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OutstandingCommercial Leasing & Finance PLC | Annual Report 2013/14

www.clc.lk

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mercial Leasing &

Finance PLC

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Corporate Information

ContentsHighlights of 2013/2014 4Financial Highlights 6Chairman’s Message 10Director’s Review 14Director/Chief Executive Officer’s Review 18Board of Directors 22Management Team 28Regional Management Team 30Operational Review 34Branch Network 39Financial Review 40Sustainability Report 44Corporate Governance 48Risk Management 84

Directors Report 90Audit Committee Report 94Integrated Risk Management Committee Report 95Remuneration Committee Report 96Directors’ Statement on Internal Control over Financial Reporting 97Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 98Independent Auditor’s Report 99Statement of Financial Position 100Statement of Comprehensive Income 101Statement of Changes in Equity 102Statement of Cash Flows 103Accounting Policies 105Notes to the Financial Statements 126Shareholder Information 162Summarised Quarterly Statistics 164Ten Year Summary 165Sources and Distribution of Income 166Statement of Value Added 167Glossary 168Notice of the Meeting 170Form of Proxy 171

Name of the Company Commercial Leasing & Finance PLC

Country of Incorporation Sri Lanka

Legal Form A quoted public company with limited liability

Date of Incorporation 22nd April 1988

Company Registration No. PQ 131/PB/PQ

Stock Exchange Listing The ordinary shares of the Company were listed on the Diri Savi Board of the Colombo Stock Exchange on 5th June 2012.

Credit Rating ICRA Lanka assigned the company an issuer rating of (SL)A- (Stable).

Registered Office and Head Office No. 68, Bauddhaloka Mawatha, Colombo 04. Tel: 011 4526500/526 Fax:011 4526 559 Website: www.clc.lk

Directors Mr I C Nanayakkara – Non-Executive Chairman (alternate to W D K Jayawardena) Mr W D K Jayawardena – Non-Executive Director (alternate to I C Nanayakkara) Mrs K U Amarasinghe – Non - Executive Director Mr P D J Fernando – Senior Independent Director Dr H Cabral, PC – Independent Director Mr D M D K Thilakaratne – Executive Director/ CEO

Secretaries Chrishanthi S. Emmanuel, FCIS, FCCS (stepped down w.e.f. 2nd May 2014)

LOLC Corporate Services (Private) Limited (appointed w.e.f. 2nd May 2014) 100/1 Sri Jayewardanapura Mawatha Rajagiriya Tel: 011 5880354/7 0115880880 (general)

Auditors KPMG, Chartered Accountants

Lawyers Julius & Creasy, Attorneys-at-Law Nithya Partners

Registrars PW Corporate Secretarial (Private) Ltd No. 3/17 Kynsey Road, Colombo 8. Tel: 011 4897733-5

Principal Activities During the year the principal activities of the Company com-prised provision of leasing, hire purchase, loans and mobiliz-ing of fixed and savings deposits.

Bankers Bank of Ceylon Standard Chartered Bank PLC Citi Bank N A Hatton National Bank PLC Hongkong and Shanghai Banking Corporation Ltd Deutsche Bank Nation Trust Bank PLC Commercial Bank of Ceylon PLC NDB Bank Seylan Bank PLC MCB Bank Sampath Bank PLC DFCC Vardhana Bank Union Bank of Colombo PLC People’s Bank Habib Bank

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Digital Plates & Printing by Printel (Pvt) LtdPhotography by Taprobane Street & Danush De Costa

Once again, Commercial Leasing & Finance PLC has accelerated to the forefront of the LOLC Group, delivering record returns to stand out in our conglomerate of high value companies. For several years our bold strategies have set us apart in our highly competitive business segment, taking us to a high position in industry rankings with exceptional revenues and a solid reputation trusted by thousands of rural and urban customers across the island.

We will strive to be outstanding, whatever we choose to do. Because we dare to break barriers, we have the will to win and the power to achieve.

The daring to break barriers, the will to win, the power to achieve...

Outstanding


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Commercial Leasing & Finance PLC (CLC), a member of the LOLC Group, is one of Sri Lanka’s leading financial service providers offering solutions ranging from leasing, fixed deposits, savings, loans and factoring. The year 2013 saw the Company complete its 25th year in business, during which time it has contributed much towards redefining the financial sector landscape in Sri Lanka.

With 53 customer touch points spread across the country, CLC has become a trusted brand, synonymous with stability and dependability. It plays an invaluable role as a key catalyst in financial empowerment and the inclusion of the "Un-bankable" segment.

CLC will continue to grow and expand with its unique operating philosophy - “Hithawathkama” - which encapsulates how the trust and progress of all our stakeholders will continue to be the priority in our hearts and minds.


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Corporate Vision

To soar into the future, giving wings to the dreams, hopes and aspirations of our people and everyone who has a stake in the success of our enterprise.

To forge ahead to reach new frontiers, to touch new horizons, seeking new challenges and exploring new opportunities.

Together with our people with diverse strengths, committed to achieving personnel excellence and the continuous growth of our enterprise.

Mission StatementIn order to make our vision a reality, we always strive: to provide innovative financial solutions of highest possible quality at an optimum valueto ensure utmost customer focus and dedication to superior customer serviceto provide best returns to our stakeholders through the strength of our customer, strategic partner and employee and satisfaction

Core ValuesTo serve our customers with utmost careTo serve our customers professionally To do work with utmost integrityBe performance drivenTo work as a team and treat fellow colleagues as one family

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Highlights of 2013/2014

25th Anniversary Celebrations

Avissawella Branch Relocation Jaffna Branch Relocation

25th Anniversary Celebrations

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Edexcel Job Fair

Fixed Deposits Staff Competition Winners

Sports Carnival 2013

Champions of MCA “E” division cricket tournament

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The Company’s balance sheet strengthened throughout the year increasing total

assets to Rs. 32,934 Mn from Rs.27,229 Mn, an increase of 21% compared to last

year. The net lending portfolio including factoring increased from Rs. 24,985 Mn to

Rs. 27,570 Mn. The equity of the Company reached Rs.8,856 Mn from Rs.7,837 Mn

with the earnings from operations

Financial Highlights

For the year ended 31 March 2010 2011 2012 2013 2014

Performance indicators (Rs. ‘Mn)Interest income 2,495 3,402 5,317 5,996 7,514 Interest expense 1,362 1,309 2,167 2,515 3,039 Net interest income 1,133 2,093 3,150 3,481 4,475 Profit before tax 362 741 3,245 1,603 1,289 Profit after tax 354 664 2,964 1,168 936

New executions (leases and loans) 5,675 12,926 15,262 11,232 18,593 Factoring funds in use 1,437 2,954 3,005 2,859 2,231

Financial position (Rs. ‘Mn)Total assets 12,534 21,351 26,398 27,229 32,934 Net lending portfolio 9,764 18,339 24,101 24,985 27,570 Outstanding borrowings 9,231 14,880 16,974 14,660 14,369 Deposits from customers - - 385 2,962 7,534 Shareholders funds 2,029 3,695 6,763 7,837 8,856

Key indicators Earnings per share (Adjusted) (Rs. per share) 0.06 0.10 0.46 0.18 0.15 Net asset value per share (Adjusted) (Rs. per share) 0.32 0.58 1.06 1.23 1.39

Interest cover (times) 1.26 1.57 2.49 1.63 1.42 Debt to equity ratio (times) 4.55 4.03 2.57 2.25 2.47 Return on equity (%) 19.12 23.20 56.69 16.01 11.21Return on average total assets ( %) 3.22 3.92 12.42 4.36 3.11Non performing ratio 0.9 0.76 2.80 2.98 2.44

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32,934 27,570

8,856

Total Assets Net lending portfolio

Shareholders’ funds

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Shareholders' Funds and ROERs.Mn %

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Total Assets to Return on AverageTotal AssetsRs.Mn %

Total assetsReturn on averagetotal assets

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OutstandingThe daring to break barriers, the will to win, the power to achieve

P. R. P. PiyasenaA Vegetable Seller from Wellawa

I’ve been a customer of CLC since 2003, and have leased 2 lorries which we use to transport vegetables from Dambulla. We recommend CLC to anyone because they are easy to do business with, very customer friendly and understanding

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ManagementReviews

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Chairman’s Message

Ishara NanayakkaraChairman

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In the year under review, CLC continued to be a key contributor to LOLC Group’s performance, accounting for 28% of the Group’s PBT and 28% of its revenue whilst the contribution in terms of asset was 19%. A majority of CLC’s customer base is drawn from the SME or Micro sectors of the country. Being a catalyst for financial inclusion for a section of the population who have hitherto had no access to formal finance It is my pleasure to welcome you to the 22nd Annual General Meeting of Commercial Leasing & Finance PLC (CLC). The year also marked a milestone as CLC celebrated the completion of 25 years in business during which it has empowered people and become a trusted brand from the rural hinterlands to the cosmopolitan cities of Sri Lanka.

CLC achieved a Profit After Tax of Rs.936 Mn during the year albeit a decline of 20% over the previous year, whilst Income grew by 25% to Rs. 7,514 Mn.

The economic & indusTRy enviRonmenT :The performance of the Sri Lankan economy was more robust compared with 2012 and growth in Gross Domestic Product (GDP) rebounded to 7.3%, reflecting a strengthening of domestic demand, exports and tourism.

The industry environment however, was challenging, mainly due to the setback in the agriculture sector due to adverse weather during the first half of the year. The negative impact on agricultural production affected recoveries of customer payments and the demand for credit in the SME and Micro finance sectors of the country, and hence adversely impacted the financial services sector of the country. CLC’s performance in this backdrop is thus commendable and is a reflection of the resilience of its unique business model.

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Interest incomeRs.Mn

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Chairman’s Message

A sTRong invesTmenT cAse The year under review was CLC’s second year of operations as a registered finance company since it broadened its sphere of influence as a deposit taking institution. A significant growth in deposits in FY 2013/14, by 154% over the previous year is hence a noteworthy achievement. It is a reflection of the public's trust and confidence in the Company as well as the drive and commitment of the entire team.

CLC became a member of the LOLC Group six years ago, and has since then evolved from being a medium sized financial company to be amongst the top five players in the industry today, achieving results that continue to be above industry performance. In the year under review, CLC continued to be a key contributor to LOLC Group’s performance, accounting for 28% of the Group’s PBT and 28% of its revenue whilst the contribution in terms of asset was 19%.

A majority of CLC’s customer base is drawn from the SME or Micro sectors of the country. Being a catalyst for financial inclusion for a section of the population who have hitherto had no access to formal finance, enables us to make a valuable contribution which extends far beyond our bottom line to benefit society and the nation. We will continue to expand our reach and products in the SME & Micro sectors across the country.

CLC is one of the few Sri Lankan finance companies to be funded by leading international funding agencies such as FMO, the Asian Development Bank (ADB) and Triodos. These agencies together account for 30% of the Company’s funding. It is heartening to know that we expect the channels of foreign funding to expand in value and number in the year ahead. These partnerships are a valuable endorsement of the role we play in Sri Lanka’s economic progress. Furthermore, they also stand as testimony to the high standards of governance and management we strive for at CLC. We also appreciate the opportunity these relationships offer us to continuously raise the bar for ourselves- whether it be in technical know how or by being abreast of the latest in best practices.

ouTlook:We welcome the new regulatory initiative by the Central Bank to consolidate the financial services industry for the greater stability and sustainability it will facilitate for Sri Lanka’s financial sector. Consolidation would also ensure better protection to the deposit holders and the public at large and the industry stands to benefit from economies of scale and economies of scope, facilitating greater international competitiveness and growth. CLC has been categorized as an “A” institution and is currently engaged in evaluating opportunities for acquisitions of smaller “B” category entities.

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Net Interest IncomeRs. Mn

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The outlook for the Sri Lankan economy for the next few years is one of sustained rapid growth which is primarily to be driven by easy access to private sector credit and the continuing expansion of infrastructure. Moreover, an improving external environment, higher investments, and a recovery in domestic consumption would also support stronger GDP growth.

Anticipating this high growth environment, CLC looks to the next year and beyond with much optimism to create and meet new opportunities and to keep expanding its potential as a financial services provider.

There is much potential in the Micro and SME sectors of the economy. Driven by our triple bottom line focus to facilitate financial inclusion and remain a catalyst for growth, these sectors will continue to be amongst priority areas for CLC.

AcknowledgemenTs :I would like to convey my sincere appreciation to the Board for their continued support and to the team at CLC whose unreserved commitment, tireless effort and talents have been the cornerstones of the Company’s success. My sincere gratitude also extends to our longstanding customers, funding partners, business Introducers, shareholders, and all other valuable stakeholders for un wavering confidence placed in us.

Ishara NanayakkaraChairman26th May 2014

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Kapila Jayawardana Director

Director’s Review

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Dear Stakeholder,

CLC’s unique business model combined with the right strategies, operational excellence, prudent and effective credit policies and procedures, has made it one of the most resilient financial institutions in Sri Lanka. Thus, the year under review saw CLC perform well despite a challenging environment.

The performance of the Company is discussed adequately in the Chairman’s Message, CEO’s Reviews and the Operational Review I would hence provide an overview of the key strengths of the Company and salient points in the industry environment which impacted our performance.

The bAckdRoP To ouR PeRfoRmAnce :Sri Lanka’s economy rebounded to grow at a more robust pace in 2013, The industry environment however, was quite challenging especially during the first two quarters of the year. The decline in agricultural production, as a result of adverse weather at the beginning of the year, impacted the demand for credit in the SME and Micro financing sectors. The set back in agri production also affected customer repayments, which in turn impacted the Non Performing Loans (NPL) ratios of the sector, requiring the entire banking sector to facilitate a higher provisioning during the year.

Moreover, the lagged effect of the credit squeeze that prevailed in 2012 also continued into 2013. Additionally, the decline in prices of certain categories of brand new vehicles in Sri Lanka also had an adverse impact on the Leasing sector, further augmenting the challenges faced

CLC’s deposit base increased substantially during the year, with total deposits in volume terms increasing by 154%. I congratulate the entire team at CLC for their drive and commitment which have enabled the Company to secure a significant deposit base in just its second year as a deposit taking institution

by the financial sector during the year. However, the Agriculture sector bounced back strongly in the second half of 2013 to record a growth of 4.7 % compared to a growth of 5.2 % in 2012. The Industry sector recorded the highest sectoral expansion achieving a strong growth of 9.9 % during

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CLC’s business model remains an unique one, even vis a vis the other financial companies within the LOLC Group. The strength of this “Business Introducer” model has been a key element of CLC’s performance

Director’s Review

A sToRy of susTAinAble PRofiTAbiliTy:CLC’s business model remains an unique one, even vis a vis the other financial companies within the LOLC Group. The strength of this “Business Introducer” model has been a key element of CLC’s performance; and during this year as well it contributed around 55% of total business volumes. In addition to a lean management style which this model facilitates due to its cost efficacy; the strength of our partnerships with over 1100 “Business Introducers” also inspires us to reach higher and wider.

CLC’s deposit base increased substantially during the year, with total deposits in volume terms increasing by 154%. I congratulate the entire team at CLC for their drive and commitment which have enabled the Company to secure a significant deposit base in just its second year as a deposit taking institution. It also reflects the public trust and confidence in the Company, customer satisfaction levels and the stability and dependability which are associated with brand CLC.

ouTlook :I am confident that the financial sector consolidation program of the Central Bank will present unique opportunities for us. CLC is categorized as an “A” grade institution and is presently engaged in due diligence and analysis of a number of “B” grade Financial Institutions to look at the potential of absorbing them.

2013, largely driven by Construction and Manufacturing sub-sectors whilst the Services sector which continued to be the dominant sector of the economy, grew by 6.4 % during 2013 (compared with a 4.6 % growth in 2012) mainly driven by higher growth in wholesale and retail trade, hotels and restaurants, transport, banking, insurance, and real estate.

Interest rates remained low during the year, combined with a stable exchange rate and record low levels of inflation. The Current Account deficit narrowed significantly whilst the relaxed monetary policy stance adopted by the Central Bank in December 2012 continued in 2013, facilitated by mild inflation and inflation expectations.

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In the vibrant economic environment we anticipate, CLC is well supported by its brand equity, the strength of its business model and the synergies of LOLC and CLC, to capitalize on the numerous opportunities that we foresee.

AcknowledgemenTs :I would like to convey my sincere appreciation to our Chairman and my colleagues on the Board for their guidance, continual support and to the team at CLC whose unreserved effort and commitment have been cornerstones of the Company’s success. My sincere appreciation also to our customers, funding partners, shareholders, Business Introducers and other stakeholders for their constant support and inspiration.

Kapila JayawardenaDirector26th May 2014

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Krishan ThilakaratneDirector/Chief Executive Officer

Director/Chief Executive Officer’s Review

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Dear Stakeholder,It is my pleasure to share with you the Annual Report and Audited Financial Statements for the year ended 31st March 2014.

PeRfoRmAnceDuring the year under review, the Company achieved a Profit After Tax of Rs. 936 million which was a 20% decline over the previous year, mainly due to high provisioning in a challenging environment. Nevertheless, appropriate strategies and timely action enabled CLC to perform commendably in comparison to many in the industry.

Our financial products mainly benefit the micro sector of the economy and small to medium scale entrepreneurs. Brand CLC has become a household name in the multitude of rural and semi urban locations we operate in. This has enabled CLC to become an integral part of the empowerment and enrichment of these communities

Some highlights of our performance in FY 2013/14 include the following :

� An NPL ratio of 2.4% compared with an industry average of 6.5%.

� Profit Before Interest and Tax increased by 5% over the previous year.

� ROI was approximately 11.21% which is significant for a company with a Net Asset Value of over Rs. 8 billion.

� The deposit base grew significantly by almost 154% over the previous year.

� Our Portfolio grew by 10% over the previous year.

During the year, CLC also received several external endorsements of its commitment to excellence in what and how we do; and these include, being ranked 44th amongst the “Most valuable 100 Brands in Sri Lanka” by the Brands Annual 2014 Edition; being ranked 70th in the “LMD Top 100 Leading Listed Companies”; and being shortlisted for “Peoples’ Financial Service Provider of the Year” at the SLIM Peoples’ Awards 2014 - an award for brands which “have left a lasting impression in the hearts and minds of the people”.

The year was a challenging one for the financial sector due to several reasons. For one, the demand for credit from the SME and Micro financing sectors decreased due to the adverse impact of weather on agriculture during the first part of the year. Agriculture accounts for a sizeable component of our SME and Micro financing portfolios. In addition, recoveries became a key challenge due to the setback in the agriculture sector. Moreover, the decline in gold prices in the global market, albeit having no impact on CLC, impacted the economy, as pawning business accounts for a considerable portion of the portfolios of most Banks as well as Non- Banking Financial Institutions (NBFI’s). Although Banks and NBFI’s faced a challenging environment in 2013 conditions eased towards the latter part of the

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year as weather became more conducive to agriculture whilst gold prices in the global market began to stabilize. Furthermore, there was a decline in prices of certain categories of new vehicles during the year which exerted pressure on provisioning, thereby impacting the industry.

Our non performing loans (NPL) ratio, at 2.4% during the year, was once again amongst the best in the industry and well above the industry average of 6.5%. This achievement is made all the more significant as it was despite NPL’s reaching the all time highest, in the backdrop of a challenging industry environment. The low NPL was thus, a result of very effective corrective measures adopted by the company, and demonstrates the efficacy of our comprehensive recovery and collection processes. CLC strengthened its credit procedures further and adopted stringent monitoring procedures which are also constantly reviewed and refined where necessary.

CLC’s deposits base grew exceptionally by 154% during the year to Rs. 7.5 billion, amply reflecting the trust and public confidence in our dependability and stability, supported by its strong balance sheet and profitability.

The fact that this deposit base of Rs. 7.5 billion has been mobilized within just two years of operations as a deposit taking Finance Company is further testimony to the brand equity of CLC earned over 25 years in business.

Our strategy of pioneering Factoring into outstation markets targeting a market which was hitherto neglected, has proven to be a success. It has also enabled us to enjoy first- mover advantage in this niche market. Thus, nearly 50% of Commercial Factors’ business in revenue terms in 2013/14 came from regions outside the Western Province. The year under review saw Commercial Factors expand further in the regions for alternative markets to the extremely competitive Western Province. These efforts were supported by CLC’s extensive branch network, enabling it to educate businesses across the country on leveraging Factoring services for their business activities. Commercial Factors which constitute of CLC’s total portfolio contributed 9% to its revenue during the year.

Six of the Company’s branches were upgraded during the year, to enhance the environment for our customers as well as employees. We also conducted a number of initiatives to strengthen relationships with our customers. The fact that over 30% of new business during the year came from existing customers is an endorsement of the strength of our relationships with customers.

ouR PeoPleOur strong team will continue to be the key factor in propelling the company forward. Whether it be the success of our marketing strategy, operational excellence or the efficacy of our credit policies the commitment, dedication and talent of our team have been the key contributor. A staff retention ratio of

Director/Chief Executive Officer’s Review

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New ExecutionsRs.Mn

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We expect the year ahead to a have a more conducive and vibrant industry environment than year 2013, and thus plan to add new products and expand our branch network.

Sri Lanka’s economy has immense potential and is expected to continue to grow at a rapid pace for the next few years. The country’s goal to achieve a USD 4,000 Per Capita income and become a USD 100 billion economy by 2016, augurs well for increased opportunities for investments, savings, equipment and working capital as well as consumption financing. CLC is thus well poised to contribute to this journey and harness the new opportunities it foresees. A further diversification of funding sources, strategic partnerships, and the expansion of our distribution channel will enhance our potential in such a growth environment.

APPReciATionI would like to convey my sincere appreciation to the Chairman and the Board of Directors for their vision, unstinted support and guidance, and for the confidence placed in me and my team. I also extend my gratitude to the corporate management and the entire team at CLC, for their passion, commitment, talents and tireless efforts that have fuelled our journey thus far and will continue to take CLC to new heights. The confidence and support of our customers, funding partners, business introducers, shareholders and other stakeholders, have been significant factors that have contributed to our performance, and the strength of the CLC brand during its 25 years in business. I extend my heartfelt gratitude to them.

Krishan ThilakeratneDirector/Chief Executive Officer26th May 2014

87% achieved in FY 2013/14 is thus most heartening. CLC continued staff training programmes and a variety of other initiatives to build a cohesive team, during the year as well.

sTRATegy & ouTlookThe new regulatory initiative by the Central Bank of Sri Lanka, introduced in January 2014, to encourage consolidation in the financial sector will result in greater stability and sustainability of the sector. CLC which is categorized as an “A” institution is currently engaged in evaluating opportunities for mergers or acquisitions with smaller entities in the “B” category.

Our financial products mainly benefit the micro sector of the economy and small to medium scale entrepreneurs. Brand CLC has become a household name in the multitude of rural and semi urban locations we operate in. This has enabled CLC to become an integral part of the empowerment and enrichment of these communities. We will continue to expand in these micro and SME sectors in the next few years and capitalize on the numerous opportunities that still remain untapped. We also plan to become a ‘One stop shop’ for financing requirements of all our customers such as Capital revenue, Working Capital revenue, and Consumption spending via loans and leasing products.

Our branch network and the “Business Introducer” channel which has proven to be successful, would continue to be a key conduit for this strategy in the next few years. In addition, the Company will also introduce a new Franchisee model in the year ahead. The synergies that we enjoy from being a member of the LOLC Group, and the trust earned by brand CLC as the first choice in the micro and SME market in Sri Lanka, will continue to be key strengths which we will leverage on.

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Board of Directors

Mr. Krishan Thilakaratne Director/Chief Executive Officer

Mr. Priyantha FernandoSenior Independent Director

Mr. Ishara NanayakkaraChairman/Non-Executive Director

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Mr. Kapila JayawardenaNon-Executive Director

Dr. Harsha Cabral, PCIndependent Non-Executive Director

Mrs. Kalsha AmarasingheNon-Executive Director

Miss. Chrishanthi EmmanuelCompany Secretary

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Mr. Ishara NanayakkaraMr. Ishara Nanayakkara joined the Board of Commercial Leasing & Finance PLC in June 2008 and was appointed Chairman on 31st January 2012. He is also the Deputy Chairman of Lanka ORIX Leasing Company PLC and Lanka ORIX Finance PLC. Mr Nanayakkara is the Chairman of LOLC Micro Credit Limited, the micro finance arm of LOLC Group. He also serves on the Board of PRASAC Micro Finance Institute; one of the largest Micro Finance institutions in Cambodia. His enduring interest in microfinance was further evident by his latest initiative and LOLC’s first overseas investment, LOLC Myanmar Micro Finance Company Ltd of which he is the founding Chairman. He was also instrumental in the joint venture between BRAC and LOLC to form BRAC Lanka Finance PLC. Mr. Nanayakkara is the Deputy Chairman of Seylan Bank PLC, a premier commercial bank in the country. His strategic participation in general, life and micro insurance through LOLC Insurance Company Ltd, factoring and working capital through LOLC Factors Ltd, stock brokering and securities through LOLC Securities Ltd, Islamic finance through LOLC Al-falaah, SME financing in addition to conventional lending and deposit product knowhow, reflects his vivid exposure in the financial services arena. He is also the Executive Chairman of Brown & Company PLC and Browns Investments PLC. The Browns Group is a renowned conglomerate with leading market position in trade, leisure, manufacturing, consumer appliances and agriculture equipment; Browns Investments is the strategic investing arm of Browns with a portfolio of Leisure, Plantation, construction, agriculture inputs and banking.

Mr. Nanayakkara also serves on the Boards of Sierra Constructions Ltd, Free Lanka Holdings PLC, Lanka Century Investment PLC, Associated Battery Manufacturers (Cey) Ltd and Agstar Fertilizer PLC . He holds a diploma in Business Accounting from Australia.

Mr. Kapila JayawardenaMr. Kapila Jayawardena counts over thirty two years experience in Banking, Financial Management and Corporate Management. Mr. Jayawardena was appointed as a Director of the Company in June 2008. He was the former CEO/Country Head of Citibank Sri Lanka and Maldives.

Mr. Jayawardena has played a pivotal role in the banking sector contributing to the financial market reforms, development and regularly advising regulators on prudential requirements and has widespread experience in introducing innovative financial service products to the market.

LOLC Group is one of the largest conglomerates in Sri Lanka with a presence in diversified industries such as Financial Services, Trading, Manufacturing, Construction, Leisure and Renewable Energy.

As an individual with extensive International and domestic financial experience, Mr. Jayawardena was a key member of the following committees.

