1. Basis of Preparation
The consolidated financial statements are prepared in accordance with 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 (SLAS), International Accounting Standards (IAS) are followed.

2. Group Accounting

i) Subsidiary Undertakings
Subsidiary undertakings, which are those entities in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been consolidated. Consolidated financial statements are prepared from the date on which effective control is transferred to the Group and are no longer consolidated from the date of cessation of such control through disposal or otherwise. All Inter-Company transactions, balances and unrealised surpluses and deficits on transactions between Group Companies have been eliminated. The accounting policies of the Subsidiary are the same as those of the Company. No disclosure of minority interest is made as the Subsidiary is wholly owned.

The Group reporting dates are set out in Note 20.

ii) Associated Undertakings
Investments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which the Group has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control.

Equity accounting involves recognising in the Income Statement the Group’s share of the Associates’ profit or loss for the year. The Group’s interest in the Associate is carried in the Balance Sheet at an amount that reflects its share of the net assets of the Associate.

The Group’s principal associated undertaking is shown in Note 09.

3. Foreign Currency Transactions
Foreign currency transactions in Group companies are accounted for at the exchange rates prevailing at the date of the transactions: gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the Income Statement. Such balances are translated at year-end exchange rates unless hedged by forward foreign exchange contracts, in which case the rates specified in such forward contracts are used. Where such gains and losses arise on foreign currency loans incurred to acquire or construct qualifying assets as defined in SLAS 20 they are capitalised as part of such qualifying assets. All other gains and losses are recognised in the Income Statement to the extent that they are regarded as an adjustment to borrowing cost.

4. Property, Plant & Equipment
Property, plant & equipment is carried at cost less accumulated depreciation, less a provision for any permanent diminution in value.

Cost includes all costs directly attributable to bringing an asset to working condition for its intended use.

Cost in the case of the network comprises all expenditure up to and including the cabling within customers’ premises, undersea cables, contractors’ charges and payments on account of materials, customs duty and borrowing costs.

Significant renovations are capitalised if they extend the life of the asset beyond its originally estimated useful life or increase its recoverable value. Maintenance, repairs and minor renewals are charged to income as incurred.

Property, plant & equipment that are disposed of are eliminated from the Balance Sheet, along with the corresponding accumulated depreciation. Any gain or loss resulting from such disposal is included in current income. Gains and losses on disposal of property, plant & equipment are determined by reference to their carrying amount and are taken into account in determining operating profit.

The basis of valuation used on the transfer of assets from SLT to SLTL is explained in Note 8 to the financial statements.

Depreciation is calculated using the most appropriate method to allocate the cost of each asset to their residual values over their estimated useful lives.

The depreciation methods and useful lives are shown in Note 8 to the financial statements.

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Interest costs on borrowings to finance the construction of property, plant & equipment are capitalised, during the period of time that is required to complete and prepare the property for its intended use, as part of the cost of the asset.

5. Investments
Long-term investments are shown 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.

6. Inventories
All inventories are held to be used by the Company in providing its services. Inventories are stated at the lower of cost and net realisable value. For this purpose, the cost of inventories is based on the standard costs, which is reduced by the corresponding price variance at the year end. Cost is calculated on a first in first out basis. Provision is made for slow-moving and obsolete inventories, which are not expected to be used internally.

7. Trade Receivables
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts at the year end. Bad debts are written off once decided as irrecoverable after due recovery procedures.

8. Cash & Cash Equivalents
Cash and cash equivalents are carried in the Balance Sheet at cost. For the prupose of the Cash Flow Statement, cash & cash equivalents comprise cash in hand, deposits held at call with banks, other short-term highly liquid investments and bank overdrafts. In the Balance Sheet, cash book overdrawn balances are included in borrowings in current liabilities.

9. Share Capital
Dividends on ordinary shares are recognised in equity in the period in which they are declared.

10. Deferred Insurance Premium
Insurance premium paid by the Company to secure foreign loans under the 150K Project Scheme has been deferred on the grounds that the benefit of this expenditure is not exhausted in the period in which it is incurred and will be written off to the Income Statement over the repayment period of the loans.

