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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
1. GENERAL INFORMATION
Sri Lanka Telecom PLC was incorporated under the Companies Act No. 17 of 1982 on
25 September 1996 and re-registered on
4 June 2007 under the Companies Act No. 07 of 2007, which came into effect from 3 May 2007. The registered office of the Company is situated at Lotus Road, Colombo 1. The Company is a quoted public company which has its listing on the Colombo Stock Exchange.
The Group provides a broad portfolio of telecommunication services across Sri Lanka,
the main activity being domestic and international fixed and mobile telephone services. In addition, the range of services provided by the Group include, interalia, internet services, data services, domestic and international leased circuits, frame relay, ISDN, satellite uplink and maritime transmission, IPTV service, directory publishing, Wi-max service and provision of manpower.
The Consolidated financial statements have been approved for issue by the Board of Directors on 17 February 2009.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these Consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless stated otherwise.
2.1 Basis of preparation
The Consolidated financial statements are prepared in accordance and comply with Sri Lanka Accounting Standards. The Consolidated financial statements are prepared under the historical cost convention. Where any item is not covered by Sri Lanka Accounting Standards (SLASs), International Financial Reporting Standards (IFRSs) are followed.
The preparation of financial statements in conformity with SLASs & IFRSs requires the use of certain critical accounting estimates. It requires management to exercise their judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Consolidated financial statements, are disclosed in Note 3.
2.2 Consolidation
(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanied by a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable tangible and intangible assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (See Note 2.6).
The inter-Company transactions, balances and unrealised gains on transactions between Group Companies are eliminated. The unrealised losses are also eliminated.
(b) Transactions and minority interests
The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group and are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.
2.3 Segment reporting
A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. All business segments which account for more than 10% of the total Group revenue are separately reported (See Note 4).
2.4 Foreign currency translation
(a) Functional and presentation currency
The items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency'). The Consolidated financial statements are presented in Sri Lanka Rupees, which is the Company's functional and Group's presentation currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of such transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the income statement within ‘interest income and finance costs’. All other foreign exchange gains and losses are presented in the income statement within ‘operating costs’.
(c) Group Companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate of the date of that balance sheet;
(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
(iii) all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.
The goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing rate of the date of that balance sheet.
2.5 Property, plant & equipment
All property, plant & equipment are stated at historical cost less accumulated depreciation except as noted in Note 15 where property, plant & equipment of Department of Telecommunications were transferred to
Sri Lanka Telecom at a valuation performed by the Government of Sri Lanka.
(a) Measurement
The historical cost includes all costs directly attributable to bringing an asset to working condition for its intended use and significant renovations. The cost in the case of the telecommunication network comprises all expenditure up to and including the cabling cost and telecommunication equipment within customers' premises and undersea cables.
The subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amounts of the assets replaced are derecognised. All repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
Cost of long-term capital projects are carried forward in capital work-in-progress until they are available for use.
An asset’s carrying amount is written down immediately to its recoverable amount if the carrying amount is greater than its estimated recoverable amount.
The interest costs on borrowings to finance the construction of property, plant & equipment
are capitalised during the period that is taken to complete and prepare the asset for its intended use.
(b) Depreciation
The freehold land is not depreciated. The depreciation on other assets is calculated using the straight-line method to allocate their cost or re-valued amounts to residual values over the estimated useful lives, as follows:
Asset category
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Useful life
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Freehold buildings
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40 years
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Ducts, cables and other outside plant
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10 to 12.5 years
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Undersea cables
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10 years
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Telephone exchanges and transmission equipment
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10 to 12.5 years
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Motor vehicles
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5 years
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Other fixed assets
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4 to 10 years
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(c) Disposal
The gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement.
2.6 Intangible assets
(a) Goodwill
The goodwill represents the excess of the cost of an acquisition over the fair value of the Group's shares of the net identifiable assets of the acquired subsidiary at the date of acquisition. The goodwill on acquisitions of subsidiaries is included in intangible assets. The separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination.
(b) Licences
Separately acquired licences are shown at historical cost. Licences acquired in a business combination are recognised at fair value at the acquisition date. Licences have a finite useful life and are carried at cost less accumulated amortisation. The amortisation is calculated using the straight-line method to allocate the cost over the period of the licence.
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (five years).
(c) Computer software
Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group are recognised as intangible assets when the following criteria are met:
• it is technically feasible to complete the software product so that it will be available for use;
• management intends to complete the software product and use or sell it;
• there is an ability to use or sell the software product;
• it can be demonstrated how the software product will generate probable future economic benefits;
• adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and
• the expenditure attributable to the software product during its development can be reliably measured.
Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
The computer software costs recognised as intangible assets are amortised over their estimated useful lives (not exceeding 5 years).
(d) Deferred insurance premium
The insurance premium paid by the Company to secure foreign loans under the 150K Project Scheme has been deferred on the basis that the benefit of this expenditure is not exhausted in the period in which it was incurred. This insurance premium is amortised over the loan repayment period of 10 years.
2.7 Grants
The grants relating to property, plant & equipment are included in non-current liabilities and are credited to the income statement on a straight-line basis over the expected useful lives of the related assets.
2.8 Impairment of non-financial assets
The assets that have an indefinite useful life, for example, goodwill, are not subject to amortisation. They are tested annually for impairment. The assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.
2.9 Investments
The long-term investments are initially recognised at cost and provision is only made where, in the opinion of the Directors, there is a permanent diminution in value. Where there has been a permanent diminution in the value of an investment, it is recognised as an expense in the period in which the diminution is identified.
On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the income statement.
2.10 Inventories
All inventories are held for the provision of service by the Group. The inventories are stated at the lower of cost and net realisable value. For this purpose, the cost of inventories is determined using the Weighted Average Cost (WAC). The cost of inventories include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provision is made for slow-moving and obsolete inventories, which are not expected to be used internally.
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