and advances to customers’ as appropriate. The difference between the sale and repurchase price is treated as interest and recognised over the life of the agreement for loans and advances to banks and customers.

5.3.11 Stated Capital

Shares are classified as equity when there is no contractual obligation to transfer cash or other financial assets.

6 Cash Flow

The cash flow has been prepared by using the ‘Direct Method’. Cash and cash equivalents include cash balances, time deposits and Treasury Bills of three months’ maturity at the time of issue. For the purpose of cash flow statement, cash and cash equivalents are presented net of bank overdrafts.

7Business Segment Reporting

Business segment results include items directly attributable to a business segment as well as those that can be allocated on a reasonable basis. Unallocated items include corporate assets, head office expenses, and tax assets and liabilities.

8Directors’ Responsibility

The Directors acknowledge the responsibility for true and fair presentation of the financial statements in accordance with Sri Lanka Accounting Standards.

9New Accounting Standards which became Effective during the Year

9.1 Sri Lanka Accounting Standard(SLFRS 11) - ‘Joint Arrangements’

SLFRS 11 replaces Sri Lanka Accounting Standard (LKAS 31) - ‘Interest in Joint Ventures’. The new standard removed the option to account for jointly-controlled entities using the proportionate consolidation method.

The change to the accounting policy and the impact is given in Note 36.3.

9.2 Sri Lanka Accounting Standard (SLFRS 13) - ‘Fair Value Measurement’

SLFRS 13 establishes a single source of guidance SLFRS for all fair value measurements. The application of SLFRS 13 has no material impact on the fair value measurements carried out by the Bank and the Group. Necessary disclosures required by the new standard have been included in the notes to the financial statements.

9.3 Sri Lanka Accounting Standard (SLFRS 10) - ‘Consolidated Financial Statements’

SLFRS 10 replaces the portion of LKAS 27 which deals with accounting for consolidated financial statements and SIC 12 - Consolidation of Special Purpose Entities.

There was no impact on the consolidation of investments held by the Bank and the Group.

9.4 Sri Lanka Accounting Standard (SLFRS 12) - ‘Disclosure of Interests in Other Entities’

SLFRS 12 sets out the requirements for disclosure relating to an entities interest in other entities such as subsidiaries, joint ventures, associates etc.

Necessary disclosures required by the new standard have been included in the notes to the financial statements.

10New SLFRS issued and not yet Effective

10.1 SLFRS Applicable for Financial Periods beginning on or after 1 January 2015

10.1.1 SLFRS 9 - ‘Financial Instruments’

SLFRS 9 - ‘Financial Instruments’ replaces the existing guidance in LKAS 39 - ‘Financial Instrument: Recognition and Measurement’. SLFRS 9 includes revised guidance on the classification and measurement of financial instruments including a new expected credit loss model for calculating impairment on financial assets.

SLFRS 9 is effective for annual period beginning on or after 1 January 2018 with early adoption permitted.

10.1.2 SLFRS 15 - ‘Revenue from Contracts with Customers’

SLFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including LKAS 18 ‘Revenue’ and LKAS 11 on ‘Construction Contracts’.

SLFRS 15 is effective for annual period beginning on or after 1 January 2018.

10.2 Possible Impact on the Application of the new SLFRS on the Group’s Financial Statements

The Bank has not yet assessed the impact on the application of the above standards.

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
11Income
Interest Income	8,010,024	9,529,636	16,098,667	18,479,672
Fee and commission income	167,995	115,296	1,137,267	849,105
Net gain from trading	146,679	33,565	479,988	212,306
Net gain from financial instruments at fair value through profit or loss	656,512	(386,281)	678,217	(323,943)
Net gain from financial investments	2,150,427	1,211,493	2,201,070	1,152,989
Other operating income/(expense)	(737,552)	(22,759)	(501,498)	5,718
	10,394,085	10,480,950	20,093,711	20,375,847

12Net Interest Income

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Interest income
Placements with banks	82,130	343,003	52,860	474,501
Loans to and receivables from banks	88,969	176,869	205,776	269,133
Loans to and receivables from other customers	7,235,442	8,414,216	14,240,041	16,117,942
Other financial assets held-for-trading	93,128	22,020	140,765	31,840
Financial investments – held-to-maturity	118,039	30,318	123,871	42,018
Financial investments – available-for-sale	388,312	542,459	1,331,350	1,543,487
Others	4,004	751	4,004	751
	8,010,024	9,529,636	16,098,667	18,479,672
Interest expenses
Due to banks	110,795	463,975	189,818	643,989
Due to other customers	1,485,318	1,688,643	6,026,658	7,056,688
Other borrowings	1,341,627	2,029,273	1,341,627	2,029,273
Debt securities issued	1,737,707	712,499	1,849,481	830,279
	4,675,447	4,894,390	9,407,584	10,560,229
Net interest income	3,334,577	4,635,246	6,691,083	7,919,443
Interest income on Sri Lanka Government Securities	494,982	612,312	1,742,249	1,795,580

This income includes notional tax credit of 10% imputed for the withholding tax deducted/paid at source.

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
13Net Fee and Commission Income
Fee and commission income	167,995	115,296	1,137,267	849,105
Fee and commission expenses	–	–	17,303	6,442
Net fee and commission income	167,995	115,296	1,119,964	842,663
Comprising:
Loans and advances	100,212	61,001	503,530	318,963
Credit cards	–	–	24,641	10,096
Trade and remittances	–	–	326,306	339,964
Guarantees	27,743	28,727	145,090	119,937
Management and consulting fees	40,040	25,568	120,397	53,703
Net fee and commission income	167,995	115,296	1,119,964	842,663

14Net Gain from Trading

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Foreign exchange	–	–	144,429	165,006
Fixed income securities	146,679	33,565	335,559	47,300
	146,679	33,565	479,988	212,306

15Net gain/(loss) from Financial Instruments at Fair Value through Profit or Loss

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Forward exchange fair value changes - Contracts with commercial banks	81,577	91,799	96,819	154,137
- Contract with CBSL (Note 42.1)	574,935	(478,080)	574,935	(478,080)
Realised gain on gold put option	–	–	6,463	–
	656,512	(386,281)	678,217	(323,943)

16Net Gain from Financial Investments

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Assets available-for-sale
Gain on sale of equity securities	1,135,054	186,135	1,135,054	186,135
Gain on sale of Government securities	–	2,860	4,909	2,860
Dividend income	777,536	815,352	777,803	815,564
Dividend income from subsidiaries, joint venture and associate	214,422	176,560	–	–
Net gain from repurchase transactions	23,415	30,586	283,304	148,430
	2,150,427	1,211,493	2,201,070	1,152,989

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
17Other Operating (Loss)/Income (Net)
Premises rental income	62,820	60,931	205,997	192,475
Gain on investment properties	–	–	–	2,321
Gain on sale of property, plant and equipment	1,717	20,324	1,077	21,623
Foreign exchange loss	(500,677)	(651,397)	(465,807)	(800,191)
Recovery of loans written-off	42,471	75,467	46,244	80,030
Amortisation of deferred Income on Government grant - CBSL Swap (Note 42.2)	(376,185)	459,330	(376,185)	459,330
Others	32,302	12,586	87,176	50,130
	(737,552)	(22,759)	(501,498)	5,718

18Impairment Charge for Loans and Other Losses

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Loans to and receivables from other customers
Specific allowance for impairment (Note 31.2.1)	556,493	157,036	1,143,903	714,762
Collective allowance for impairment (Note 31.2.2)	(887,547)	135,395	(957,842)	475,867
Impairment charge - Other debts	8,355	6,002	11,775	6,002
Impairment charge - Investment in subsidiaries (Note 34.1)	11,000	–	–	–
Write-offs- Loans to and receivables from other customers	4,135	5,555	48,720	5,555
- Financial investments	–	19,536	–	19,536
	(307,564)	323,524	246,556	1,221,722

19Personnel Expenses

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Salaries and other benefits	752,623	721,522	1,900,124	1,711,401
Provision for staff retirement benefits (Note 19.1)	190,418	184,974	312,476	285,015
	943,041	906,496	2,212,600	1,996,416

19.1 Provision for Staff Retirement Benefits

19.1.1 Amount Recognised as Expense

19.1.1.1 Funded Pension Liability

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Current service cost	77,397	67,108	77,397	67,108
Interest on obligation	167,979	157,588	167,979	157,588
Expected return on pension assets	(177,105)	(162,026)	(177,105)	(162,026)
	68,271	62,670	68,271	62,670

19.1.1.2 Unfunded Pension Liability

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Current service cost	–	6,464	–	6,464
Interest on obligation	6,187	7,190	6,187	7,190
	6,187	13,654	6,187	13,654

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
19.1.1.3 Unfunded end of Service Gratuity Liability
Current service cost	8,221	7,191	23,359	16,409
Interest on obligation	4,392	3,709	10,965	7,666
Provision for gratuities computed on formula method	–	–	–	5,577
	12,613	10,900	34,324	29,652
Total defined benefit plans	87,071	87,224	108,782	105,976

19.1.1.4 Defined Contribution Plan

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Employer’s contribution to employees’ provident fund	86,123	81,458	169,192	148,766
Employer’s contribution to employees’ trust fund	17,224	16,292	34,502	30,273
Total defined contribution plans	103,347	97,750	203,694	179,039
Total expense recognised in the income statement	190,418	184,974	312,476	285,015

20Other Expenses

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Directors’ remuneration	45,398	48,711	87,502	74,350
Auditors’ remuneration
Audit fees and expenses	4,032	3,753	6,023	5,655
Audit related fees and expenses	3,039	7,343	4,984	8,815
Fees for non-audit services	455	936	479	1,203
Depreciation - Investment property	–	–	11,285	9,613
- Property, plant and equipment	116,673	113,066	268,614	247,036
Amortisation - Intangible assets	23,682	23,920	100,232	90,626
Expenses on litigation	–	–	179	151
Premises equipment and establishment expenses	219,355	222,692	823,994	730,124
Other overhead expenses	313,993	292,543	759,604	800,939
	726,627	712,964	2,062,896	1,968,512

21Value Added Tax (VAT) and Nation Building Tax on Financial Services

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
Financial services VAT - Current year	499,986	408,069	741,924	577,103
- Under provision for prior year	106	–	7,353	–
Nation building tax on financial services	85,152	24,937	134,795	24,937
	585,244	433,006	884,072	602,040

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000 Restated
22Tax Expenses
22.1 Composition
Current tax	449,555	569,318	841,269	852,351
Under/(Over) provisions in previous years	22,868	(877)	54,183	(46,818)
Deferred tax - origination and reversal of temporary differences	58,519	54,679	81,906	96,906
	530,942	623,120	977,358	902,439

22.2 Current Tax

Current tax is the amount of income tax payable in respect of the taxable profit for the financial year. Taxable profit is determined in accordance with the provisions of Inland Revenue Act No. 10 of 2006 as amended.

22.2.1 Reconciliation of Effective Tax Rate with Income Tax Rate

	BANK							GROUP
For the year ended 31 March	2015				2014			2015				2014
	%		LKR 000		%		LKR 000	%		LKR 000		%		LKR 000 Restated
Tax using 28% tax rate on profit before tax	28.00		1,055,962		28.00		898,960	28.00		1,516,472		28.00		1,152,886
Non-deductible expenses	7.16		270,050		5.24		168,393	9.65		522,895		8.76		360,584
Allowable deductions	(3.93)		(148,355)		(12.43)		(399,187)	(7.30)		(395,287)		(11.23)		(462,471)
Dividend income	(8.11)		(305,851)		(10.15)		(325,750)	(5.65)		(305,851)		(7.91)		(325,809)
Tax incentives	(10.32)		(389,159)		(2.87)		(92,238)	(7.53)		(407,895)		(3.40)		(140,065)
Taxable timing difference from capital allowances on assets	(0.88)		(33,092)		9.94		319,140	(0.61)		(33,100)		7.82		322,156
Tax losses from prior year	–		–		–		–	(0.01)		(507)		(0.29)		(12,029)
Taxed at different rates	–		–		–		–	0.08		4,237		(0.45)		(18,461)
Adjustments					–		–	(1.10)		(59,695)		(0.59)		(24,440)
Current tax expense	11.92		449,555		17.73		569,318	15.53		841,269		20.71		852,351

22.3 Deferred Tax

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is calculated using the tax rates expected to apply in the periods in which the assets will be realised or the liabilities settled. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets.

23Basic Earnings per Ordinary Share

Basic earnings per share of the Bank has been calculated by dividing the profit after income tax by the number of shares as at 31 March 2015.

Basic group earnings per share has been calculated by dividing the profit after income tax attributable to the equity holders of the Bank by the number of shares as at 31 March 2015.

	BANK		GROUP
For the year ended 31 March	2015	2014	2015	2014
Profit attributable to equity holders of the Bank – LKR 000	3,240,348	2,587,450	4,362,256	3,151,400
Number of ordinary shares	265,097,688	265,097,688	265,097,688	265,097,688
Basic earnings per ordinary share – LKR	12.22	9.76	16.46	11.89

As at 31 March 2015	Fair value through profit or loss mandatory LKR 000	Fair value held-for- trading LKR 000	Fair value through other comprehensive income LKR 000	Amortised cost LKR 000	Held-to- maturity LKR 000	Total LKR 000
24Analysis of Financial Instruments by Measurement Basis
24.1 Bank
Financial Assets
Cash and cash equivalents	–	–	–	110,576	–	110,576
Placements with banks	–	–	–	716,622	–	716,622
Derivative assets held-for-risk management	29,335	–	–	–	–	29,335
Other financial assets held-for-trading	–	1,469,166	–	–	–	1,469,166
Loans to and receivables from banks	–	–	–	484,067	–	484,067
Loans to and receivables from other customers	–	–	–	73,448,705	–	73,448,705
Financial investments	–	–	27,823,496	–	2,085,921	29,909,417
Government grant receivable	483,727	–	–	–	–	483,727
	513,062	1,469,166	27,823,496	74,759,970	2,085,921	106,651,615
Financial Liabilities
Due to banks	–	–	–	1,928,867	–	1,928,867
Derivative liabilities held-for-risk management	1,737	–	–	–	–	1,737
Due to other customers	–	–	–	22,484,652	–	22,484,652
Other borrowing	–	–	–	24,361,797	–	24,361,797
Debt securities issued	–	–	–	19,445,924	–	19,445,924
Subordinated term debt	–	–	–	609,373	–	609,373
	1,737	–	–	68,830,613	–	68,832,350

As at 31 March 2014	Fair value through profit or loss mandatory LKR 000	Fair value held-for- trading LKR 000	Fair value through other comprehensive income LKR 000	Amortised cost LKR 000	Held-to- maturity LKR 000	Total LKR 000
24.2 Bank
Financial Assets
Cash and cash equivalents	–	–	–	545,388	–	545,388
Placements with banks	–	–	–	2,681,779	–	2,681,779
Derivative assets held-for-risk management	1,630	–	–	–	–	1,630
Other financial assets held-for-trading	–	1,017,980	–	–	–	1,017,980
Loans to and receivables from banks	–	–	–	1,233,617	–	1,233,617
Loans to and receivables from other customers	–	–	–	61,341,469	–	61,341,469
Financial investments	–	–	25,073,488	–	535,958	25,609,446
Government grant receivable	276,878	–	–	–	–	276,878
	278,508	1,017,980	25,073,488	65,802,253	535,958	92,708,187
Financial Liabilities
Due to banks	–	–	–	5,153,754	–	5,153,754
Derivative liabilities held-for-risk management	55,609	–	–	–	–	55,609
Due to other customers	–	–	–	16,630,363	–	16,630,363
Other borrowing	–	–	–	25,434,080	–	25,434,080
Debt securities issued	–	–	–	14,009,017	–	14,009,017
Subordinated term debt	–	–	–	609,373	–	609,373
	55,609	–	–	61,836,587	–	61,892,196