11. Borrowing Costs
Borrowing costs are written off to the Income Statement as incurred, unless they relate to borrowings which fund significant capital projects, in which case they are capitalised with the relevant qualifying asset up to the date of commissioning, and written off to the Income Statement over the period during which the asset is depreciated. Borrowing costs include interest charged, commitment fees, guarantee premium and exchange differences on foreign loans to the extent that they are regarded as an adjustment to interest costs.

12. Taxation
Taxes on income are accounted for using the liability method. Under this method the expected tax effect of temporary differences between the figures used for financial reporting and income tax reporting purposes are recorded as deferred taxes at the rates that are expected to apply when the temporary differences reverse.

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax.

Under this method the Group is required to make provision for deferred income taxes on revaluations, if any, of non-current assets and, in relation to an acquisition, on the difference between the fair values of the net assets acquired and their tax base. Provision for taxes, mainly withholding taxes, which could arise on the remittance of retained earnings, principally relating to Subsidiaries, is only made where there is a current intention to remit such earnings.

The principal temporary differences arise from depreciation on property, plant & equipment, revaluations of certain non-current assets, provisions for retirement benefits and tax losses carried forward. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the deferred tax assets can be utilised.

13. Defined Benefit Plan
SLTL as a matter of policy obtains actuarial valuation of the retirement benefit liability once in three years.

An actuarial valuation was carried out by an independent professional valuer to ascertain the full liability arising in terms of the Payment of Gratuity Act, No. 12 of 1983, in respect of all employees of SLTL as at 31 December 2001. The valuation was made adopting the Projected Unit Credit Method as recommended by the
Sri Lanka Accounting Standards No. 16 - Retirement Benefit Costs.

The assumptions based on which the results of the actuarial valuation was determined, are included Note 18 to the financial statements.

The liability is not funded externally.

14. Defined Contribution Plan
All employees of SLTL are members of the Employees’ Provident Fund of SLTL and the Employees’ Trust Fund to which SLTL contributes 15% and 3% respectively of such employees’ basic salary and allowances.

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

16. Revenue Recognition
Revenue is recognised on an accrual basis when it is probable that the economic benefits will flow to the Company and the revenue and associated costs can be reliably measured. Revenue is measured at the amount of consideration net of discounts and taxes. The specific criteria used for recognition of revenue are as follows:

i) Domestic and International Call Revenue and Rental Income
The customers are billed for calls and rental on monthly cycle based on the calendar months. Customers are charged GST and NSL at the applicable rates but accounted for as a liability. Revenue is recognised net of such taxes based on the amounts billed.

ii) Revenue from other Network
Operators and International
Settlements
Revenue is received from other network operators, local and international, for the use of SLTL network for completing connections. These revenues are recognised, net of taxes, based on traffic minutes and stipulated rates.

iii) Revenue from other
Telephony Services
Revenue is recognised on an accrual basis based on the usage of these services.

iv) Connection Fees
These are initially recognised as deferred income and subsequently recognised as revenue by amortising over a period of 15 years.

v) Equipment Sales
Revenue on equipment sales is recognised, net of taxes, on completion of sales transaction.

vi) Interest Income
Interest income is derived from short-term investments of excess funds and is recognised on an accrual basis.

17. Expenditure
Expenses are recognised on accrual basis. All expenditure incurred in the running of the business and in maintaining property, plant & equipment in a state of efficiency has been charged to income in arriving at the profit for the year.

For the purpose of presentation of the Income Statement information nature of expense method is used.

18. Financial Instruments
The Group adopted IAS 39 - Financial Instruments: Recognition and Measurement, at 1 January 2001. The financial effects of adopting IAS 39 are displayed in Note 23 to the financial statements.

Financial Risk Management

Foreign Exchange Risk

The Group operates internationally and is exposed to foreign exchange risk arising from exposure to various currencies but mainly with respect to US Dollars, Sterling Pounds and Japanese Yen.

The Company hedges 100% of anticipated loan repayments in each major currency for the following 5 years.

19. Comparatives
Where necessary, comparative figures have been adjusted to conform with the prior year adjustment for the deferred tax asset arising on Investment Tax Allowance.

The Directors are of the view that the proposed treatment gives a fairer picture of the results for the year and the assets and liabilities at the Balance Sheet date.