� Chairman, Sri Lanka Bank’s Association (SLBA) 2003/2004

� Member of the Financial Services Reforms Committee (FSRC) 2003/ 2004

Board of Directors

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� Director of Lanka Clear and was instrumental in completing the automated clearing project for the Sri Lankan banking industry 2004

� President of the American Chamber of Commerce Sri Lanka 2006/2007

� Member of the inaugural Sovereign ratings team for Sri Lanka

� Member of the National Council of Economic Development (NCED)

� Board Member of the United States - Sri Lanka Fulbright Commission

Presently, Mr. Jayawardena holds Chairmanship/directorship in the following companies:

� Lanka ORIX Leasing Company PLC – Group Managing Director/CEO

� Lanka ORIX Finance PLC- Chairman � LOLC Insurance Company Limited - Chairman � LOLC Securities Limited - Chairman � Eden Hotel PLC - Chairman � Speed Italia (Pvt) Ltd - Chairman � United Dendro Energy (Pvt) Ltd - Chairman � Palm Garden Hotels PLC – Chairman � LOLC General Insurance Ltd – Chairman � LOLC Life Insurance Ltd - Chairman � LOLC Micro Credit Ltd - Director � Brown & Co., PLC - Director � Browns Investments PLC – Director � Seylan Bank PLC – Director � BRAC Lanka Finance PLC – Director � Riverina Resorts (Pvt) Ltd - Director

Qualifications : Master of Business Administration, American University of Asia Fellow of the Institute of Bankers, Sri LankaAssociate of the Institute of Cost and Executive Accountants, London.

Mrs. Kalsha AmarasingheMrs. Kalsha Amarasinghe was appointed to the Board in June 2008. She holds an Honours Degree in Economics.

She serves on the Boards of Lanka ORIX Leasing Company PLC, LOLC Micro Credit Ltd, LOLC Insurance Co. Ltd, United Dendro Energy (Pvt) Ltd, Palm Garden Hotels PLC and Eden Hotel Lanka PLC. She also serves as a Director on the Boards of Lanka ORIX Finance PLC, Brown & Company PLC, Browns Investments PLC and Riverina Resorts (Pvt) Ltd.

Mr. Priyantha Fernando Mr Priyantha Fernando was appointed to the Board in March 2012. He has more than 36 years of experience in the banking sector. He was attached to the Central Bank of Sri Lanka serving in senior and diverse capacities. He was the Deputy Governor of the Central Bank in 2010-2011 in charge of the Financial System Stability and the Corporate Services cluster. Mr Fernando has extensive experience and expertise in the fields of Banking and Financial Sector regulation, Information Technology, National Accounting and Statistics, Finance and Fund Management. At the Central Bank he was the chairman of the Financial Stability Committee, member of the Monetary Policy Committee, member of the Risk Management Committee, Chairman of the National Payment Council.

He was an ex-officio board member in several regulatory organisations namely the Insurance Board of Sri Lanka, the Chairman of the Credit Information Bureau, Institute of Bankers–Sri Lanka. He has also served as a Board Member at Employers Trust Fund, LankaClear Pvt Ltd and Lanka Financial Services Bureau.

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During his career he initiated and spearheaded several key projects of national importance, especially in the area of developing the infrastructure for the national payments and settlement system.

Mr Fernando has served on a number of committees at national level covering a range of subjects representing the Central Bank and Ministry of Finance.

He has been appointed the Chairman of Golden Key Credit Card Company and currently serves on the boards of the Securities and Exchange Commission of Sri Lanka, Union Bank of Colombo PLC, Hambana Petro Chemicals (Pvt) Ltd, Taprobane Holdings Ltd, Ceylon Leather Products PLC, Commercial Insurance Brokers (Pvt) Ltd, Thomas Cook Travels Sri Lanka, and the International Institute of Higher Education.

Dr. Harsha Cabral, PC Dr Harsha Cabral was appointed to the Board as an Independent Director in December 2011. He is a President’s Counsel and holds a PhD in Corporate Law (University of Canberra) Australia. Dr Cabral is a Senior Counsel in Corporate Law with 26 years of experience, specialising in Company Law, Intellectual Property Law, Commercial Law, International Trade Law & Commercial Arbitration.

He serves as a Commissioner, Law Commission of Sri Lanka. He is a Member of the Advisory Commission in Company Law, Sri Lanka (key member in drafting the new Companies Act No. 07 of 2007), Ministerial Committee appointed to reform the Law on Commercial Arbitration. He is a Council member of the University of Colombo, member of the Board of Studies - the

Council of Legal Education in Sri Lanka, member of the Academic Board of Studies of the Institute of Chartered Accountants of Sri Lanka and a member of the Corporate Governance Committee of the Institute of Chartered Accountants of Sri Lanka.

He currently serves on the Boards of Diesel & Motor Engineering PLC (DIMO), Union Bank of Colombo PLC, Richard Pieris & Co. Distributors Ltd., Tokyo Cement Company (Lanka) PLC, Tokyo Super Cement Co (Private) Ltd., Fuji Cement Co (Lanka) Ltd, Tokyo Cement Power (Lanka) Ltd, Hayleys PLC. Hambana Petrochemicals (Pvt) Ltd, Lanka ORIX Finance PLC and Alumex PLC.

Dr Cabral is a lecturer and examiner of University of Wales-UK, University of Colombo & Sri Lanka Law College, Council member/faculty member of Institute for the Development of Commercial Law & Practice, a lecturer & examiner, Post Graduate Diploma in Advanced Corporate Law, Institute of Advanced Legal Studies, Sri Lanka Law College and the Vice President of Business Recovery & Insolvency Practitioners Association of Sri Lanka.

He is the author of several books on Company Law & Intellectual Property Law.

Mr. Krishan Thilakaratne Mr Krishan Thilakaratne was appointed as Executive Director/ CEO of Commercial Leasing & Finance PLC in March 2012. Mr Thilakaratne also serves as General Manager of LOLC Al-Falaah - Islamic Business Unit of Lanka ORIX Finance PLC and as Head of the Valuation Unit of LOLC Motors Ltd.

Board of Directors

27


He also serves on the Boards of Commercial Factors (Pvt) Ltd and Commercial Insurance Brokers (Pvt) Ltd - the largest Insurance Broker in Sri Lanka - which is an associate company of Commercial Leasing & Finance PLC.

Mr Thilakaratne previously held the positions of CEO, Lanka ORIX Factors Ltd., & CEO, Auto Finance of LOLC. He is an Associate Member of the Institute of Bankers of Sri Lanka and joined the LOLC Group in 1995.

Miss. C S EmmanuelMiss Chrishanthi Emmanuel brings over 20 years of experience to the role of Company Secretary. She is a Fellow of the Institute of Chartered Secretaries and Administrators – UK and a Fellow of the Institute of Chartered Corporate Secretaries (Sri Lanka). She also served as Company Secretary of several companies within the LOLC Group and now serves as a director of LOLC Corporate Services (Private) Ltd.

28


Management Team

Mr. Krishan Thilakaratne - Director/Chief Executive Officer

Mr. Jude Anthony - Deputy General Manager - Branch Network

Mr. Nihal Weerapana - Deputy General Manager - Recoveries

Mrs. Deepmalie Abhayawardane - Assistant General Manager - Factoring

Mr. Tharanga Indrapala - Assistant General Manager - Operations

Mrs. Nishanthi Kariyawasam - Head of Finance

Mr. Lasantha Peiris - Head of IT Operations

Mr. Prasanna Dayarathna - Chief Manager - Customer Service

29


Mr. Terrence Kaushalya - Chief Manager - Saving & Deposits BU

Mr. Dishan Obeysinghe - Chief Manager - ABF

Mr. Upul Samarasinghe - Chief Manager - Credit

Mr. Ruwan Wickremeratne - Chief Manager - Recoveries

Mr. Priyankara Senaviratne - Manager - Human Resources

Mr. Prasad Perera – Assistant Manager - MARCOM

Mr. Rasika Alwis – Head of Administration

30


Regional Management Team

Mr. Lal Abeyratne - RM - Kandy Region

Mr. Samitha Aruggoda - RM - Gampaha Region

Mr. Sarath Gamage - RM - Anuradhapura Region

Mr. Prasanna Goonethilleke - RM - Kurunegala Region

Mr. Prasanna Karanadagolla - RM - Polonnaruwa Region

Mr. Pradep Madurasinghe - RM - Negombo Region

Mr. Thilak Ranasinghe - RM - Matara Region

Mr. Suneetha Samarawickrama - RM - Colombo Region

31


Mr. Sunil Shantha - RM - Galle Region

Mr. Sarath Wijenayake - RM - Ratnapura Region

Mr. Harsha Kumarage - ARM - Anuradhapura Region

32


I obtained a loan to buy a vehicle and develop my business, and it has worked out great for me. I chose CLC because of the excellent customer service they provide. They advised me well and briefed me on all the details of the loan. They also facilitate great convenience by offering a comprehensive door step service


P. P. sarveswaranTrader of Fancy ItemsColombo

33


OperationalReview

34


Commercial Leasing & Finance PLC (CLC) performed well in a challenging environment and its unique business model continued to be a key competitive advantage, also making it one of the most resilient financial institutions in Sri Lanka. The rating awarded to CLC in 2012/13, of “A-” rating by ICRA Lanka Ltd (an associate of Moody’s Investor Services) was reaffirmed during 2013/14.

CLC’s Income rose by 25 % to Rs. 7.5 billion during the year whilst Profit After Tax declined by 20 % to Rs. 936 million. A more detailed discussion of our financial performance follows in the Financial Review presented on pages 40 to 43.

indusTRy enviRonmenT The year was a challenging one for the financial sector as a whole as unfavorable weather conditions adversely impacted agriculture during the first half of the year. Agriculture accounts for a sizeable component of our SME and Micro financing portfolios. The demand for credit from the agriculture-led SME and Micro financing sectors decreased on the one hand, whilst recoveries of loans and lease payments were also impacted due to the reduced purchasing power amongst customers. It resulted in the sector’s NPL’s rising to its highest ever.

Moreover, the decline in gold prices in the global market, albeit having no impact on CLC, impacted the economy as pawning business accounts for about 20% of the portfolios of most Banks as well as Non-Banking Financial Institutions (NBFI’s). Although Banks and NBFI’s faced a challenging environment in 2013 conditions eased towards the latter part of the year as weather became more conducive to agriculture and interest rates began to ease.

Operational Review

comPAny PeRfoRmAnce credit : The above environment necessitated that CLC in addition to pursuing new business, also made collections of customer payments one of its key priorities in 2013/14. The marketing staff also actively engaged in collections. 2013/14 was hence, an year of consolidation rather than of geographic expansion. The Company’s efforts to strengthen collections however, proved successful with CLC able to contain its NPL ratio at 2.4% significantly above the industry’s average of 6.5% in 2013/14. CLC has sustained an exceptionally

low NPL for many years demonstrating the efficacy of its portfolio management. We will continue to constantly review and refine our monitoring and collection processes and fine tune them when necessary.

A stronger collection structure, credit policies and more stringent monitoring procedures were factors which

As an enterprise engaged in providing Financial Services, the quality of service delivery is an area of emphasis in our training and development, and more so because of the excellence we strive for at CLC

35


supported our performance in 2013/14. CLC’s overall recovery system is organized under 10 regional zones which span the entire island. These zones are under the purview of 8 supervisors whose oversight is supported at lower levels by regional call centers and teams of mobile field officers. Our portfolio is thus monitored daily to prevent sudden deterioration of asset quality.

A key element of the success of our portfolio and risk management has also been the diversity of our portfolio with all revenue streams contributing to profitability, without overexposure to any one type of asset or customer segment. The Company has thus been able to remain resilient through market fluctuations with minimum impact on shareholder value.

deposits:CLC’s deposits achieved an outstanding performance with the deposit base growing by 154% to Rs. 7.5 billion during the year, from a base of Rs. 3 billion in 2012/13. This achievement is made all the more significant by the fact that it has only been two years since CLC became a deposit taking institution. It is thus testimony to the public trust and confidence in the stability of CLC and the brand equity its has earned over 25 years in business. The Company held a recognition and reward programme during the year to reward employees who canvassed the most number of FD’s. All employees of CLC were enthusiastic participants and it is their drive and commitment which enabled CLC mobilise Rs. 2 billion in just 3 months and make the programme a tremendous success.

Moreover, the fact that considerable contributions to the growth in the deposit base came from existing customers is a clear reflection of customer satisfaction levels and the service standards at CLC.

leasing:The decline in prices of new vehicles during the year adversely affected the Leasing industry, as the drop in prices saw a rise in demand for certain categories of brand new vehicles vis a vis leasing of vehicles, on the one hand; whilst the asset value of vehicles recovered by Leasing companies declined in value on the other hand.

The Leasing business of the NBFI sector was further impacted by the fact that the Banking sector, recognising its profitability, moved into Leasing more strongly. The Banks, which are now entering a traditionally non-banking sector, are able to leverage on their lower cost of funds vis a vis Finance Companies. The NBFI’s meanwhile will strive to leverage on greater flexibility.

The strength of CLC’s relationships with vendors and other companies continue to be a key advantage in the Leasing segment. Our Leasing portfolio at year end amounted to Rs. 12 billion. During the year under review, CLC maintained its market leadership in the light vehicles category and continued to focus on the market at grass roots level.

factoring The factoring arm of CLC - Commercial Factors Ltd, achieved a 42% growth (over the previous year) of their new business portfolio. However, the total gross portfolio of the division dropped by 22% compared to 2012/13 due to the highly competitive environment created by the significant reduction in interest rates. Despite this drop in portfolio, the division contributed 9% to CLC’s total revenue.

Commercial Factors continued to make sturdy progress in seeking alternate markets to the extremely competitive Western Province. This was fuelled by CLC’s extensive branch network which made it

36


possible to educate businesses across the country on leveraging factoring services for their business activities. Unparalleled efforts resulted in Commercial Factors concluding the year with nearly 50% of the new business portfolio coming from regions outside the Western province. The new strategies adopted by CLC to build market awareness and the vigorous expansion into the regions, strengthen the Company’s optimism that 2015 will be an year for Commercial Factors to reinforce its position as one of the largest factoring/working capital related solutions providers in Sri Lanka.

ouR deliveRy chAnnels CLC continued to maintain a multi channel delivery network (comprising branches, intermediaries and dealers) which has been a key success factor in its growth. Its unique “Business Introducer (BI)” Channel has proven to be a success and a key competitive advantage. The BI channel which today consists of over 800 “Business Introducers”, continues to facilitate a lean and cost effective model and ensure the sustainability of CLC’s profitability. The strength of the relationships we enjoy with these intermediaries also inspire and motivate us to reach higher and wider.

Whilst no new branches were opened during the year due to a focus on consolidation and collections, several of our existing branches were upgraded and expanded, with some moving into better and larger locations. These include the Jaffna and Avisawella branches, whilst the Gampaha branch acquired additional space at the same location. The Matara branch was refurbished whilst the Ambalangoda branch also initiated plans to expand into the upper floor areas at its current location.

With a customer centric approach that permeates our corporate culture, our marketing strategy is designed to develop brand CLC and to support the Company’s business channels.

mARkeTing And cusTomeR seRvice As an enterprise engaged in providing Financial Services, the quality of service delivery is an area of emphasis in our training and development, and more so because of the excellence we strive for at CLC. Combined with the technical know how of our people, our service quality has been a key factor in the strong relationships we have built and the trust and confidence that brand CLC has earned amongst all its stakeholders.

Delegation of authority to Regional Managers and Branch Managers, for credit approvals within stipulated limits, has enabled a speedier and a more flexible service to benefit customers.

A customer loyalty rate of 90% recorded (measured encompassing outflow and inflow and the rates of renewal) is most heartening and a notable achievement which endorses the service levels and the customer friendly environment and practices at CLC. Furthermore, the fact that 30% of the Company’s new business has come from existing customers, further reflects our customer satisfaction levels.

As the high retention ratios reflect, customer retention is a strategic priority at CLC. The Customer Service Hotline to respond to customer queries and complaints is a key tool used to facilitate customer convenience. All customer queries and complaints are handled in a professional manner by a team empowered with comprehensive product and company knowledge to answer any query.

During the year under review, we set up a Marketing Call Centre at our Head office dedicated to handle all inbound calls on advertisements, product promotions and marketing campaigns. The marketing division is also in the process of purchasing a complete lead

Operational Review

37


management system to handle all marketing leads more efficiently and effectively.

Furthermore the Company signed up to SLIPS with Lanka Clear in order to expedite interbank transactions. CLC was one of the 1st Non-Banking Financial Institute (NBFI) to do so. Technology has also been a key factor in our efforts to constantly enhance service levels and the year ahead will see CLC offering mobile banking facilities to customers.

mARcomDuring the year under review, Brand CLC performed exceptionally well. It was noteworthy to be among the four shortlisted companies at the SLIM Nielsen ‘Peoples Awards‘ in the Financial Service Provider category and being ranked 44th in the LMD Brands Annual 2014. Traditional mediums and new mediums such as e–flyers and web advertising were used in creating awareness. CLC’s MARCOM strategy of advertising tie-ups with partners offering tangible benefits for the customers has been proven a success. CLC always

tries to understand potential customer segments and communicate with them effectively. With the means of creating awareness among the general public, two mobile propaganda units were mobilized in promotional activities.

ouR PeoPleIn a highly competitive market in the service industry, the commitment, determination and talents of our people have been the key differentiators and the corner stone of our success. An excellent annual average staff retention rate of 87% and a monthly retention ratio of 98% recorded during the year, are thus most heartening and noteworthy, in a highly competitive market which has seen many new entrants into the business over the past few years. The team that makes up CLC today stands at 610, compared with a total of four employees at its inception in 1988.

A culture sans hierarchy is actively promoted within the company. We believe that employees must be provided an environment in which they can give their best to the organization whilst reaching towards their own potential. A merit based work place ensures professionalism and has also served to engender a new mind set. A clear career path, succession planning and performance based remuneration are key elements which has enabled CLC to become a preferred employee, as reflected in the high staff retention ratio.

Our training and development initiatives include continuous training as well as need based training which follow training needs analyses. Continuous training involves providing programmes regularly to motivate individuals, create the appropriate culture, build leadership skills and enhance knowledge and skills. During the year under review, over 6,375 hours of training were provided through both internal and external training programmes.

During the year under review, we set up a Marketing Call Centre at our Head office dedicated to handle all inbound calls on advertisements, product promotions and marketing campaigns

38


We firmly believe that the sustainability of our human resource is not merely about the monetary rewards which are commensurate with performance but it also has much to do with satisfaction levels which are linked to the corporate culture, spirit of camaraderie, opportunities for recognition, personal development and fellowship. Some of the informal channels at CLC that facilitate a team spirit include the annual CLC sports day – a much anticipated event which brings together employees from the head office and the 53 branches. CLC’s Sports Club sponsored by the company, plays an active role in employee recreation, and also participates in mercantile cricket, football, rugby, badminton and athletics. During the year under review, the CLC Cricket team won the Mercantile E Division Cricket tournament.

looking AheAd During the year under review we focused on consolidation and further strengthening of our credit practices, monitoring and collection processes and systems, to withstand storms and sustain our

Operational Review

profitability and growth into the future. The industry environment in the year ahead is expected to recover and CLC will look to expand its reach and product portfolio. It will offer innovative financial solutions to customers and look at expanding the branch network by approximately six to seven branches in 2014. The Company will also promote ‘One Stop Shops” where customers of all age groups will be able to find solutions for all their financial needs under one roof. We look forward to create and meet new opportunities and increase value creation to all our stakeholders in the vibrant economic environment we anticipate.

39


Nilliady

Jaffna

Killinochchi

Mannar Parakamapura

Kebitigollewa

Trincomalee

Serunuwara

Batticaloa

Kalmunai

Ampara

Monaragala

BadullaNuwara Eliya

Welimada

RatnapuraMaharagama

Kalutara

NugegodaBambalapitiya

PettahKiribathgoda

KaduwelaAvissawella

Kalawana

Tissamaharama

Embilipitiya

UdugamaAmbalangoda

Pitigala

Baduraliya

GalleMatara

Anuradhapura

Nochchiyagama

Dambulla

Polonnaruwa

Bakamoona

Puttalam

ChilawKurunegala

Matale

Mahiyanganaya

KandyWarakapola

Gampaha

Kuliyapitiya

Negombo

Wennappuwa

Medawachchiya

Vavuniya

CLC Branches

Post Office Services Centers

Specialised Factoring Branches

Branch Network

40


oveRviewDespite the year being a challenging one for the financial service industry, the Company remained resilient and made steady progress in its long term vision and strategy. The financial services sector encountered a general deterioration of asset quality during the financial year 2013/14 continuing from the last financial year. Though consistently better compared to the industry, the Company made higher provisioning which had an adverse effect on the profitability. The Company’s profitability remained strong and healthy at similar levels as last year, in line with the challenging environment in which the business was operated. The PBT for the year was Rs. 1289 Mn and after providing for taxation of Rs.353 Mn the Company recorded Rs.936 Mn as PAT.

inTeResT incomeThe principal source of income of the Company increased by a healthy 25% over the previous year to reach Rs.7,514 Mn from Rs.5,996 Mn. Income growth was mainly attributable to the growth in business volumes during the period.

Financial Review

Interest income FY 2013/14Rs. Mn

FY 2012/13Rs. Mn

Variance %

Leasing 3,163 2,591 22

Loans & advances 2,646 1,330 99

Hire purchase 495 1,056 (53)

Factoring 695 723 ( 4)

Overdue interest

446 282 58

Other 70 13 430

Total 7,514 5,996 25

Leasing and loan interest income represents 77% of the total interest income and increased by 22% and 99% respectively. Interest income on leasing and loans reached to Rs. 3,163 Mn and Rs.2,646 Mn from Rs.2,591 Mn and Rs.1,330 Mn respectively. The overdue interest income grew by 58% to reach Rs.446 Mn compared with Rs.282 Mn in the previous year. Factoring income stood at Rs.695 Mn, with a decrease of 4% from Rs. 723 Mn and interest income from hire purchases reduced to Rs.495 Mn from Rs.1056 Mn due to the shift in the product mix.

Components of interest income 2012/13

Leasing

Loans

Hire Purchase

Factoring

Overdue Interest

43%

22%

18%

12%5%

Components of interest income 2013/14

Leasing

Loans

Hire Purchase

Factoring

Overdue Interest

Other

42%

35%

7%

9%

6% 1%

41


inTeResT exPenseThe interest expense of the Company increased by 21% to Rs.3,039 Mn from Rs.2,515 Mn. The increase in the interest expense was mainly due to the increase in the deposit base by 154% and foreign borrowings and securitized loans raised during the year supporting the volume growth.

Expenses FY 2013/14Rs. Mn

FY 2012/13Rs. Mn

Variance %

Direct expenses 158 51 211

Premises, equipment & establishment expenses

242 191 27

Personnel costs 571 465 23

Allowance for impairment & write offs

1,131 273 315

Depreciation and amortization 54 57 (5)

Other operating expenses 1,175 943 25

VAT on financial services 115 115 -

Total operating expenses 3,446 2,095 65

Total operating expenses rose by 65% in comparison with the previous year. The recorded increase in premises, equipment and establishment expenses, personnel cost and other operating expenses for the financial year were well in line with the reported business growth and the increased level of business activity at the branches.

AllowAnce foR imPAiRmenT And wRiTe offsThe allowance for impairment on leases, loans, hire purchase and factoring receivables was calculated using a statistical model as in previous years, in line with the requirement of the Sri Lanka Financial Reporting Standards (SLFRS). For the purpose of calculating provision for impairment, the total lending portfolio was segregated to significant and non-significant customers based on the agreed threshold and selected trigger points for factoring. Customers who were not significant were categorized based on their risk characteristics and included in the collective provision model.

Composition of interest expense 2013/14

Long term

Short term

Securitisation

Deposits

42%

27%

11%

20%

Composition of interest expense 2012/13

Long term

Short term

Securitisation

Deposits

8%

12%

43%

37%

42


Impairment loss for the year increased from Rs. 273 Mn in the comparative year to Rs.1,131 Mn. This was due to higher provisioning being made in line with lower collections and in line with the prudent provisioning policy of the Company.

FY 2013/14Rs. Mn

FY 2012/13Rs. Mn

Individual impairment charge 855 57

Collective impairment charge 276 216

Total impairment charge 1,131 273

Individual impairment loss recorded a considerable increase compared to the previous year, mainly due to 100% provision made on shortfalls on vehicles repossessed and sold and factoring provisions.

PRofiTAbiliTyNet interest income grew by 29% from Rs. 3,481 Mn to 4,475 Mn for the year under review and recorded a profit before tax of Rs.1,289 Mn compared to the Rs.1,603 Mn reported last year despite the lower demand for credit, thinning margins and deterioration of asset quality. TAxATionThe Company paid Rs.115 Mn as VAT on financial services which is included in operating expenses. The current year’s profit after tax reached to Rs.936 Mn after providing Rs.247 Mn as income taxes and Rs.106 Mn as deferred tax. The Company’s tax expense dipped by 19% from 434 Mn to 353 Mn due to the reduction in taxable income in the year under review.

AsseT gRowThThe Company’s balance sheet strengthened throughout the year increasing total assets to Rs. 32,934 Mn from Rs.27,229 Mn, an increase of 21% compared to last

year. The net lending portfolio including factoring increased from Rs. 24,985 Mn to Rs. 27,570 Mn. The net lending portfolio to total assets, 84% is a reduction from 92% compared to the previous year. The dip was mainly due to the increase in other interest earning assets held in line with the minimum holding of liquid assets for time and savings deposits. The other reason for the change in composition of assets is due to the increase in Property, Plant and Equipment from Rs.369 Mn to Rs. 1070 Mn. The Company purchased a land in Nawala to the value of Rs.578 Mn during this financial year, to operate second hand vehicle sales unit.

fundingThe borrowings of the Company increased to Rs.21,904 Mn from 17,623 Mn. During the year under review, the Company received loans securitized amounting to Rs.1.8 Bn and foreign funding equivalent to Rs.3.7 Bn from FMO and PROPARCO. The Company enjoys the rare benefit of having a wide range of multilateral and bilateral funding agencies as a result of its parent Company’s long standing relationship with these institutions. These

Financial Review

5,000

Total assetsNet portfolio

0

10,000

15,000

30,000

25,000

20,000

35,000

'10 '11 '12 '13 '14

Total assets to net lending portfolioRs.Mn

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funding lines assisted the Company to maintain a healthy maturity structure between the company’s assets and liabilities. The Company policy is to have a zero foreign exchange risk with 100% hedging on all foreign borrowings which safeguarded the Company against the foreign exchange fluctuations that prevailed during the year. This policy is aligned to the mandate given by the Central Bank of Sri Lanka (CBSL) of zero exposure to exchange risks on foreign borrowings.

dePosiTs fRom cusTomeRsThe Company’s deposit base increased to Rs 7,534 from Rs. 2,962 Mn last year. The Company received approval from the (CBSL) to commence mobilizing deposits in December 2011 and in a short span of time was able to successfully reach a 154% growth in deposits during the year as a result of the concentrated efforts made on deposit mobilization and higher inflow of deposits from customers of other finance companies.

cAPiTAlizATionThe Company’s rich repository of capital continued to energize and strengthen the company’s growth prospects, while meeting regulatory requirements.