As at 31 March 2015	Fair value through profit or loss mandatory LKR 000	Fair value held-for- trading LKR 000	Fair value through other comprehensive income LKR 000	Amortised cost LKR 000	Held-to- maturity LKR 000	Total LKR 000
24.3 Group
Financial Assets
Cash and cash equivalents	–	–	–	4,060,820	–	4,060,820
Balances with Central Banks	–	–	–	2,616,406	–	2,616,406
Placements with banks	–	–	–	1,324,892	–	1,324,892
Derivative assets held-for-risk management	89,861	–	–	–	–	89,861
Other financial assets held-for-trading	–	1,469,166	–	–	–	1,469,166
Loans to and receivables from banks	–	–	–	3,563,647	–	3,563,647
Loans to and receivables from other customers	–	–	–	135,322,723	–	135,322,723
Financial investments	–	–	45,826,878	–	10,872,287	56,699,165
Government grant - receivable	483,727	–	–	–	–	483,727
	573,588	1,469,166	45,826,878	146,888,488	10,872,287	205,630,407
Financial Liabilities
Due to banks	–	–	–	5,972,567	–	5,972,567
Derivative liabilities held-for-risk management	37,153	–	–	–	–	37,153
Due to other customers	–	–	–	92,711,793	–	92,711,793
Other borrowing	–	–	–	38,846,172	–	38,846,172
Debt securities issued	–	–	–	19,445,924	–	19,445,924
Subordinated term debt	–	–	–	1,609,664	–	1,609,664
	37,153	–		158,586,120	–	158,623,273

As at 31 March 2014 (Restated)	Fair value through profit or loss mandatory LKR 000	Fair value held-for- trading LKR 000	Fair value through other comprehensive income LKR 000	Amortised cost LKR 000	Held-to- maturity LKR 000	Total LKR 000
24.4 Group
Financial Assets
Cash and cash equivalents	–	–	–	2,933,360	–	2,933,360
Balances with Central Banks	–	–	–	2,870,492	–	2,870,492
Placements with banks	–	–	–	3,138,181	–	3,138,181
Derivative assets held-for-risk management	183,892	–	–	–	–	183,892
Other financial assets held-for-trading	–	1,971,916	–	–	–	1,971,916
Loans to and receivables from banks	–	–	–	5,547,821	–	5,547,821
Loans to and receivables from other customers	–	–	–	112,167,194	–	112,167,194
Financial investments	–	–	39,901,586	–	1,073,703	40,975,289
Government grant receivable	276,878	–	–	–	–	276,878
	460,770	1,971,916	39,901,586	126,657,048	1,073,703	170,065,023
Financial Liabilities
Due to banks	–	–	–	6,673,576	–	6,673,576
Derivative liabilities held-for-risk management	227,994	–	–	–	–	227,994
Due to other customers	–	–	–	80,917,356	–	80,917,356
Other borrowings	–	–	–	27,782,494	–	27,782,494
Debt securities issued	–	–	–	14,009,017	–	14,009,017
Subordinated term debt	–	–	–	1,609,674	–	1,609,674
	227,994	–	–	130,992,117	–	131,220,111

As at 31 March 2013 (Restated)	Fair value through profit or loss mandatory LKR 000	Fair value held-for- trading LKR 000	Fair value through other comprehensive income LKR 000	Amortised cost LKR 000	Held-to- maturity LKR 000	Total LKR 000
24.4 Group -
Financial Assets
Cash and cash equivalents	–	–	–	3,680,095	–	3,976,892
Balances with Central Banks	–	–	–	2,620,510	–	2,620,790
Placements with banks	–	–	–	7,541,088	–	7,541,088
Derivative assets held-for-risk management	119,642	–	–	–	–	119,642
Other financial assets held-for-trading	–	403,716	–	–	–	403,716
Loans to and receivables from banks	–	–	–	3,847,861	–	3,847,861
Loans to and receivables from other customers	–	–	–	98,629,535	–	98,629,535
Financial investments	–	–	27,573,595	–	75,022	27,648,617
	119,642	403,716	27,573,595	116,319,089	75,022	144,788,141
Financial Liabilities
Due to banks	–	–	–	8,036,735	–	8,036,735
Derivative liabilities held-for-risk management	307,094	–	–	–	–	307,094
Due to other customers	–	–	–	62,878,401	–	62,750,266
Other borrowing	–	–	–	35,807,580	–	37,530,202
Debt securities issued	–	–	–	558,257	–	558,257
Subordinated term debt	–	–	–	1,609,690	–	1,609,690
	307,094	–	–	100,853,928	–	102,755,509

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
25Cash and Cash Equivalents
Cash in hand	378	511	1,752,387	1,747,690	2,114,750
Balances with banks	110,198	544,877	2,308,433	1,185,670	1,396,600
Money at call and short notice	–	–	–	–	168,745
	110,576	545,388	4,060,820	2,933,360	3,680,095

	GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
26Balances with Central Bank
Statutory balances with Central Bank of Sri Lanka	2,616,406	2,870,492	2,620,510

This requirement does not apply to DFCC Bank PLC and applies only to DFCC Vardhana Bank PLC.

As required by the provisions of Section 93 of Monetary Law Act, a minimum cash balance is maintained with the Central Bank of Sri Lanka. The minimum cash reserve requirement on rupee deposit liabilities is prescribed as a percentage of Rupee deposit liabilities. The percentage is varied from time to time. Applicable minimum rate was 6%. There are no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposit liabilities in the Domestic Banking Unit.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 00 Restated	01.04.2013 LKR 00 Restated
27Placements with Banks
Fixed deposits	716,622	2,681,779	1,324,892	3,138,181	7,541,088

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.201 LKR 000	31.03.2014 LKR 000
28Derivatives Held-for-Risk Management
28.1 Assets
Forward foreign exchange contracts - Currency Swaps	28,672	1,518	83,271	154,112
- Others	663	112	6,590	29,780
	29,335	1,630	89,861	183,892
28.2 Liabilities
Forward foreign exchange contracts - Currency Swaps	124	54,907	29,204	198,928
- Others	1,613	702	7,949	29,066
	1,737	55,609	37,153	227,994

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
29Other Financial Assets held-for-Trading
Government of Sri Lanka Treasury Bills	–	12,546	–	966,482	403,716
Government of Sri Lanka Treasury Bonds	1,469,166	1,005,434	1,469,166	1,005,434	–
	1,469,166	1,017,980	1,469,166	1,971,916	403,716

These financial assets held for trading are carried at fair value.

30Loans to and Receivables from Banks

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Gross loans and receivables	484,067	1,233,617	3,563,647	5,547,821	3,847,861
Allowance for impairment	–	–	–	–	–
Net loans and receivables	484,067	1,233,617	3,563,647	5,547,821	3,847,861

30.1 Analysis

30.1.1 By Product

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Securities purchased under resale agreements	–	–	281,234	2,193,864	213,724
Refinanced Loans - Plantation development project	314,517	946,446	314,517	946,446	1,279,047
KFW* DFCC (V) SME in the North and the East	169,550	287,171	169,550	287,171	410,667
Sri Lanka Development Bonds	–	–	2,798,346	2,120,340	1,944,423
Gross loans and receivables	484,067	1,233,617	3,563,647	5,547,821	3,847,861

* KFW - Kreditanstalt Fur Wiederaufbau

30.1.2 By Currency

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Sri Lankan Rupee	484,067	1,233,617	765,301	3,427,481	1,903,438
United States Dollar	–	–	2,798,346	2,120,340	1,944,423
Gross loans and receivables	484,067	1,233,617	3,563,647	5,547,821	3,847,861

31Loans to and Receivables from Other Customers

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Gross loans and receivables (Note 31.1.1)	76,350,160	64,733,749	141,332,579	119,058,962	104,626,591
Specific allowance for impairment (Note 31.2.1)	(1,932,635)	(1,486,838)	(4,001,868)	(3,794,550)	(3,229,925)
Collective allowance for impairment (Note 31.2.2)	(968,820)	(1,905,442)	(2,007,988)	(3,097,218)	(2,767,131)
Net loans and receivables	73,448,705	61,341,469	135,322,723	112,167,194	98,629,535

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
31.1 Analysis
31.1.1 By Product
Overdrafts	–	–	20,426,827	19,506,108	15,677,997
Trade finance	–	–	15,317,135	13,099,299	10,299,298
Lease rentals receivable (Note 31.1.1.1)	8,250,091	8,109,397	10,962,838	9,611,637	10,722,720
Credit cards	–	–	172,537	114,956	62,118
Pawning	–	–	1,720,937	3,426,803	3,625,272
Staff loans	583,621	533,093	1,028,735	871,123	690,177
Term loans	63,282,363	51,382,876	86,715,802	66,894,773	57,935,547
Commercial papers and asset back notes	2,385,756	2,321,850	2,385,756	2,321,850	1,079,531
Debenture loans	577,347	886,132	577,347	886,132	1,096,741
Preference shares unquoted	1,270,982	1,500,401	1,270,982	1,500,401	1,792,405
Securities purchased under resale agreements	–	–	753,683	825,880	1,644,785
Gross loans and receivables	76,350,160	64,733,749	141,332,579	119,058,962	104,626,591
31.1.1.1 Lease Rentals Receivable
Gross investment in leases:
Lease rentals receivable
- within one year	4,062,394	4,584,057	5,239,805	5,286,947	5,176,069
- one to five years	5,733,058	5,209,795	7,879,730	6,406,795	8,046,570
	9,795,452	9,793,852	13,119,535	11,693,742	13,222,639
Less: Deposit of rentals	7,297	13,894	15,272	19,934	25,411
Unearned income on rentals receivable
- within one year	796,299	962,467	1,079,721	1,154,965	1,251,059
- one to five years	741,765	708,094	1,061,704	907,206	1,223,449
	8,250,091	8,109,397	10,962,838	9,611,637	10,722,720
31.1.2 By Currency
Sri Lankan Rupee	70,819,394	60,620,392	128,625,376	108,980,757	96,447,303
United States Dollar	5,530,766	4,113,357	12,257,859	9,682,794	7,857,067
Great Britain Pound	–	–	324,472	305,380	201,688
Australian Dollar	–	–	14,688	19,706	32,715
Euro	–	–	110,184	70,325	87,818
Gross loans and receivables	76,350,160	64,733,749	141,332,579	119,058,962	104,626,591

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
31.1.3 By Industry
Agriculture and fishing	3,738,938	2,653,397	12,504,037	11,340,488	8,954,768
Manufacturing	21,971,033	18,229,030	36,744,877	30,274,534	28,744,509
Tourism	6,911,685	4,931,548	8,560,968	5,864,832	4,829,044
Transport	3,315,608	3,382,023	4,939,098	4,410,181	4,280,827
Construction	9,145,886	7,811,247	13,193,926	11,472,648	8,993,588
Traders	11,774,944	10,983,060	30,172,954	25,007,570	21,660,919
Financial and business services	6,347,630	7,298,096	7,349,374	8,173,064	7,051,910
Infrastructure	6,973,946	4,330,762	8,464,095	6,345,743	6,155,533
Other services	5,788,567	4,750,608	9,644,160	6,928,916	5,603,459
Consumer durables	–	–	7,705,195	7,062,375	6,209,668
New economy	72,782	79,025	991,070	1,067,778	803,573
Others	309,142	284,953	1,062,825	1,110,833	1,338,793
Gross loans and receivables	76,350,160	64,733,749	141,332,579	119,058,962	104,626,591

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
31.2 Movement in Specific and Collective Allowance for Impairment
31.2.1 Specific Allowance for Impairment
Balance as at 1 April	1,486,838	1,477,986	3,794,550	3,229,925
Charge to income statement	556,493	157,036	1,143,903	714,762
Effect of foreign currency movements	–	–	1,884	5,563
Effect of discounting	–	(2,456)	–	(2,456)
Write-off loans & receivables	(110,696)	(145,728)	(938,469)	(153,244)
Balance on 31 March	1,932,635	1,486,838	4,001,868	3,794,550
31.2.2 Collective Allowance for Impairment
Balance as at 1 April	1,905,442	1,868,892	3,097,218	2,767,131
Charge/(Write-back) to income statement	(887,547)	135,395	(957,842)	475,867
Effect of foreign currency movements	–	–	(53)	718
Transfer to dues on terminated leases	(17,016)	(15,460)	(17,016)	(15,460)
Write-off of loans & receivables	(32,059)	(83,385)	(114,319)	(131,038)
Balance on 31 March	968,820	1,905,442	2,007,988	3,097,218
Total	2,901,455	3,392,280	6,009,856	6,891,768

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
32Financial Investments – Available-for-Sale
Government of Sri Lanka Treasury Bills	4,051,126	4,659,319	20,030,203	18,674,580	10,846,584
Government of Sri Lanka Treasury Bonds	1,497,382	2,490,393	3,516,272	3,297,815	19,143
Equity securities
Quoted ordinary shares (Note 32.1)	21,136,695	17,261,361	21,136,695	17,261,361	16,038,566
Unquoted ordinary shares (Note 32.2)	141,959	141,959	147,374	147,374	149,874
Preference shares (Note 32.3)	500	500	500	500	500
Quoted units in Unit Trusts (Note 32.4)	190,153	218,525	190,153	218,525	198,680
Unquoted units in Unit Trusts (Note 32.5)	805,681	301,431	805,681	301,431	320,248
	27,823,496	25,073,488	45,826,878	39,901,586	27,573,595

All the financial investments are carried at fair value except for unquoted equity securities and irredeemable preference shares whose fair value cannot be reliably measured, is carried at cost.

As at	31.03.2015			31.03.2014
	Number of ordinary shares	Cost* LKR 000	Fair value LKR 000	Number of ordinary Shares	Cost* LKR 000	Fair value LKR 000
32.1 Quoted Ordinary Shares
Banks, Finance & Insurance
Commercial Bank of Ceylon PLC – voting	119,806,122	3,074,609	19,887,816	117,951,857	2,862,295	14,390,127
Commercial Bank of Ceylon PLC – non-voting	224,143	17,434	29,408	219,963	17,039	21,336
Nations Trust Bank PLC	–	–	–	22,865,356	1,329,712	1,483,962
National Development Bank PLC	2,000,000	352,369	497,000	2,000,000	352,369	358,000
		3,444,412	20,414,224		4,561,415	16,253,425
Beverages, Food & Tobacco
Ceylon Tobacco Company PLC	59,532	3,360	59,472	150,967	8,520	159,421
Distilleries Company of Sri Lanka PLC	417,485	69,829	100,405	1,087,200	181,846	220,702
		73,189	159,877		190,366	380,123
Chemicals and Pharmaceuticals
Chemical Industries (Colombo) PLC – voting	247,900	14,131	18,840	247,900	14,131	11,279
Chemical Industries (Colombo) PLC – non-voting	389,400	15,577	22,391	389,400	15,577	14,525
		29,708	41,231		29,708	25,804
Construction and Engineering
Access Engineering PLC	400,000	8,010	7,680	400,000	8,010	9,000
Colombo Dockyard PLC	160,000	22,645	26,480	200,000	28,306	34,640
Millennium Housing Developers PLC		–	–	1,500,000	2,500	9,600
		30,655	34,160		38,816	53,240
Diversified Holdings
Carson Cumberbatch PLC	46,967	13,635	17,847	46,967	13,635	17,143
Hayleys PLC	7,333	2,225	2,200	7,333	2,225	2,090
Hemas Holdings PLC	496,560	16,297	36,994	620,700	20,371	23,462
John Keells Holdings PLC	126,258	10,080	25,138	157,823	12,600	35,905
John Keells Holdings PLC – Warrants	14,028	–	374	14,028	–	974
Richard Pieris & Co PLC	1,000,000	8,234	7,300	1,000,000	8,234	6,600
		50,471	89,853		57,065	86,174
Healthcare
Ceylon Hospitals PLC – voting	100,000	2,306	11,500	100,000	2,306	11,500
Ceylon Hospitals PLC – non-voting	240,000	4,167	18,024	300,000	5,208	23,100
		6,473	29,524		7,514	34,600
Hotels & Travels
Dolphin Hotels PLC	400,000	3,857	22,760	500,000	4,822	21,100
		3,857	22,760		4,822	21,100
Investment Trusts
Ceylon Guardian Investment Trust PLC	150,688	5,616	27,727	277,000	10,324	49,306
Ceylon Investment PLC	485,592	15,587	44,189	765,000	24,556	56,993
		21,203	71,916		34,880	106,299
Telecommunications
Dialog Axiata PLC	2,050,000	18,860	21,730	2,050,000	18,860	18,450
Manufacturing
Ceylon Grain Elevators PLC	48,997	1,297	1,862	48,997	1,297	1,715
Chevron Lubricants Lanka PLC	330,814	11,020	130,010	588,000	19,588	155,408
Piramal Glass Ceylon PLC	7,500,000	21,036	42,750	7,500,000	21,036	25,500
Royal Ceramics Lanka PLC	139,800	16,996	15,797	139,800	16,996	11,044
Tokyo Cement Company (Lanka) PLC – non-voting	1,127,096	21,040	42,041	2,471,700	46,142	71,679
		71,389	232,460		105,059	265,346
Power and Energy
Vallibel Power Erathna PLC	2,400,000	6,400	18,960	3,000,000	8,000	16,800
		6,400	18,960		8,000	16,800
Total Quoted Ordinary Shares – Bank/Group		3,756,617	21,136,695		5,056,505	17,261,361

Sector classification and market value per share are based on official valuations list published by Colombo Stock Exchange.