The equity of the Company reached Rs.8,856 Mn from Rs.7,837 Mn with the earnings from operations. The capital adequacy ratio witnessed a slight dip to 27.63% from 29.53% with the increase of risk weighted assets from Rs.25,659 Mn to Rs.30,415 Mn and tier 1 and 2 core capital from Rs.7,576 Mn to Rs.8,404 Mn. The Company’s capital adequacy levels are well above the stipulated minimum regulatory requirements, demonstrating the financial strength of the Company.

The Company’s market capitalization as at 31st March 2014 was Rs. 2.4 Bn with a share price of Rs.3.80,which resulted in a Price Earning (PE) ratio of twenty five (times).

Funding Mix 2013/14

Foreign funding agencies

Securitization

Other long term

Short term

Customer deposit

Other

1%

30%

8%

19%8%

34%

Funding Mix 2012/13

Foreign funding agencies

Securitization

Other long term

Short term

Customer deposit

Other

3%

21%

7%

21%31%

17%

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Sustainability Report

Being in financial services, microfinance and SME, our role of empowering and progressively uplifting a substantial segment of our country’s population is based around the tripod of sustainability – environmental, social and economic

sustainable development strives to meet the needs of the present without compromising the ability of future generations to meet theirs.

As a responsible corporate citizen in the financial services industry in Sri Lanka, Commercial Leasing & Finance is committed to a vision of sustainable development. In doing so, the Company has extended the corporate sustainability practices of its parent Company LOLC towards the wellbeing of people, community, the environment and business.

susTAining TRusT And confidenceCLC’s philosophy of “Hithawathkama” strives to support all stakeholders including customers, employees and the community through value creation and by enabling their progress through wealth enhancement. In sustaining this trust, we have implemented policies where we do not finance entities that are environmentally hazardous or engage in unlawful practices or businesses. Thorough credit appraisals and risk measures are undertaken to ensure that there are no harmful impacts to the Company and its stakeholders. In addition, we are also guided by our Group’s governance and anti-corruption policies including the policy agreements held with our key financial partners. Moreover, our Company’s systems and processes are geared to promote business continuity and sustainability in the way we design products, deliver financial services, organise the workplace and engage with society.

cusTomeRsCLC ensures that its products and services are driven and shaped by customer needs and aspirations. With this in mind, CLC has set in place many channels and systems to maintain close relations with customers and continuously obtain feedback and input.

With the objective of strengthening our customer service to better harness the many opportunities in the vibrant environment that is now emerging, the Company made several initiatives to further strengthen customer service. Amongst the many measures to enhance service standards was additional training and development of the team.

emPloyeesThe talent, dynamism and the commitment of our youthful team have been the cornerstones of the Company’s rapid growth and we firmly believe that all honour is due to them. They have been guided by a strong leadership team who possess great sagacity and experience.

45


Continuous development programs such as training, capacity building, recreational and social events, safe working atmosphere and culture along with excellent remuneration and benefits, including performance evaluations and rewards have provided our invaluable human resource - employees - to generate optimum productivity. We also adhere to the United Nations Global Compact principles, of which LOLC is a signatory. We uphold its principles of human resource and labor and we do not engage in child-labour. We also ensure that we maintain gender equality at all levels and we provide opportunities for both the men and women of our Company to excel in their fields of employment. In addition, we have also concentrated on developing the capacities and talents of our staff in regional and deep rural branches.

Another key facet of CLC’s success story is the strong relationship between employees and leaders that has made us a single team with a single vision. CLC has been able to ensure high retention as reflected in the ratios, and this achievement has been supported by the competitive remuneration packages offered by the Company, the Company culture as well the management and directors working together to provide training for the future development and motivation of the entire team.

As one of the top “Great Places to Work” in Sri Lanka and a preferred employer, CLC adopts a comprehensive approach to engaging with employees. From recruitment to retirement, we welcome, inspire, communicate with, develop, listen to, and reward and care for employees as one family, whilst sharing and celebrating achievements and life’s greatest moments. CLC has over the years maintained sound HR structures and employee development initiatives.

In addition to a competitive remuneration package, amongst the benefits offered is medical insurance which covers most aspects of surgical and medical illness for its

staff. In addition, employees are eligible for a variety of other benefits which include an annual Sports Day, annual trip for employees as well as their family members.

enviRonmenTBeing in financial services, microfinance and SME, our role of empowering and progressively uplifting a substantial segment of our country’s population is based around the tripod of sustainability – environmental, social and economic. These factors impact and influence us and are integrated into our business and decision-making.In doing so, we have been successful in extending our vision for a greener future to our customers engaged in agricultural and plantation businesses. This has resulted in our customers adopting strategies that minimize harmful environmental impact. We are proud to be a part of a Group that has included environmental sustainability as a part of its core diversified business activities, as illustrated by our Group’s plantation and renewable energy Companies.

socieTyCLC’s CSR activities broadly focus on economic prosperity and physical and emotional wellbeing of the community at large, particularly in rural areas of the country. Our community initiatives in 2013 include:

� donation of school books and computers to the Library of Attanakadawala Maha Vidyalaya in Polonnaruwa and the repainting of several class rooms.

� blood donation camp with the help of the National Blood Bank

� extension of assistance to celebrate Vesak, in various parts of the island.

CLC has a Sustainability Committee which continuously looks at enhancing a sustainable business model and extending it to its stakeholders. Key areas which we consistently work to improve are energy and resource consumption savings and e-waste reduction.

46



g.m.c. bandara Proprietor of Caramel ProductsKavudawatte

I have been a customer of CLC for almost 16 years and will continue to work with them because of the ease of doing business, how they facilitate hassle free transactions and how attentive they are to customers

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Corporate Governance

48


This section details the governance framework in place at Commercial Leasing & Finance PLC (CLC) and the manner in which it ensures compliance with the regulatory requirements. CLC’s governance structure ensures alignment of its business strategy and direction through effective engagement and communication with its stakeholders, Board of Directors, Board Sub-Committees and Management.

CLC’s external instruments of governance include: the Companies Act No. 7 of 2007; the Finance Business Act No. 42 of 2011, including rules and directions issued to finance companies from time to time by the Monetary Board of the CBSL and any amendments thereto and the Listing Rules of the Colombo Stock Exchange. In terms of internal instruments of governance the following are included: Articles of Association; the Role of the Board; Board approved policies and procedures; and processes for internal controls and anti money laundering.

The members of the Board consist of persons with multiple industrial/professional backgrounds in which they have achieved eminence, who contribute effectively to decisions made by the Board to guide CLC towards achieving its objectives. In accordance with best practices, the offices of Chairman and Chief Executive Officer are separate, and the Chairman is a non-executive director. This ensures a balance of power and enhances accountability. To bring in a greater element of independence the Board appointed Mr P D J Fernando as the Senior Independent Director.

CLC has in place a number of mandatory Board sub committees to fulfill regulatory requirements and for better governance of its activities. These committees meet periodically to deliberate on matters falling within their respective charters/terms of reference and their recommendations are duly communicated to the main Board. Furthermore the following mechanisms in place

enable the Board to oversee the accomplishment of the targets in the business plan: review performance at monthly board meetings; seeking recommendations through sub committees on governance, including compliance with internal controls, human resources, risk management, credit and IT; and review of statutory and other compliances through a monthly paper on compliance submitted to the Board covering the operations of CLC.

The Governance structure at CLC ensures that the Directors take all necessary steps to avoid conflicts of interest in their activities with, and commitments to other organizations or related parties. If a Director has a conflict of interest in a matter to be considered by the Board, such matters are disclosed and discussed at board meetings, where independent directors who have no material interest in the transaction are present.

As required by the Finance Companies Corporate Governance Direction, CLC has established a self evaluation mechanism undertaken by each director annually to evaluate the performance of the Board. These evaluations are subsequently tabled at a Board meeting and the records are maintained by the Company Secretary. During the year under review, in line with evaluations carried out by the finance sector, the self evaluation format was further strengthened.

The shareholders of CLC have multiple ways of engaging with the Board including the following: annual general meetings are the main forum at which the Board maintains effective communication with its shareholders on matters which are relevant and of concern to the general membership; access to the Board and the Company Secretaries; written correspondence from the Company Secretaries to inform shareholders of relevant matters; CLC’s website which is accessible by all stakeholders and the general public; and disclosures


49


disseminated through the Colombo Stock Exchange including interim reporting.

M/s KPMG, Chartered Accountants were reappointed as external auditors of the Company by the shareholders at the Annual General Meeting held in September 2013. In accordance with section 8 (2) c) (iv) of the Finance Companies Corporate Governance Direction No. 3 of 2008, a new audit partner was appointed effective from 1st April 2013. Their services were also engaged to seek: a) an assessment of the Company’s compliance with the requirements of the Finance Companies

Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board; and b) the Company’s level of adherence to the internal controls on financial reporting.

The Directors confirm that no significant deviations have been observed by the external auditors and that the Company has not engaged in any activity that contravenes any applicable law or regulation. To the best of the knowledge of the Directors the Company has been in compliance with all prudential requirements, regulations and laws.

Direction No.

Reference to the Finance Companies Corporate Governance Direction No. 3 0f 2008

CLC’s Level of compliance

2 The Responsibilities of the Board of Directors

2.1 The Board of Directors shall strengthen the safety and soundness of the finance company by:

a. approving and overseeing the finance company’s strategic objectives and corporate values and ensuring that such objectives and values are communicated throughout the finance company;

Complied with

b. approving the overall business strategy of the finance company, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least immediate next three years;

Complied withA financial forecast for the period 2014 to 2017 has been approved by the Board.

All identified risks have been taken into account when preparing this forecast. Further, a Risk Management Policy has been approved by the Board which includes risk management procedures and mechanisms.

The extent of compliance as required by the finance companies corporate governance direction no. 3 0f 2008 including subsequent amendments;

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Direction No.



c. identifying risks and ensuring implementation of appropriate systems to manage the risks prudently;

Complied withThe Board has delegated this function to its subcommittee, the Integrated Risk Management Committee (IRMC).

Approved minutes of the quarterly IRMC meetings are tabled at Board Meetings for review and guidance.

Risk Management Reports on Liquidity and Maturity of Deposits are submitted to the Board on a monthly basis.

d. approving a policy of communication with all stakeholders, including depositors, creditors, shareholders and borrowers;

Complied with

e. reviewing the adequacy and the integrity of the finance company’s internal control systems and management information systems;

Complied withThe Board has delegated this function to its Audit Committee. Approved minutes of the Audit Committee meetings are tabled at Board Meetings for review and guidance. The Committee reviews the Internal Audit Reports submitted by the Internal Auditors of the Company (Enterprise Risk Management Division).

On behalf of the Board, the Committee performs a comprehensive exercise that entails reviewing of all aspects of MIS including operational and regulatory risks. MIS reviews of all products have been periodically reviewed by the Internal Audit and reported to the Audit Committee.


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A representative from the Company participates at the Group IT Steering Committee meetings which are held on a quarterly basis to address IT issues of the Company. Specific reports are presented to the Committee when necessary. All IT security policies are approved prior to deploying and accuracy of reports are checked during the relevant application control review stage and presented to the management. Audit logs and reports are reviewed and verified on a regular basis.

The Board has also approved an IT Security Policy which covers the system and physical data that is used for generating management reports with accuracy.

f. identifying and designating key management personnel, who are in a position to: influence policy; direct activities; and exercise control over business activities, operations and risk management;

Complied with

g. defining the areas of authority and key responsibilities for the Board and for the key management personnel;

Complied withArticles 76-78 of the Company’s Articles of Association defines the powers and duties of the Board of Directors.

Further the responsibilities of the Board have been defined and approved based on the role of the board of its parent company, Lanka ORIX Leasing Company PLC.

The areas of authority and responsibilities of the key management personnel defined in individual job descriptions have been approved by the Board.

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h. ensuring that there is appropriate oversight of the affairs of the finance company by key management personnel, that is consistent with the finance company’s policy;

Complied withThe Company has a policy on Oversight of the affairs of the Company by KMPs including a process to review the delegation process approved by the Board.

Delegated authority given to key management personnel is reviewed periodically by the Board to ensure that they remain relevant to the needs of the Company.

i. periodically assessing the effectiveness of its governance practices, including: the selection, nomination and election of directors and appointment of key management personnel; the management of conflicts of interests; and the determination of weaknesses and implementation of changes where necessary;

Complied withDirectors are selected and nominated to the Board for skills and experience in order to bring about an objective judgment on issues of strategy, performance and resources. Election of directors are effected in accordance with the requirements of the Companies Act No. 7 of 2007. Effectiveness of this process is ascertained by their contribution at board meetings in their respective fields. In addition a Board approved procedure for the appointment of Directors is also in place.

KMPs are selected and recruited in terms of the HR policy of the Company. KMPs directly report to the CEO and performance appraisals are completed at least twice a year.

Conflicts of interest are managed on a monthly basis where directors disclose their directorships in other companies. KMPs declare any interest annually.

Weaknesses are identified from the above processes and changes may be implemented where necessary.


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j. ensuring that the finance company has an appropriate succession plan for key management personnel;

Complied with

k. meeting regularly with the key management personnel to review policies, establish lines of communication and monitor progress towards corporate objectives;

Complied withKey Management Personnel are called in by the members of the Board during board and board committee meetings when the need arises to explain matters relating to their area of functions.

l. understanding the regulatory environment; Complied withAs a practice the Company Secretary includes an agenda item in monthly board meetings tabling correspondence with regulators which enable the directors to understand the regulatory environment, concerns and changes and make appropriate decisions.

A monthly compliance report is also submitted to the Board. This report includes details of weekly, monthly and annual returns duly submitted to the CBSL and the requirements of all the directions issued by the Monetary Board and the Company’s current position with regard to each direction.

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m. exercising due diligence in the hiring and oversight of external auditors.

Complied withThe Board Audit Committee is responsible for the hiring and overseeing of the external auditors.

Article 122 of the Company’s Articles of Association lays down a process for appointing of external auditors at the AGM.

The Audit Committee is governed by a Board approved Audit Charter/TOR. This is periodically reviewed by the Board to ensure that it remains relevant.

2.2 The Board shall appoint the chairman and the chief executive officer and define and approve the functions and responsibilities of the chairman and the chief executive officer in line with paragraph 7 of this Direction.

Complied withThe Chairman and CEO have been duly appointed and their functions and responsibilities have been defined and approved by the Board.

2.3 There shall be a procedure determined by the Board to enable directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the finance company’s expense. The Board shall resolve to provide separate independent professional advice to directors to assist the relevant director(s) to discharge the duties to the finance company.

Complied withA Board approved detailed procedure has been established to obtain independent professional advice when necessary.

2.4 A director shall abstain from voting on any Board resolution in relation to a matter in which he or any of his relatives or a concern in which he has substantial interest, is interested, and he shall not be counted in the quorum for the relevant agenda item at the Board meeting.

Complied with.Article 79 of the Company’s Articles of Association requires an interested director to disclose his/her interest at board meetings. Article 83 requires such a director to abstain from voting on any board resolution. He/she will not to be counted in the quorum.


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2.5 The Board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the finance company is firmly under its authority.

Complied withThe Board has put in place systems and controls to facilitate the effective discharge of Board functions. Pre-set agenda of meetings ensure the direction and control of the Company is firmly under Board control and authority.

The agenda of the monthly Board meetings includes reports on performance and on compliance with relevant regulations. This enables the Board to ensure that the Company performs at an optimal level, while being fully compliant.

2.6 The Board shall, if it considers that the finance company is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of the Department of Supervision of Non-Bank Financial Institutions of the situation of the finance company prior to taking any decision or action.

No such situation has arisen. The Board has implemented a procedure to alert any such event - in that the Compliance Officer provides a statement of assurance in his monthly compliance report that the Company could remain a going concern.

2.7 The Board shall include in the finance company’s Annual Report, an annual corporate governance report setting out the compliance with this Direction.

Complied withThis report serves the said requirement

2.8 The Board shall adopt a scheme of self-assessment to be undertaken by each director annually, and maintain records of such assessments.

Complied withThe directors carry out a self evaluation annually. These are then provided to the Board for their information.

In line with evaluations carried out by the finance sector, the directors’ self evaluation format was further strengthened during the year under review by the Board.

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3 Meetings of the Board

3.1 The Board shall meet at least twelve times a financial year at approximately monthly intervals. Obtaining the Board’s consent through the circulation of written or electronic resolutions/papers shall be avoided as far as possible.

Complied withThe Board met 15 times during the year. Please see page 81 for further details.

Approvals obtained through the circulation of resolutions (15) were subsequently tabled at the following board meeting.

3.2 The Board shall ensure that arrangements are in place to enable all directors to include matters and proposals in the agenda for regular Board meetings where such matters and proposals relate to the promotion of business and the management of risks of the finance company.

Complied withA Board approved Policy on Board’s relationship with the Company Secretary is in place to enable all directors to include matters and proposals in the agenda for regular board meetings.

3.3 A notice of at least 7 days shall be given of a regular Board meeting to provide all directors an opportunity to attend. For all other Board meetings, a reasonable notice shall be given.

Complied withA schedule of all meetings for the coming year is circulated to all Directors at the end of December or beginning of January. At the beginning of each month, a reminder of all meetings during that month is also sent out. In addition, notices are sent out 7 days prior to the meeting. All these enable any director to include matters in the Agenda.

3.4 A director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a director. Provided that participation at the directors’ meetings through an alternate director shall,however, be acceptable as attendance.

Complied withPlease see page 81 for further details.

Mr. W D K Jayawardena has been appointed as alternate director to Mr. I C Nanayakkara and vice versa.


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3.5 The Board shall appoint a company secretary whose primary responsibilities shall be to handle the secretarial services to the Board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

Complied withThe Company Secretary is a fully qualified Chartered Secretary, admitted as a Fellow of the Institute of Chartered Secretaries & Administrators, UK (FCIS) and of the Institute of Corporate Secretaries, Sri Lanka. (FCCS) and registered as a Company Secretary with the Registrar General of Companies

She ensures that proper board procedures are followed and that applicable rules and regulations are brought to the notice of the Board.

3.6 If the chairman has delegated to the company secretary the function of preparing the agenda for a Board meeting, the company secretary shall be responsible for carrying out such function.

Complied withThe Board approved policy on board’s relationship with the Company Secretary provides for the Chairman to delegate to the Company Secretary the preparation of the agenda for board meetings.

3.7 All directors shall have access to advice and services of the company secretary with a view to ensuring that Board procedures and all applicable laws, directions, rules and regulations are followed.

Complied withThe Board approved policy on board’s relationship with the Company Secretary provides that all directors shall have access to the advice/services of the Company Secretary.

3.8 The company secretary shall maintain the minutes of Board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any director

Complied with

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Direction No.



3.9 Minutes of Board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the Board acted with due care and prudence in performing its duties. The minutes of a Board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by

the Board in its deliberations; (b) the matters considered by the Board; (c) the fact-finding discussions and the issues

of contention or dissent which may illustrate whether the Board was carrying out its duties with due care and prudence;

(d) the explanations and confirmations of relevant executives which indicate compliance with the Board’s strategies and policies and adherence to relevant laws and regulations;

(e) the Board’s knowledge and understanding of the risks to which the finance company is exposed and an overview of the risk management measures adopted; and

(f) the decisions and Board resolutions.

Complied withDetailed minutes are kept covering the given criteria.

4 Composition of the Board

4.1 The number of directors on the Board shall notbe less than 5 and not more than 13.

Complied withThe Board comprises 6 directors

4.2 The total period of service of a director other than a director who holds the position of chief executive officer or executive director shall not exceed nine years. The total period in office of a non executive director shall be inclusive of the total period of service served by such director up to the date of this Direction.

No director has completed 9 years as a non executive director.


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Direction No.



4.3 An employee of a finance company may be appointed, elected or nominated as a director of the finance company (hereinafter referred to as an “executive director”) provided that the number of executive directors shall not exceed one-half of the number of directors of the Board. In such an event, one of the executive directors shall be the chief executive officer of the company.

Complied withThere is 1 Executive Director (the CEO) and 5 Non Executive Directors on the Board

4.4 The number of independent non-executivedirectors of the Board shall be at least one fourth of the total numbers of directors. A non-executive director shall not be considered independent if such director:

a) has shares exceeding 2% of the paid up capital of the finance company or 10% of the paid up capital of another finance company;

b) has or had during the period of two years immediately preceding his appointment as director, any business transactions with the finance company as described in paragraph 9 hereof, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds of the finance company as shown in its last audited balance sheet;

Complied withThere are 2 independent non-executive directors on the Board.

Mr. P D J Fernando, Senior Independent DirectorDr H Cabral, PC, Independent Director

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Direction No.



c) has been employed by the finance company during the two year period immediately preceding the appointment as director;

d) has a relative, who is a director or chief executive officer or a key management personnel or holds shares exceeding 10% of the paid up capital of the finance company or exceeding 12.5% of the paid up capital of another finance company.

e) represents a shareholder, debtor, or such other similar stakeholder of the finance company;

f) is an employee or a director or has a share holding of 10% or more of the paid up capital in a company or business organization:

(i) which has a transaction with the finance company as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds as shown in its last audited balance sheet of the finance company; or

(ii) in which any of the other directors of the finance company is employed or is a director or holds shares exceeding 10% of the capital funds as shown in its last audited balance sheet of the finance company; or

(iii) in which any of the other directors of the finance company has a transaction as defined in paragraph 9, aggregate value outstanding of which at any particular time exceeds 10% of the capital funds, as shown in its last audited balance sheet of the finance company.


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Direction No.



4.5 In the event an alternate director is appointed to represent an independent non-executive director, the person so appointed shall also meet the criteria that apply to the independent non-executive director.

No alternate directors were appointed to represent independent directors during the year.

4.6 Non-executive directors shall have necessary skills and experience to bring an objective judgment to bear on issues of strategy, performance and resources.

Complied withDirectors profiles are provided on pages 22 to 27.

4.7 A meeting of the Board shall not be duly constituted, although the number of directors required to constitute the quorum at such meeting is present, unless at least one half of the number of directors that constitute the quorum at such meeting are non-executive directors.

Complied withThe quorum was maintained at all the board meetings held during the year.

Details of attendance at meetings are provided on page 81.

4.8 The independent non-executive directors shall be expressly identified as such in all corporate communications that disclose the names of directors of the finance company. The finance company shall disclose the composition of the Board, by category of directors, including the names of the chairman, executive directors, non-executive directors and independent non-executive directors in the annual corporate governance report which shall be an integral part of its Annual Report.

Complied withThe current directorate is as given below :

Mr I C Nanayakkara, Non Executive Chairman Mr W D K Jayawardena, Non Executive Director Mrs K U Amarasinghe, Non Executive DirectorMr P D J Fernando, Senior Independent DirectorDr H Cabral, PC, Independent Director Mr D M D K Thilakaratne, Executive Director/CEO

The directors profiles are given on pages 22 to 27.

4.9 There shall be a formal, considered and transparent procedure for the appointment of new directors to the Board. There shall also be procedures in place for the orderly succession of appointments to the Board.

Complied withCompany’s Articles 70-74 address the general procedure for appointment and removal of Directors to the Board.Further a Board approved procedure is in place for the board members to select and appoint new directors to the board.

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Direction No.



4.10 All directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

Complied withArticle 70 of the Company’s Articles of Association provides that directors appointed shall be subject to election by shareholders at the first AGM.

4.11 If a director resigns or is removed from office, the Board shall announce to the shareholders and notify the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka, regarding the resignation of the director or removal and the reasons for such resignation or removal, including but not limited to information relating to the relevant director’s disagreement with the Board, if any.

No such situation has arisen as at the date of this report.

5 Criteria to assess the fitness and propriety of directors

5.1 Subject to the transitional provisions contained herein, a person over the age of 70 years shall not serve as a director of a finance company

Complied withThe Board of Directors have been assessed as fit and proper in terms of the Finance Companies (Assessment of Fitness and Propriety of Directors and Officers Performing Executive Functions) Direction No. 3 of 2011

The age of the current directors is within the period permitted under this direction.

5.2 A director of a finance company shall not hold office as a director or any other equivalent position in more than 20 companies/societies/bodies corporate, including associate companies and subsidiaries of the finance company.

Complied with


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Direction No.



6 Delegation of Functions

6.1 The Board shall not delegate any matters to a board committee, chief executive officer, executive directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the Board as a whole to discharge its functions.

Complied withThe Board has established a procedure under which powers have been delegated to the Director/CEO as sanctioned by the Company’s Articles of Association.

Article 77 of the Company’s Articles of Association empowers the Board to delegate its powers to a committee of directors or to a director or employee upon such terms and conditions and with such restrictions as the Board may think fit.

6.2 The Board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the finance company.

Complied withThe delegated powers are reviewed periodically by the Board and a process to review the delegation process has been approved by the Board.

7 The Chairman and the Chief Executive Officer

7.1 The roles of chairman and chief executive officer shall be separated and shall not be performed by the one and the same person.

Complied with.

7.2 The chairman shall be a non-executive director. In the case where the chairman is not an independent non-executive director, the Board shall designate an independent non-executive director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the finance company’s Annual Report.

Complied with The Chairman is a non-executive director.

The Board has designated Mr P D J Fernando as the Senior Independent Director to ensure a greater element of independence.

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Direction No.



7.3 The Board shall disclose in its corporate governance report, which shall be an integral part of its Annual Report, the name of the chairman and the chief executive officer and the nature of any relationship [including financial, business, family or other material/ relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the Board.

Complied withThere is no financial, business, family or other relationship between the Chairman and the CEO.

Mr I C Nanayakkara and Mrs K U Amarasinghe share a family relationship.

There is no financial, business, family or other material relationship between the other members of the Board .

A process has been developed for directors to disclose any relationship between board members.

7.4 The chairman shall: (a) provide leadership to the Board; (b) ensure that the Board works effectively and

discharges its responsibilities; and (c) ensure that all key issues are discussed by the

Board in a timely manner.

Complied with

7.5 The chairman shall be primarily responsible for the preparation of the agenda for each Board meeting. The chairman may delegate the function of preparing the agenda to the company secretary.

Complied withThe Chairman has delegated this function to the secretary.This has been included in the “Policy on Board’s relationship with the Company Secretary” approved by the Board.


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Direction No.



7.6 The chairman shall ensure that all directors are informed adequately and in a timely manner of the issues arising at each Board meeting.

Complied withThe Chairman ensures that all directors are properly briefed on issues arising at Board Meetings by submission of the agenda and board papers with sufficient time prior to meetings.

Further, minutes of previous month’s board meeting are distributed to the Board members and tabled at the next board meeting for review and approval.

7.7 The chairman shall encourage each director to make a full and active contribution to the Board’s affairs and take the lead to ensure that the Board acts in the best interests of the finance company.

Complied with

7.8 The chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relationships between executive and non-executive directors.

Complied with

7.9 Subject to the transitional provisions contained herein, the chairman, shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever.

Complied with

7.10 The chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the Board.

Complied withA Board approved communication policy covers this aspect.

The annual general meeting of the Company is the main forum at which the Board maintains effective communication with shareholders.

Periodic announcements made to the Colombo Stock Exchange also contribute towards this purpose.

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7.11 The chief executive officer shall function as the apex executive-in-charge of the day-to-day-management of the finance company’s operations and business.

Complied with

8 Board appointed Committees

8.1 Every finance company shall have at least the two Board committees set out in paragraphs 8(2) and 8(3) hereof. Each committee shall report directly to the Board. Each committee shall appoint a secretary to arrange its meetings, maintain minutes, records and carry out such other secretarial functions under the supervision of the chairman of the committee. The Board shall present a report on the performance, duties and functions of each committee, at the annual general meeting of the company.

Complied with

Please refer the reports on pages 94 to 96.

8.2 Audit Committee Please refer page 94 for the Committee Report

a. The chairman of the committee shall be a non-executive director who possesses qualifications and experience in accountancy and/or audit.

Complied withMr. W D K Jayawardena, Non Executive Director, has been appointed as the Chairman of the Audit Committee by the Board.

His qualifications are as follows:- MBA in Financial Management - Fellow Member of the Institute of Bankers - Over 27 years of Banking (of which 9 years was as CEO of Citibank Sri Lanka) - Associate of the Institute of Cost and Executive Accountants

b. The Board members appointed to the committee shall be non-executive directors.

Complied withThe remaining members of the Committee are Independent Directors: Mr. P D J Fernando and Dr. H Cabral, PC.


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Direction No.



c. The committee shall make recommendations on matters in connection with: (i) the appointment of the external auditor for

audit services to be provided in compliance with the relevant statutes;

(ii) the implementation of the Central Bank guidelines issued to auditors from time to time;

(iii) the application of the relevant accounting standards; and

(iv) the service period, audit fee and any resignation or dismissal of the auditor, provided that the engagement of an audit partner shall not exceed five years, and that the particular audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

Complied withA formal Agenda for Audit Committee meetings including items prescribed by the Direction is followed for the conduct of Audit Committee meetings.

The implementation of CBSL guidelines and relevant accounting standards; and the evaluation of the service period, fees and rotation of external auditors are carried out by the Audit Committee in consultation with the Chief Financial Officer.

d. The committee shall review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

Complied withThe external Auditors are independent as they report direct to the Audit Committee of the Board.

Further, the Auditor’s Engagement Letter submitted to the committee evidence the external auditor’s independence, and that the audit is carried out in accordance with SLAS.

e. The committee shall develop and implement a policy with the approval of the Board on the engagement of an external auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that the provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the committee shall consider:

Complied withThe Board has approved a specific procedure for engagement of the external auditors for providing non-audit services.

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(i) whether the skills and experience of the auditor make it a suitable provider of the non-audit services;

(ii) whether there are safeguards in place to ensure that there is no threat to the objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and

(iii) whether the nature of the non-audit services, the related fee levels and the fee levels

individually and in aggregate relative to the auditor, pose any threat to the objectivity and/or independence of the external auditor.

f. The committee shall, before the audit commences, discuss and finalize with the external auditors the nature and scope of the audit, including: (i) an assessment of the finance company’s

compliance with Directions issued under the Act and the management’s internal controls over financial reporting;

(ii) the preparation of financial statements in accordance with relevant accounting principles and reporting obligations; and

(iii) the co-ordination between auditors where more than one auditor is involved.

Complied with


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Direction No.



g. The committee shall review the financial information of the finance company, in order to monitor the integrity of the financial statements of the finance company, its annual report, accounts and periodical reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the finance company’s annual report and accounts and periodical reports before submission to the Board, the committee shall focus particularly on: (i) major judgemental areas; (ii) any changes in accounting policies and

practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting

standards and other legal requirements.

Complied withThe Committee has a process to review financial information of the Company when the quarterly and annual audited financial statements and the reports prepared for disclosure are presented to the Committee.

h. The committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary

Complied withThe Committee met the external auditors at all 5 meetings held during the year.

Furthermore the auditors met the Committee in the absence of the executive management twice during the year.

i. The committee shall review the external auditor’s management letter and the management’s response thereto.

Complied with

j. The committee shall take the following steps with regard to the internal audit function of the finance company:(i) Review the adequacy of the scope,

functions and resources of the internal audit department, and satisfy itself that the department has the necessary authority to carry out its work;

Complied with

The Committee has considered the scope of the internal audit function and noted the adequacy of resources and that necessary authority had been allocated to carry out its work.

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Direction No.



j. (ii) Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department;

(iii) Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department;

(iv) Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function;

(v) Ensure that the committee is apprised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;

(vi) Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care;

The Audit Plan for 2013 was tabled by the Head of Internal Audit and discussed at a Committee meeting and results of the internal audit process has been reviewed and appropriate actions obtained where necessary. Furthermore an Internal Audit Plan for 2014/15 has been recommended by the Committee.

An overall assessment of performance of the senior staff members and the Head of Internal Audit for the year 2013/14 has been carried out by the Committee. N/A

N/A

The Committee is satisfied that the internal audit function is performed with independence, impartiality and proficiency.

The internal auditor reports direct to the Board Audit Committee.

k. The committee shall consider the major findings of internal investigations and management’s responses thereto;

Complied with


71


Direction No.



l. The chief finance officer, the chief internal auditor and a representative of the external auditors may normally attend meetings. Other Board members and the chief executive officer may also attend meetings upon the invitation of the committee. However, at least once in six months, the committee shall meet with the external auditors without the executive directors being present.

Complied with.

m. The committee shall have: (i) explicit authority to investigate into any

matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and(iv) authority to obtain external professional

advice and to invite outsiders with relevant experience to attend, if necessary.

Complied withThe Board approved Terms of Reference of the Audit Committee ensures that it has the authority for points I to iv as required by the direction.

n. The committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.

Complied withDuring the year 2013/14 the Committee has held 5 meetings and conclusions of such meetings have been recorded by the Secretary in the Minutes of the relevant meetings.

o. The Board shall, in the Annual Report, disclose in an informative way, (i) details of the activities of the audit

committee; (ii) the number of audit committee meetings

held in the year; and (iii) details of attendance of each individual

member at such meetings.

Complied withPlease refer report on page 94.

p. The secretary to the committee (who may be the company secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings

Complied with

72


Direction No.



q. The committee shall review arrangements by which employees of the finance company may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and toact as the key representative body for overseeing the finance company’s relations with the external auditor.

Complied withA whistle blowing policy has been introduced and the number of the related “hot line” has been publicized to all Company employees. This was done to enhance accountability, so that deliberate deviations from controls and / or processes and procedures could be highlighted by any employee and thus addressed promptly.

8.3 Integrated Risk Management Committee Please refer page 95 for the Committee Report

a. The committee shall consist of at least one non-executive director, CEO and key management personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The committee shall work with key management personnel closely and make decisions on behalf of the Board within the framework of the authority and responsibility assigned to the committee.

Complied with

b. The committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the finance company on a monthly basis through appropriate risk indicators and management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on the finance company basis and group basis

Complied withAs delegated by the Committee the Chief Risk Officer assesses risks which have been identified by heads of divisions on a monthly basis and summarized and submitted to the quarterly Committee meetings.

c. The committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset-liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the committee

Complied with


73


Direction No.



d. The committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the finance company’s policies and regulatory and supervisory requirements.

Complied with

e. The committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans.

Complied with4 meetings were held during the financial year 2013/14.

f. The committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank of Sri Lanka.

Complied withSpecific risks and limits are identified by the IRMC and decisions are taken collectively.

Moreover a formal documented disciplinary action procedure involving Internal Audit & HR is in place.

g. The committee shall submit a risk assessment report within a week of each meeting to the Board seeking the Board’s views, concurrence and/or specific directions.

Complied withThe CRO submits a summary report to the Members of the Board within 7 days after the committee meeting. This includes the risks discussed at the meeting, mitigation actions proposed by ERM and the responses received from the risk owners.

Further, approved Committee minutes are tabled at the subsequent Board meeting seeking the board’s views and specific direction.

74


Direction No.



h. The committee shall establish a compliance function to assess the finance company’s compliance with laws, regulations, directions, rules, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to the committee periodically.

Complied withA Compliance Officer has been appointed by the Board. She monitors compliance of CBSL rules, regulations and directions issued under the Finance Business Act and submits a monthly compliance report to the Board for their review.

Monitoring compliance of other applicable laws, internal controls and approved policies on all areas of business operations is carried out by the ERM division under the supervision of the CRO.

9 Related party transactions

9.1 The following shall be in addition to the provisions contained in the Finance Companies (Lending) Direction, No. 1 of 2007 and the Finance Companies (Business Transactions with Directors and their Relatives) Direction, No. 2 of 2007 or such other directions that shall repeal and replace the said directions from time to time.

9.2 The Board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the finance company with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:a) A subsidiary of the finance company;b) Any associate company of the finance company;c) A director of the finance company;d) A key management personnel of the finance

company;

9.2-9.4 Complied withA Board approved process is in place to ensure that the Company does not engage in related party transactions as defined in this direction and to enable directors to take measures to avoid a conflict of interest.

Transactions with related parties are made with the sanction of the Board subject to such transactions being in the normal course of business.


75


Direction No.



9.3 The transactions with a related party that are covered in this Direction shall be the following:a) Granting accommodation,b) Creating liabilities to the finance company

in the form of deposits, borrowings and investments,

c) providing financial or non-financial services to the finance company or obtaining those services from the finance company,

d) creating or maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information

that may give benefits to such related party.

Further, Directors are individually requested to declare their transactions with the Company at each Board meeting and in the annual declaration.

The Company will further strengthen the current monitoring mechanism.

9.4 The Board shall ensure that the finance company does not engage in transactions with a related party in a manner that would grant such party “more favourable treatment” than that is accorded to other similar constituents of the finance company. For the purpose of this paragraph, “more favourable treatment” shall mean:

a) Granting of “total net accommodation” to a related party, exceeding a prudent percentage of the finance company’s regulatory capital, as determined by the Board. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related party in the finance company’s share capital and debt instruments with a remaining maturity of 5 years or more.

76


Direction No.



b) Charging of a lower rate of interest than the finance company’s best lending rate or paying a rate of interest exceeding the rate paid for a comparable transaction with an unrelated comparable counterparty;

c) Providing preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/ commissions, that extends beyond the terms granted in the normal course of business with unrelated parties;

d) Providing or obtaining services to or from a related-party without a proper evaluation procedure;

e) Maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party, except as required for the performance of legitimate duties and functions.

10 Disclosures

10.1 The Board shall ensure that: (a) annual audited financial statements and

periodical financial statements are prepared and published in accordance with the formats prescribed by the regulatory and supervisory authorities and applicable accounting standards, and that

(b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English.

Complied with


77


Direction No.



10.2 The Board shall ensure that at least the following disclosures are made in the Annual Report:

a. A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

Complied withPlease refer the Directors Report on pages 90 to 93.

b. A report by the Board on the finance company’s internal control mechanism that confirms that the financial reporting system has been designed to provide a reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements has been done in accordance with relevant accounting principles and regulatory requirements.

Complied withPlease refer the Directors Statement on Internal Controls on page 97.

c. The external auditor’s certification on the effectiveness of the internal control mechanism in respect of any statements prepared or published after March 31, 2010.

Complied withThe Company has obtained a certification on the effectiveness of the internal controls over financial reporting from M/s KPMG, Chartered Accountants.

d. Details of directors, including names, transactions with the finance company.

Complied withPlease refer the Directors Report on pages 90 to 93 and Note 35 to the Financial Statements.

e. Fees/remuneration paid by the finance company to the directors in aggregate, in the Annual Reports published after January 1, 2010.

Complied withPlease refer the Directors Report on pages 90 to 93.

f. Total net accommodation as defined in paragraph 9(4) outstanding in respect of each category of related parties and the net accommodation outstanding in respect of each category of related parties as a percentage of the finance company’s capital funds.

Complied withTotal net accommodation outstanding in respect of each category of related party is found under Note 35 to the Financial Statements

Net accommodations granted to related parties as a percentage of capital funds of the Company at the year-end was 4%.

78


Direction No.



g. The aggregate values of remuneration paid by the finance company to its key management personnel and the aggregate values of the transactions of the finance company with its key management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the finance company.

Complied withPlease refer Note 35 to the Financial Statements.

h. A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any non - compliances.

Complied withStatus of compliance with prudential requirements, regulations and laws are in the Directors report set out in pages 90 to 93.

i. A statement of the regulatory and supervisory concerns on lapses in the finance company’s risk management, or non compliance with the Act, and rules and directions that have been communicated by the Director of the Department of Supervision of Non-Bank Financial Institutions, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the finance company to address such concerns.

Complied withThere were no significant supervisory concerns / lapses in the Company’s risk management and compliance with this direction to be directed by the Monetary Board to be disclosed to the public.

j. The external auditor’s certification of the compliance with the Act and rules and directions issued by the Monetary Board in the annual corporate governance reports published after January 1, 2011.

Complied withThe Company has engaged the services of the external auditors to assess the company’s level of compliance with the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board.


79


Section No.

Rules of the Colombo Stock Exchange CLC’s Level of compliance

7.10 Rules on Corporate Governance

7.10 Statement confirming that as at the date of the annual report that the Company is in compliance with these rules.

Complied withThe Company is compliant with the listing rules of the Colombo Stock Exchange.

For further details please see below.

7.10.1 Non Executive DirectorsThe Board of Directors of a listed entity shall include at least : two non executive directors; or such number of non executive directors equivalent to one third of the total number of directors whichever is higher .

Complied withAs at 31st March 2014 the Board comprised 6 directors of whom 5 were non executive directors

7.10.2 Independent DirectorsWhere the constitution of the Board of Directors includes only two non executive directors in terms of 7.10.1, both such non executive directors shall be independent. In all other instances two or 1/3rd of the non executive directors appointed to the Board, whichever is higher shall be independent.

Complied withAs at 31st March 2014 the Board comprised 2 independent directors.

7.10.3-4 Directors disclosuresAnnual determination as to the independence or non independence of each non executive director

Complied withThe Board has determined the independent/ non independent status based on the criteria set out by the CSE.

Please refer directors profiles on pages 22 to 27.

7.10.5 Remuneration CommitteeShall comprise of a minimum of two independent non executive directors or of non executive directors a majority of whom shall be independent, which ever shall be higher

Complied withPlease refer committee report on page 96.As at 31st March 2014 the Committee comprised 3 non executive directors of whom 2 were independent.

7.10.6 Audit CommitteeShall comprise of a minimum of two independent non executive directors or of non executive directors a majority of whom shall be independent, which ever shall be higher

Complied withPlease refer committee report on page 94.As at 31st March 2014 the Committee comprised 3 non executive directors of whom 2 were independent.

The extent of compliance of the listing Rules of the colombo stock exchange and subsequent amendments thereto;

80


In addition to the above corporate governance requirements, the Board of Directors having considered the new directives of the Securities & Exchange Commission (SEC) and the Colombo Stock Exchange (CSE) adopted the following measures to comply with the relevant provisions:

Minimum Public Holding(effective from 1st January 2014)

The directive requires a listed entity on the Diri Savi Board to maintain a minimum of 10% of its shares in the hands of a minimum of 200 public shareholders.

A two year transitional period was permitted for compliance where these companies must reach a public holding of 7.5% by December 2015 and be fully compliant by December 2016.

By 31st March 2014, the company was required to submit a status report to the CSE and SEC stating the free float

As at 1st January 2014 the public float of the Company was 1.075% held by 621 shareholders.

On 31st March 2014, the Company submitted a status report to the CSE and SEC stating the free float.

The Company will increase its public float by: 6.425% by 31st December 2015; and a further 2.5% by 31st December 2016 to be in compliance.

Disclosure of Directors Dealings in shares (effective from 1st April 2014)

A Board approved procedure has been put in place to ensure that the Directors and the CEO make relevant disclosures in a timely manner, in the event they make an acquisition or disposal of shares in the entity, to facilitate making an announcement to the Exchange within five market days upon such acquisition or disposal.


81


ATTendAnce of membeRs AT meeTingsBoard Meetings

Name of Director IN NI EX NEX Meeting Dates Total

30/0

4/20

13

29/0

5/20

13

19/0

6/20

13

01/0

8/20

13

14/0

8/20

13

29/0

8/20

13

27/0

9/20

13

29/1

0/20

13

11/1

1/20

13

20/1

1/20

13

19/1

2/20

13

29/0

1/20

14

12/0

2/20

14

21/0

2/20

14

19/0

3/20

14 15

Mr I C Nanayakkara X X 0 1 1* 1 1* 1 1* 1 1* 1* 1 1* 1* 1* 1 14

Mr W D K Jayawardena X X 0 1* 1 1 1 1 1 1 1 1 1 1 1 1 1 14

Mrs K U Amarasinghe X X 1 1 1 1 0 1 1 1 1 1 1 1 1 1 0 13

Dr H Cabral, PC X X 1 1 0 1 1 1 1 1 1 1 1 1 1 1 1 14

Mr P D J Fernando X X 1 1 1 0 1 1 1 0 1 1 1 1 1 0 1 12

Mr D M D K Thilakaratne X X 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 15

Audit Committee Meetings


29/0

5/20

13

14/0

8/20

13

27/0

9/20

13

11/1

1/20

13

12/0

2/20

14

05

Mr W D K Jayawardena X X 1 1 1 1 1 05

Dr H Cabral, PC X X 1 1 1 1 1 05

Mr P D J Fernando X X 1 1 1 1 1 05

82


Integrated Risk Management Committee Meetings


30/0

4/20

13

01/0

8/20

13

20/1

1/20

13

29/0

1/20

14 04

Mr W D K Jayawardena X X 0 1 1 1 03

Mrs K U Amarasinghe X X 1 1 1 1 04

D M D K Thilakaratne X X 1 1 1 1 04

Remuneration Committee Meeting

Name of Director IN NI EX NEX Meeting Date Total

19/06/2013 01

Mr I C Nanayakkara X X 1 01

Dr H Cabral, PC X X 0 00

Mr P D J Fernando X X 1 01

* present by Alternate


83


Enterprise Risk Management at Commercial Leasing & Finance PLC (CLC) comes under the scope and purview of the LOLC Group Enterprise Risk Management Division. All risk governance structures, mechanisms and processes are common to all regulated subsidiaries of the LOLC group. Therefore, any reference to LOLC in the following article refers to the LOLC group unless specifically stated.

enTeRPRise Risk mAnAgemenT Managing risks with in the risk appetite of an organization is one of the key elements of success and is a fundamental in good governance. LOLC at the start of its journey towards becoming a conglomerate identified the importance of governance, risk and compliance and initiated mechanisms in all three spheres.

The RooTs The Seed of enterprise risk management was first planted in the holding company where the Internal Audit, Information systems audit and Risk Management formed the main roots of growth. We identified the synergies of these three closely inter related functions and placed them under the banner of Enterprise Risk Management (ERM). Having identified that total independence of these three functions as a key ingredient for an effective and efficient growth of risk management, the Chairman of the board of directors of Lanka ORIX Leasing PLC overlooks the ERM. ERM submits its reports and recommendations to the board of CLC via the Audit committee and the Integrated Risk Management Committee (IRMC). The compliance function maintains a very close working relationship with ERM ensuring that both units complement each other for a better controlled environment. The above initiatives by the board demonstrate its true commitment in maintaining proper Governance, Risk and compliance structures within the organization.

Risk Management

Risk Management in the current context requires a vast and diversified knowledge of operations and of the environment of such business operates. The dynamic nature and the volatility of todays’ businesses in turn require constant enhancement of knowledge. The human resource element plays a key role in this aspect. ERM department comprises of staff with expertise in all major operational areas of the organization and have access to an internally managed resource base in electronic form on various subject matter to read and update their knowledge. We constantly train ERM staff on key knowledge domains and skills by way of both internal and external training. We strongly believe that the best risk management practice is empowering all employees to be risk managers with in their scope of work. ERM division initiates risk training sessions at induction level for new recruits while unit specific training sessions are conducted for operational staff on request or on need identification by ERM.

enterprise Risk management

Risk Management

Information Systems Audit

Internal Audit

84


A sTRong sTem Risk Identification and analysis is primarily a responsibility of the business process owners who are also the risk owners. Their efforts are well complimented by the independent risk reviews carried out by the Risk Management function and the internal control reviews conducted by the dedicated Audit function at CLC. Deficiencies or risks reported are promptly addressed and followed up by the business process owners and are monitored by ERM. Any adverse movements of the risk indicators so identified are reported to the board of management via the IRMC.

The internal audit function review the adequacy and the reliability of the internal controls while The IS audit review the ICT platform of the organization in line with the best practices and IS auditing standards formulated by the ISACA USA (Information Systems Audit & Control Association). All audit findings are reported to the audit committee and are followed up until resolution. Auditee confirmations of rectifying audit queries are obtained and random secondary audits are undertaken to ensure that all recommendations by the audit committee are implemented. ERM plays a consultative role on major operational process changes ensuring that adequate internal controls are embedded in all new business processes and appropriate risk mitigation strategies and mechanisms are in place.

All assignments undertaken by ERM undergo a stringent quality assurance mechanism adopted by ERM to ensure that all reporting are consistent and required standards are met. Periodic reviews of all ERM processes are undertaken and constant quality improvements and value additions are incorporated.

The risk governance structures and mechanisms adopted by LOLC were recognised by the OCEG (Open Compliance and Ethics Group) USA with a GRC achievement award in 2012 which bears testimony for the sound risk governance structures adopted by LOLC. bRAnching offThe diversified nature of the LOLC group with key organizations which are regulated and their respective branch network possess a major challenge to ERM in deploying resources which is currently overcome by appointing risk management officers who are entrusted with coordinating all ERM activities with respect of all major companies of the LOLC group. In addition the audit function have located internal auditors in selected regions for ease of operations in reviewing localized operations of the LOLC group.

Risk information often lies with the business process owners and in order to obtain first-hand information from various business silos and service units compulsory, periodic reporting lines were established from each units to ERM. This include a declaration by the head of each business /support unit of maintaining an effective internal control framework. These initiatives ensure that entity level risks are closely monitored and grass root level risk information is communicated to ERM on a timely manner.

To supplement this process a whistleblowing hotline for corporate users to report on any risk and a customer feedback line for external stake holders to report any irregularity are in operation. Both these channels of communication are managed by ERM and all reported issues are followed up until resolution.

Risk Management

85


Aiming To flouRish The scattered nature of information among the entities required a robust yet flexible information management system and due to the complexities involved in drawing information from different entities and systems LOLC opted for a phased out implementation of a risk information management system. During the last financial year we managed to integrate financial data of all major companies of the LOLC group and are currently in live mode enhancing the risk monitoring and information capacity of the ERM. We have now entered the second phase of the project which is integrating the operational level /transactional level information which we hope will be fully operational by the end of this calendar year thus enhancing the capabilities of ERM considerably. This will allow us to monitor the movement of risk indicators and facilitate deeper analysis of such data.

As an initiative to further strengthen our risk management practices and the internal control frame work we have planned to roll out self-risk assessments and internal control assessment initiatives in two phases beginning with the branch network and ending with the support services level.

In keeping in line with our vision for risk management “Building an organizational Culture where Protection, Assurance, Reliability, Accountability, Transparency and Confidentiality are treasured and lasting values.“ We constantly strive to formulate the best yet unique risk management structures and mechanisms which are dynamic and flexible yet strong and consistent to complement the growth strategies of LOLC group.

Risk PRofile of commeRciAl leAsing & finAnce Plc The following is a high level categorisation of risks and is based on perceived risks

Risk Levels Risk Score

Very High 5

High 4

Medium 3

Low 2

Very Low 1

The above is used only for illustration purposes of this report.

Financial Risks

Asset & Liability Risk

Profitability & Income structure Risk

Capital Adequacy Risk

Credit Risk

Liquidity Risk

Interest rate Risk

Market Risk

Currency Risk

012345

86


Operational Risks Event Risk

Business Risks

Legal Risk

Policy Risk

Financial Infrastructure Risk

Systemic Risk

Image Risk

Industry Risk

012345

012

3

45

012345

Business Strategy Risk

Internal Systems & Operational Risk

Technology Risk

Mismanagement & Fraud Risk

Political Risk

Contagion Risk

Disaster Management & Business Continuity Risk

Exogenous Risk

Risk Management

87


FinancialInformationFinancial Calendar 2013/141st Quarter results 2013/2014 released on 15th August 20132nd Quarter results 2013/2014 released on 13th November 2013 3rd Quarter results 2013/2014 released on 14th February 20144th Quarter results 2013/2014 released on 29th May 2014Annual Report for 2013/2014 released on 29th August 201422nd Annual General Meeting on 30th September 2014

Proposed Financial Calendar 2014/15 1st Quarter results 2014/2015 will be released on 15th August 2014 2nd Quarter results 2014/2015 will be released on 14th November 2014 3rd Quarter results 2014/2015 will be released on 13th February 20154th Quarter results 2014/2015 will be released on 29th May 2015 Annual Report for 2014/2015 will be released in June 201523rd Annual General Meeting in June 2015

88


I am a seed paddy farmer and I chose CLC because of the friendly and helpful staff. This has helped me form a strong ‘Hithawathkama’ bond with CLC.

s.m. PunchibandaPaddy and Pineapple FarmerMuthugala


89


ContentsDirectors Report 90Audit Committee Report 94Integrated Risk Management Committee Report 95Remuneration Committee Report 96Directors’ Statement on Internal Control over Financial Reporting 97Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 98Independent Auditor’s Report 99

Statement of Financial Position 100Statement of Comprehensive Income 101Statement of Changes in Equity 102Statement of Cash Flows 103Accounting Policies 105Notes to the Financial Statements 126Shareholder Information 162Summarised Quarterly Statistics 164Ten Year Summary 165Sources and Distribution of Income 166Statement of Value Added 167

90


Your Directors have pleasure in presenting their Statement of Affairs together with the Audited Financial Statements for the year ended 31st March 2014.