* Cost is reduced by write-off of diminution in value other than temporary in respect of Investments.

As at	31.03.2015		31.03.2014
	Number of ordinary shares	Cost* LKR 000	Number of ordinary Shares	Cost* LKR 000
32.2 Unquoted Ordinary Shares
Credit Information Bureau of Sri Lanka	8,884	888	8,884	888
Durdans Medical & Surgical Hospital (Pvt) Limited	1,273,469	16,029	1,273,469	16,029
Fitch Ratings Lanka Limited	62,500	625	62,500	625
Plastipak Lanka Limited	240,000	2,400	240,000	2,400
Sampath Centre Limited	1,000,000	10,000	1,000,000	10,000
Samson Reclaim Rubbers (Pvt) Limited	116,700	2,334	116,700	2,334
Sinwa Holdings Limited	460,000	9,200	460,000	9,200
Sun Tan Beach Resorts (Pvt) Limited	9,059,013	90,433	9,059,013	90,433
The Video Team (Pvt) Limited	30,000	300	30,000	300
Wayamba Plantations (Pvt) Limited	2,750,000	9,750	2,750,000	9,750
Total unquoted ordinary shares - Bank		141,959		141,959
Investments in unquoted ordinary shares by subsidiaries (Note 32.2.1)		5,415		5,415
Total unquoted ordinary shares - Group		147,374		147,374

* Cost is reduced by write-off of diminution in value other than temporary in respect of Investments.

As at	31.03.2015		31.03.2014
	Number of ordinary shares	Cost* LKR 000	Number of ordinary Shares	Cost* LKR 000
32.2.1 Investments in Unquoted Ordinary Shares by Subsidiaries
Credit Information Bureau of Sri Lanka	300	30	300	30
Lankaclear (Pvt) Limited	100,000	1,000	100,000	1,000
Lanka Financial Services Bureau Limited	100,000	1,000	100,000	1,000
Society for Worldwide Interbank Financial Telecommunication	6	3,385	6	3,385
		5,415		5,415

As at		31.03.2015			31.03.2014
	Number of ordinary shares	Cost LKR 000	Fair value LKR 000	Number of ordinary shares	Cost LKR 000	Fair value LKR 000
32.3 Unquoted Irredeemable Preference Shares
Arpico Finance Company PLC	50,000	500	500	50,000	500	500
Total investments in unquoted irredeemable preference shares – Bank/Group		500	500		500	500
32.4 Quoted Units in Unit Trusts
NAMAL Acuity Value Fund	2,112,810	106,070	190,153	3,018,300	151,528	218,525
Total investments in quoted units – Bank/Group		106,070	190,153		151,528	218,525
32.5 Unquoted Units in Unit Trusts
NAMAL Growth Fund	155,000	251,539	266,465	155,000	1,539	16,647
NAMAL Income Fund	14,012,129	143,059	169,687	14,012,129	143,059	164,222
NAMAL Money Market Fund	10,030,193	107,391	111,723	10,030,193	101,241	105,316
National Equity Fund	500,000	5,313	16,315	500,000	5,313	15,246
Guardian Acuity Equity Fund	9,052,504	150,000	147,917	–	–	–
JB Vantage Value Equity Fund	5,224,660	100,000	93,574	–	–	–
Total investments in unquoted Unit Trusts – Bank/Group		757,302	805,681		251,152	301,431

	Ordinary Shares		Preference	Unit Trusts		Total
As at	Quoted LKR 000	Unquoted LKR 000	Unquoted LKR 000	Quoted LKR 000	Unquoted LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
32.6 Equity Securities
32.6.1 Composition*
32.6.1.1 Bank
Performing investments	21,136,695	39,076	500	190,153	297,725	21,664,149	17,804,546	16,519,937
Non-performing investments	–	102,883	–	–	507,956	610,839	119,230	182,516
	21,136,695	141,959	500	190,153	805,681	22,274,988	17,923,776	16,702,453
32.6.1.2 Group
Performing investments	21,136,695	41,106	500	190,153	297,725	21,666,179	17,805,576	16,525,352
Non-performing investments	–	106,268	–	–	507,956	614,224	123,615	182,516
	21,136,695	147,374	500	190,153	805,681	22,280,403	17,929,191	16,707,868

* Disclosure as per the Direction on the prudential norms for classification,valuation and operation of the Bank’s investment portfolio.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
33Financial Investments – Held-to-Maturity
Quoted debentures (Note 33.1)	2,085,921	535,958	3,124,755	1,073,703	75,022
Sri Lanka Government Securities
Treasury bills	–	–	6,977,913	–	–
Treasury bonds	–	–	769,619	–	–
	2,085,921	535,958	10,872,287	1,073,703	75,022

As at	31.03.2015		31.03.2014
	Number of debentures	Cost of investment LKR 000	Number of debentures	Cost of investment LKR 000
33.1 Quoted Debentures
Abans PLC	2,500,000	258,631	2,500,000	258,784
Alliance Finance Company PLC	4,221,693	431,682	–	–
Central Finance Company PLC – Type A	134,400	13,864	134,400	13,871
Central Finance Company PLC – Type C	1,793,900	185,263	1,793,900	185,362
Lion Brewery (Ceylon) PLC	1,412,500	144,712	–	–
People’s Leasing & Finance PLC	748,500	77,878	748,500	77,941
People’s Leasing & Finance PLC – Type B	328,800	33,633	–	–
Hemas Holdings PLC	827,900	87,330	–	–
Richard Pieris and Company PLC	1,201,000	126,536	–	–
Singer (Sri Lanka) PLC	1,267,000	129,200	–	–
Vallibel Finance PLC	3,500,000	350,099	–	–
Softlogic Finance PLC	418,200	42,851	–	–
Siyapatha Finance Ltd	2,000,000	204,242	–	–
Total investments in quoted debentures – Bank		2,085,921		535,958
Investments in quoted debentures by Subsidiaries:
People’s Leasing and Finance PLC	2,249,000	259,528	2,000,000	225,599
Lion Brewery (Ceylon) PLC	71,000	73,347	71,000	73,347
Alliance Finance Company PLC	1,500,000	161,654	1,500,000	155,781
HDFC Bank	532,200	55,128	532,200	54,645
Central Finance Company PLC	281,800	30,004	281,800	28,373
Lanka Orix Leasing Company PLC	3,000,000	302,704	–	–
Singer (Sri Lanka) PLC	1,266,900	126,938	–	–
Softlogic Finance PLC	288,300	29,531	–	–
		1,038,834		537,745
Total investments in quoted debentures – Group		3,124,755		1,073,703

	DFCC Consulting (Pvt) Limited Ownership 100% LKR 000	DFCC Vardhana Bank PLC Ownership 99.2% LKR 000	Lanka Industrial Estates Limited Ownership 51.2% LKR 000	Synapsys Limited Ownership 100% LKR 000	BANK
					31.03.2015 LKR 000	31.03.2014 LKR 000
34Investments in Subsidiaries
Balance at beginning	5,000	5,823,028	97,036	70,000	5,995,064	3,782,453
Investment in rights issue	–	–	–	–	–	2,212,611
Balance before impairment	5,000	5,823,028	97,036	70,000	5,995,064	5,995,064
Less: Allowance for impairment (Note 34.1)	–	–	–	37,500	37,500	26,500
Balance net of impairment	5,000	5,823,028	97,036	32,500	5,957,564	5,968,564
34.1 Movement in Impairment Allowance
Balance at beginning					26,500	26,500
Charge to income statement					11,000	–
Balance on 31 March					37,500	26,500

34.2 Non-Controling interest (NCI) in Subsidiaries

	Percentage of Ownership Interest held by NCI	Percentage of Voting Rights held by NCI	Share of Total Comprehensive Income of NCI for the Year Ended 31 March		NCI as at 31 March		Dividends Paid to NCI year ended 31 March
	2015 %	2015 %	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000
DFCC Vardhana Bank PLC	0.83	0.83	8,777	6,088	73,217	65,617	1,176	965
Lanka Industrial Estates Limited	48.84	48.84	67,153	58,136	280,665	268,111	54,600	54,600
			75,930	64,224	353,882	333,728	55,776	55,565

34.3 Summarised Financial Information of Subsidiaries

Lanka Industrial Estates Limited

As at	31.03.2015 LKR 000	31.03.2014 LKR 000
Assets	674,782	644,997
Liabilities	100,169	96,085
Equity	574,613	548,912
For the year ended	31.03.2015 LKR 000	31.03.2014 LKR 000
Revenue	210,734	189,203
Profit after tax	137,314	119,042
Other comprehensive income	170	(16)
Total comprehensive income	137,484	119,026

Summarised Financial Information of DFCC Vardhana Bank PLC is not given since NCI is not material.

	BANK		GROUP
For the year ended 31 March	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 00
35Investments in Associate (Unquoted)
National Asset Management Limited (Ownership 30%)
Balance at beginning	35,270	35,270	54,164	53,467
Share of profit after tax	–	–	14,967	6,334
Share of other comprehensive income	–	–	829	363
Dividend received – Elimination on consolidation	–	–	(6,000)	(6,000)
Balance on 31 March	35,270	35,270	63,960	54,164

As at	31.03.2015 LKR 000	31.03.2014 LKR 000
35.1 Summarised Financial Information of Associate
National Asset Management Limited
Assets	247,641	191,398
Liabilities	34,494	10,905
Equity	213,147	180,493
For the year ended	31.03.2015 LKR 000	31.03.2014 LKR 000
Revenue	141,886	89,928
Profit after tax	49,890	20,796
Other comprehensive income	2,763	1,527
Total comprehensive income	52,653	22,323

As at	31.03.2015	31.03.2014
	Cost of Investment LKR 000	Cost of Investment LKR 000
36Investments in Joint Venture (unquoted)
36.1 Investments in joint venture - Bank
Acuity Partners (Pvt) Limited (ownership 50%)	655,000	655,000

As at	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated
36.2 Investment in Joint Venture - Group
Share of identifiable assets and liabilities of joint venture as at 1 April	1,159,599	1,032,315
Share of unrealised profit on disposal of investments	(184,688)	(184,688)
Balance at beginning	974,911	847,627
Share of profit net of tax	138,303	90,632
Share of other comprehensive income	8,378	14,010
Change in holding - through subsidiary of joint venture	28,632	43,666
Dividend received during the year	(26,199)	(21,024)
Group’s share of net assets as at 31 March	1,124,025	974,911

36.3 Composition of Assets and Liabilities in the Investment in Joint Venture as at 01 April 2013

The Group adopted Sri Lanka Accounting Standard (SLFRS 11) - ‘Joint arrangements’ with effect from 01 April 2014. Accordingly, the Group changed its method of accounting for the investment in joint venture from proportionate consolidation to equity method. In accordance with the transitional provisions set out in SLFRS 11 the Group applied the standard with retrospective effect. The composition of the assets and liabilities within the investment in joint venture as at 01 April 2013 is given below:

	LKR 000
Cash and cash equivalents	349,933
Statutory deposit with Central Bank of Sri Lanka	280
Placements with banks	75,000
Other financial assets held-for-trading	189,692
Financial investments – Available-for-sale	86,069
Financial investments – Held-to-maturity	82,941
Non-current assets held-for-sale	2,875
Loans and receivable to banks	1,811,384
Loans and advances	20,409
Investments in associate companies	361,784
Property, plant and equipment	29,863
Intangible assets	2,031
Other assets	338,780
Total assets (A)	3,351,041
Due to banks	254,188
Borrowings	1,747,965
Deferred tax liability	246
Other liabilities	113,533
Total liabilities (B)	2,115,932
Non-controlling interest (C)	202,794
Share of identifiable assets and liabilities of joint venture as at 01 April 2013 (A - B - C)	1,032,315

36.4 Restatement due to the Change in Accounting Policy

	Total LKR 000
Profit for the year ended 31 March 2014 as previously stated	3,249,675
Adjustment for the profit attributable to non-controlling interest due to change in accounting policy	(34,662)
Restated Profit for the year ended 31 March 2014	3,215,013

36.5 Summarised Financial Information of Joint Venture - Acuity Partners (Pvt) Limited

For the year ended	31.03.2015 LKR 000	31.03.2014 LKR 000	01.04.2013 LKR 000
Revenue	916,313	583,650	448,481
Depreciation	30,958	36,771	24,095
Income tax expense	70,658	96,435	22,515
Profit after tax	448,246	241,982	95,662
Other comprehensive income	19,345	40,699	(8,420)
Total comprehensive income	467,591	282,681	87,242

As at	31.03.2015 LKR 000	31.03.2014 LKR 000	01.04.2013 LKR 000
Current assets	7,000,804	5,727,237	5,436,304
Non-current assets	3,299,730	2,143,016	1,513,627
Current liabilities	5,915,668	4,414,520	3,720,387
Non-current liabilities	575,605	514,691	716,145

		BANK
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
37Due from Subsidiaries
DFCC Consulting (Pvt) Limited	–	4
DFCC Vardhana Bank PLC	122,712	37,970
Synapsys Limited	12,379	5,054
	135,091	43,028

	GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
38Investment Properties
Cost
Balance at beginning	280,467	257,058	230,638
Acquisitions	14,074	30,489	56,664
Disposals	–	(7,080)	(22,807)
Transfers	–	–	(7,437)
Balance on 31 March	294,541	280,467	257,058
Less: Accumulated Depreciation
Balance at beginning	97,186	87,573	82,657
Charge for the year	11,285	9,613	8,834
Transfers	–	–	(3,918)
Balance on 31 March	108,471	97,186	87,573
Net book value on 31 March	186,070	183,281	169,485

As at 31 March 2015	Buildings Sq. Ft.	Extent of land Perches*	Cost LKR 000	Accumulated depreciation/ impairment LKR 000	Net Book value LKR 000	Fair value LKR 000
38.1 List of Investment Properties
Pattiwila Road, Sapugaskanda, Makola	280,000	20,000	294,541	108,471	186,070	1,096,558

The fair value of investment property as at 31 March 2015 situated at Pattiwila Road, Sapugaskanda, Makola was based on market valuation carried out in April 2014 by Mr P B Kalugalagedara Chartered Valuer fellow member of Institute of valuers (Sri Lanka).