PRinciPAl AcTiviTies And nATuRe of oPeRATions During the year the principal activities of the Company comprised provision of leasing, hire purchase, loans, receivable financing, and mobilizing of fixed and savings deposits.

mARkeTs seRved The Company operates in all provinces of Sri Lanka with the largest concentration of branches being in the Western and North Central Provinces.

diRecToRATe The Directors during the year under review were as follows: 1. Mr. I C Nanayakkara Non Executive Chairman (Alternate to Mr W D K Jayawardena) 2. Mr. W D K Jayawardena Non Executive Director (Alternate to – Mr I C Nanayakkara) 3. Mrs. K U Amarasinghe Non Executive Director 4. Mr. P D J Fernando Senior Independent Director 5. Dr. H Cabral, PC Independent Non Executive Director 6. Mr. D M D K Thilakaratne Executive Director/CEO

RecommendATions foR Re elecTion of diRecToRsIn terms of Article 75 of the Articles of Association Dr. H Cabral, PC and Mr. P D J Fernando retire by rotation at the Annual General Meeting of the Company and offer themselves for re-election. The Board recommends their re-election.

Directors Report

diRecToRs inTeResTs in conTRAcTs The Directors have made the declarations required by the Companies Act No. 7 of 2007. These have been noted by the Board, recorded in the Minutes and entered into the Interest Register which is maintained by the Company.

Lists of companies on which these Directors serve have been included on pages 92 to 93.

diRecToRs’ RemuneRATion The Company paid Rs. 24,025,332 as Directors’ remuneration for the financial year ended 31st March 2014.

diRecToRs shAReholding

Directors Name As At 31.03.2014

As at 31.03.2013

1 Mr. I C Nanayakkara Nil Nil

2 Mr. W D K Jayawardena Nil Nil

3 Mrs. K U Amarasinghe Nil Nil

4 Mr. P D J Fernando Nil Nil

5 Dr. H Cabral, PC Nil Nil

6 Mr. D M D K Thilakaratne Nil Nil

meeTings of The boARd of diRecToRsTwelve scheduled monthly meetings and three special meetings were held during the year. A schedule of Directors’ attendance at Board Meetings and Sub Committee Meetings has been included on pages 81 to 82.

boARd sub commiTTees In compliance with regulatory guidelines and also with best practices, the Board has formed the following sub committees:

Audit Committee Integrated Risk Management Committee Remuneration Committee

91


The reports of these Committees can be found on pages 94 to 96.

finAnciAl sTATemenTs & AudiToR’s RePoRT And diRecToRs’ ResPonsibiliTy foR finAnciAl RePoRTing The financial statements and the auditor’s report are given on pages 99 to 161.

The Directors are responsible for the preparation of financial statements of the Company to reflect a true and fair view of the state of its affairs. The Directors are of the view that the financials have been prepared in accordance with the requirements of the Sri Lanka Accounting Standards, the Companies Act No. 7 of 2007, the Finance Business Act No. 42 of 2011 and all relevant directions of the Central Bank of Sri Lanka.

significAnT AccounTing Policies The Accounting Policies adopted in the preparation of the financial statements and any changes thereof where applicable have been included in the Notes to the financial statements on pages 105 to 125.

TRAnsAcTions wiTh RelATed PARTies Details of related party transactions are disclosed in the financial statements on pages 149 to 151 under Note 35.

going conceRn The Directors after making necessary inquiries have the expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Therefore the going concern basis has been adopted in the preparation of the financial statements.

coRPoRATe goveRnAnceCLC is governed by the requirements of the Finance Companies (Corporate Governance) Direction no. 3 of 2008 and the Listing Rules of the Colombo Stock Exchange and subsequent amendments thereto. The manner in which CLC ensures adherence with the above requirements has been disclosed on pages 48 to 82.

sTATuToRy PAymenTs For the year under review, all known statutory payments have been made and all retirement gratuities have been provided for. Further, all management fees and payments to related parties for the year under review have been reflected in the accounts.

AudiToRs M/s KPMG, the Auditors of the Company retire and offer themselves for reappointment. The Board recommends their re-appointment for the year 2014/2015 at a fee to be decided by the Board.

Auditor’s remuneration is given in the Note No. 8 to the Audited financial statements on page 127.

As far as the Directors are aware, the Auditors do not have any other relationship with the Company or any of its subsidiaries nor do they have any interest in contracts with the Company or any of its subsidiaries.

comPliAnce wiTh lAws And RegulATions The Company has not engaged in any activity that contravenes any applicable law or regulation, and to the best of the knowledge of the Directors the Company has been in compliance with all prudential requirements, regulations and laws.

shAReholding sTRucTuRe The stated capital of the Company is Rs. 1,425,946,629/- divided into 6,377,711,170 shares.

AssociATe comPAny The Company holds 40% of the equity of Commercial Insurance Brokers (Pvt) Limited (CIB). The following two directors have been nominated to its Board by the Company:

• Mr. D M D K Thilakaratne • Mr. P D J Fernando

92


During the past 27 years CIB has been one of the premier insurance broking firms in the country.

evenTs AfTeR The RePoRTing dATe No circumstances have arisen since the reporting date that would require disclosure.

humAn ResouRces The total staff strength of the Company as at end March 2014 was 610. (2013 - 539)

AnnuAl geneRAl meeTing The Annual General Meeting of the Company will be held on 30th September 2014 at 11.00 a.m. at the Auditorium of Lanka ORIX Leasing Company PLC at No. 100/1 Sri Jayawardenapura Mawatha, Rajagiriya. Should you be unable to attend, please complete the proxy form in the manner instructed therein and return it to the Company.

For and on behalf of the Board of Directors of Commercial Leasing & Finance PLC

D.M.D,K. Thilakaratne Director/ CEO

26th May 2014Colombo 04

Name Directorships held

Mr I C Nanayakkara Chairman:Commercial Leasing & Finance PLCBrown & Company PLCLOLC Micro Credit Limited Browns Investments PLC

Deputy Chairman:Lanka ORIX Leasing Company PLCLanka ORIX Finance PLC Seylan Bank PLC

Director:PRASAC Micro Finance Institute Sierra Constructions Limited Agstar Fertilizers (Private) Limited BRAC Lanka Finance PLC LOLC Myanmar Microfinance Co. Ltd FLC Holdings PLC Associated Battery Manufacturers (Ceylon) LtdLanka Centuary Investments PLC

Mr W D K Jayawardena Chairman:LOLC Insurance Company LimitedLOLC Securities LtdUnited Dendro Energy (Private) LimitedLanka ORIX Finance PLC Eden Hotel PLCLOLC Life Insurance LimitedLOLC General Insurance LimitedPalm Garden Hotels PLCSpeed Italia (Pvt) Limited

Managing Director/ Group CEO:Lanka ORIX Leasing Company PLC

Director:LOLC Micro Credit LimitedCommercial Leasing & Finance PLCBrown & Company PLCBrowns Investments PLC Riverina Resorts (Pvt) LtdBRAC Lanka Finance PLC Seylan Bank PLC

Directors Report

93



Mrs K U Amarasinghe Director:

Commercial Leasing & Finance PLC

Lanka ORIX Finance PLC

Lanka ORIX Leasing Company PLC

LOLC Insurance Company Limited

LOLC Micro Credit Limited

United Dendro Energy (Pvt) Limited

Eden Hotel Lanka PLC

Palm Garden Hotels PLC

Brown & Company PLC

Browns Investments PLC

Riverina Resorts (Pvt) Ltd

Dr Harsha Cabral, PC Director :Diesel & Motor Engineering PLC (DIMO)

Union Bank of Colombo PLC

Richard Pieris & Co. Distributors Ltd.

Tokyo Cement Company (Lanka) PLC.

Tokyo Super Cement Co (Private) Ltd.

Fuji Cement Co (Lanka) Ltd.

Hayleys PLC

Lanka ORIX Finance PLC


Hambana Petro Chemicals (Pvt) Ltd

Tokyo Cement Power Co. Ltd

Alumex PLC

Browns Investments PLC

Mr P D J Fernando Chairman:Golden Key Credit Card Company.

Director :


Union Bank of Colombo PLC

Taprobane Holdings Ltd

Hambana Petro Chemicals (Pvt) Ltd

Securities and Exchange Commission

of Sri Lanka

Commercial Insurance Brokers (Pvt) Ltd

Ceylon Leather Products PLC

Thomas Cook Travels Sri Lanka


Mr D M D K Thilakaratne Director:Commercial Leasing & Finance PLC

Commercial Insurance Brokers (Pvt) Ltd

Commercial Factors (Pvt) Limited

94


The Audit Committee was established for the purpose of assisting the Board in fulfilling their responsibilities relating to financial governance. The Committee comprises non-executive directors, with the majority of them being independent:

W D K Jayawardane - Committee Chairman (Non Executive Director)P D J Fernando - Senior Independent DirectorDr H Cabral, PC - Independent Non Executive Director

The Audit Committee is governed by the Audit Charter which defines its terms of reference. The composition and scope of the committee meets the requirements set out in the Finance Companies Corporate Governance Direction No 3 of 2008 and the Listing Rules of the Colombo Stock Exchange. The Committee Charter was last reviewed and revised by the Board in February 2014.

The Committee meets quarterly and additional meetings are held as and when a need arises. 05 meetings were held during the year and the members’ attendance at Audit Committee meetings is provided on page 81. Minutes of such meetings which include details of matters discussed are reported regularly at Board meetings. The audit partner was present/invited to attend all five meetings and on two occasions the auditors were able to meet with the Audit Committee members without the presence of the other directors and members of the management.

The Committee has been mandated to ensure that a sound Financial Reporting System is established by : reviewing the appropriateness of procedures in place for the identification, evaluation and management of business risks; ensuring that internal controls relating to all the areas of operations, including Human Resources and IT enhance good governance while not impeding business; seeking assurance that agreed control systems are in place, are operating efficiently and are regularly monitored; ensuring that appropriate controls are put in place prior to the implementation of significant business

Audit Committee Report

changes, facilitating monitoring of the changes; reviewing internal and external audit functions; and ensuring compliance with applicable laws, regulations, listing rules and established policies of the Company

During the year under review the Committee reviewed interim and annual financial statements prior to publication, checking and recommending changes in accounting policies, significant estimates and judgments made by the management, compliance with relevant accounting standards/regulatory requirements and issues arising from internal and external audit.

Effectiveness of the Company’s internal controls was evaluated through reports provided by the management, and by the internal and external auditors. The Committee is satisfied that an effective system of internal control is in place to provide the assurance on safeguarding the assets and the integrity of financial reporting.

The Committee addressed the external auditors findings reported in the Management Letter relating to the previous financial year’s (2012/13) audit.

The Committee reviewed the independence and objectivity of the external auditors, M/s KPMG, Chartered Accountants and has received a declaration confirming that they do not have any relationship or interest in the Company as required by the Companies Act No. 7 of 2007.

In accordance with section 8 (2) c) (iv) of the Finance Companies Corporate Governance Direction No. 3 of 2008, Mr Yohan Perera rotated out having completed five years and a new partner, Mr Upul Karunaratne was appointed to take over from 2013/14.

W D K JayawardenaChairmanAudit Committee

Colombo 26th May 2014

95


The Integrated Risk Management Committee (IRMC) was established to assist the Board in performing its oversight function in relation to different types of risks faced by the Company in its business operations and ensures adequacy and effectiveness of the risk management framework of the Company. The Committee comprises the following members:

W D K Jayawardena - Committee Chairman/Non Executive Director Mrs. K U Amarasinghe - Non Executive Director D M D K Thilakaratne - Director/CEO Mrs. S Wickremasekera - Chief Risk Officer Mrs. S Kotakadeniya - Chief Financial Officer J Kelegama - Chief Credit Officer R Perera - Group Treasurer C Dias - Chief Information Officer N Weerapane - Deputy General Manager/ Recoveries

The IRMC has adopted the provisions of the section 8 (3) of the Finance Companies Corporate Governance Direction No. 3 of 2008 issued by the Monetary Board of the Central Bank of Sri Lanka as its Terms of Reference. The composition and the scope of work of the Committee is in conformity with the provisions of the aforesaid Direction.

During the year the Committee met 4 times on a quarterly basis. Credit, Operational, Market and Liquidity Risks are monitored by divisional heads and reported to the Chief Risk Officer on a monthly basis. These risks are then reviewed and assessed monthly by the Chief Risk Officer and summarized reports are submitted quarterly to the Committee for concurrence and/or specific directions in order to ensure that the risks are managed appropriately.

As delegated by the Committee the Chief Risk Officer submits a risk assessment report to the Board, subsequent to each meeting within a week of each meeting, stating the risk mitigation actions pursued and seeking the Board’s views. In addition proceedings of meetings are also tabled at a subsequent meeting of the Board. The attendance of members at meetings is stated on page 82.

The Committee works closely with the key management personnel and the Board in fulfilling its duties in risk management. During the year the Committee reviewed risk indicators designed to monitor the level of specific risks, with a view to determining the adequacy of such indicators; reviewed actual results computed monthly against each risk indicator and took prompt corrective action to mitigate the effects of the specific risk; reviewed the effectiveness of the compliance function to assess the Company’s compliance with laws, regulatory guidelines, internal controls and approved policies in all areas of business operations.

W D K Jayawardena ChairmanIntegrated Risk Management Committee

Colombo26th May 2014

Integrated Risk Management Committee Report

96


The Remuneration Committee was established to assist the Board in evaluating and recommending remuneration for board members including the CEO. The Committee comprises three non-executive directors with the majority of them being independent.

I C Nanayakkara - Committee Chairman /Non Executive DirectorP D J Fernando - Senior Independent DirectorDr. H Cabral, PC - Independent Non Executive Director

The Committee is governed by its Remuneration Policy which has vested it with powers to evaluate, assess and recommend to the Board for approval any fee, remuneration and ex gratia to be paid to its directors including the chief executive officer based on: the need of the Company to be competitive; the need to attract, motivate and retain talent; and the need to encourage and reward high levels of performance and achievement of corporate goals and objectives. The composition of the Committee meets the requirements set out in the Listing Rules of the Colombo Stock Exchange.

The Committee met once during the year under review and proceedings of the meeting were reported to the Board. The attendance of members at the meeting is stated on page 82. The Committee is responsible for determining the remuneration policy relating to the

Director/CEO; periodically evaluating the performance of the Director/CEO against the set targets and goals and determining the basis for revising remuneration, benefits and other payments of performance based incentives; determining the remuneration policy relating to executive and non-executive directors including alternate directors; and recommending these to the Board for adoption.

During the year the Committee recommended a scheme of fees to the independent non executive directors (INED). All INEDs receive a fee for attending board meetings and committee meetings. They do not receive any performance or incentive payments. Directors’ emoluments are disclosed on page 127 under Note No. 8.

I C Nanayakkara ChairmanRemuneration Committee

Colombo 26th May 2014

Remuneration Committee Report

97


ResPonsibiliTyIn line with the Finance Companies Direction No. 03 of 2008 section 10(2) b), the Board of Directors present this report on Internal Control over Financial Reporting.

The Board of Directors (“the Board”) is responsible for the adequacy and effectiveness of the internal control mechanism in place at the Commercial Leasing & Finance PLC. (“the Company”).

The Board has established an on-going process for identifying, evaluating and managing the significant risks faced by the Company and this process includes the system of Internal Control over Financial Reporting. The process is regularly reviewed by the Board.

The Board is of the view that the system of Internal Control over Financial Reporting in place, is sound and adequate to provide reasonable assurance regarding the reliability of Financial Reporting, and that the preparation of Financial Statements for external purposes is in accordance with relevant accounting principles and regulatory requirements.

The management assists the Board in the implementation of the Board’s policies and procedures pertaining to Internal Control over Financial Reporting. In assessing the Internal Control System over Financial Reporting, identified officers of the Company collated all procedures and controls that are connected with significant accounts and disclosures of the Financial Statements of the Company & continue to review & update every year. These in turn are being observed and checked by the Internal Audit Department of the Company for suitability of design and effectiveness on an on-going basis.

Directors’ Statement on Internal Control over Financial Reporting

confiRmATionBased on the above processes, the Board confirms that the Financial Reporting System of the Company has been designed to provide reasonable assurance regarding the reliability of Financial Reporting and the preparation of Financial Statements for external purposes and has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

exTeRnAl AudiToR’s ceRTificATionThe External Auditors have submitted a certification on the process adopted by the Directors on the system of internal controls over financial reporting. The matters addressed by the External Auditor’s in this respect, will be taken in to consideration & appropriate steps will be taken to incorporate same, where applicable. By order of the Board

I C Nanayakkara Chairman

Krishan Thilakaratne Director/CEO

W D K JayawardenaChairman/Audit Committee

26th May 2014

98


Chief Executive Officer’s and ChiefFinancial Officer’s Responsibility StatementThe financial statements are prepared in accordance with the new Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, the requirements of the Companies Act No. 7 of 2007, the Finance Business Act No. 42 of 2011 and the Listing Rules of the Colombo Stock Exchange.

The accounting policies used in the preparation of the financial statements are appropriate and are consistently applied, unless otherwise stated in the notes accompanying the financial statements. Significant accounting policies and estimates that involve a high degree of judgment and complexity were discussed with our external auditors and the Audit Committee.

We confirm that to the best of our knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial position, results of operations and cash flows of the company as of, and for, the periods presented in this annual report.

We are responsible for establishing and maintaining internal controls and procedures. We have designed such controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the company is made known to us and for safeguarding the company’s assets and preventing and detecting fraud and error. We have evaluated the effectiveness of the company’s internal controls and procedures and are satisfied that the controls and procedures were effective as of the end of the period covered by this annual report. We confirm, based on our evaluations that there were no significant deficiencies and material weaknesses in the design or operation of internal

controls and any fraud that involves management or other employees. Our internal auditors also conduct periodic reviews to ensure that the internal controls and procedures are consistently followed.

The financial statements were audited by Messrs. KPMG, Chartered Accountants, the Independent Auditors. The Audit Committee pre - approves the audit and non-audit services provided by KPMG in order to ensure that the provision of such services does not impair KPMG’s independence. The Audit Committee also reviews the external audit plan and the management letters and follows up on any issues raised during the statutory audit. The Audit Committee also meets with the external and internal auditors to review the effectiveness of the audit.

We confirm that the company has complied with all applicable laws and regulations and guidelines and that there are no material litigations that are pending against the company other than those arising in the normal course of conducting business.

Sunjeevani KotakadeniyaChief Financial Officer - LOLC Group

Krishan ThilakaratneDirector/CEO

26 May 2014

99


To The shAReholdeRs of commeRciAl leAsing & finAnce PlcRePoRT on The finAnciAl sTATemenTsWe have audited the accompanying financial statements of Commercial Leasing & Finance PLC (“the Company”), which comprise the statement of financial position as at 31 March 2014, the statements of comprehensive income, changes in equity and cash flow for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information as set out on pages 100 to 161 of the annual report.

mAnAgemenT’s ResPonsibiliTy foR The finAnciAl sTATemenTsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

scoPe of AudiT And bAsis of oPinionOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

oPinionIn our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31 March 2014 and the financial statements give a true and fair view of the financial position of the company as at 31 March 2014 and of its financial performance and its cash flow for the year then ended in accordance with Sri Lanka Accounting Standards.

RePoRT on oTheR legAl And RegulAToRy RequiRemenTsThese financial statements also comply with the requirements of Section 151 (2) of the Companies Act No. 07 of 2007.

CHARTERED ACCOUNTANTSColombo, 26 May 2014.

Independent Auditor’s Report

100


Statement of Financial Position

100

As at 31st March 2014 2013 Note Rs. Rs.

ASSETSCash and cash equivalents 11 736,358,424 842,084,879Financial assets held for trading 12 215,068,436 5,090,543Other investments 13 2,545,327,729 503,081,928Rentals receivable on leases & hire purchases 14 12,707,422,540 14,714,721,243Loans and advances 15 13,059,739,309 7,829,909,298Factoring receivables 16 1,803,034,055 2,440,078,100Due from related companies 17 52,432,438 -Value Added Tax (VAT) recoverable 370,890,238 323,955,273Current tax assets 18 9,792,039 -Other current assets 19 278,464,780 136,386,331Equity accounted investees 20 71,530,887 64,392,910Investment properties 21 14,038,000 -Property, plant and equipment 22 1,069,814,268 369,551,259Total Assets 32,933,913,143 27,229,251,764

LIABILITIES AND EQUITYLiabilitiesBank overdraft 11 655,802,303 948,679,852Derivative liabilities 23 97,551,618 95,733,093Other financial liabilities due to customers 24 7,678,277,663 3,032,796,623Loans and borrowings-current 25 6,079,289,334 8,617,499,107Loans and borrowings- non current 25 7,357,846,071 4,534,914,618Current tax liabilities 26 325,847,577 289,880,330Due to related companies 27 276,213,293 559,315,236Trade and other payables 28 956,615,589 804,443,780Deferred tax liabilities 29 609,923,788 484,071,546Employee benefits 30 40,337,807 24,779,031Total Liabilities 24,077,705,043 19,392,113,216

EquityStated capital 31 1,425,946,629 1,425,946,629Reserves 32 1,134,338,837 896,839,205Retained earnings 33 6,295,922,634 5,514,352,714Total Equity 8,856,208,100 7,837,138,548Total Liabilities & Equity 32,933,913,143 27,229,251,764

Net Assets Value Per Share 1.39 1.23

The accounting Policies and Notes form an integral part of these Financial Statements.Figures in brackets indicate deduction.

These Financial Statements are prepared and presented in compliance with the requirements of Companies Act No. 7 of 2007.

Mrs. S.S. KotakadeniyaChief Financial Officer-LOLC Group

The Board of Directors is responsible for the preparation and presentation of these financial statements.Approved and Signed for and on behalf of the Board by;

Mr. I.C. Nanayakkara Mr. D.M.D.K. ThilakaratneChairman Director / CEO

Colombo,26th May 2014.

101


Statement of Comprehensive Income

101

For the year ended 31st March 2014 2013 Note Rs. Rs.

Interest income 4 7,514,197,452 5,995,620,646

Interest Expense 5 (3,039,090,127) (2,514,872,806)Net interest income 4,475,107,325 3,480,747,840

Other income 6 252,729,184 209,543,614

Operating expensesDirect expenses (157,392,522) (50,645,215)Premises, equipment & establishment expenses (242,029,001) (191,089,795)Personnel costs (571,069,725) (464,517,854)Allowance for impairment & write offs 7 (1,131,450,042) (272,585,729)Depreciation and amortization (54,545,531) (57,178,111)Other operating expenses (1,174,570,840) (943,415,359)VAT on financial services (115,162,815) (115,515,588)Results from operating activities 1,281,616,033 1,595,343,803

Share of profit of equity accounted investee (net of tax) 7,137,976 7,640,136

Profit before tax 8 1,288,754,009 1,602,983,939Tax expense 9 (352,795,118) (434,531,127)Profit for the year 935,958,891 1,168,452,812

Other comprehensive income

Revaluation surplus 22 98,787,980 -Deferred tax on revaluation 29.3 (19,680,635) -Defined benefit plan actuarial gains/(losses) 30.2 (10,205,511) 1,179,540Net Change in fair value of available for sale finance assets 29,358,066 5,222,676Effective portion of changes in fair value of cash flow hedges (15,149,239) (100,506,442)Other comprehensive income/ (expense) for the year, net of tax 83,110,661 (94,104,226)Total comprehensive income for the year 1,019,069,552 1,074,348,586

Earnings per share 10 0.15 0.18

The accounting Policies and Notes form an integral part of these Financial Statements.Figures in brackets indicate deductions

102


For the year ended 31st March 2014

Stated Revaluation Hedging Available- General Statutory Investment Retained Total

Capital Reserve Reserve for-Sale Reserve Reserve Fund Earnings Equity

Reserve Fund Fund

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Balance as at 01 April 2012 1,425,946,629 56,872,900 112,921,358 (5,245,657) 288,079,789 289,382,256 108,049,238 4,486,783,449 6,762,789,962

Total comprehensive income for the year

Profit for the year - - - - - - - 1,168,452,812 1,168,452,812

Other comprehensive income - - (100,506,442) 5,222,676 - - - 1,179,540 (94,104,226)

Total comprehensive income for the period - - (100,506,442) 5,222,676 - - - 1,169,632,352 1,074,348,586

Transferred to/(from) during the year - - - - - 58,422,641 83,640,446 (142,063,087) -

Balance as at 31 March 2013 1,425,946,629 56,872,900 12,414,916 (22,981) 288,079,789 347,804,897 191,689,684 5,514,352,714 7,837,138,548

Total comprehensive income for the year

Profit for the year - - - - - - - 935,958,891 935,958,891

Other comprehensive income - 79,107,345 (15,149,239) 29,358,066 - - - (10,205,511) 83,110,661

Total comprehensive income for the period - 79,107,345 (15,149,239) 29,358,066 - - - 925,753,380 1,019,069,552

Transferred to/(from) during the year - - - - - 46,797,945 97,385,515 (144,183,460) -

Balance as at 31 March 2014 1,425,946,629 135,980,246 (2,734,323) 29,335,085 288,079,789 394,602,842 289,075,199 6,295,922,634 8,856,208,100

The accounting Policies and Notes form an integral part of these Financial Statements.

Figures in brackets indicate deductions.