Rental income from investment property of Group for 2015, LKR 173 million (2014 - LKR 161 million)

Operating expenses on investment property of Group for 2015 - LKR 18 million (2014 - LKR 17 million)

	Land & buildings LKR 000	Office equipment LKR 000	Furniture & fittings LKR 000	Motor vehicles LKR 000	Total LKR 000
39Property, Plant and Equipment
39.1 Composition: Bank
Cost as at 31.03.2014	299,516	614,746	241,773	239,090	1,395,125
Acquisitions	94	12,852	1,971	23	14,940
Less: Disposals	–	129	–	–	129
Cost as at 31.03.2015	299,610	627,469	243,744	239,113	1,409,936
Accumulated depreciation as at 31.03.2014	168,751	489,396	135,966	147,997	942,110
Depreciation for the year	12,399	43,172	22,801	38,301	116,673
Less: Disposals	–	54	–	–	54
Accumulated depreciation as at 31.03.2015	181,150	532,514	158,767	186,298	1,058,729
Net book value as at 31.03.2015	118,460	94,955	84,977	52,815	351,207
Net book value as at 31.03.2014	130,765	125,350	105,807	91,093	453,015

As at 31 March 2015	Buildings Sq. Ft.	Extent of land Perches*	Cost LKR 000	Accumulated depreciatio impairment LKR 000	Net Book value LKR 000
39.1.1 List of Freehold Land and Buildings
73/5, Galle Road, Colombo 3	57,200	104.45	82,268	60,897	21,371
5, Deva Veediya, Kandy	4,600	12.54	16,195	6,927	9,268
259/30, Kandy Road, Bambarakelle, Nuwara-Eliya	–	28.72	7,279	–	7,279
73, W A D Ramanayake Mawatha, Colombo 2	21,400	45.00	191,268	113,326	77,942
4 A, 4th Cross Lane, Borupana, Ratmalana	–	20.00	2,600	–	2,600
			299,610	181,150	118,460

* 1 perch = 25.2929m²; 1 sq ft = 0.0929m²

	LKR million	Date of valuation
39.1.2 Market Value of Properties
73/5, Galle Road, Colombo 3	946	31.03.2014
5, Deva Veediya, Kandy	72	31.03.2014
73, W A D Ramanayake Mawatha, Colombo 2	440	31.03.2014
4A, 4th Cross Lane, Borupana, Ratmalana	10	31.03.2014

(Valued by Mr A A M Fathihu - Former Government Chief Valuer)

	Land & buildings LKR 000	Office equipment LKR 000	Furniture & fittings LKR 000	Motor vehicles LKR 000	Capital work- in-progress LKR 000	Total LKR 000
39.2 Composition: Group
Cost as at 01.04.2013 as previously stated	519,351	1,192,966	677,447	337,160	–	2,726,924
Impact on change in accounting policy – Investment in Joint Venture	(5,133)	(31,172)	(28,720)	(14,475)	–	(79,500)
Cost as at 01.04.2013 - Restated	514,218	1,161,794	648,727	322,685	–	2,647,424
Acquisitions	19,440	206,967	57,754	31,448	26,482	342,091
Less: Disposals/write-off	2,421	92,689	29,688	37,527	–	162,325
Cost as at 31.03.2014	531,237	1,276,072	676,793	316,606	26,482	2,827,190
Acquisitions	36,828	97,409	42,853	1,144	53,859	232,093
Less: Disposals	–	1,762	433	967	–	3,162
Cost as at 31.03.2015	568,065	1,371,719	719,213	316,783	80,341	3,056,121
Accumulated depreciation as at 01.04.2013 as previously stated	264,150	917,138	330,694	187,287		1,699,269
Impact on change in accounting policy – Investment in Joint Venture	–	(21,020)	(22,663)	(5,954)	–	(49,637)
Accumulated depreciation as at 01.04.2013 - Restated	264,150	896,118	308,031	181,333	–	1,649,632
Depreciation for the year	20,422	113,355	64,129	49,130	–	247,036
Less: Disposals/write-off	2,421	92,483	28,699	35,063	–	158,666
Accumulated depreciation as at 31.03.2014	282,151	916,990	343,461	195,400	–	1,738,002
Depreciation for the year	21,192	126,907	68,602	51,913	–	268,614
Less: Disposals	–	1,687	176	564	–	2,427
Accumulated depreciation as at 31.03.2015	303,343	1,042,210	411,887	246,749	–	2,004,189
Net book value as at 31.03.2015	264,722	329,509	307,326	70,034	80,341	1,051,932
Net book value as at 31.03.2014	249,086	359,082	333,332	121,206	26,482	1,089,188
Net book value as at 01.04.2013	250,068	265,676	340,696	141,352	–	997,792

39.3 Fully Depreciated Property Plant & Equipment – Bank

The initial cost of fully depreciated property, plant & equipment which are still in use as at the reporting date is as follows:

	BANK
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
Land & buildings	58,571	58,571
Office equipment	425,422	399,005
Furniture & fittings	21,064	6,897
Motor vehicles	47,606	47,606
	552,663	512,079

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated
40Intangible Assets
Cost as at 1 April as previously stated	383,225	392,489	1,105,782	1,059,649
Impact on change in accounting policy -
Investment in Joint Venture	–	–	–	(8,806)
Cost as at 1 April – Restated	383,225	392,489	1,105,782	1,050,843
Acquisitions	45,834	4,220	143,144	68,423
Less: Write-off*	2,252	13,484	2,252	13,484
Cost as at 31 March	426,807	383,225	1,246,674	1,105,782
Accumulated depreciation as at 1 April as previously stated	322,847	312,411	868,348	797,981
Impact on change in accounting policy - Investment in Joint Venture	–	–	–	(6,775)
Accumulated depreciation as at 1 April - Restated	322,847	312,411	868,348	791,206
Amortisation for the year	23,682	23,920	100,232	90,626
Less: Write-off*	2,102	13,484	2,102	13,484
Accumulated amortisation as at 31 March	344,427	322,847	966,478	868,348
Net book value as at 31 March	82,380	60,378	280,196	237,434

* Software not in use was written-off.

	GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
41Goodwill on Consolidation
DFCC Vardhana Bank PLC	146,603	146,603	146,603
Lanka Industrial Estates Limited	9,623	9,623	9,623
	156,226	156,226	156,226

42Government Grant Receivable/Deferred Income - CBSL Swap

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
42.1 Government Grant - Receivable
Fair value at the beginning of the period/initial contract date	276,878	754,958	276,878	754,958
Change in fair value on the renewal of contract	(368,086)	–	(368,086)	–
Change in fair value during the period (Note 15)	574,935	(478,080)	574,935	(478,080)
Fair value at the end of period	483,727	276,878	483,727	276,878
42.2 Government Grant - Deferred Income
Fair value at the beginning of the period/initial contract date	295,628	754,958	295,628	754,958
Change in fair value on the renewal of contract	(368,086)	–	(368,086)	–
Change in fair value during the period	574,935	(478,080)	574,935	(478,080)
Foreign exchange (loss)/gain on revaluation	(198,750)	18,750	(198,750)	18,750
Amortisation of deferred income on Government grant (Note 17)	376,185	(459,330)	376,185	(459,330)
Fair value at the end of period	303,727	295,628	303,727	295,628

DFCC Bank PLC (DFCC) in October 2013 raised USD 100 million by Issue of Notes abroad repayable in October 2018. The proceeds of this note issue are to be deployed predominantly in LKR denominated monetary assets. In order to hedge the resulting net open foreign currency liability position, DFCC Bank PLC has entered into a annually renewable currency SWAP arrangement with Central Bank of Sri Lanka (CBSL) for 75% of the US Dollar (USD) denominated liability. Accordingly this contract was renewed in November 2014.

The currency SWAP arrangement, pursuant to Government policy for the principal amount only is designed to reimburse DFCC by CBSL for any exchange loss incurred and conversely for DFCC to pay CBSL any exchange gain arising from depreciation of LKR vis-a-vis USD or appreciation of LKR vis-a-vis USD respectively.

Although USD denominated notes are repayable at the end of 5 years, the currency SWAP arrangement contract is renewed annually up to the date of repayment of the notes so as to exchange cash flow arising from movement in USD/LKR spot exchange rate that occurs at the time of renewal of the annual contract.

The currency SWAP arrangement with CBSL provides for SWAP of LKR to USD at the end of the contract at the same spot rate as the initial SWAP of USD to LKR at the commencement of the annual contract. (i.e. CBSL SWAP arrangement amounts to a full discount to USD LKR spot rate at the end of the contract).

The hedging instrument for currency swap is deemed to be a derivative asset recognised at the fair value at the inception of the contract. The fair value of this derivative asset is measured by reference to forward exchange quotes for USD purchase contracts by commercial banks, who are the normal market participants. Thus the fair value gain at the inception of the contract is the full amount of the forward premium quote at the end of one year.

The subsequent change in fair value is recognised in the income statement. CBSL normally does not enter in to forward exchange contracts with market participants providing 100% discount to the USD LKR spot rate at the time of the maturity of the contract. Thus this arrangement has features of both derivative instrument and Government grant through the agency of CBSL.

The initial gain by reference to forward price of an equivalent forward exchange dollar purchase contract is recognised as a Government grant and deferred income.

The deferred income is amortised on a systematic basis over the period in which the Bank recognises the fall in value of derivative which the grant is intended to compensate.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
43Deferred Tax Asset/Liability
Deferred tax liability (Note 43.1)	486,855	433,071	642,021	553,222	455,438
Deferred tax asset (Note 43.2)	–	–	1,562	2,285	834
Net total	486,855	433,071	640,459	550,937	454,604
43.1 Deferred Tax Liability
Balance at beginning	445,366	388,943	589,884	498,167	387,616
Recognised in income statement	61,024	56,423	134,953	91,717	110,551
Recognised in other comprehensive income	163	–	17,892	–	–
	506,553	445,366	742,729	589,884	498,167
Transferred from deferred tax asset	(19,698)	(12,295)	(100,708)	(36,662)	(42,729)
	486,855	433,071	642,021	553,222	455,438
43.2 Deferred Tax Asset
Balance at beginning	12,295	10,383	38,947	43,563	21,014
Recognised in income statement	2,505	1,744	53,047	(5,189)	21,178
Recognised in other comprehensive income	4,898	168	10,276	573	1,371
	19,698	12,295	102,270	38,947	43,563
Offset against deferred tax liability	(19,698)	(12,295)	(100,708)	(36,662)	(42,729)
	–	–	1,562	2,285	834

43.3 Recognised Deferred Tax Assets and Liabilities

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Assets
Property, equipment and software	–	–	35	–	–
Gratuity liability and actuarial loss on defined benefit plans	19,698	12,295	44,182	28,489	43,563
Excess of 1% ceiling on bad and doubtful debts	–	–	24,842	–	–
Tax losses on finance leases	–	–	33,211	10,458	–
	19,698	12,295	102,270	38,947	43,563
Liabilities
Property, equipment and software	41,175	39,224	128,431	114,464	98,725
Finance leases	465,215	406,142	596,406	475,420	399,442
Fair value of available for sale financial assets	163	–	17,892	–	–
	506,553	445,366	742,729	589,884	498,167

	GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
43.4 Unrecognised Deferred Tax Assets
Taxable Losses
DFCC Consulting (Pvt) Limited - Subsidiary	16,187	4,532
Synapsys Limited - Subsidiary*	21,670	2,167
	37,857	6,699

* Tax effect at 10%

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
44Other Assets
Refundable deposits and advances	57,024	92,191	211,775	277,264	360,754
Dividend due	435,050	474,219	435,050	474,219	499,593
Debtors	225,051	254,367	1,441,576	1,282,690	1,334,655
Receivable from pension fund (Note 49.1.3)	–	161,230	–	161,230	70,022
	717,125	982,007	2,088,401	2,195,403	2,265,024
45Due to Banks
Balances with foreign banks	–	–	1,003,855	996,008	1,423
Borrowing - Local banks	–	–	1,886,673	938,815	1,595,204
Borrowing - Other local sources	1,600,288	2,351,249	1,600,288	2,351,249	6,399,596
Securities sold under repurchase (Repo) agreements	–	2,802,505	1,151,206	2,387,504	40,512
Bank Overdrafts	328,579	–	330,545	–	–
	1,928,867	5,153,754	5,972,567	6,673,576	8,036,735

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
46Due to Other Customers
Balance on 31 March	22,484,652	16,630,363	92,711,793	80,917,356	62,878,401
46.1 Analysis
46.1.1 By Product
Demand deposits (current accounts)	–	–	3,605,464	1,909,231	1,438,682
Savings deposits	–	–	15,650,249	12,981,665	10,005,848
Fixed deposits	22,484,652	16,630,363	72,682,602	64,790,341	50,931,526
Certificate of deposits	–	–	546,523	586,707	370,833
Other deposits	–	–	226,955	649,412	131,512
	22,484,652	16,630,363	92,711,793	80,917,356	62,878,401
46.1.2 By Currency
Sri Lankan Rupee	22,484,652	16,616,195	84,178,004	72,474,579	52,957,435
United States Dollar (USD)	–	14,168	5,096,847	4,550,791	5,816,060
Great Britain Pound (GBP)	–	–	831,443	864,487	2,465,352
Others	–	–	2,605,499	3,027,499	1,639,554
	22,484,652	16,630,363	92,711,793	80,917,356	62,878,401

47Other Borrowing

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
Repayable in foreign currency
Borrowing sourced from
Multilateral institutions	3,645,633	3,861,248	3,645,633	3,861,248	3,960,348
Bilateral institutions	4,001,694	5,029,962	4,001,694	5,029,962	11,032,295
	7,647,327	8,891,210	7,647,327	8,891,210	14,992,643
Repayable in Rupees
Borrowing sourced from
Multilateral institutions	14,814,449	13,965,048	14,814,449	13,965,048	15,473,232
Bilateral institutions	1,411,145	1,991,184	1,411,145	1,991,184	3,849,912
Central Bank of Sri Lanka – refinance loans (secured)	488,876	586,638	488,876	586,638	502,075
Securities sold under repurchase (Repo) agreements	–	–	14,484,375	2,348,414	989,718
	16,714,470	16,542,870	31,198,845	18,891,284	20,814,937
	24,361,797	25,434,080	38,846,172	27,782,494	35,807,580

47.1 Assets Pledged as Security

Nature	31.03.2015 LKR 000
Assignment in terms of Section 88 A of the Monetary Law of Loans refinanced by Central Bank	488,876

48Debt Securities Issued

						BANK/GROUP
Year of issuance	Face value LKR 000	Interest rate %	Repayment terms	Issue date	Maturity date	31.03.2015 LKR 000	31.03.2014 LKR 000
Issued by Bank
i. Debenture issue (LKR) - Unlisted	36,400	16.00	2 Years	22 Jan. 2013	22 Jan. 2015	–	37,436
	506,000	16.50	3 Years	22 Jan. 2013	22 Jan. 2016	525,638	525,974
- Listed	5,000,000	8.50	3 Years	18 Aug. 2014	17 Aug. 2017	5,174,080	–
ii. Notes issue (USD)	13,075,000	9.625	5 Years	1 Nov. 2013	31 Oct. 2018	13,746,206	13,445,607
						19,445,924	14,009,017
Due within one year						525,638	37,436
Due after one year						18,920,286	13,971,581
						19,445,924	14,009,017

Carrying values are the discounted amounts of principal and interest.

48.1 Listed Debentures

Debenture category	Interest payable frequency	Applicable interest rate (%)	Comparative government securities	Balance as at 31.03.2015 LKR 000	Maturity date			Yield last traded %
					Highest	Lowest	Last Traded
Fixed Rate:
2014/2017	Annually	8.50	8.60%	3,997,528	99.92	99.92	99.92	8.50
2014/2017	Semi-annually	8.33	8.60%	877,025	100.30	100.30	100.30	8.21
2014/2017	Quarterly	8.24	8.60%	299,527	N/T	N/T	N/T	N/T

N/T - Not Traded

Ratios	31.03.2015	31.03.2014
Debt to equity ratio (times)	1.05	1.07
Interest cover (times)	1.38	1.34
Liquid asset ratio (%)	47.6	77.5

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
49Other Liabilities
Accruals	47,180	49,089	49,508	52,508	67,427
Prior years’ dividends	40,025	33,176	40,025	33,176	27,382
Security deposit for leases	4,065	4,065	18,141	12,954	41,806
Prepaid loan and lease rentals	104,049	88,601	104,049	88,601	95,292
Account payables	266,456	267,917	1,804,536	1,585,340	1,676,251
Provision for staff retirement benefits (Note 49.1)	140,638	112,660	242,961	181,428	167,607
Other provisions (Note 49.2)	237,743	197,187	327,707	274,980	246,905
	840,156	752,695	2,586,927	2,228,987	2,322,670

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
49.1 Provision for Staff Retirement Benefits
Included under Other Asset
Defined benefit-funded pension (Note 49.1.3)	–	(161,230)	–	(161,230)
	–	(161,230)	–	(161,230)
Included under Other Liabilities
Defined benefit - unfunded pension (Note 49.1.1)	67,686	68,740	67,686	68,740
- unfunded end of service gratuity (Note 49.1.2)	70,355	43,920	172,678	112,688
- funded pension (Note 49.1.3)	2,597	–	2,597	–
	140,638	112,660	242,961	181,428

	BANK/ GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
49.1.1 Unfunded Pension Liability
Opening balance	68,740	79,893
Current service cost	–	6,464
Interest on obligation	6,187	7,190
Benefit payments during the year	(6,996)	(23,902)
Actuarial experience gain	(245)	(905)
Present value of defined benefit pension obligations 31 March	67,686	68,740

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated
49.1.2 Unfunded End of Service Gratuity
Opening balance	43,920	37,091	112,688	87,714
Current service cost	8,221	7,191	23,359	16,409
Interest on obligation	4,392	3,709	10,965	7,666
Provisions made for gratuities computed on formula method	–	–	–	5,577
Benefit payments during the year	(3,672)	(4,671)	(8,054)	(6,741)
Actuarial experience loss	17,494	600	33,720	2,063
Present value of defined benefit pension obligations 31 March	70,355	43,920	172,678	112,688

	BANK/GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
49.1.3 Funded Pension Liability/(Asset)
Present value of defined benefit pension obligations (Note 49.1.3.1)	2,141,649	1,866,434
Fair value of pension assets (Note 49.1.3.2)	(2,139,052)	(2,027,664)
Defined benefit liability/(asset)	2,597	(161,230)
49.1.3.1 Movement in Defined Pension Obligation
Present value of defined benefit pension obligations on 01 April	1,866,434	1,750,987
Current service cost	77,397	67,108
Interest on obligation	167,979	157,588
Benefit payments during the year	(110,448)	(88,672)
Actuarial experience loss/(gain)	140,287	(20,577)
Present value of defined benefit pension obligations on 31 March	2,141,649	1,866,434
49.1.3.2 Movement in Pension Assets
Pension assets on 01 April	2,027,664	1,821,009
Expected return on pension assets	177,105	162,026
Employer’s contribution	59,002	65,997
Benefits paid	(110,448)	(88,672)
Actuarial experience (loss)/gain	(14,271)	67,304
Pension assets on 31 March	2,139,052	2,027,664
49.1.3.3 Plan Assets Consist of the Following
Debentures	337,546	338,116
Government Bond	1,289,144	1,206,726
Fixed deposits	512,046	473,907
Others	316	8,915
	2,139,052	2,027,664

	Unfunded Pension Liability*	Unfunded End of Service Gratuity*	Funded Pension Liability*
As at	31.03.2015 LKR 000	31.03.2015 LKR 000	31.03.2015 LKR 000
49.1.3.4 The Expected Benefit Payout in the Future Years to the Defined Benefit Obligation - Bank
Within next 12 months	6,996	7,782	158,528
Between 2 and 5 years	27,984	52,935	661,000
Beyond 5 years	34,980	70,045	1,053,617

* Based on expected benefits payout in next 10 years.

49.1.3.5 Unfunded Pension Liability

This relates to pension liability of an ex-employee, not funded through the DFCC Bank Pension Fund. The liability covers the pension benefit to retiree and survivors.

49.1.3.6 Actuarial Valuation

Actuarial valuation was carried out by Mr Piyal S Goonetilleke, Fellow of the Society of Actuaries USA, of Piyal S Goonetilleke & Associates, on 31 March 2015.

49.1.3.7 Actuarial Valuation Method

Projected unit credit method was used to allocate the actuarial present value of the projected benefits earned by employees to date of valuation.

	Pension benefit (%)	End of service gratuity (%)
49.1.3.8 Principal Actuarial Assumptions
Discount rate as at 31 March 2015, per annum
Pre-retirement	9.0	9.5
Post-retirement	9.0	not applicable
Future salary increases per annum	10.5	10.0
Expected rate of return on pension assets	9.0	–
Actual rate of return on pension assets	8.07	–
Mortality	UP 1984 mortality table	up 1984 mortality table
Retirement age	55 years	55 years
Normal form of payment:	lump sum commuted pension payment followed by reduced pension for 10 years (25% reduction) (for new entrants recovery period is 15 years)	lump sum
Turnover rate -
Age
20	10.0	10.0
25	10.0	10.0
30	10.0	10.0
35	7.5	7.5
40	5.0	5.0
45	2.5	2.5
50/55	1.0	1.0

The principal actuarial assumptions in the previous year has not changed other than the discount rate used for end of service gratuity. The discount rate is the yield rate on 31 March 2015 with a term equalling the estimated period for which all benefit payments will continue. This period is approximately 24.4 years for pension and 10.9 years for end of service gratuity. The differences in the discount rates for pension and end of service gratuity reflect the differences in the estimated period for benefit payments.

The differences in the rate of future annual salary increases reflect the remaining working life of participants for each plan.

49.1.3.9 Sensitivity of Assumptions Used in the Actuarial Valuation

The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions used with all other variables held constant in the employment benefit liability measurement. The effect in the income statement and the statement of financial position with the assumed changes in the discount rates and salary increment rate is given below:

	Effect on income statement increase/(decrease) LKR 000	Effect on defined benefit obligation increase/(decrease) LKR 000
Funded Pension Liability
Discount rate
Increase by 1%	200,350	(200,350)
Decrease by 1%	238,339	238,339
Salary Increment Rate
Increase by 1%	(60,953)	60,953
Decrease by 1%	56,783	(56,783)
Unfunded Pension Liability*
Discount rate
Increase by 1%	4,803	(4,803)
Decrease by 1%	(5,522)	5,522
Unfunded End of Service Gratuity
Discount rate
Increase by 1%	6,669	(6,669)
Decrease by 1%	(7,584)	7,584
Salary Increment Rate
Increase by 1%	(7,322)	7,322
Decrease by 1%	6,587	(6,587)

* Salary increment not applicable – ex-employee.

As at 31 March	2014 LKR 000	2013 LKR 000	2012 LKR 000	2011 LKR 000	2010 LKR 000
49.1.3.10 Historical Information
Present value of the defined benefit obligation	1,866,434	1,750,987	1,494,887	1,367,956	1,317,586
Fair value of plan assets	2,027,664	1,821,009	1,607,025	1,497,559	1,416,019
Surplus in the plan	(161,230)	(70,022)	(112,138)	(129,603)	(98,433)

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated
49.2 Other Provisions
Balance as at 31 March	197,187	194,561	274,980	246,905
Provisions for the financial year	237,743	203,937	329,004	284,264
Provisions used during the year	(177,343)	(178,794)	(256,433)	(233,672)
Provisions reversed during the year	(19,844)	(22,517)	(19,844)	(22,517)
Balance as at 31 March	237,743	197,187	327,707	274,980

	BANK
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
50Due to Subsidiaries
DFCC Consulting (Pvt) Limited	31	–

						BANK		GROUP
As at	Face value LKR 000	Interest rate %	Repayment terms	Issue date	Maturity date	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
51Subordinated Term Debt
i. Issued by Bank
Listed debentures	590,000	14.00	10 Years	26 Sep. 2006	26 Sep. 2016	609,373	609,373	609,373	609,373
ii. Issued by other subsidiaries
Listed debentures	833,333	11.50	5 Years	26 Sep. 2011	7 Sep. 2016	–	–	833,589	833,589
	166,667	6 Months gross TB+1.5%	5 Years	26 Sep. 2011	7 Sep. 2016	–	–	166,702	166,712
						609,373	609,373	1,609,664	1,609,674
Due within one year						–	–	291	301
Due after one year						609,373	609,373	1,609,373	1,609,373
						609,373	609,373	1,609,664	1,609,674

51.1 Bank’s Listed Subordinated Debentures

Subordinated debentures listed in the Colombo Stock Exchange are redeemable at maturity. Fixed interest at 14% p.a. is payable annually. On 31 March 2015 comparative Government Securities interest rate is 8.24% p.a. (gross) and not traded during the period.

The relevant ratios are disclosed in Note 48.1.

	BANK/GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000
52Stated Capital
Balance on 31 March (Number of shares - 265,097,688)	4,715,814	4,715,814

In accordance with Section 58 of Companies Act No. 07 of 2007 share capital and share premium have been classified as stated capital.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
53Statutory Reserves
Reserve fund	1,545,000	1,380,000	1,545,000	1,380,000
Investment fund account	–	1,001,648	–	1,001,648
	1,545,000	2,381,648	1,545,000	2,381,648

53.1 Reserve Fund

Five percentum of profit after tax is transferred to the reserve fund as per Direction issued by Central Bank of Sri Lanka under Section 76 (j) (1) of the Banking Act No. 30 of 1988 as amended by Banking (Amendment) Act No. 33 of 1995.

53.2 Investment Fund Account

This represents cumulative savings of financial services VAT and income tax. The amount is appropriated from profits. The amount of the reserve was to be utilised only for the purpose prescribed by the Central Bank of Sri Lanka. The operations of this fund ceased on 01 October 2014 and balance at that date was transferred to retained earnings.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
54Retained Earnings
Balance on 31 March	6,541,651	4,089,601	12,755,357	9,163,494

This represents cumulative net earnings, inclusive of proposed dividend amounting to LKR 1,591 million payable on approval by the shareholders at the Annual General Meeting on 30 June 2015. The balance is retained and reinvested in the business of the Bank.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000 Restated	01.04.2013 LKR 000 Restated
55Other Reserves
General reserve	13,779,839	13,779,839	13,779,839	13,779,839	13,779,839
Fair value reserve	17,512,960	12,443,175	15,112,861	10,079,975	8,718,485
	31,292,799	26,223,014	28,892,700	23,859,814	22,498,324

These are distributable reserves.

	BANK		GROUP
As at	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
56Contingent Liabilities and Commitments
Guarantees issued to -
Banks in respect of indebtedness of customers of the Bank	–	–	27,080	–
Companies in respect of indebtedness of customers of the Bank	1,167,264	1,886,883	9,675,687	8,044,336
Principal collector of customs (duty guarantees)	–	2,000	78,935	79,087
Shipping guarantees	–	–	74,726	906,439
Documentary credit	–	–	5,514,468	3,469,836
Bills for collection	–	–	2,251,076	2,101,303
Performance bonds	–	48,627	2,138,132	1,856,664
Forward exchange contracts (net)	14,183,209	14,851,956	15,843,573	14,851,956
Commitments in Ordinary Course of Business -
Commitments for unutilised credit facilities	25,572,860	13,399,472	39,365,166	25,953,560
Capital expenditure approved by the Board of Directors
Contracted	29,237	18,106	64,653	469,483
Not contracted	27,116	27,003	39,052	56,301
	40,979,686	30,234,047	75,072,548	57,788,965

57Litigation

57.1 Litigation Against the Bank

57.1.1 A client has filed action against five defendants including the Bank in the District Court of Kurunegala claiming that a property mortgaged by him to the Bank had been unlawfully transferred to a third party under the Recovery of Loans by Banks (Special Provisions) Act No. 4 of 1990 and seeking the sale of the property to be set aside, and also claiming LKR 6 million as damages from the Bank. The District Court has issued an Interim Injunction for which one of the defendants has appealed to the Provincial High Court of Civil Appeal against the said Order. The Civil Appellate High Court has set aside the Order of the District Court granting the Interim Injunction.

Accordingly the case was transferred back to the District Court of Kurunegala to fix for trial. However, after fixing the matter for trial the plaintiff has moved to amend the plaint to which defendants, including the Bank, have objected. The Bank is defending the case before the District Court.

57.1.2 A client of the Bank has instituted legal action in the District Court of Matara against the Bank claiming a sum of LKR 10 million for non-disbursement of the full loan approved to him. The Bank has suspended the disbursement of the facility approved to him as he has made a false statement in his application to the Bank. The Bank is defending this action.

57.1.3 The bank has appealed to the High Court to set a side an award made in favour of an ex-employee by the labour Tribunal.

57.2 Litigation Against the Subsidiaries

57.2.1 Litigation against DFCC Vardhana Bank PLC

57.2.1.1 There are three cases filed in the District Court of Kandy and one case filed in District Court of Kuliyapitiya where third parties are claiming ownership of properties acquired by the Bank under recovery action. The Bank will be defending the cases before the respective District Courts.

57.2.1.2 There are two cases filed in the District Court of Bandarawela and Elpitiya where third parties are claiming ownership of properties mortgaged to the Bank. The Bank will be defending the cases before the respective District Courts.

57.2.1.3 There is one case filed in Commercial High Court where the customer is claiming damages from the Bank for not releasing the property mortgaged by him in favour of the Bank. The Bank will be defending the case before the Commercial High Court.

57.2.1.4 There is one case filed in the Labour Tribunal by one ex-employee of the Bank claiming compensation from the Bank.

No material losses are anticipated as a result of the above transactions.

58Related Party Transactions

58.1 The Group’s related parties include associate, Trust established by the Bank for post-employment retirement plan, joint venture, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced for which significant voting power is held by Key Management Personnel or their close family members.

As at	31.03.2015 LKR 000	31.03.2014 LKR 000
58.2 Transactions with Subsidiaries
58.2.1 Statement of Financial Position
Assets
Cash and cash equivalents	–	543,284
Placements with the banks	716,624	1,375,545
Loans to and receivable from other customers	3,690	5,687
	720,314	1,924,516
Liabilities
Due to banks	215,485	–
Due to other customers	–	73,508
	215,485	73,508

For the year ended 31 March	2015 LKR 000	2014 LKR 000
58.2.2 Income Statement
Interest income	82,689	20,611
Interest expense	12,158	14,589
Other operating (loss)/income (net)	29,282	28,452
Net gain from trading	16,651	–
Net gain from financial instruments at fair value through profit or loss	26,439	–
Net Gain from financial investments – Dividend received	182,807	150,076
Other overhead expenses	84,844	79,665
Personnel expenses - Reimbursed expenses	287,901	220,260
- Seconded expenses	2,639	4,085

58.3 Transactions with Joint Venture

58.3.1 Income Statement

For the year ended 31 March	2015 LKR 000	2014 LKR 000
Net gain from trading	6,011	522
Interest expense	890	–
Other overhead expenses	92	88
Net gain from financial investments – Dividend received	26,200	21,026

For the year ended 31 March	2015 LKR 000	2014 LKR 000
58.4 Transactions with Associate
58.4.1 Income Statement
Net gain from financial investments – Dividend received	5,415	5,459
Other overhead expenses	1,104	1,092

As at	31.03.2015 LKR 000	31.03.2014 LKR 000
58.5 Transaction with Entities in which Directors of the Bank have Significant Influence without Substantial Shareholding
58.5.1 Statement of Financial Position
Assets
Loans to and receivables from other customers	72,608	1,187,793
Financial investments – available-for-sale	116,203	181,846
		1,369,639
Liabilities
Due to other customers	–	1,317,529
Debt securities issued	–	25,000.00
	–	1,342,529

For the year ended 31 March	2015 LKR 000	2014 LKR 000
58.5.2 Income Statement
Interest income	6,093	139,577
Interest expense	–	185,604
Net gain from financial investments - dividend received	1,636	3,100
Other overhead expenses	–	1,692

58.6 Transactions with Key Management Personnel

58.6.1 Key Management Personnel

Key Management Personnel are the Board of Directors of the Bank, Executive Vice-Presidents, Senior Vice-President – Treasury, Chief Technology and Services Officer and the Secretary to the Board for the purpose of Sri Lanka Accounting Standard on ‘Related Party Disclosures’.