Statement of Changes in Equity

103


Statement of Cash Flows

For the year ended 31st March 2014 2013 Note Rs. Rs. CASH FLOW FROM/ (USED IN) OPERATING ACTIVITIESProfit before e tax 1,288,754,009 1,602,983,939 Adjustment for:Profit on disposal of property, plant and equipment 6 (1,814,277) (2,862,463)Depreciation 22 54,545,531 57,178,111 Provision for employee benefits 31.1 6,838,949 5,503,298 Net impairment loss on financial assets 7 1,131,450,042 272,585,729 Change in fair value of investments 6 6,826,019 (520,189)Investment income 6 (141,199) (161,724)Interest expense 5 3,039,090,127 2,514,872,806 Share of equity accounted investee 20.1 (7,137,976) (7,640,136)Cash flows from operating activities before working capital changes 5,518,411,225 4,441,939,371

Changes in working Capital(Increase) / decrease in operating assets & liabilities(Increase)/decrease in leases, hire purchase receivables 1,454,912,969 2,117,909,689 (Increase)/decrease in advances and other loans receivable (5,457,218,799) (3,378,999,164)(Increase)/decrease in factoring receivable 285,368,525 105,239,684 (Increase)/decrease in other receivables and related party receivables (287,258,313) 887,256,480 Increase/(decrease) in trade and other payables and related party payable (130,930,134) (835,927,258)(Increase)/decrease in customer deposits 4,645,481,040 2,576,981,250 6,028,766,513 5,914,400,052

Cash generated from / (used in) operationsFinance cost paid (3,039,090,127) (2,662,069,555)Income tax paid (220,448,303) (128,028,178)Economic service charge paid - (47,283,000)Employee benefits paid 30 (1,485,684) (1,037,000)

Net cash flows generated from operating activities 2,767,742,399 3,075,982,319

104


For the year ended 31st March Note 2014 2013 Rs. Rs. CASH FLOW FROM INVESTING ACTIVITIESAcquisition of property, plant and equipment (661,301,448) (112,671,966)Acquisition / (Disposal) of investment properties 21 (14,038,000) - Purchase of financial investments (2,032,539,933) (383,487,790)Purchase of quoted shares 12.1 (216,803,912) - Proceeds from the sale of property, plant and equipment 7,095,165 3,892,463 Dividend received from investments 6 141,199 2,753,724 Net cash used in investing activities (2,917,446,929) (489,513,569)

CASH FLOW FROM FINANCING ACTIVITIESNet movement in interest bearing loans and borrowings (3,565,249,269) (130,301,753)Net movement in derivatives 6,321,485 - Proceeds from long-term interest bearing loans and borrowings 25.1 8,226,591,727 1,759,727,084 Repayments of long-term interest bearing loans and borrowings 25.1 (4,330,808,319) (3,544,092,611)Repayment of debentures - (700,000,000)Long term loans received from related companies - 100,000,000 Net cash flows generated from (used in) financing activities 336,855,624 (2,514,667,280)

Net increase in cash and cash equivalents 187,151,094 71,801,470 Cash and cash equivalents at the beginning of the year (106,594,973) (178,396,443)Cash and cash equivalents at the end of the year (Note A) 80,556,121 (106,594,973)

Note ACash in hand and favourable bank balances 11.1 736,358,424 842,084,879 Unfavourable bank balances used for cash management purposes 11.2 (655,802,303) (948,679,852)Cash and cash equivalents at the end of the year 80,556,121 (106,594,973)

The accounting Policies and Notes form an integral part of these Financial Statements.Figures in brackets indicate deductions.

Statement of Cash Flows

105


1. coRPoRATe infoRmATion1.1 generalCommercial Leasing & Finance PLC was incorporated as a Private Limited Company in April 1988 and in 1992 converted into a Public Limited Company and listed in the Colombo Stock Exchange. In 2008 the Company submitted an application to delist from Colombo Stock Exchange and it was treated as de-listed with effect from July 01, 2009. Further to Finance Leasing Act No 56 of 2000, on 07th December 2011, the Company has obtained the License to carry on Finance Business under the Finance Business Act No 42 of 2011. Company has relisted in Colombo Stock Exchange in June 2012 in compliance with the CBSL Directions with the divestment of 10% of the stated capital.

The registered office and the principal place of business of the Company is located at No.68, Bauddhaloka Mawatha,Colombo 04.

The Company had 610 (2013 –539) employees as at the reporting date.

1.2 Parent entity and ultimate Parent company

The immediate and ultimate holding Company is Lanka ORIX Leasing Company PLC, which is incorporated in Sri Lanka.

1.3 Principal Activities and nature of operations

The principal activities of the Company comprised of leasing, hire purchase, loans, factoring and mobilization of public deposits. There were no significant changes in the nature of the principal activities of the Company during the financial year under review.

2. bAsis of PRePARATion2.1 statement of complianceThe financial statements of the Company comprise the statement of financial position, statement of

comprehensive income, statement of changes in equity and cash flows together with the notes to the financial statements.

The Financial Statements of the Company have been prepared in accordance with the Sri Lanka Accounting Standards (LKASs/SLFRSs) laid down by the Institute of Chartered Accountants of Sri Lanka (ICASL) and the requirements of the Companies Act No.7 of 2007. The presentation of these Financial Statements is also in compliance with the requirements of the Finance Business Act no 42 of 2011.

These financial statements were authorized for issue by the Board of Directors on 26th May 2014.

2.2 Presentation of financial statementsThe assets and liabilities of the Company presented in the Statement of Financial Position are grouped by nature and listed in-order to reflect their relative liquidity and maturity pattern. An analysis regarding recovery or settlement within twelve months after the reporting date (current) and more than twelve months after the reporting date (non-current) is presented in note 34 (current and non-current analysis)

Financial assets and financial liabilities are offset and the net amount reported in the Statement of Financial Position only when there is a legally enforceable right to off-set the recognised amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expenses are not offset in the Statement of Comprehensive Income unless required or permitted by an accounting standard or an interpretation, and as specially disclosed in the accounting policies of the Company.

2.3 basis of measurement The Financial Statements have been prepared on the historical cost basis and applied consistently with no adjustments being made for inflationary factors affecting the financial Statements, except for the

Accounting Policies

106


following material items in the Statement of Financial Position;

� Financial instruments at Fair Value through Profit or Loss are measured at fair value.

� Derivative financial instruments are measured at fair value.

� Available-for-sale financial assets are measured at fair value.

� The liability for defined benefit obligations are measured at present value, based on an actuarial valuation as explained in note 30.

� Lands and buildings are measured at the revalued amounts.

2.4 functional and presentation currencyThe functional currency is the currency of the primary economic environment in which the entity operates. These Financial Statements are presented in Sri Lankan Rupees (LKR), which is the Company’s functional currency and the Company’s presentation currency. All financial information has been rounded to the nearest Rupee unless stated otherwise.

2.5 Use of Significant Judgments, Estimates and Assumptions

The preparation of the financial statements in conformity with SLFRSs/LKASs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results which form the basis of making the judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Information about critical judgments, estimates and assumptions in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are included in the following notes to these Financial Statements.

Critical accounting estimate/judgment

Disclosure referenceNote

Financial Instruments – fair value disclosure

12 & 13

Useful lives of property, plant and equipment

3.6.1.7

Employee benefits 30

Collective allowance for impairment 3.3.4

Investment Property 21

2.6 comparative informationTo facilitate comparison relevant balances pertaining to the previous year have been reclassifies to confirm to current classification and presentation.

2.7 materiality and AggregationAs per LKAS – 01 “Presentation of Financial Statements”, each material class of similar items is presented separately in the Financial Statements. Items of dissimilar nature or function are presented separately unless they are immaterial.

2.8 going concern The Board of Directors is satisfied that the Company has adequate resources to continue its operations in the foreseeable future and management is not aware of any material uncertainties that may cast significant

Accounting Policies

107


doubt upon the Company’s ability to continue as a going concern. Therefore going-concern basis has been adopted in preparing these Financial Statements.

2.9 directors’ Responsibility for the financial statements

The Board of Directors is responsible for the preparation and fair presentation of these Financial Statements in accordance with Sri Lanka Accounting Standards and as per the provisions of the Companies Act No. 07 of 2007. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of Financial Statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

2.10 new Accounting standards issued but not Effective at Reporting Date

The Institute of Chartered Accountants of Sri Lanka has issued the following new Sri Lanka Accounting Standards which will become applicable for financial periods beginning on or after 1st January 2014.

Accordingly, these Standards have not been applied in preparing these financial statements.

Sri Lanka Accounting Standards –SLFRS 10 “Consolidated financial statements”

The objective of this SLFRS is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

An investor is expected to control an investee if and only if the investor has all the following; power over the investee; exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect the amount of the investor’s returns.

This Standard will require the Company to review the group structure in the context of the new Standard and its requirements. Accordingly adoption of this standard is expected to have an impact on the Group structure, and consolidated reporting.

SLFRS 10 has become effective from 1 April 2014 for the Company with early adoption permitted. This SLFRS has superseded the requirements relating to consolidated financial statements in LKAS 27-Consoliadated and Separate Financial Statements.

Sri Lanka Accounting Standards –SLFRS 11 “Joint Arrangements”

The objective of this SLFRS is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (ie. joint arrangements).

SLFRS 11 has become effective from 1 April 2014 for the Company with early adoption permitted. This SLFRS has superseded the requirements relating to consolidated financial statements in LKAS31”Interests in Joint Ventures”

Sri Lanka Accounting Standard-SLFRS 12”Disclosure of Interests in Other Entities”

SLFRS 10 will become effective from 1 April 2014 for the Company with early adoption permitted.

Sri Lanka Accounting Standard - SLFRS 13, “Fair Value Measurement”

This SLFRS defines fair value, sets out in a single SLFRS a framework for measuring fair value; and requires disclosures about fair value measurements.

This SLFRS has become effective for the Group from 1 April 2014. Earlier application is permitted.

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This SLFRS shall be applied prospectively as of the beginning of the annual period in which it is initially applied. The disclosure requirements of this SLFRS need not be applied in comparative information provided for periods before initial application of this SLFRS.

Sri Lanka Accounting Standard – SLFRS 9 “Financial Instruments”

The objective of this SLFRS is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.

An entity shall apply this SLFRS to all items within the scope of LKAS 39 Financial Instruments: Recognition and Measurement.

The effective date of this standard has been deferred.

3. significAnT AccounTing PoliciesThe accounting policies set out below have been applied consistently to all periods presented in these financial statements unless otherwise indicated.

3.1 basis of consolidation3.1.1. Equity accounted Investees - AssociatesAssociates are those entities in which the Company has significant influence, but not control, over the financial and operating activities. Significant influence is presumed to exist when the Company holds between twenty and fifty percent of the voting power of another entity.

Associates are accounted for using the equity method (equity accounted investees) and are initially recognised at cost in the terms of Sri Lanka Accounting Standards – LKAS 28 on “Investment in Associates”. The Company’s investment in associate includes goodwill identified on acquisition, net of any accumulated impairment losses.

The Financial Statements include the Company’s share of the income and expenses and equity movements of equity accounted investees, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. Accordingly, under the Equity Method, investments in Associates are carried at cost plus post-acquisition changes in the Company’s share of net assets of the Associate and are reported as a separate line item in the Statement of Financial Position. The Income Statement and the Statement of Comprehensive Income reflects the Company’s share of current year’s share of profit and the share of other comprehensive income of the Associates.

When the Company’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to zero and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. If the Associate subsequently reports profits, the Company resumes recognising its share of those profits only after its share of the profits equal the share of losses not recognised previously.

The Company discontinues the use of the Equity Method from the date that it ceases to have significant influence over the Associate and accounts for the investment in accordance with the Sri Lanka Accounting Standard-LKAS 39 on ‘Financial Instruments: Recognition and Measurement’.

Where there has been a change recognised directly in the equity of the Associate, the Company recognizes its share of any such changes and discloses this, when applicable, in the Statement of Changes in Equity.

Profits and losses resulting from transactions between the Company and the Associate are eliminated to the extent of the interest in the Associate.

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The financial year of the Company ends on March 31st and the associate Company's financial ends on 31st December. The difference between the reporting date of associate Company and Commercial Leasing & Finance PLC does not exceed three months.

There are no significant restrictions on the ability of the Associate to transfer funds to the Company in the form of cash dividend or repayment of loans and advances.

Summarized financial information of the Associate together with the Company’s interest is given in the Note 20.

3.2 foreign currency 3.2.1 Foreign Currency TransactionsTransactions in foreign currencies are translated to the respective functional currency (Sri Lankan Rupees-LKR) at exchange rates at the dates of the transactions.

Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items are the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on retranslation are recognised in Statement of Comprehensive Income.

3.3 financial instruments3.3.1 Non-derivative financial assets

The Company initially recognises loans and receivables on the date that they are originated. All other financial assets are recognised initially on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument.

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

The Company Classifies non-derivative financial assets into following categories; financial assets at fair value through profit or loss, held to maturity financial assets, loans and receivables and available for sale financial assets.

3.3.1.1 Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through Profit or Loss if the Company manages such investments and

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makes purchase and sale decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Upon initial recognition, transaction costs are recognised in Profit or Loss as incurred.

Financial assets at fair value through Profit or Loss are measured at fair value, and subsequent therein are recognised in Profit or Loss.

Financial assets classified as held-for-trading comprise equity securities actively managed by the Company’s treasury department to address short-term liquidity needs. Financial assets designated as at fair value through profit or loss comprise equity securities that otherwise would have been classified as available-for-sale.

3.3.1.2 Loans and ReceivablesLoans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Loans and receivables of the Company comprise of the following,

3.3.1.2.1 Cash and Cash EquivalentsCash and cash equivalents comprise of cash in hand and cash at banks and other highly liquid financial assets which are held for the purpose of meeting short-term cash commitments with original maturities of less than three months which are subject to insignificant risk of changes in their fair value.

Bank overdrafts that are repayable on demand and form an integral part of the Company cash management are included as a component of cash and cash equivalents for the purpose of the Statement of Cash Flows.

3.3.1.2.2 Rental receivables on Finance Leases and Hire purchases

Assets leased to customers which transfer substantially all the risks and rewards associated with ownership other than legal title, are classified as finance leases. Amounts receivable under finance leases are included under “Lease Rentals Receivable”. Leasing balances are stated in the Statement of Financial Position after deduction of initial rentals received, unearned lease income and the provision for impairment.

Assets sold to customers under fixed rate hire agreements, which transfer all risk and rewards as well as the legal title at the end of such contractual period are classified as ‘Hire Purchase Receivable’. Such assets are accounted for in a similar manner as finance leases.

3.3.1.2.3 Rental receivables on Operating Leases Leases where the Company as the lessor effectively retains substantially all the risk and rewards incidental to the ownership are classified as operating leases. Lease rentals from operating leases are recognised as income on a straight-line basis over the lease term.

3.3.1.2.4 Advances and Other Loans to CustomersAdvances and other loans to customers comprised of revolving loans, loans with fixed installments.After initial measurement, ‘loans and advances’ are subsequently measured at amortised cost using the EIR, less allowance for impairment except when the Company recognises loans and receivables at fair value through profit or loss. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in ‘Interest Income’ in the Statement of Comprehensive Income. The losses arising from impairment are recognised in the Statement of Comprehensive Income.

Revolving loans to customers are reflected in the statement of financial position at amounts disbursed less repayments and allowance for impairment losses.

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Loans to customers with fixed installments are stated in the statement of financial position net of possible loan losses and net of interest, which is not accrued to revenue.

3.3.1.3 Held-to-Maturity Financial AssetsIf the Company has the positive intent and ability to hold debt securities to maturity, then such financial assets are classified as held-to-maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortized cost using the effective interest method, less any impairment losses.

Any sale or reclassification of a more than an insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and prevent the Company from classifying investment securities as held-to-maturity for the current and the following two financial years.

The Company does not have any financial assets designated as “held to maturity” as at the reporting date of financial assets.

3.3.1.4 Available-for-Sale Financial AssetsAvailable-for-sale financial assets are non-derivative financial assets that are designated as available for- sale and that are not classified in any of the previous categories of financial assets. Available-for-sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these are measured at fair value and changes therein, other than impairment losses are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised, the cumulative gain or loss in other comprehensive income is transferred to Profit or Loss.

Available-for-sale financial assets comprise of Treasury Bonds.

3.3.2 Non-derivative financial liabilities The Company initially recognizes debt securities, deposits from customers and loans & borrowings on the date that they are originated. All other financial liabilities are recognised at initially on the trade date, which is the date that the Company becomes party to the contractual provisions of the instruments.

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

The Company classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction cost. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using effective interest rate method.

Other financial liabilities comprise of loans & borrowings, bank overdraft, customer deposits and trade and other payables.

Stated capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects.

3.3.3 De-recognition of Financial Assets and Financial Liabilities

Financial AssetsFinancial assets (or, where applicable or a part of a financial asset or part of a group of similar financial assets) is derecognised when;

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� The rights to receive cash flows from the asset have expired; or

� The Company has transferred its rights to cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘passthrough’ arrangement; and either:

� the Company has transferred substantially all the risks and rewards of the assets, or

� the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its rights to receive cash flow from an asset or has entered in to a pass through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the assets nor transferred control of it, the asset is recognised to the extent of the Company’s continuing involvement in it. In that case, the Company also recognises an associated liability. The transferred assets and the associated liabilities are measured on a basis that reflects the right and obligation that the Company has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial LiabilitiesA financial liability is derecognised when the obligation under liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts are recognised in the profit or loss.

3.3.3.1 Amortized cost measurementThe amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment.

3.3.3.2 Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Company measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If a market for a financial instrument is not active, the Company establishes fair value using valuation techniques. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and other equity pricing models.

The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Company, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments.

The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is

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evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in Statement of Financial Performance.

Valuation of Financial InstrumentsThe Company measures the 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 of an identical instrument.

Level 2 – Valuation techniques based on observable inputs, either directly (i.e., as prices) or indirectly (i.e., derived from prices), this category included instruments valued using: quoted market prices in active markets similar instruments; quoted prices for identical or similar instruments in markets are considered less than active: or other valuation techniques where all significant inputs are directly observable from market data.

Level 3 – Valuation techniques use 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.

Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Company determines fair values using valuation techniques

Valuation techniques include comparison to similar instruments for which market observable prices exist, other equity pricing models and other valuation models.

The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instruments at the reporting date that would have been determined by market participants acting at arm’s length.

The Company widely recognised valuation models for determining the fair value of common and more simple financial instruments. Observable prices and model inputs are usually available in the market for listed debt and equity securities. Availability of observable market inputs reduces the need of management judgment 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 are is prone to changes based on specific events and general conditions in the financial markets.

3.3.4 Impairment of Financial InstrumentsAt each reporting date the Company 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 (are) impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably.

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Objective evidence that financial assets (including equity securities) 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 Company

on terms that the Company would not otherwise consider

� indications that a borrower or issuer will enter bankruptcy,

� the disappearance of an active market for a security � other observable data relating to a group of assets

such as adverse changes in the payment status of borrowers or issuers in the group of economic conditions that correlate with defaults in the group.

In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

Impairment of Financial Assets carried at Amortized CostThe Company considers evidence of impairment for loans and advances at both a specific and collective basis. All individually significant loans and advances and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and advances and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified.

Loans and advances that are not individually significant are collectively assessed for impairment by grouping them together with similar risk characteristics based on product types.

In assessing collective impairment the Company uses statistical modeling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s

judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modeling, Default rates, loss rates and the expected timing of future recoveries are regularly taken into account to ensure that they remain appropriate.

Impairment losses on assets carried at amortized cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Impairment losses are recognised in Profit or Loss and reflected in an allowance account against loans and advances. Interest on impaired assets continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through Profit or Loss.

Impairment of Financial Investments - Available for SaleImpairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss recognised previously in profit or loss. Changes in cumulative impairment losses attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income.

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In the case of equity investments classified as available for sale, objective evidence would also include a ‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the Statement of Comprehensive Income is removed from equity and recognised in the Statement of Comprehensive Income. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in Other Comprehensive Income.

3.4 Accounting for derivative financial instruments

Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active markets, or using valuation techniques. All derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. 3.4.1 Hedge accountingThe Company holds derivative financial instruments to hedge its foreign currency risk exposure. On initial designation of the derivative as the hedge instrument, the Company formally documents the relationship between the hedging instrument and hedged item, its risk management objective and its strategy in undertaking the hedge.

Central treasury documents the assessment, both at hedge inception and on an on-going basis, of whether or not the hedging instruments, primarily forward rate contracts, that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items.

Derivatives are recognised initially at fair value; any attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

3.4.1.1 Cash flow hedgeWhen a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. When the hedged item is a non-financial asset, the amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the non-financial item affects profit or loss.2 In other cases as well, the amount accumulated in equity is reclassified to profit or loss in the same period that the hedged item affects profit or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the balance in equity is reclassified to profit or loss.

3.4.1.2 Hedge Effectiveness TestingTo qualify for hedge accounting, at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective and demonstrate actual effectiveness on an on-going basis. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed.

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The method adopted by the Company to assess hedge effectiveness is based on its risk management strategy. For expected effectiveness, the hedging instrument must be expected to be highly effective in offsetting changes in cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other in the range of 80% to 125%. The ineffective portion of will be recognised immediately in income statement. In measuring the effectiveness the forecasted transaction of entering into another forward contract is also taken into consideration.

3.4.2 Other non-trading derivativesWhen a derivative financial instrument is not designated in a hedge relationship that qualifies for hedge accounting, all changes in its fair value are recognised immediately in profit or loss.

3.5 investment Properties3.5.1 Basis of RecognitionInvestment property is the property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes.

3.5.2 Basis of Measurement3.5.2.1 Fair value ModelInvestment properties are initially recognised at cost. Subsequent to initial recognition the investment properties are stated at fair values, which reflect market conditions at the reporting date. Gains or losses arising from changes in fair value are included in the Statement of Comprehensive Income in the year in which they arise. 3.5.2.2 De-recognition Investment properties are de-recognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no

future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the Statement of Comprehensive Income in the year of retirement or disposal.

3.5.2.3 Subsequent Transfers to/from Investment Property

Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner occupation, commencement of an operating lease to another party or completion of construction or development.

Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner occupation or commencement of development with a view to sale.

For a transfer from investment property to owner occupied property or inventories, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. If the property occupied by the Company as an owner occupied property becomes an investment property, the Company, accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

For a transfer from inventories to investment property, any difference between the fair value of the property at that date and its previous carrying amount is recognised in the Statement of Comprehensive Income. When the Company completes the construction or development of a self-constructed investment property, any difference between the fair value of the property at that date and its previous carrying amount is recognised in the Statement of Comprehensive Income.

3.5.2.4 Determining Fair Value External and independent valuers, having appropriate recognised professional qualifications and recent

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experience in the location and category of property being valued, values the investment property portfolio as at each reporting date. In financial periods within that period the fair value is determined by the Board of Directors.

The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably.

3.6 PRoPERty, Plant anD EqUiPmEnt 3.6.1 Freehold Property, Plant & Equipment3.6.1.1 Basis of Recognition Property, plant and equipment are recognised if it is probable that future economic benefits associated with the asset will flow to the Company and cost of the asset can be reliably measured.

3.6.1.2 Basis of MeasurementItems of property, plant and equipment are measured at cost/revaluation less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site at which they are located and capitalized borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

3.6.1.3 Cost ModelThe Company applies the cost model to all property, plant and equipment except freehold land and buildings; which records at cost of purchase together with any incidental expenses thereon less any accumulated depreciation and accumulated impairment losses if any.

3.6.1.4 Revaluation ModelThe Company revalues its land and buildings which are measured at its fair value at the date of revaluation less any subsequent accumulated depreciation and accumulated impairment losses. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date.

On revaluation of lands and buildings, any increase in the revaluation amount is credited to the revaluation reserve in shareholder’s equity unless it off sets a previous decrease in value of the same asset that was recognised in the Statement of Comprehensive Income. A decrease in value is recognised in the Statement of Comprehensive Income where it exceeds the increase previously recognised in the revaluation reserve. Upon disposal, any related revaluation reserve is transferred from the revaluation reserve to retained earnings and is not taken into account in arriving at the gain or loss on disposal. 3.6.1.5 Subsequent Cost Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Company. Ongoing repairs and maintenance are expensed as incurred.

3.6.1.6 Reclassification to investment propertyWhen the use of a property changes from owner-occupied to investment property, the property is re-measured to fair value and reclassified as investment property. Any gain arising on re-measurement is recognised in Profit or Loss to the extent that it reverses a previous impairment loss on the specific property,

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with any remaining gain recognised and presented in the revaluation reserve in equity. Any loss is recognised immediately in Profit or Loss. 3.6.1.7 Depreciation Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that component is depreciated separately.

Depreciation is recognised in Profit or Loss on a straight-line basis over the estimated useful life of each component of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. Lands are not depreciated.

Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is de-recognised.

Depreciation methods, useful life values are assessed at the reporting date. The estimated useful lives for the current year are as follows: Free-hold building 40 years Fixtures 05 years Office Furniture 05 years Office Equipment 05 years Free-hold motor Vehicles 04 years Computer Equipment 05 years 3.6.1.8 De-recognitionAn item of property, plant and equipment is de-recognised upon disposal or when no future economic are expected from its use or disposal.

The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment, and is recognised net within other income/other expenses in the Statement of Comprehensive Income. When revalued assets are sold, the amounts included in the revaluation surplus reserve are transferred to retained earnings.

3.6.2 Operating Lease AssetsWhen acting as lessor, the Company includes the assets subject to operating leases in ‘Property, Plant and Equipment’ and accounts for them accordingly. Impairment losses are recognised to the extent that residual values are not fully recoverable and the carrying value of the assets is thereby impaired.

3.6.3 Capital Work-in-ProgressCapital work-in-progress represents the accumulated cost of materials and other costs directly related to the construction of an asset. Capital work in progress is transferred to the respective asset accounts at the time it is substantially completed and ready for its intended use.

3.7 impairment of non-financial assetsThe carrying amounts of the Company’s non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its related Cash-Generating Unit (CGU) exceeds its estimated recoverable amount.

The Company’s corporate assets do not generate separate cash inflows and are utilized by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated.

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Impairment losses are recognised in Profit or Loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.

An impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. 3.8 Tax expenseTax expense comprises current, deferred tax and other statutory taxes. Income tax and deferred tax expense is recognised in Statement of Comprehensive Income except to the extent that it relates to items recognised in the Statement of Other Comprehensive Income or Statement of Changes in equity.

3.8.1 Current tax expenseCurrent tax is the expected tax payable or recoverable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the tax on dividend income.

The provision for income tax is based on the elements of income and expenditure as reported in the Financial Statements and computed in accordance with the provisions of the Inland Revenue Act. No 10 of 2006 and subsequent amendments thereto.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the Commissioner General of Inland Revenue.

3.8.2 Deferred taxDeferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are not discounted.The net increase in the carrying amount of deferred tax liability net of deferred tax asset is recognised as deferred tax expense and conversely any net decrease is recognised as reversal to deferred tax expense, in the Statement of Comprehensive Income.