	BANK		GROUP
For the year ended 31 March	2015 LKR 000	2014 LKR 000	2015 LKR 000	2014 LKR 000
58.6.2 Compensation of Directors and Other Key Management Personnel
Number of persons	15	15	45	48
Short-term employment benefits	100,299	162,403	186,655	239,161
Post-employment benefits - pension	5,750	19,110	5,750	19,110
- others	15,586	20,126	24,426	27,706
	121,635	201,639	216,831	285,977

As at 31 March	2015		2014
	Number of KMPs	LKR 000	Number of KMPs	LKR 000
58.6.3 Other Transactions with Key Management Personnel and their Close Family Members
58.6.3.1 Statement of Financial Position
Assets
Loans and advances	2	6,278	3	7,076

These loans are granted under a uniform scheme applicable to all employees of the Bank.

As at 31 March	2015		2014
	Number of KMPs	LKR 000	Number of KMPs	LKR 000
Liabilities
Due to other Customers	2	17,280	1	15,595
Debt securities issued	2	26,028	2	26,524
		43,308		42,119

For the year ended 31 March	2015 LKR 000	2014 LKR 000
58.6.3.2 Income Statement
Interest Income	279	214
Expense - Interest	5,662	6,126
- Rent	–	2,100

58.6.4 Transactions with DFCC Bank Pension Fund – Trust

DFCC Bank Pension Fund constituted as a Trust was established by the DFCC Bank to discharge defined benefit pension liability of eligible employees of the Bank.

	31.03.2015 LKR 000	31.03.2014 LKR 000
Contribution prepaid as at 1 April	161,230	70,022
Contribution due for the financial year recognised as expense in profit or loss	(68,271)	(62,670)
Recognition of actuarial gains/(losses) in the other comprehensive income	(154,558)	87,879
Contribution paid by the Bank	59,002	65,999
Contribution (payable)/prepaid as at 31 March (Note 49.1.3)	(2,597)	161,230

58.7 Transactions with Government of Sri Lanka (Gosl) and it’s Related Entities

Entities related to the Government of Sri Lanka (GOSL) by virtue of their aggregate shareholdings has the power to participate in the financial and operating policy decision of the Bank and by extension to participate in the financial and operating policy decisions of the Bank. However, in fact this power was not exercised.

Paragraph 25 of Sri Lanka Accounting Standard Related Party Disclosure – LKAS 24 has exempted DFCC Bank from the normally applicable disclosure requirements on transactions with GOSL – related entities. In making use of this exemption the Board has determined that the limited disclosure required under paragraph 26 of LKAS 24 is only required to be made for transaction that are individually significant because of their size although these transactions were undertaken on normal market terms in the ordinary course of business and there was no requirement to disclose the transactions to regulatory or supervisory authorities or require shareholder approval.

58.7.1 Individually Significant Transactions Included in the Statement of Financial Position

As at	2015 LKR 000	2014 LKR 000
58.7.1.1 Statement of Financial Position
Assets
Loans to and receivables from other customers	3,527,078	1,845,443
Placements with Banks	–	1,306,634
Other financial assets held-for-trading	1,469,166	1,017,980
Financial investments available-for-sale	5,548,508	7,149,712
Government grant receivable	483,727	276,878
	11,028,479	11,596,647
Liabilities
Due to Banks	–	2,200,402
Due to other customers	661,890	591,369
Other borrowings – Credit lines	20,354,251	20,432,918
Government grant deferred income	303,727	295,628
	21,319,868	23,520,317
Commitments
Undrawn credit facilities	5,585,860	1,239,808

For the year ended 31 March	2015 LKR 000	2014 LKR 000
58.7.1.2 Income Statement
Interest income - loans and receivables to other customers	201,183	118,633
- placements with Banks	9,790	259,223
- Financial investments	543,330	434,482
Interest expense - other borrowings - credit lines	1,230,725	1,610,818
- term borrowings	46,062	421,733
- due to other customers	47,874	79,390

There are no other transactions that are collectively significant with Government related entities.

58.8 Pricing Policy and Terms for Transactions with Related Parties

Bank enters into transactions with related parties in the ordinary course of business on terms similar to comparable transactions with an unrelated comparable counterparty with the exception of accommodation granted to Key Management Personnel under approved schemes uniformly applicable to all or specific categories of employees. The terms include pricing for loans, deposits and services, collateral obtained for loans where appropriate.

For the year ended 31 March 2015	Lending LKR 000	Finance leasing LKR 000	Investing in equity LKR 000	Commercial banking LKR 000	Other LKR 000	Unallocated LKR 000	Eliminations LKR 000	Total LKR 000
59Operating Segments Information
Revenue
Interest income	6,825,885	1,184,139	–	8,140,241	32,536	–	(84,134)	16,098,667
Net fees and commission income	167,995		–	871,612	248,689	–	(168,332)	1,119,964
Net gain from trading	–	–	–	333,309	–	146,679	–	479,988
Net gain from financial instruments at fair value through profit or loss	–	–	–	21,705	–	656,512	–	678,217
Net gain/(loss) from financial investments	–	–	2,127,011	265,065	–	23,416	(214,422)	2,201,070
Other income	(34,344)	–		46,354	219,708	(703,208)	(30,008)	(501,498)
Total income	6,959,536	1,184,139	2,127,011	9,678,286	500,934	123,399	(496,896)	20,076,408
Percentage*	35	6	10	48	2	1	(2)	100
Expenses
Segment losses	(319,927)	12,363		565,120	–	–	(11,000)	246,556
Depreciation	–	–	–	208,422	31,426	–	–	239,848
Other operating & interest expense	4,250,864	505,454	–	7,073,993	306,599	–	(282,474)	11,854,436
Inter segment expense
	3,930,937	517,817	0	7,847,535	338,025	–	(293,474)	12,340,840
Result	3,028,599	666,322	2,127,011	1,830,751	162,909	–	–	7,735,568
Unallocated expenses								1,588,796
Value added tax and nation building tax on financial services								884,072
								5,262,700
Share of profits of associate and joint venture								153,270
Profit before tax								5,415,970
Income tax on profit on ordinary activities								977,358
Profits for the year								4,438,612
Other comprehensive income net of tax								4,854,824
Total comprehensive income								9,293,436
Non-controlling interests								75,930
Total comprehensive income attributable to equity holders of the Bank								9,217,506
Assets	71,347,897	10,966,528	29,487,466	98,559,783	783,076	5,051,461	(6,773,897)	209,422,314
Percentage*	34	5	14	47	–	2	(3)	100
Investments in associate and joint venture								1,187,985
								210,610,299
Liabilities	58,153,494	7,425,082	–	92,437,374	151,038	4,801,205	(620,647)	162,347,546
Capital expenditure - additions				174,707	42,446	14,940		232,093

* Net of eliminations.

For the year ended 31 March 2014 (Restated)	Lending LKR 000	Finance leasing LKR 000	Investing in equity LKR 000	Commercial banking LKR 000	Other LKR 000	Unallocated LKR 000	Eliminations LKR 000	Total LKR 000
Revenue
Interest income	8,169,118	1,575,227	–	8,773,840	52,471	–	(90,984)	18,479,672
Net fees and commission income	103,998	12,902	–	697,627	184,978	–	(156,841)	842,663
Net gain or from trading	–	–	–	178,741	–	33,565	–	212,306
Net gain from financial instruments at fair value through profit or loss	–	–	–	62,338	–	(386,281)	–	(323,943)
Net gain/(loss) from financial investments	–	–	1,211,493	118,056	–	–	(176,560)	1,152,989
Other income	41,262	–	(31,297)	(141,527)	199,763	(32,724)	(29,759)	5,718
Total Income	8,314,378	1,588,129	1,180,196	9,689,075	437,212	(385,440)	(454,144)	20,369,405
Percentage*	41	8	6	47	2	(2)	(2)	100
Expenses
Segment losses	357,304	(46,295)	13,786	896,927	–	–	–	1,221,722
Depreciation	–	–	–	182,549	21,554	–	–	204,103
Other operating & interest expenses	3,485,965	566,624	–	7,689,330	299,152	–	(277,584)	11,763,487
Inter segment expense	–	–	–	–	–	–	–	–
	3,843,269	520,329	13,786	8,768,806	320,706	–	(277,584)	13,189,312
Result	4,471,109	1,067,800	1,166,410	920,269	116,506	–		7,180,093
Unallocated expenses								2,557,567
Value added tax and nation building tax on financial services								602,040
								4,020,486
Share of profits of associate and joint venture								96,966
Profit before tax								4,117,452
Income tax on profit on ordinary activities								902,439
Profit for the year								3,215,013
Other comprehensive income net of tax								1,449,414
Total comprehensive income for the year								4,664,427
Non-controlling interests								64,224
Total comprehensive income, attributable to equity holders of the Bank								4,600,203
Assets	61,615,401	9,617,324	24,547,340	78,429,809	764,571	6,277,575	(7,285,800)	173,966,219
Percentage*	35	5	14	45	–	4	(3)	100
Investments in associate and joint venture								1,029,075
								174,995,294
Liabilities	47,429,081	7,298,457	–	72,016,398	167,462	8,761,945	(1,132,547)	134,540,796
Capital expenditure - additions				194,563	17,017	130,511		342,091

* Net of eliminations.

59.1 Revenue and expenses attributable to the incorporated operating segments of industrial estate management, unit trust management, stockbroking and consultancy services are included in the column for other.

59.2 Revenue and expenses attributable to the operating segment of DFCC Vardhana Bank PLC is included in the column for commercial banking and finance leasing.

59.3 Property and equipment and depreciation attributable to an incorporated operating segment is included in the relevant segment and the balance is unallocated.

59.4 Eliminations are the consolidation adjustments for inter-company transactions, dividend and dividend payable attributable to minority shareholders.

60Reclassification of Comparative Figures

The following information has been reclassified to confirm with the current year's classification in order to provide a better presentation.

	Bank/Group
	As disclosed previously	Current Presentation
	LKR 000	LKR 000
Income Statement
NBT on financial services (FS) reported under other expenses	24,937	–
NBT on FS reported under VAT and NBT on FS	–	24,937

61Events Occurring After the Reporting Period

61.1 Proposed Dividend

The Directors have recommended the payment of a final dividend of LKR 6/- per share for the year ended 31 March 2015, which require the approval of the shareholders at the Annual General Meeting to be held on 30 June 2015. The Board of Directors confirms that the Bank has satisfied the solvency test in accordance with Section 57 of the Companies Act No. 07 of 2007 and have obtained the certificate from the Auditors.

The proposed final dividend exceeds the minimum distribution mandated by the Inland Revenue Act No. 10 of 2006 and therefore the 10% deemed dividend tax, will not be imposed on the Bank.

61.2 Proposed Consolidation of Banking Business

61.2.1 Proposed Merger with National Development Bank PLC (NDB)

The Memorandum of understanding entered into on 24 March 2014 by DFCC Bank PLC (DFCC), DFCC Vardhana Bank PLC (DVB) and National Development Bank PLC (NDB) as a step in working towards the intended amalgamation of the three banks was terminated on 11 May 2015 to enable both banking groups to pursue their respective business and expansion strategies.

61.2.2 Proposed Merger of DFCC Bank PLC (DFCC) and DFCC Vardhana Bank PLC (DVB)

DFCC Bank PLC (DFCC) and DFCC Vardhana Bank PLC (DVB) have decided after due consideration that it would be in the best interests of both banks, its shareholders and other stakeholders to amalgamate DFCC and its 99.2% owned subsidiary , DVB, and continue their activities as a single legal entity which is a licensed commercial bank. Accordingly on 15 May 2015, the banks have made an application to the Central Bank seeking provisional approval for a merger.

No other circumstances have arisen which would require disclosure or adjustment to the Financial Statements.

62Other Matters

The interim budget proposal presented by the Minister of Finance on 29 January 2015 and the pursuant Bill gazetted on 30 March 2015 impose a one off tax of 25% on the taxable profit for the Year of Assessment 2013/14 on any company or each company in a Group of companies if the Company’s/Group’s profit before income tax exceeds LKR 2 billion. The consolidated profit before tax of the Group and that of the Bank for the year of assessment 2013/14 exceeds the set threshold of LKR 2 billion. Accordingly, as per the provisions of the Bill, the estimated liability of the Bank and the Group approximately amount to LKR 533 million and LKR 837 million respectively.

No adjustments have been made in the financial statements for the year ended 31 March 2015 since the Bill has not yet been enacted.

63Fair Value Measurement

63.1 Determining Fair Value

The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques as described in Note 5.2.5. 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 assumptions and other risks affecting the specific instrument. The Group’s accounting policy on fair value measurements is discussed in Note 5.2.5. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.

Level 2: Valuation techniques based on observable inputs, either directly (i.e. prices) or indirectly (i.e. derived from prices).

This category includes instruments valued using quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The Group uses widely recognised valuation models for determining the fair value of common and more simple financial instruments, like government securities, interest rate and currency swaps that use mostly observable market data and require little management judgement and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, government securities and simple over the counter derivatives like forward exchange contracts and interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.

Management judgements and estimations are usually required for selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of probability of counterparty default and prepayments and selection of appropriate discount rates.

63.2 Valuation framework

The established control framework with respect to the measurement of fair values, includes an oversight which is independent of front office management. Treasury Middle office has overall responsibility for independently verifying the results of trading and investment operation.

Specific controls include:

• Verification of observable pricing
• Review and approval process for new models and changes to models involving both product control and group market risk
• Calibration and back testing of models
• Stress Testing

When third party information, such as broker quotes or pricing services is used to measure fair value, the evidence so obtained to support the conclusion that such valuations meet the requirements of SLFRSs/LKASs is documented.

This includes:

• Verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument
• Several quotes obtained from randomly selected brokers for the same financial instrument and the fair value determined on this basis

Any changes to the fair value methodology is reported to the Bank’s Audit Committee.

63.3 Fair Value by Level of the Fair Value Hierarchy - Bank

As at 31 March 2015	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Total LKR 000
Financial Assets
Derivative assets held-for-risk management	28
Forward foreign exchange contracts			29,335		29,335
Other financial assets held-for-trading	29
Government of Sri Lanka Treasury Bills and Bonds			1,469,166		1,469,166
Financial Investments available-for-sale	32
Quoted ordinary shares		21,136,695			21,136,695
Units in Unit Trusts - Quoted		190,153			190,153
Units in Unit Trusts - Unquoted			805,681		805,681
Unquoted shares				142,459	142,459
Government of Sri Lanka Treasury Bills and Bonds			5,548,508		5,548,508
Government grant receivable	42		483,727		483,727
		21,326,848	8,336,417	142,459	29,805,724
Financial Liabilities
Derivative liabilities held-for-risk management	28
Forward foreign exchange contracts			1,737		1,737
		–	1,737	–	1,737

As at 31 March 2014	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Total LKR 000
Financial Assets
Derivative assets held-for-risk management	28
Forward foreign exchange contracts			1,630		1,630
Other financial assets held-for-trading	29
Government of Sri Lanka Treasury Bills and Bonds			1,017,980		1,017,980
Financial Investments available-for-sale	32
Quoted ordinary shares		17,261,361			17,261,361
Units in Unit Trusts - Quoted		218,525			218,525
Units in Unit Trusts - Unquoted			301,431		301,431
Unquoted shares				142,459	142,459
Government of Sri Lanka Treasury Bills and Bonds			7,149,712		7,149,712
Government grant receivable	42		276,878		276,878
		17,479,886	8,747,631	142,459	26,369,976
Financial Liabilities
Derivative liabilities held-for-risk management	28
Forward foreign exchange contracts			55,609		55,609
		–	55,609	–	55,609

There were no transfers between Level 1, Level 2 and Level 3 during 2015 and 2014.

63.4 Fair Value by Level of the Fair Value Hierarchy - Group

As at 31 March 2015	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Total LKR 000
Financial Assets
Derivative assets held-for-risk management	28
Forward foreign exchange contracts			89,861		89,861
Other financial assets held-for-trading	29
Government of Sri Lanka Treasury Bills and Bonds			1,469,166		1,469,166
Financial Investments available-for-sale	32
Quoted ordinary shares		21,136,695			21,136,695
Units in Unit Trusts - Quoted		190,153			190,153
Units in Unit Trusts - Unquoted			805,681		805,681
Unquoted shares				147,874	147,874
Government of Sri Lanka Treasury Bills and Bonds			23,546,475		23,546,475
Government grant receivable	42		483,727		483,727
		21,326,848	26,394,910	147,874	47,869,632
Financial Liabilities
Derivative liabilities held-for-risk management	28
Forward foreign exchange contracts			37,153		37,153
		–	37,153	–	37,153

As at 31 March 2014	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Total LKR 000
Financial Assets
Derivative assets held-for-risk management	28
Forward foreign exchange contracts			183,892		183,892
Other financial assets held-for-trading	29
Government of Sri Lanka Treasury Bills and Bonds			1,971,916		1,971,916
Financial Investments available-for-sale	32
Quoted ordinary shares		17,261,361			17,261,361
Units in Unit Trusts - Quoted		218,525			218,525
Units in Unit Trusts - Unquoted			301,431		301,431
Unquoted shares				147,874	147,874
Government of Sri Lanka Treasury Bills and Bonds			21,972,395		21,972,395
Government grant receivable	42		276,878		276,878
		17,479,886	24,706,512	147,874	42,334,272
Financial Liabilities
Derivative liabilities held-for-risk management	28
Forward foreign exchange contracts			227,994		227,994
		–	227,994	–	227,994

There were no transfers between Level 1, Level 2 and Level 3 during 2015 and 2014.

63.5 Fair Value of Financial Instruments Carried at Amortised Cost - Bank

The following table summarises the carrying amounts and the Bank’s estimate of fair values of those financial assets and liabilities not presented on the Bank’s Statement of Financial Position at fair value. The fair values in the table below may be different from the actual amounts that will be received/paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions which are not observable in the market.

As at 31 March 2015	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Fair value LKR 000	Carrying amount LKR 000
Assets
Cash and cash equivalents	25		110,576		110,576	110,576
Placements with banks	27		716,622		716,622	716,622
Loans to and receivables from banks	30		484,067		484,067	484,067
Loans to and receivables from other customers	31			73,737,898	73,737,898	73,448,705
Financial Investments – held-to-maturity	33	2,090,105			2,090,105	2,085,921
Total		2,090,105	1,311,265	73,737,898	77,139,268	76,845,891
Liabilities
Due to banks	45		1,928,867		1,928,867	1,928,867
Due to other customers	46			22,744,161	22,744,161	22,484,652
Other borrowing	47			24,361,797	24,361,797	24,361,797
Debt securities issued	48		20,293,950		20,293,950	19,445,924
Subordinated term debt	51		640,847		640,847	609,373
		–	22,863,664	47,105,958	69,969,622	68,830,613

As at 31 March 2014	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Fair value LKR 000	Carrying amount LKR 000
Assets
Cash and cash equivalents	25		545,388		545,388	545,388
Placements with banks	27		2,681,779		2,681,779	2,681,779
Loans to and receivables from banks	30		1,233,617		1,233,617	1,233,617
Loans to and receivables from other customers	31			61,341,541	61,341,541	61,341,469
Financial Investments – held-to-maturity	33	550,696			550,696	535,958
Total		550,696	4,460,784	61,341,541	66,353,021	66,338,211
Liabilities
Due to banks	45		5,153,754		5,153,754	5,153,754
Due to other customers	46			16,962,343	16,962,343	16,630,363
Other borrowing	47			25,434,080	25,434,080	25,434,080
Debt securities issued	48		14,320,815		14,320,815	14,009,017
Subordinated term debt	51		649,578		649,578	609,373
			20,124,147	42,396,423	62,520,570	61,836,587

63.6 Fair Value of Financial Instruments Carried at Amortised Cost - Group

The following table summarises the carrying amounts and the Group estimate of fair values of those financial assets and liabilities not presented on the Bank’s Statement of Financial Position at fair value. The fair values in the table below may be different from the actual amounts that will be received/paid on the settlement or maturity of the financial instrument. For certain instruments, the fair value may be determined using assumptions which are not observable in the market.

As at 31 March 2015	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Fair value LKR 000	Carrying amount LKR 000
Assets
Cash and cash equivalents	25		4,060,820		4,060,820	4,060,820
Balances with Central Banks	26		2,616,406		2,616,406	2,616,406
Placements with banks	27		1,324,892		1,324,892	1,324,892
Loans to and receivables from banks	30		3,563,647		3,563,647	3,563,647
Loans to and receivables from other customers	31			135,618,870	135,618,870	135,322,723
Financial Investments – held-to-maturity	33	2,090,105	8,818,133		10,908,238	10,872,287
Total		2,090,105	20,383,898	135,618,870	158,092,873	157,760,775
Liabilities
Due to banks	45		5,972,567		5,972,567	5,972,567
Due to other customers	46			93,124,652	93,124,652	92,711,793
Other borrowing	47			38,846,172	38,846,172	38,846,172
Debt securities issued	48		20,293,950		20,293,950	19,445,924
Subordinated term debt	51		1,668,739		1,668,739	1,609,664
			27,935,256	131,970,824	159,906,080	158,586,120

As at 31 March 2014	Notes	Level 1 LKR 000	Level 2 LKR 000	Level 3 LKR 000	Fair value LKR 000	Carrying amount LKR 000
Assets
Cash and cash equivalents	25		2,933,360		2,933,360	2,933,360
Balances with Central Banks	226		2,870,492		2,870,492	2,870,492
Placements with banks	27		3,138,181		3,138,181	3,138,181
Loans to and receivables from banks	30			5,547,821	5,547,821	5,547,821
Loans to and receivables from other customers	31			112,188,288	112,188,288	112,167,194
Financial Investments – held-to-maturity	33	550,696	542,171		1,092,867	1,073,703
Total		550,696	9,484,204	117,736,109	127,771,009	127,730,751
Liabilities
Due to banks	45		6,673,576		6,673,576	6,673,576
Due to other customers	46			81,261,847	81,261,847	80,917,356
Other borrowing	47			27,782,494	27,782,494	27,782,494
Debt securities issued	48		14,320,815		14,320,815	14,009,017
Subordinated term debt	51		1,651,720		1,651,720	1,609,674
			22,646,111	109,044,341	131,690,452	130,992,117

Given below is the basis adopted by the Bank/Group in order to establish the fair values of the financial instruments.

63.7 Cash and Cash Equivalents and Placements with Banks

Carrying amounts of cash and cash equivalents and placements with banks approximates their fair value as these balances have a remaining maturity of less than three months from the reporting date.

63.8 Loans to and Receivables from Banks and Other Customers

63.8.1 Lease Rentals Receivable - Bank

The estimated fair value of lease rentals receivable is the present value of future cash flows expected to be received from such finance lease facilities calculated based on current interest rates for similar type of facilities. The finance lease portfolio is at fixed interest rates and the fair value calculated on this basis as at 31 March 2015 was LKR 8,539 million as against a carrying value of LKR 8,250 million. (2014 - fair value calculated on this basis was LKR 8,181 million as against a carrying value of LKR 8,109 million).

63.8.2 Other Loans

Composition:

	%
Floating rate loan portfolio	71
Fixed rate loans
- With remaining maturity less than one year	11
- Others	18
Total	100

Since the floating rate loans can be repriced monthly, quarterly and semi annually in tandem with market rates fair value of these loans is approximately same as the carrying value. Carrying amount of fixed rate loans with a remaining maturity of less than one year approximates the fair value.

Based on the results of the fair value computed on the lease rentals receivable, it is estimated that the fair value of the other loans at fixed interest rates with maturity of more than one year is not materially different to its carrying value as at the reporting date.

63.8.3 Loans to and Receivables from Banks and Other Customers - DVB

Approximately 80% of the total portfolio of loans and receivables to customers as at the reporting date comprises of contractual maturities of less than one year. The fair values of loans and advances with less than one year residual maturity is a close approximate to the carrying value.

The estimated fair value of loans and advances to other customers with residual maturity of more than one year with fixed interest rates is the present value of future cash flows expected to be received from such loans and receivables based on the current average interest rates for similar types of loans and advances prevailing as at the reporting date.

The fair value calculated on the above basis for fixed rate loans including housing loans and finance leases as at 31st December 2014 was LKR 5,319.7 million as against its carrying value which amounted to LKR 5,312.8 million. However, the Bank reserves the right to change the contracted fixed interest rates at it’s discretion.

63.9 Financial Investments - Held-to-Maturity

Fair value of the fixed rate debentures are based on prices quoted in the Colombo Stock Exchange, where there is an active market for quoted debentures.

Where there is no active market, fair value of the fixed rate debentures has been determined by discounting the future cash flows by the interest rates derived with reference to Government Treasury Bond rates with adjustments to risk premiums at the time of investment.

63.10 Due to Banks

Carrying value of amounts due to banks approximates their fair value as these balances have a remaining maturity of less than one year from the reporting date.

63.11 Due to Other Customers

The carrying value of deposits with a remaining maturity of less than one year approximates the fair value.

Fair values of deposits with a remaining maturity of more than one year is estimated using discounted cash flows applying current interest rates offered for deposits of similar remaining maturities.

The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the reporting date and the savings account balances are repriced frequently to match with the current market rates, therefore the demand and saving deposits carrying amounts are reasonable approximation to the fair values as at the reporting date.

63.12 Other Borrowing

This consists of borrowings sourced from multilateral and bilateral institutions. 70% of these borrowing are repriced either monthly, quarterly or semi-annually and rates are revised in line with changes in market rates. Hence the carrying value of these borrowings approximates the fair value.

The others at fixed rates which relates to borrowings on credit lines are based on interest rates which are specific to each refinancing arrangement and as such there are no comparable market rates. Hence, the fair value approximates the carrying value.

63.13 Debt Securities Issued

Debts issued comprise the USD notes issue and LKR debentures. Fair value of the USD notes are determined by reference to the bid and ask price quoted in the Singapore Stock Exchange. The LKR debentures are fair valued by reference to current Government Treasury Bond rates with a risk premium.

64Financial Risk Management

64.1 Introduction and Overview

Bank has exposure to following key risks from financial instruments:

• Credit Risk
• Liquidity Risk
• Operational Risk
• Market Risk

This note presents information about the Bank’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing such risk.

Risk Management Framework

The Board of Directors has the overall responsibility for the establishment and oversight of the Bank’s risk management framework. It has set up a Board Integrated Risk Management Committee (BIRMC) with three Non-Executive Directors, Chief Executive Officer and Chief Risk Officer (CRO) as members. The supervision and management of the broad risk categories includes credit, liquidity, market risk, operational and strategic risk. As per the Board approved Charter, BIRMC assists the Board to manage these risks prudently. Bank’s risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls and to monitor risk and adherence to limits. Risk management policies and systems are reviewed at least annually to reflect changes in market conditions, business strategy, products and services offered.

64.2 Credit Risk

64.2.1 Qualitative Disclosures

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Bank’s loans and advances to customers and other banks and investment in debt securities.

Management of credit risk includes the following elements:

1. Formulating credit policies in consultation with business units covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements.
2. Establishing the authorisation structure for the approval and renewal of credit facilities.
3. Limiting concentration of exposures to counterparties and industries.
4. Developing and maintaining Bank’s risk grading models in order to categorise exposures according to the degree of risk of financial loss and to focus management on the attendant risks.
5. Independent risk assessment, monitoring, recommending and reporting by the Integrated Risk Management Department (IRMD).
6. Reviewing compliance through regular audits by internal audit.

64.2.2 Quantitative Disclosures

	BANK		GROUP
	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000
64.2.2.1 Loans to and Receivables from Other Customers
Individually impaired
Gross amount	2,507,267	1,849,169	5,202,800	4,735,558
Allowance for impairment	(1,932,635)	(1,486,838)	(4,001,868)	(3,794,550)
Carrying amount	574,632	362,331	1,200,932	941,008
Collectively impaired
Gross amount	1,278,835	1,938,512	3,455,407	3,293,778
Allowance for impairment	(968,820)	(1,905,442)	(2,007,988)	(3,097,218)
Carrying amount	310,015	33,070	1,447,419	196,560
Past due but not impaired
Gross amount	12,073,322	14,761,765	29,168,304	29,580,747
Allowance for impairment	–	–	–	–
Carrying amount	12,073,322	14,761,765	29,168,304	29,580,747
Neither past due nor impaired
Gross amount	60,490,736	46,184,303	103,506,068	81,448,879
Allowance for impairment	–	–	–	–
Carrying amount*	60,490,736	46,184,303	103,506,068	81,448,879
Carrying amount	73,448,705	61,341,469	135,322,723	112,167,194
64.2.2.2 Loans to and Receivables from Banks
Neither past due nor impaired
Gross amount	484,067	1,233,617	3,563,647	5,547,821
Allowance for impairment	–	–	–	–
Carrying amount	484,067	1,233,617	3,563,647	5,547,821

* Carrying amount of the Bank’s loans an advances includes accounts with renegotiated terms of which the capital outstanding as at 31 March 2015 amounts to LKR 1,124 million (31 March 2014 - LKR 717 million).

64.2.2.3 Analysis of Security Values of Loans and Advances to Customers

	BANK				GROUP
	Gross loan balance	Security value	Gross loan balance	Security value	Gross loan balance	Security value	Gross loan balance	Security value
	31.03.2015 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2014 LKR 000	31.03.2015 LKR 000	31.03.2015 LKR 000	31.03.2014 LKR 000	31.03.2014 LKR 000
Against Individually Impaired
Mortgages over property, plant and machinery	2,070,294	1,264,737	1,439,652	1,267,319	1,550,604	1,917,899	2,322,796	2,005,606
Others	4,647	757			705,257	3,557
Unsecured	361,868	–	409,517	–	2,876,480		2,412,762
Against Collectively Impaired
Mortgages over property, plant and machinery	674,900	1,685,200	1,535,650	2,065,911	1,094,448	2,734,422	2,050,397	3,132,019
Others	450	500	6,400	2,207	813,740	556,150	226,893	56,868
Unsecured	458,450	–	198,216	–	1,369,966	–	816,351
Against Past Due But Not Impaired
Mortgages over property, plant and machinery	6,839,857	17,019,733	8,739,258	23,525,015	13,923,918	39,423,628	14,481,279	38,208,361
Others	335,163	178,422	266,667	114,215	6,984,107	2,896,689	6,425,987	2,471,142
Unsecured	2,018,260	74,343	2,725,752	–	4,598,182	74,343	5,096,332
Against Neither Past Due Nor Impaired
Mortgages over property, plant and machinery	26,202,035	55,837,996	17,835,288	41,406,004	38,781,539	101,929,409	26,988,462	86,085,688
Treasury Guarantee	2,912,507	2,912,507	1,172,632	1,172,632	2,912,507	2,912,507	1,172,632	1,172,632
Debt securities	1,270,982	1,270,982	1,500,401	1,500,401	1,270,982	1,270,982	1,369,290	1,500,401
Equity	345,614	993,574	449,487	1,278,574	345,614	993,574	449,487	1,278,574
Others	6,634,476	3,210,494	5,942,691	3,341,951	28,342,756	11,823,703	22,929,630	11,224,012
Unsecured	17,970,566	739,821	14,402,741	–	24,799,641	739,821	22,705,027
	68,100,069	85,189,066	56,624,352	75,674,229	130,369,741	167,276,684	109,447,325	147,135,303

The above analysis does not include balances relating to lease rentals receivable.