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3.8.3 Withholding Tax on DividendsDividend distributed out of taxable profit of the local companies attracts a 10% deduction at source and is not available for set off against the tax liability of the Company. Withholding tax that arises from the distribution of dividends by the Company is recognised at the same time as the liability to pay the related dividend is recognised.

3.8.4 Nation Building Tax (NBT)As per the provisions of the Nation Building Tax Act, No. 9 of 2009 and the subsequent amendments thereto, Nation Building Tax should be payable at the rate of 2% with effect from 1 January 2011 on the liable turnover as per the relevant provisions of the Act.

3.8.5 Value Added Tax on Financial Services (VAT on FS)VAT on Financial Services is calculated in accordance with the amended VAT Act No. 7 of 2003 and subsequent amendments thereto. The base for the computation of VAT on Financial Services is the accounting profit before income tax adjusted for the economic depreciation and emoluments of employees. VAT on financial services is computed on the prescribed rate of 12%.

The VAT on Financial service is recognised as expense in the period it becomes due.

3.8.6 Corporate Insurance Levy (CIL)As per the provisions of the Section 14 of the Finance Act No. 12 of 2013, the CIL was introduced with effect from April 01, 2013 and is payable to the National Insurance Trust Fund. Currently, the CIL is payable at 1% of the profit after tax.

3.8.7 Borrowing CostsBorrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets that take a substantial period of time to get ready for its intended use or sale, are capitalized as part of the assets.

Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in Profit or Loss using the effective interest method.

3.8.8 Other Non-Financial Liabilities and ProvisionsLiabilities are recognised in the Statement of Financial Position when there is a present obligation as a result of a past event, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Obligations payable at the demand of the creditor within one year of the reporting date are treated as current liabilities. Liabilities payable after one year from the reporting date are treated as non-current liabilities.

3.8.9 Deposits due to CustomersDeposits include term deposits and certificates of deposits. They are stated in the Statement of Financial Position at amount payable. Interest paid / payable on these deposits based on effective interest rate is charged to the Statement of Comprehensive income.

3.8.10 Deposit Insurance Scheme In terms of the Finance Companies Direction No 2 of 2010 “Insurance of Deposit Liabilities” issued on 27th September 2010, all Registered Finance Companies are required to insure their deposit liabilities in the Deposit Insurance Scheme operated by the Monetary Board in terms of Sri Lanka Deposit Insurance

Scheme Regulations No 1 of 2010 issued under Sections 32A to 32E of the Monetary Law Act with effect from 1st October 2010.

Deposits to be insured include time and savings deposit liabilities and exclude the following.

Deposit liabilities to member institutionsDeposit liabilities to Government of Sri LankaDeposit liabilities to shareholders, directors, key management personnel and other related parties as

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defined in Finance Companies Act Direction No 03 of 2008 on Corporate Governance of Registered Finance CompaniesDeposit liabilities held as collateral against any accommodation grantedDeposit liabilities falling within the meaning of dormant deposits in terms of the Finance Companies Act, funds of which have been transferred to Central Bank of Sri Lanka

Registered Finance Companies are required to pay a premium of 0.15% on eligible deposit liabilities as at end of the month to be payable within a period of 15 days from the end of the respective month.

3.9. debt securities issuedThese represent the funds borrowed by the Company for long-term funding requirements. Subsequent to initial recognition debt securities issued are measured at their amortised cost using the effective interest method, except where the Company designates debt securities issued at fair value through profit or loss. Interest paid/payable is recognised in profit or loss.

3.10. other liabilitiesOther liabilities are recorded at amounts expected to be payable at the Reporting date.

3.11 Employee Benefits3.11.1 Defined Contribution Plans A Defined Contribution Plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to Defined Contribution Plans are recognised as an employee benefit expense in the Statement of Comprehensive Income in the periods during which services are rendered by employees.

3.11.1.1 Employees’ Provident Fund (EPF)The Company and employees contribute 12% and 8% respectively on the salary of each employee to the above mentioned funds.

3.11.1.2 Employees’ Trust Fund (ETF)The Company contributes 3% of the salary of each employee to the Employees’ Trust Fund.

3.11.2 Defined Benefits Plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognised past service costs are deducted.

The calculation is performed every three years by a qualified actuary using the projected unit credit method. For the purpose of determining the charge for any period before the next regular actuarial valuation falls due, an approximate estimate provided by the qualified actuary is used.

When the benefits of a plan are improved, the portion of the increased benefit related to past service by employees is recognised in Profit or Loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in Profit or Loss.

The Company recognizes all actuarial gains and losses arising from the defined benefit plan in other comprehensive income (OCI) and all other expenses related to defined benefit plans are recognize as personnel expenses in Statement of Comprehensive Income. This retirement benefit obligation is not externally funded.

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However, according to the Payment of Gratuity Act No.12 of 1983, the liability for the gratuity payment to an employee arises only on the completion of 5 years of continued service with the Company.

3.11.3 Short-term Employee BenefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

3.12 Provisions, Contingent assets and contingent liabilities

Provisions are made for all obligations (legal or constructive) existing as at the reporting date when it is probable that such an obligation will result in an outflow of resources and a reliable estimate can be made of the quantum of the outflow. The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation at that date.

All contingent liabilities are disclosed as a note to the Financial Statements unless the outflow of resources is remote. Contingent assets are disclosed, where inflow of economic benefit is probable.

sTATemenT of comPRehensive income3.13 Revenue RecognitionRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Company, and the revenue and associated costs incurred or to be incurred can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment.

3.13.1 Interest Income on Leases, Hire Purchases, Loans and Advances

Interest income and expense are recognised in Profit or Loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Company estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.

The calculation of the effective interest rate includes all transaction costs and fees paid or received 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 and expense presented in the Statement of Comprehensive Income includes,

� interest on financial assets and financial liabilities measured at amortized cost calculated on an effective interest basis

� interest on available for sale investment securities calculated on an effective interest basis

� Interest income and expense on all trading assets and liabilities are considered to be incidental to the Company’s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income.

Fair value changes on other derivatives held for risk management purposes, and other financial assets and liabilities carried at fair value through Profit or Loss, are presented in net income from other financial instruments at fair value through Profit or Loss in the Statement of Comprehensive Income.

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The excess of aggregated contract receivable over the cost of the assets constitutes the total unearned income at the commencement of a contract. The unearned income is recognised as income over the term of the facility commencing with the month that the facility is executed in proportion to the declining receivable balance, so as to produce a constant periodic rate of return on the net investment.

3.13.2 Fees and Other IncomeFees 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, including account servicing fees are recognised as the related services are performed.

Profit or loss on contracts terminated, collections on contracts written off, interest on overdue rentals, interest on revolving loans, interest earned on property sale and buy back agreements are accounted for on cash basis

3.13.3 Net income from other financial instruments at fair value through Profit or Loss

Net income from other financial instruments at fair value through Profit or Loss relates to non-trading derivatives held for risk management purposes that do not form part of qualifying hedge relationships and financial assets and liabilities designated at fair value through Profit or Loss, and include all realized and unrealized fair value changes, interest, dividends and foreign exchange differences.

3.13.4 Factoring IncomeRevenue is derived from two sources, Funding and providing Sales Ledger Related Services.Funding - Discount income relating to factoring transactions is recognised at the end of a given accounting month. In computing this discount, a

fixed rate agreed upon at the commencement of the factoring agreement is applied on the daily balance in the client’s current account.

Sales Ledger Related Services - A service charge is levied as stipulated in the factoring agreement.

Income is accounted for on an accrual basis and deemed earned on disbursement of advances for invoices factored.

The above revenue components are accounted on an accrual basis.

3.13.5 Other IncomeRent income and non-operational interest income are accounted for on accrual basis.

Dividend income is recognised when the right to receive payment is established.

Gain on disposal of property, plant and equipment and other non-current assets, including investments held by the Group have been accounted for in the Statement of Comprehensive Income, after deducting from the net sales proceeds on disposal of the carrying amount of such assets.

3.13.6 Rental IncomeRental income from investment property is recognised in Profit or Loss on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. Rental income from subleased property is recognised as other income.

3.14 expenses RecognitionExpenses are recognised in the Statement of Comprehensive Income on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the

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property, plant & equipment in a state of efficiency has been charged to income in arriving at the profit for the year.

For the presentation of the Statement of Comprehensive Income the Directors are of the opinion that the nature of the expenses method present fairly the element of the Company’s performance, and hence such presentation method is adopted.

3.15 earnings per shareThe Company presents basic earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the Profit or Loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year.

3.16 cash flow statementThe Cash Flow Statement has been prepared using the ‘Indirect Method’ of preparing Cash Flows in accordance with the Sri Lanka Accounting Standard 7 ‘Cash Flow Statements.’ Cash and cash equivalents comprise short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

Cash and cash equivalents comprise of cash in hand and cash at banks and other highly liquid financial assets which are held for the purpose of meeting short-term cash commitments with original maturities of less than three months which are subject to insignificant risk of changes in their fair value.

3.17 movement of Reserves Movement of Reserves is disclosed in the Statement of Changes in Equity.

3.18 Related Party TransactionsTransactions with related parties are conducted on normal business terms. The relevant disclosures are given in Notes 35 to the Financial Statements.

3.19 Transactions with Related PartiesThe Company carries out transactions in the ordinary course of its business with parties who are defined as related parties in Sri Lanka Accounting Standard 24.

3.20 Transactions with key management Personnel

According to Sri Lanka Accounting Standard 24 “Related Party Disclosures”, Key management personnel, are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Company has pre-defined approved list of key management personal. Their immediate family members also have been classified as Key Management Personnel of the Company.

The immediate family member is defined as spouse or dependent. Dependent is defined as anyone who depends on the respective Key Management Personnel for more than 50% of his/her financial needs.

3.21 operating segmentsAn operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. All operating segments operating results are reviewed regularly by Board of Directors of the Company to make decisions about resources to be allocated to the segment and to assess its performance, and for which discrete financial information is available.

Accordingly, the segment comprises of financial services are described in Note 40.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

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Expenses that cannot be directly identified to a particular segment are allocated on bases decided by the management and applied consistently throughout the year.

3.22 subsequent events All material subsequent events have been considered and where appropriate adjustments or disclosures have been made in the respective Notes to the Financial Statements.

3.23 commitments and contingenciesAll discernible risks are accounted for in determining the amount of all known liabilities. Contingent Liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent Liabilities are not recognised in the statement of financial position but are disclosed unless they are remote.

3.24 capital management The Board of Directors monitors the return on capital investment on a month basis. This review is mainly carried out through return on investment analysis prepared on a quarterly basis. The plan forecasts are also reviewed on a monthly basis to ensure that targets are met in order to manage the capital invested on the Company. The Board of Directors also decides and monitors the level of dividends to ordinary shareholders. The Company does not subject to any externally impose capital requirements. However companies within the group have such requirement based on the industry in which such Company established. The group companies which require externally imposed capital will monitor such requirement on a regular basis and report to respective legal authority in order to ensure compliance with such regulatory requirement.

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For the year ended 31st March 2014 2013 Rs. Rs. 4 inTeResT incomeInterest income on - Finance Lease 3,162,956,843 2,591,199,867 Hire Purchase 495,423,571 1,055,987,060 Loans and Advances 2,645,629,956 1,330,037,674 Hire rentals 14,045,763 13,189,002 Overdue Rental 445,595,317 281,793,413 Factoring 694,703,244 723,413,630 Rentals & sales proceeds - contracts written off 55,842,758 - 7,514,197,452 5,995,620,646

5 inTeResT exPenseInterest on other financial liabilities due to customers 625,573,069 290,936,134 Interest on commercial papers and promissory notes 2,505,044 38,189,295 Interest on bank overdrafts and other short-term borrowings 805,850,937 891,824,756 Interest on long term borrowings 1,227,550,930 1,026,824,254 Interest on debentures - 7,640,548 Interest on securitisation 326,936,821 216,082,424 Costs incidental to obtaining loans 50,673,326 43,375,395 3,039,090,127 2,514,872,806

6 oTheR incomeDividend Income 141,199 161,724 Interest received from deposits and government securities 69,633,271 28,585,064 Interest income on commercial papers and fixed deposits 5,691,938 - Gain on disposal of property, plant and equipment 1,814,277 2,862,463 Appreciation in market value of quoted investments (6,826,019) 520,192 Supplier commissions/Admin fees 229,900 192,392 Administration fees - Lanka ORIX Finance PLC 1,007,483 6,765,407 Documentation fees 102,709,147 78,578,869 Staff loan interest 17,405,549 13,257,272 Commission Income 41,563,285 38,921,525 Three wheeler handling fees 2,437,100 29,796,349 Sundry income 16,922,054 9,902,357 252,729,184 209,543,614

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For the year ended 31st March 2014 2013 Rs. Rs.

7 AllowAnce foR imPAiRmenT And wRiTe offsLease receivables 513,928,739 203,472,672 Hire purchases 38,456,995 (23,140,173)Advances & loans 227,388,788 35,145,465 Factoring 351,675,520 57,107,765 1,131,450,042 272,585,729

8 PRofiT befoRe TAxProfit from ordinary activities before VAT on financial services and tax statedafter charging all expenses including the following:

Directors’ fees and emoluments 24,025,332 37,333,713Auditors’ remuneration - statutory audit 1,025,000 900,000 - audit related services 725,000 1,391,786Depreciation on Property Plant & Equipment 54,545,531 57,178,110Legal and professional expenses 38,414,936 26,291,192Personnel costs (Note 8.1) 571,069,725 464,517,854

8.1 Personnel costsSalaries and other benefits 526,927,919 429,008,785Defined contribution plan cost - EPF 29,839,886 24,007,017 - ETF 7,462,971 5,998,754Defined benefit plan costs - retiring gratuity (Note 30.1) 6,838,949 5,503,298 571,069,725 464,517,854

Number of employees 610 539

9 income TAx exPenseCurrent tax expense - (Note 9.1) 246,623,512 308,809,717Deferred tax expense (Note 29.4) 106,171,606 125,721,410Current income tax expense 352,795,118 434,531,127

The Company is liable for tax at the rate of 28% on its taxable income in accordance with the Inland Revenue Act No 10 of 2006 and subsequent amendments made thereon.

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For the year ended 31st March 2014 2013 Rs. Rs.

9.1 current Tax expenseCurrent year income tax expense on ordinary activities - (Note 9.2) 204,660,899 290,317,015Under provision of taxes in respect of previous years 41,962,613 18,492,702 246,623,512 308,809,717

9.2 numerical Reconciliation of accounting profits to income tax expense,Accounting profit before income tax 1,288,754,009 1,602,983,939Aggregate disallowable expenses 6,643,793,532 6,518,750,877Aggregate tax deductible expenses (7,201,615,760) (7,084,888,333)Taxable profit 730,931,781 1,036,846,483

Income tax at 28 % 204,660,899 290,317,015Current income tax expense 204,660,899 290,317,015

9.3 Deferred tax has been computed using the enacted tax rate of 28%

10 eARnings PeR shAReAmount Used as the NumeratorNet profit attributable to equity holders of the Company 935,958,891 1,168,452,812

Number of Ordinary Shares Used as the DenominatorWeighted average number of ordinary shares in issue (shares) 6,377,711,170 6,377,711,170Earnings per ordinary share 0.15 0.18

Basic earnings per share is calculated by dividing the net profit for the year attributable to the ordinary shareholders by the weighted average number of ordinary shares outstanding during the year.


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As at 31st March 2014 2013 Rs. Rs.

11 cAsh And cAsh equivAlenTs comPonenTs of cAsh equivAlenT11.1 favourable cash & cash equivalent balancesCash in hand 13,212,011 15,323,888Cash in saving account 27,095 26,266Balances with banks 723,119,318 826,734,725 736,358,424 842,084,879

11.2 unfavourable cash & cash equivalent balances

Bank overdraft (655,802,303) (948,679,852)Total cash and cash equivalents in the cash flow statement 80,556,121 (106,594,973)

12 finAnciAl AsseTs held foR TRAding Equity shares (Note 12.1) 215,068,436 5,090,543 215,068,436 5,090,543

12.1 equity sharesBalance as at beginning of the year 5,090,543 4,570,351 Investments made during the period 216,803,912 - Marked to market adjustments (6,826,019) 520,192 Balance as at end of the year (Note 12.2) 215,068,436 5,090,543

12.2 equity shares - Portfolio As at 31st March As at 31st March

2014 2013

No. of Cost Fair Value No. of Cost Fair Value

Shares Rs. Rs Shares Rs. Rs

Colombo Drydocks PLC 4,315 85,997 753,831 4,315 85,997 923,842

DFCC Bank PLC 38 380 5,468 38 380 4,982

Overseas Realty Ceylon PLC 113,680 1,664,891 2,330,440 113,680 1,664,891 1,591,520

Seylan Bank PLC 74,261 1,104,210 2,747,657 72,400 1,104,210 2,570,200

Hayleys Limited 734,144 216,803,912 209,231,040 - - -

219,659,391 215,068,436 2,855,478 5,090,543

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13 oTheR invesTmenTsFinancial investments - Available-for-sale (Note 13.1) 276,776,250 163,670,930Loans and receivables (Note 13.2) 2,268,543,679 319,751,000Derivative assets held for risk management (Note 13.3) 7,800 19,659,998 2,545,327,729 503,081,928

13.1 financial investments - Available-for-saleInvestments in treasury bonds (Note 13.1.1) 276,593,750 163,488,430Unquoted Shares (Note 13.1.2) 182,500 182,500 276,776,250 163,670,930

13.1.1 Investments in Treasury Bonds As at 31st March 2014 As at 31st March 2013 Cost Fair Value Cost Fair Value Rs. Rs. Rs. Rs.

Softlogic Finance PLC 37,585,520 37,892,000 37,585,520 33,844,480Entrust Securities PLC 19,015,800 24,260,000 77,143,353 82,043,450First Capital Treasuries Limited 19,546,680 19,010,000 31,976,730 36,884,250Wealth Trust Securities Limited 11,239,800 11,881,250 11,239,800 10,716,250Capital Alliance 180,481,520 183,550,500 - - 267,869,320 276,593,750 157,945,403 163,488,430

13.1.2 Unquoted Shares As at 31st March As at 31st March 2014 2013 No. of Cost Fair Value No. of Cost Fair Value Shares Rs. Rs Shares Rs. Rs

Equity Investments Lanka Ltd 17,250 172,500 172,500 17,250 172,500 172,500Credit Information Bureau 100 10,000 10,000 100 10,000 10,000 182,500 182,500 182,500 182,500


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13.2 loans and Receivables Treasury Bills & Repos 1,464,638,200 319,751,000Investments in term deposits 50,465,753 -Commercial Papers 753,439,726 - 2,268,543,679 319,751,000

13.3 derivative Assets held for Risk management Forward rate contracts (Note.13.3.1) 7,800 19,659,998

13.3.1 Forward rate contractsThe Company uses a mixture of forward foreign exchange contracts to hedge the foreign currency translation risk on its foreign borrowings.

The fair value of the derivatives designated as cash flow hedges are as follows,

As at 31st March 2014 As at 31st March 2013 Assets Liabilities Assets Liabilities Rs. Rs. Rs. Rs. 7,800 97,551,618 19,659,998 95,733,093

The time periods in which the hedged cash flows are expected to occur and affect the statement of comprehensive income are as follows:

As at 31st March 2014 As at 31st March 2013 Within 1 Year 1-5 Years Over 5 Years Within 1 Year 1-5 Years Over 5 Years Rs. Rs. Rs. Rs. Rs. Rs.

6,486,949,193 - - 3,587,264,511 - -

For the year ended 31 March 2014 net loss of Rs.15 Mn (2013: Net gain of Rs. 100 Mn) relating to the effective portion of cash flow hedges were recognised in other comprehensive income.

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As at 31st March 2014 2013 Rs. Rs. 14 RenTAls ReceivAble on leAses And hiRe PuRchAses Finance lease receivables (Note 14.1) 12,089,856,060 11,945,407,087 Hire purchase receivables (Note 14.2) 617,566,480 2,769,314,156 12,707,422,540 14,714,721,243

Rentals Receivable on Leases and Hire PurchasesGross rental receivables 17,935,896,570 20,690,476,286 Unearned income (4,627,329,435) (5,366,816,967)Total rentals receivable ( Note 14.4) 13,308,567,135 15,323,659,319 Allowance for impairment (Note 14.3) (601,144,595) (608,938,076)Net receivables 12,707,422,540 14,714,721,243

14.1 finance lease ReceivablesGross rentals receivable 17,111,590,959 17,000,240,346 Unearned income (4,471,251,747) (4,657,366,038) 12,640,339,212 12,342,874,308 Allowance for impairment (Note 14.1.3) (550,483,152) (397,467,221) 12,089,856,060 11,945,407,087

Finance Lease ReceivablesReceivables within one year (Note 14.1.1) 3,822,887,085 3,136,758,316 Receivable from one to five years (Note 14.1.2) 8,351,165,203 8,738,594,035 Overdue rental receivable 466,286,924 467,521,957 (-) Allowance for impairment (550,483,152) (397,467,221) 12,089,856,060 11,945,407,087

14.1.1 Receivables within One YearGross rentals receivable 6,155,401,295 5,533,902,702 Unearned income (2,332,514,210) (2,397,144,386) 3,822,887,085 3,136,758,316

14.1.2 Receivable from One to Five YearsGross rentals receivable 10,489,902,740 10,998,815,687 Unearned income (2,138,737,537) (2,260,221,652) 8,351,165,203 8,738,594,035


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14.1.3 Allowance for ImpairmentSpecific Allowance for ImpairmentBalance as at 1st April - - Charge / (Reversal) for the year 408,463,271 - Balance as at 31st March 408,463,271 -

Collective Allowance for ImpairmentBalance as at 1st April 397,467,221 193,936,430 Charge / (Reversal) for the year 105,465,468 203,530,791 Write offs (360,912,808) - Balance as at 31st March 142,019,881 397,467,221 Total allowances for impairment 550,483,152 397,467,221

14.2 Rentals Receivable on hire Purchases Gross rentals receivable 824,305,611 3,690,235,940 Unearned income (156,077,688) (709,450,929) 668,227,923 2,980,785,011 Allowance for impairment (Note 14.2.3) (50,661,443) (211,470,855)Net receivables 617,566,480 2,769,314,156

Hire Purchase ReceivablesReceivables within one year (Note 14.2.1) 417,309,455 1,390,158,604 Receivables from one to five years (Note 14.2.2) 184,086,808 1,300,871,169 Overdue rental receivable 66,831,660 289,755,238 (-) Allowance for impairment (Note 14.2.3) (50,661,443) (211,470,855) 617,566,480 2,769,314,156

14.2.1 Receivables within One YearGross rentals receivable 543,480,869 1,885,237,414 Unearned income (126,171,414) (495,078,810) 417,309,455 1,390,158,604

14.2.2 Receivables from One to Five YearsGross rentals receivable 213,993,082 1,515,243,288 Unearned income (29,906,274) (214,372,119) 184,086,808 1,300,871,169

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14.2.3 Allowance for ImpairmentSpecific Allowance for ImpairmentBalance as at 1st April - - Charge / (Reversal) for the year 43,727,622 - Balance as at 31st March 43,727,622 -

Collective Allowance for ImpairmentBalance as at 1st April 211,470,855 234,611,028 Charge / (Reversal) for the year (5,270,627) (23,140,173)Write offs (199,266,407) - Balance as at 31st March 6,933,821 211,470,855 Total allowances for impairment 50,661,443 211,470,855

14.3 Allowance for impairment for leases and hire Purchases ReceivablesBalance as at 1st April 608,938,076 428,547,458 Charge / (Reversal) for the year 552,385,734 180,390,618 Write offs (560,179,215) - Balance as at 31st March 601,144,595 608,938,076

14.4 concentration by sector Gross amount % Gross amount % As at 31.03.2014 As at 31.03.2013 Rs. Rs.

Manufacturing 404,993,454 3% 595,543,458 4%Agriculture 1,782,258,127 13% 1,509,971,497 10%Trade 2,556,314,152 19% 4,701,602,400 31%Transport 908,224,065 7% 1,011,623,094 7%Construction 249,005,261 2% 236,115,385 2%Services 3,519,992,328 26% 5,331,838,167 35%Micro and Others 3,887,779,748 29% 1,936,965,318 13% 13,308,567,135 15,323,659,319

Lease & Hire Purchase receivables amounting to Rs.12,557,408,184 /- assigned under funding arrangement (2013- Rs. 8,774,395,201/-) also included under lease and hire purchase receivables.


135



15 loAns And AdvAnces Advances and loans 13,059,739,309 7,829,909,298 13,059,739,309 7,829,909,298

15.1 Rentals Receivable on loans to customersRentals receivable on loans to customers 12,896,914,946 7,743,786,828Overdue loan installments 277,325,621 134,368,747Total rentals receivable (Note 15.2) 13,174,240,567 7,878,155,575Allowance for impairment (Note 15.1.1) (114,501,257) (48,246,277) 13,059,739,309 7,829,909,298

15.1.1 Allowance for ImpairmentSpecific Allowance for ImpairmentBalance as at 1st April - -Charge / (Reversal) for the year 75,831,857 -Balance as at 31st March 75,831,857 -

Collective Allowance for ImpairmentBalance as at 1st April 48,246,277 13,100,812Charge / (Reversal) for the year 151,556,931 35,145,465Write off (161,133,808) -Balance as at 31st March 38,669,400 48,246,277Total allowances for impairment 114,501,257 48,246,277

15.2 concentration by sector Gross Amount as at % Gross Amount as at % 31.03.2014 31.03.2013 Rs. Rs.