64.3 Liquidity Risk

64.3.1 Qualitative Disclosures

Liquidity risk is the risk that the Bank will not have sufficient financial resources to meet bank’s obligations as they fall due. This risk arises from mismatches in the timing of cash flows.

Management of liquidity risk includes the following elements:

1. Taking steps to ensure, as far as possible, that it will always have sufficient financial resources to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the bank’s reputation.
2. The Asset and Liability Committee (ALCO) is mandated to execute liquidity management policies, procedures and practices approved by the Board of Directors, effectively.
3. Monitoring of potential liquidity requirements and availability using the maturity analysis and cash flow forecast under normal and stressed conditions.
4. Monitoring the Group’s liquidity through the Liquid Assets Ratio (statutory minimum is currently 20%) using a flow approach.
5. Effecting threshold limits relevant for liquidity management as a part of the overall risk limits system of DBB.

As at 31 March	2015 %	2014 %
64.3.2 Quantitative Disclosures
64.3.2.1 Liquidity Risk Position
64.3.2.1.1 DFCC Bank PLC
Liquid asset ratio –
As at 31 March	47.6	77.5
Average for the year	42.5	67.5
Minimum for the year	30.0	34.2
Maximum for the Year	55.0	110.2
64.3.2.1.2 DFCC Vardhana Bank PLC
Liquid asset ratio of domestic banking unit –
As at 31 March	21.5	39.3
Average for the year	24.2	30.5
Maximum for the year	34.3	39.3
Minimum for the year	20.3	24.6
Gross advances to deposit ratio	98.0	77.0

As at 31 March 2015	Carrying Amount	Total*	Up to 3 months		3 to 12 months		1 to 3 years		3 to 5 years		>5 years
	LKR 000	LKR 000	LKR 000	%	LKR 000	%	LKR 000	%	LKR 000	%	LKR 000	%
64.3.2.2 Maturity Profile of Financial Liabilities - Bank
Liabilities with Contractual Maturity (Interest Bearing Liabilities)
Due to banks	1,928,867	1,928,867	1,928,867	100	–	–	–	–	–	–	–	–
Due to other customers	22,484,652	22,549,557	9,673,745	43	10,205,255	45	1,653,936	7	1,016,621	5	–	–
Other borrowings	24,361,797	24,362,817	1,730,225	7	2,278,309	9	6,526,995	27	5,547,618	23	8,279,670	34
Debt securities issued	19,445,924	19,461,598	529,025	3	700,647	4	4,917,636	25	13,314,290	68	–	–
Subordinated term debt	609,373	610,367	–	–	20,367	3	590,000	97	–	–	–	–
	68,830,613	68,913,206	13,861,862	20	13,204,578	19	13,688,567	20	19,878,529	29	8,279,670	12
Other Liabilities (Non-interest Bearing Liabilities)
Derivative liabilities held for risk management	1,737	1,737	1,406	81	331	19	–	–	–	–	–	–
Other liabilities	840,156	732,351	488,145	67	–	–	–	–	–	–	244,206	33
	841,893	734,088	489,551	67	331	0	–	–	–	–	244,206	33

* Represents the aggregate of the contractual maturities.

As at 31 March 2015	Carrying Amount	Total*	Up to 3 months		3 to 12 months		1 to 3 years		3 to 5 years		>5 years
	LKR 000	LKR 000	LKR 000	%	LKR 000	%	LKR 000	%	LKR 000	%	LKR 000	%
64.3.2.3 Maturity Profile of Financial Liabilities - Group
Liabilities with Contractual Maturity (Interest Bearing - Liabilities)
Due to banks	5,958,378	4,805,350	3,771,633	78	136,661	3	265,794	6	260,006	5	371,256	8
Due to other customers	88,878,888	88,989,674	40,077,692	45	25,239,326	28	6,070,891	7	5,071,935	6	12,529,830	14
Other borrowings	38,846,172	39,999,568	12,418,258	31	7,227,013	18	6,526,995	16	5,547,632	14	8,279,670	21
Debt securities issued	19,445,924	19,461,666	529,025	3	700,647	4	4,917,636	25	13,314,358	68	–	–
Subordinated term debt	1,609,664	1,610,666	–	–	20,666	1	1,590,000	99	–	–	–	–
	154,739,026	154,866,924	56,796,608	37	33,324,313	22	19,371,316	13	24,193,931	16	21,180,756	14
Other Liabilities (Non-interest - Bearing Liabilities)
Due to banks	14,189	14,189	14,189	100	–	–	–	–	–	–	–	–
Derivative liabilities held for risk management	37,153	37,153	7,409	20	29,744	80	–	–	–	–	–	–
Due to other customers	3,832,905	3,832,905	1,612,595	42	1,318,822	34	–	–	–	–	901,488	24
Other liabilities	2,586,927	2,502,384	1,863,021	74	239,673	10	547	–	–	–	399,143	16
	6,471,174	6,386,631	3,497,214	55	1,588,239	25	547	–	–	–	1,300,631	20

* Represents the aggregate of the contractual maturities.

64.4 Market Risk

64.4.1 Qualitative Disclosures

Market risk is the risk of loss due to changes in market variables, such as interest rates, equity prices, foreign exchange rates and commodity prices. This will affect the Group’s income or the value of its holdings of financial instruments. the Bank was not exposed to direct commodity prices risk since it does not take positions on exchange traded commodities. The objective of the Group’s market risk management is to manage and control market risk exposures within acceptable parameters, in order to ensure the Group’s solvency and the income growth, while optimising the return on risk.

64.4.1.1 Management of Market Risks

The following policy frameworks stipulate the policies and practices for management, monitoring and reporting of market risk

1. Market risk management framework
2. ALCO charter
3. Treasury trading guidelines and limits system
4. Treasury manual
5. Overall risk limits for market risk management
6. New product development policy

Overall authority for managing market risk is vested with the Board of Directors through the BIRMC. The operational authority for managing market risk is vested with ALCO. Foreign exchange risk is managed within approved limits and by segregation of reporting responsibilities of Treasury Front Office, Middle Office and Back Office.

Exposure to market risk arises from two sources viz trading portfolios from positions arising from making to market and non-trading portfolios from positions arising from financial investments designated as available-for-sale (AFS) and held-to-maturity and from derivatives held for risk management purposes.

64.4.2 Quantitative Disclosures

The following analysis is in respect of DFCC Bank PLC and DFCC Vardhana Bank PLC (collectively referred to as DBB) since these two entities have the most impact on these risks.

64.4.2.1 Interest Rate Risk - DBB

64.4.2.1.1 Duration Analysis as at 31 March 2015

Portfolio	Face value LKR 000	Marked-to- market value LKR 000	Duration	Interpretation of duration
Government securities trading portfolio	1,350,000	1,469,166	3.74	Portfolio value will decline approximately by 3.74% as a result of 1% increase in the interest rates.
Treasury Securities AFS portfolio	23,825,832	23,533,468	0.44	Portfolio value will decline approximately by 0.44% as a result of 1% increase in the interest rates.

Market risk exposure for interest rate risk in the trading portfolio is not significant.

64.4.2.1.2 Potential Impact to NII of DBB Due to Change in Market Interest Rates

Overall up to the 12-month time bucket, DBB carried an asset sensitive position. This asset sensitivity will vary for each time bucket up to the 12-month period. The interest rate risk exposure as at 31 March 2015 is quantified based on the assumed change in the interest rates for each time period and is given in table below:

	0 to 1 month LKR 000	Over 1 - up to 3 months LKR 000	Over 3 - up to 6 months LKR 000	Over 6 - up to 12 months LKR 000
Total interest-bearing assets	65,356,153	20,387,124	11,756,426	21,574,105
Total interest-bearing liabilities	36,150,413	35,724,565	20,107,100	11,038,822
Net rate sensitive assets (liabilities)	29,205,740	(15,337,442)	(8,350,674)	10,535,283
Assumed change in interest rates (%)	0.5	1.0	1.5	2.0
Impact	146,029	(140,593)	(93,945)	105,353
Total net impact if interest rates increase				16,843
Total net impact if interest rates decline				(16,843)

We have assumed that the assets and liabilities are re-priced at the beginning of each time bucket and have also taken into account the remaining time from the re-pricing date up to one year.

64.4.2.2 Forex Risk in Net Open Position (NOP)/Unhedged Position of DBB

The following table indicates the DBB’s exchange rate risk exposure based on its size of the NOP/unhedged positions in the foreign currency assets/liabilities. By 31 March 2015, DBB carried a USD equivalent net open/unhedged ‘oversold’ position of LKR 1.8 billion. The impact of exchange rate risk is given below:

	Amount in thousands
Net liability exposure - USD	13,504
Value of position in LKR	1,801,494
Exchange rate (USD/LKR) as at 31 March 2015	133.4
Possible potential loss to DBB - LKR
If Exchange rate (USD/LKR) - depreciates by 1%	18,015
- depreciates by 10%	180,149
- depreciates by 15%	270,224

The estimated potential exchange loss is off set by the interest gain due to interest differential between LKR and the respective foreign currencies.

64.4.2.3 Equity Prices Risk

Equity prices risk is part of market risk which is defined as the risk of possible losses arising from the equity market investments due to changes in the market prices of the invested shares. Group is exposed to equity prices risk through its investments in the equity market which has been shown in the AFS portfolio.

Parameter	Position as at 31 March 2015 LKR 000	Position as at 31 March 2014 LKR 000
Marked-to-market value of the total quoted equity portfolio	21,136,695	17,261,361
Value-at-risk (under 99% probability for a quarterly time horizon)	24.7%	21.5%
Maximum possible loss of value in the marked-to market value of the portfolio as indicated by the VAR over a quarterly period	5,220,763	3,711,193
Unrealised gains in the AFS equity portfolio reported in the fair value reserve	17,380,078	12,204,856

Equity prices risk is quantified using the Value at Risk (VAR) approach based on the Historical Loss method. Historical two-year portfolio returns, is adopted to compute VAR as a measure of the equity prices risk exposure by DBB. This VAR computation for the equity AFS portfolio considers a quarterly time horizon. The quantified VAR accounts for 30% of the fair value reserve in the AFS equity portfolio.

64.4.2.4 Market Risk Exposures of DFCC Group for Regulatory Capital Assessment as at 31 March 2015

Under the Standardised Approach of Basel II with effect from January 2008, market risk exposures are quantified for regulatory capital purposes. The computation results as at 31 March 2015 are as follows:

	Risk-weighted assets LKR 000	Quantified possible exposure LKR 000
Interest rate risk	716,140	71,614
Equity prices risk	83,230	8,323
Foreign exchange and gold risk	1,920,320	192,032
Total	2,719,690	271,969

64.5 Operational Risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with DBB relating to processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks.

DBB’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the DBB’s reputation with overall cost effectiveness whilst avoiding control procedures that restrict initiative and creativity.

The following are included in the process of the operational risk management in DBB:

• Monitoring of the Key Risk Indicators (KRIs) for the departments/functions under the defined threshold limits using a traffic light system.
• Operational risk incident reporting system and the independent analysis of the incidents by the IRMD, and recognise necessary improvements in the systems, processes and procedures.
• Trend analysis on operational risk incidents and review at the Operation Risk Management Committee (ORMC) and the BIRMC.
• Review of downtime of the critical systems.
• Review of HR attrition and exit interview comments in details including a trend analysis with the involvement of the IRMD. The key findings of the analysis are evaluated at the ORMC and the BIRMC in an operational risk perspective.
• Establishment of whistle-blowing process.
• Establishment of the complaint management process of the Bank under the Board approved complaints management policy. In addition to the status reporting on the complaints handling process by the Central Processing Unit, IRMD makes periodical evaluations on the effectiveness of the complaints management process and reports to the ORMC and the BIRMC.
• Appropriate segregation of duties, including independent authorisation of transactions;
• Reconciliation and monitoring of transactions;
• Compliance with regulatory and other legal requirements;
• Documentation of controls and procedures;
• Requirements for periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;
• Requirements for reporting of operational losses and proposed remedial action;
• Development of contingency plans;
• Training and professional development;
• Ethical and business standards; and
• Insurance covering risk due to threats arising from external and other events.

The primary responsibility for the development of controls to address operational risk lies with IRMD whilst implementation is assigned to senior management within each business unit. This responsibility is supported by the development of overall DBB’s standards for management of operational risk in the following areas:

Compliance with DBB’s standards is supported by a programme of periodic reviews undertaken by internal audit. The results of internal audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management.

64.6 Capital Management

64.6.1 Qualitative Disclosures

DFCC Bank PLC manages its capital at Bank and Group level considering both regulatory requirement and risk exposures. Its regulatory capital position is analysed by the BIRMC on a quarterly basis and recommendations and decisions are made accordingly. The Group capital management goals are as follows:

1. Ensure regulatory minimum capital adequacy requirements are not compromised.
2. Bank to maintain its international and local credit rating and to ensure that no downgrading occurs as a result of deterioration of risk capital of the Bank.
3. Ensure internal target minimum Capital Adequacy Ratio in Tier I is maintained.
4. Ensure maintaining of quality capital.
5. Ensure capital impact of business decisions are properly assessed and taken into consideration during product planning and approval process.
6. Ensure capital consumption by business actions are adequately priced.
7. Ensure Bank’s average long-term dividend pay-out ratio is maintained.

Central Bank of Sri Lanka sets and monitors regulatory capital requirement on both consolidated and solo basis.

The Group is required to comply with the provisions of the Basel II framework in respect of regulatory capital. The Group currently uses the Standardised Approach for credit risk and market risk and Basic Indicator Approach for operational risk. Regulatory capital comprises Tier I capital and Tier II capital.

DFCC Bank PLC and its Subsidiary DFCC Vardhana Bank PLC engaged in commercial banking business, have complied with the minimum capital requirements imposed by the Central Bank of Sri Lanka throughout the period.

As at	Notes	31.03.2015 Basel II LKR 000
64.6.2 Quantitative Disclosures
Tier I Capital
Stated capital	52	4,715,814
Statutory reserve fund	53	1,545,000
Retained earnings	54	12,755,357
General reserve	55	13,779,839
Non-controlling interests		353,882
Less: Deductions
Goodwill	41	156,226
Net deferred tax asset	43	1,562
Intangible assets	40	280,196
50% investments in the capital of other banks and financial institutions - cost		3,074,217
Total Tier I Capital		29,637,692
Tier II Capital
Qualifying subordinated liabilities		636,000
General provision*		618,767
Less: deductions
50% investments in the capital of other banks and financial institutions - cost		3,074,217
Total regulatory Capital		27,818,242

* Computed based on the Direction issued by the Central Bank of Sri Lanka.