Manufacturing 419,867,877 3% 392,055,731 5%Agriculture 664,862,004 5% 183,604,606 2%Trade 3,452,561,085 26% 3,160,639,034 40%Transport 924,956,653 7% 297,268,852 4%Construction 414,531,615 3% 153,519,977 2%Services 4,840,561,703 37% 3,527,525,904 45%Micro and Others 2,456,899,630 19% 163,541,471 2% 13,174,240,567 7,878,155,575

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16 fAcToRing ReceivAbles Factoring receivables 2,231,288,982 2,858,839,358Allowance for impairment (Note 16.1) (428,254,927) (418,761,258)Balance as at 31 March 1,803,034,055 2,440,078,100

16.1 Allowance for impairmentSpecific Allowance for ImpairmentBalance as at 1st April 418,761,258 402,073,469Charge / (Reversal) for the year 327,525,306 57,107,765Write off (342,181,851) (40,419,976)Balance as at 31st March 404,104,713 418,761,258

Collective Allowance for ImpairmentBalance as at 1st April - -Charge / (Reversal) for the year 24,150,214 -Balance as at 31st March 24,150,214 -Total allowances for impairment 428,254,927 418,761,258

16.2 concentration by sector Gross Amount as at % Gross Amount as at % 31.03.2014 31.03.2013 Rs Rs Agriculture 3,587,994 0% 1,152,124 0%Manufacturing 579,723,289 26% 744,563,337 26%Services 64,886,768 3% 276,183,174 10%Trading 1,258,093,922 56% 1,779,599,640 62%Transport 324,997,009 15% 57,341,083 2% 2,231,288,982 2,858,839,358


137



17 due fRom RelATed PARTies Lanka ORIX Finance PLC 274,383 -LOLC Motors Limited 2,158,055 -Galoya Plantations Limited 50,000,000 - 52,432,438 -

18 cuRRenT TAx AsseTsWith-Holding Tax recoverable 9,792,039 - 9,792,039 -

19 oTheR cuRRenT AsseTsFinancial AssetsLoans to employees (Note 19.1) 92,617,646 75,030,264 92,617,646 75,030,264

Non-financial AssetsPrepayments and advances 44,200,066 36,504,008Other non-financial receivables 141,647,068 24,852,059 185,847,134 61,356,067Total other current assets 278,464,780 136,386,331

19.1 loans to employeesBalance at the beginning of the year 75,030,264 70,566,666Loans granted during the year 65,491,370 56,139,159Loans recovered during the year (47,903,988) (51,675,561)Balance at end of the year 92,617,646 75,030,264

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20 equiTy AccounTed invesTees As at 31st March 2014 As at 31st March 2013

Holding % No. of Shares Balance (Rs.) Holding % No. of Shares Balance (Rs.)

Commercial Insurance Brokers Limited 40% 240,000 800,000 40% 240,000 800,000

Add : Share of profits applicable to the Company

Balance at the beginning of the year 63,592,910 58,544,774

Current year’s share of profits before taxation 11,055,576 10,114,026

Taxation (3,946,608) (2,224,552)

Current year’s share of profits after taxation (Note 20.1) 7,108,968 7,889,474

Actuarial loss 29,009 (249,338)

Dividends received during the year - (2,592,000)

Balance at the end of the year 70,730,887 63,592,910

Current Year’s share of Profit 71,530,887 64,392,910

20.1 Current year’s share of profitThe Share of Equity Accounted Investee profit is based on the audited Financial Statements for the year ended 31st December 2013.Summarized Financial data as at 31st December 2013 of Commercial Insurance Brokers (Pvt) Ltd is stated below. 31st December 2013 2012 Rs. Rs. Revenue 198,879,374 185,076,376Profit before tax 27,638,939 25,285,065Profit after tax 17,772,420 19,723,686Total assets 256,878,317 215,312,147Total liabilities 78,687,046 51,365,817

21 invesTmenT PRoPeRTiesBalance at the beginning of the year - -Additions 14,038,000 -Balance at the end of the year 14,038,000 -


139


21.1 valuation of investment PropertiesInvestment properties of the Company are stated based on a valuation performed by an independent professional valuer of Department Of Provincial Revenue(Southern Province) incorporated valuers,as at 12th February 2014 The details of which as follows;

Property & Location Method of Valuation Extent Historical Cost Fair Value

2014 2013

Imaduwa, Galle Market approach 0A. 0R 30P 7,500,000 7,500,000 -

Imaduwa, Galle Market approach 0A. 0R 3.66P 6,000,000 6,000,000 -

21.2 There were no restrictions on the title of the investment properties as at the reporting date. Further there were no items pledged as securities for liabilities.

22 PRoPERty, Plant anD EqUiPmEnt

Freehold Freehold Freehold Furniture & Office Computers Assets Capital Work Lands Buildings Motor Fittings Equipment for Operating -in-Progress Vehicles Leases (CWIP) Total Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Cost/Valuation

Balance as at 1st April 2013 95,000,000 75,849,182 84,686,459 75,245,449 106,523,143 108,164,663 75,842,452 21,017,773 642,329,121

Additions 578,239,040 - 21,499,939 6,613,583 22,397,260 14,006,299 21,907,611 3,174,002 667,837,734

Revaluations 28,500,000 70,287,980 - - - - - - 98,787,980

Disposals - - (7,803,775) (7,842,418) - - (8,495,750) - (24,141,943)

Transfers / WIP transfers - 12,700,307 - 4,955,183 - - - (24,191,775) (6,536,286)

Balance as at 31st March 2014 701,739,040 158,837,469 98,382,623 78,971,797 128,920,403 122,170,962 89,254,313 - 1,378,276,607

Accumulated Depreciation

Balance as at 1st April 2013 - 21,025,243 43,810,369 38,684,121 43,939,477 72,882,085 52,436,567 - 272,777,862

Charge for the year - 2,812,226 14,909,809 8,327,562 14,209,546 8,806,854 5,479,535 - 54,545,532

Disposals - - (5,347,261) (7,842,418) - - (5,671,375) - (18,861,054)

Balance as at 31st March 2014 - 23,837,469 53,372,917 39,169,265 58,149,023 81,688,939 52,244,727 - 308,462,339

Carrying value

As at 31 March 2014 701,739,040 135,000,000 45,009,707 39,802,532 70,771,380 40,482,023 37,009,586 - 1,069,814,268

As at 31 March 2013 95,000,000 54,823,938 40,876,090 36,561,328 62,583,666 35,282,579 23,405,885 21,017,773 369,551,259

22.1 Property, plant & equipment included fully depreciated assets that are still in use having a gross amount of Rs. 83,435,184.64/- as at 31st March 2014 (2012/13 - Rs. 76,846,447/-).

140


22.2 The Company’s land & building at No. 68 Bauddhaloka Mawatha, Colombo 04, was revalued based on the fair value by Mr. P.W Senaratna, an Independent Chartered Valuer, as at 31st March 2014, at Rs.258,500,000. The resultant revaluation surplus is Rs. 98,787,980/- and is included in revaluation Reserve

22.3 If land and buildings were measured using the cost model,the carrying amounts would be as follows:

As at 31st March 2014 2013 Rs. Rs. Cost 66,446,828 66,446,828Accumulated depreciation (15,550,990) (14,209,319) 50,895,838 52,237,509

22.4 information on freehold land and building of the company

Location Valuation of Net Book Value of Extent Extent Accommodation

Land Building Land Building Land Building

(Sq.Ft)

Bauddhaloka Mawatha, 123,500,000 135,000,000 123,500,000 135,000,000 19 Perches 21,890 Head Office

Colombo-04 Nawala - Riyapola

No 305/5.Rajagiriya road, Nawala - - 578,239,040 - 0A- 3R- 19.14P -

22.5 There were no restrictions on the title of the property plant and equipment as at the reporting date. Further there were no items pledged as securities for liabilities.

23 deRivATive liAbiliTies As at 31st March 2014 2013 Rs. Rs. Derivative liabilities held for risk management (Note 13.3.1) 97,551,618 95,733,093 97,551,618 95,733,093


141



24 oTheR finAnciAl liAbiliTies due To cusTomeRsFixed and Savings Deposits at Amortised CostFixed deposits 7,440,352,113 2,915,441,769Saving deposits 94,091,660 46,841,047Interest payable on customer deposits 143,833,890 70,513,807 7,678,277,663 3,032,796,623

25 loAns And boRRowingsCommercial papers and promissory notes 13,435,290 26,684,558Short-term loans and others (Note 25.3) 1,000,000,000 4,552,000,000Long-term borrowings (Note 25.1) 12,423,700,115 8,573,729,167 13,437,135,405 13,152,413,725

25.1 long-Term borrowingsBalance at the beginning of the year 8,613,322,388 10,297,687,915Loans obtained 8,226,591,727 1,859,727,084Repayments (4,330,808,319) (3,544,092,611)Balance at the end of the year - Gross (Note 25.4) 12,509,105,796 8,613,322,388Unamortised finance cost (85,405,681) (39,593,221)Balance at the end of the year 12,423,700,115 8,573,729,167

25.2 loans and borrowingsLoans and Borrowings- CurrentDue to related companies 232,122,857 378,185,038Other Loans and borrowings 5,847,166,477 8,239,314,069 6,079,289,334 8,617,499,107 Loans and Borrowings- Non CurrentDue to related companies 222,985,011 455,107,927Other Loans and borrowings 7,134,861,060 4,079,806,691 7,357,846,071 4,534,914,618Total loans and borrowings (Note 25) 13,437,135,405 13,152,413,725

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25.3 short-term loans and othersCommercial Bank of Ceylon - 50,000,000Hong Kong Bank - 330,000,000NDB Bank - 1,000,000,000Bank of Ceylon 200,000,000 404,000,000Union Bank 400,000,000 300,000,000Sampath Bank - 200,000,000People’s Bank - 500,000,000Hatton National Bank - 500,000,000Muslim Commercial Bank 400,000,000 400,000,000Nations Trust Bank - 193,000,000Standard Chartered Bank - 675,000,000 1,000,000,000 4,552,000,000

25.4 long-Term borrowingsCommercial Bank of Ceylon 560,000,000 770,000,000 Bank of Ceylon 348,701,042 287,779,267Hatton National Bank 590,930,000 310,170,000 People’s Bank 124,999,988 249,999,992Habib Bank 262,500,000 250,000,000Sampath Bank 1,874,615,000 1,413,208,706 Ishara Traders 455,107,870 833,292,966Asian Development Bank - 211,125,043Nederlandses Development Finance Company (FMO) 4,109,727,443 2,153,474,367 PROPARCO 1,306,109,090 -Triodos Investment Management 1,077,540,000 971,040,000Securitisation loans 1,798,875,363 1,163,232,047 12,509,105,796 8,613,322,388

26 cuRRenT TAx liAbiliTiesIncome tax payables 325,847,577 284,749,001 WHT payables - 5,131,329 325,847,577 289,880,330


143



27 AmounT due To RelATed comPAniesLOLC Services Limited - 880,000 Lanka ORIX Leasing Company PLC 269,747,963 552,591,537 LOLC Motors Limited - 5,077,000 Lanka ORIX Finance PLC - 733,738 Lanka ORIX Information Technology Services Limited - 32,961 LOLC Factors Limited 2,000,106 - LOLC Realty Limited 3,240,000 - LOLC Micro Credit Limited 1,225,224 - 276,213,293 559,315,236

28 TRAde And oTheR PAyAbles

Financial liabilitiesAccrued Expenses 204,470,881 203,440,253 Creditors for cost of equipment 237,163,463 328,220,348 Other payable 104,321,625 8,276,628 Interest payable 406,949,867 260,721,837 Total financial liabilities 952,905,836 800,659,066

Non-Financial LiabilitiesDividend payable 3,709,753 3,784,714 Total non-financial liabilities 3,709,753 3,784,714 Total trade and other payables 956,615,589 804,443,780

29 defeRRed TAx AsseTs & liAbiliTies 29.1 movement in Recognised deferred Tax liabilities

As at 31st March 2014 As at 31st March 2013 Temporary Tax Effect Temporary Tax Effect Difference Difference Rs. Rs. Rs. Rs.

Balance as at the beginning of the year 1,728,826,952 484,071,547 1,279,821,918 358,350,137 Amount originating/ (reversed) during the year (Note 29.2) 459,859,929 125,852,241 449,005,034 125,721,409 Balance as at the end of the year 2,188,686,881 609,923,788 1,728,826,952 484,071,546

144



29.2 Amount originating / (reversing) during the yearRecognised in statement of comprehensive income (Note 29.4) 106,171,606 154,512,058 Recognised in other comprehensive income (Note 29.5) 19,680,635 - Recognition of Previously Un recognised Deferred Tax - (28,790,649) 125,852,241 125,721,409

29.3 composition of deferred Tax (Assets) and liabilitiesThe movement in deferred tax assets and liabilities during the year without taking into consideration, the offsetting of balances within the same tax jurisdiction, is as follows;

Property, plant & equipment 38,035,887 45,688,926 Finance lease rental receivables 563,501,852 471,957,550 Employee Benefits (11,294,586) (6,938,129)Forward exchange contracts assets - (26,636,801)Revaluation of Property, plant and equipment 19,680,635 - Net tax effect 609,923,788 484,071,546

29.4 deferred Tax expenseDeferred Tax AssetsOriginations / reversal during the period - - Recognition of previously un recognised deferred tax - (28,790,649)

Deferred Tax LiabilitiesOriginations / reversal during the period 106,171,606 154,512,058 Impact due to rate change - 106,171,606 125,721,409

29.5 deferred Tax expenses recognised in ociAccording to Sri Lanka Accounting Standard - LKAS 12 “Income Taxes”, deferred tax shall be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or in a different period, directly to equity. Accordingly, the deferred tax liability arising on revaluation of Property, Plant & Equipment of Rs. 19,680,635/- (2012/13-Rs.nil ) of the Company was charged directly to revaluation reserve in the Statement of Changes in Equity in 2013/14.


145



30 emPloyee benefiTsPresent Value of Unfunded GratuityBalance as at the beginning of the year 24,779,031 21,492,273 Benefit paid during the year (1,485,684) (1,037,000)Expense recognised in the income statement (Note 30.1) 6,838,949 5,503,298 Expense recognised in the other comprehensive income (Note 30.2) 10,205,511 (1,179,540) 40,337,807 24,779,031

30.1 expense Recognised in the income statementCurrent service cost 3,765,821 2,828,062 Interest on obligation 3,073,128 2,675,236 6,838,949 5,503,298

30.2 expenses Recognised in other comprehensive incomeActurial Gain / (Loss) 10,205,511 (1,179,540) 10,205,511 (1,179,540)

The employee benefit liability was actuarial valued under the projected Unit Credit (PUC) method by professionally qualified actuary firm Messrs Piyal S. Goonethilake and Associates on 31st March 2014.

The principle financial assumptions used in the valuation for the current and comparative years are as follows;

2014 2013Actuarial AssumptionsRate of discount 10% 11.77%Salary increment rates 9% 9.00%Retirement age 55 years 55 years

30.3 sensitivity of the actuarial assumptionsSensitivity analysis on discounting rate and salary increment rate to Statement of Financial Position and Comprehensive Income.

Assumption Rate change Financial Position - LiabilityDiscount rate +1 37,336,518 -1 43,788,373Future salary increases +1 43,708,858 -1 37,350,477

146



31 sTATed cAPiTAlIssued and Fully Paid (Note 31.1) 1,425,946,629 1,425,946,629 No. of Shares (Note 31.2) 6,377,711,170 6,377,711,170

All shares rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company.

31.1 movement in stated capital As at 31st March 2014 2013 Rs. Rs. Balance at the beginning of the year 1,425,946,629 1,425,946,629Balance at the end of the year 1,425,946,629 1,425,946,629

31.2 movement in number of ordinary sharesBalance at the beginning of the year 6,377,711,170 6,377,711,170Balance at the end of the year 6,377,711,170 6,377,711,170

32 ReseRves As at 31st March 2014 2013 Rs. Rs.

Statutory reserve (Note 32.1) 394,602,841 347,804,897Investment fund reserve (Note 32.2) 289,075,199 191,689,684Revaluation reserve (Note 32.3) 135,980,246 56,872,900General reserve 288,079,789 288,079,789Fair value reserve on AFS (Note 32.4) 29,335,085 (22,981)Hedging reserve (Note 32.5) (2,734,323) 12,414,916Total 1,134,338,837 896,839,205

32.1 statutory ReserveThe reserve is created according to Direction No.1 of 2003 issued under the Finance Business Act No.42 of 2011. The Company transfers 5% of its annual net profit after tax to this reserve in compliance with this direction.


147


32.2 investment fund ReserveEvery Company supplying financial services are liable to pay VAT on financial services as per Section 25A-G of the Value Added Tax Act No.14 of 2002 and is required to deposit the respective sums in an Investment Fund Account established as per the Central Bank guidelines under the cover of letter No. 02/17/800/0014/01 dated 29th April 2011. The Company is required to deposit an amount equal to 8% of the value addition (profits) computed for financial VAT purposes on the same date of each month that VAT on financial services is paid and the 5% of the income tax liability on quarter tax payment. This requirement is effective from 1st January 2011.

32.3 Revaluation ReserveThe revaluation reserve relates to the revaluation surplus of Property, Plant and Equipments and the Long term investments. Once the respective revalued items have been disposed, the relevant portion of revaluation surplus is transferred to retained earnings.

32.4 fair value Reserve on Available for saleThis reserve is maintained to recognize the fair value changes of Available for Sale Financial Assets.

32.5 hedging Reserve“The hedging reserve comprises of the effective portion of the cumulative net change in fair value of cash flow hedging instruments related to hedge transactions that have not yet affected the profit or loss.“

33 ReTAined eARnings As at 31st March 2014 2013 Rs. Rs. Balance brought forward 5,514,352,714 4,486,783,449Transfers to statutory reserves (144,183,460) (142,063,087)Net profit for the year 935,958,891 1,168,452,812Other comprehensive income (10,205,511) 1,179,540Balance at the end of the year 6,295,922,634 5,514,352,714

The carrying amount of the retained earnings represents the undistributed earnings held by the Company. This could be used to absorb future losses and dividend declaration.

148


34 mATuRiTy AnAlysis of finAnciAl AsseTs And finAnciAl liAbiliTies34.1 maturity Analysis of financial AssetsAn analysis of the interest bearing assets and liabilities employed by the Company as at 31st March 2014, based on the remaining period at the balance sheet date to the respective contractual maturity date is given below.

Carrying Less than 1-3 months 4 - 12 months 13 - 60 months More than Carrying amount 1 month 60 months amount 31.03.2014 31.03.2013 Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Interest Earning AssetsCash and cash equivalents 736,358,424 736,358,424 - - - - 842,084,879 Trading assets - fair value through profit or lossEquity securities 215,068,436 215,068,436 - - - - 5,090,543 Derivative assets held for risk management 7,800 - - 7,800 - - 19,659,998

Investment securitiesAvailable-for-sale investment securities 276,776,250 - - - 37,892,000 238,884,250 163,670,930 Loans and receivables 2,268,543,679 1,853,905,479 230,424,000 184,214,200 - - 319,751,000

Finance lease receivables,

hire purchases and operating leasesFinance lease receivables (Gross) 12,640,339,212 768,277,913 827,280,211 2,693,615,885 8,351,165,204 - 11,945,407,087 Hire purchase receivables (Gross) 668,227,923 108,468,718 128,995,856 246,676,542 184,086,808 - 2,769,314,156

Advances and other loansLoans and advances 13,174,240,567 624,169,793 1,018,762,940 2,856,207,318 8,675,100,516 - 7,829,909,298 Factoring receivables 2,231,288,982 1,610,689,537 68,622,197 36,171,633 515,805,616 - 2,440,078,100

Trade and other current assets

Loans to staff 92,617,646 3,824,579 3,436,664 15,368,777 64,741,433 7,352,441 75,030,264

32,303,468,919 5,920,762,878 2,277,521,868 6,032,262,154 17,828,791,575 246,236,691 26,409,996,255

34.2 maturity Analysis of financial liabilities Carrying Less than 1-3 months 4 - 12 months 13 - 60 months More than Carrying amount 1 month 60 months amount 31.03.2014 31.03.2013 Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Interest Bearing Liabilities

Non-derivative liabilitiesBank overdrafts 655,802,303 655,802,303 - - - - 948,679,852

Deposits liabilitiesOther financial liabilities due to customers 7,678,277,663 1,202,487,506 3,189,540,088 2,696,797,357 589,452,713 - 3,032,796,623

Interest bearing borrowingsCommercial papers and promissory notes 13,435,289 - - 6,872,402 6,562,887 - 26,684,559 Short term loans and others 1,000,000,000 1,000,000,000 - - - - 4,552,000,000 Long-term borrowings 12,423,700,115 1,322,823,373 749,389,108 3,000,204,504 5,545,500,948 1,805,782,180 8,573,729,167

Other current liabilities

Derivative liabilities 97,551,618 34,017,983 43,890,000 19,643,634 - - 95,733,093

21,868,766,987 4,215,131,165 3,982,819,197 5,723,517,897 6,141,516,548 1,805,782,180 17,229,623,293


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35 RelATed PARTy TRAnsAcTions35.1 identity of Related PartiesThe Company carries out transactions in the ordinary course of its business with parties who are defined as related parties in Sri Lanka Accounting Standard 24, “Related Party Disclosures”. The pricing applicable to such transactions are based on the assessment of the risk and pricing model of the Company and is comparable with what is applied to transactions between the Company and its unrelated customers.

35.2 Transactions with key management Personnel or close family members(i) Loans to DirectorsNo loans have been given to the Directors of the Company.

(ii) Compensation of Key Management PersonnelAccording to Sri Lanka accounting Standard 24 “ Related Party Disclosure” key management personnel, are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Board of directors of the Company and it’s parent and personnel holding designation Assistant general manager and above have been classified as Key Management Personnel of the Company.

Short-term employment benefits 2014 2013 Rs Rs Directors' fees and emoluments 24,025,332 37,333,713 Other KMP emoluments 12,278,275 11,663,071 36,303,607 48,996,784

Long-term employment benefitsThere are no long to Key management Personnel during the year.

(iii) Related party TransactionsAccordingly, the value of all transactions carried out by the Company with its Related Companies during the year ended 31 March 2014 are summarized bellow.

Name of the Company Relationship Nature of the Transaction Transaction value

for the year ended

31st March 2014

Rs.

Amount due from/

(to) as at

31st March 2014

Rs.

Amount due

from/(to) as at

31st March 2013

Rs.

Lanka ORIX Leasing Company PLC

Parent Interest expense (68,972,496)

Transfer of funds 24,516,913,450

Funds received (23,293,897,422)

Treasury Handling fee (331,450,840)

Guarantee Fees (4,125,000)

Restructuring Fees (187,142,857)

Settlement of expenses by LOLC (348,481,262) (269,747,963) (552,591,537)

150



for the year ended

31st March 2014

Rs.

Amount due from/

(to) as at

31st March 2014

Rs.

Amount due

from/(to) as at

31st March 2013

Rs.

Commercial Insurance

Brokers (Pvt) Ltd

Associate Insurance Commission Received 38,270,637 - -

Lanka ORIX Finance PLC Fellow

Subsidiary

Income on maintenance of

portfolio

710,335

Transfer of funds 471,024,613

Fund received (470,961,827)

Settlement of expenses 235,000 274,383 (733,738)

LOLC Services Ltd Fellow

Subsidiary

Yard fee (4,495,040)

Payments 5,375,040 - (880,000)

LOLC Motors Limited Fellow

Subsidiary

Lease vehicle purchased from CLC 46,750,246

Lottery collection (5,922,500)

Fund Transfer Settlement of

Lottery Collection

10,999,500

Transfer of Vehicle to LOMO 2,452,462

Settlement of expenses (41,308)

Valuation Fee Income of LOMO (253,100) 2,158,055 (5,077,000)

Lanka ORIX Information

Technology Services Ltd

Fellow

Subsidiary

Provision for information services (134,400,000)

Payments 134,432,961 - (32,961)

Browns & Company PLC Fellow

Subsidiary

Lease vehicle purchased 103,691,610 - -

Ishara Traders Affiliate Lease vehicle purchased 15,850,000

Loan settled during the year 378,185,096

Interest paid 121,050,440 (455,107,870) (833,292,966)

Lanka ORIX Micro Credit

Ltd.

Fellow

Subsidiary

Yard fee (2,600,000)

Post Office Rent (575,223)

Payments 1,950,000 (1,225,223) -

LOLC Factors Ltd. Fellow

Subsidiary

Settlement of expenses (2,000,106)

Transfer of funds 2,000,000

Funds received (2,000,000) (2,000,106) -


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for the year ended

31st March 2014

Rs.

Amount due from/

(to) as at

31st March 2014

Rs.

Amount due

from/(to) as at

31st March 2013

Rs.

LOLC Realty Ltd. Fellow

Subsidiary

Rent Fee (16,200,000)

Fund Transfer Settlement of rent fee 12,960,000 (3,240,000) -

Galoya Plantations

Limited (GPL)

Affiliate Lease vehicle purchased 597,278,800

Fund Transfer 50,000,000 50,000,000 -

Galoya Holding (Pvt)

Ltd.

Fellow

Subsidiary

Lease vehicle purchased 2,625,000 - -

There are no related party transactions other than those disclosed in Note 35 to the financial statements.

35.3 Related party transactions exceeding 10% of the equity or 5% of the total assets of the entity as per Audited financial statements,whichever is lower. There are no related party transactions those require specified disclosure in accordance with the continuing listing requirements of Colombo Stock Exchange.

36 conTingenT liAbiliTies As at 31st March 2014 2013 Rs. Rs. Guarantees issued to banks and other institutions 7,150,500 -

37 cAPiTAl commiTmenTsThere were no significant capital commitments which have been approved or contracted for by the Company as at the Balance Sheet date except for the following. As at 31st March 2014 2013 Rs. Rs.

Forward exchange contracts 6,727,114,122 3,587,264,511

On this commitment the Company will receive Euro 13,212,702 and US $ 31,579,990 on conversion.

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38 evenTs AfTeR RePoRTing PeRiod There have been no material events occurring after the reporting period that require adjustment to or disclosure in these Financial Statements.

39 vAluATion of finAnciAl insTRumenTs39.1 fair value hierarchy

Company Carrying amount Level 1 Level 2 Level 3 Total

As at 31 March 2014 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Trading assets - fair value through profit or lossEquity Securities 215,068,436 215,068,436 - - 215,068,436

Derivative assets held for risk management 7,800 - 7,800 - 7,800 215,076,236 215,068,436 7,800 - 215,076,236

Investment securities

Available-for-sale investment securitiesCorporate bonds 276,593,750 276,593,750 - - 276,593,750

Unquoted equity securities 182,500 - - 182,500 182,500

276,776,250 276,593,750 - 182,500 276,776,250

491,852,486 491,662,186 7,800 182,500 491,852,486

Company Carrying amount Level 1 Level 2 Level 3 Total

As at 31 March 2013 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Trading assets - fair value through profit or lossEquity Securities 5,090,543 5,090,543 - - 5,090,543

Derivative assets held for risk management 19,659,998 - 19,659,998 - 19,659,998 24,750,541 5,090,543 19,659,998 - 24,750,541

Investment securities

Available-for-sale investment securitiesCorporate bonds 163,488,430 163,488,430 - - 163,488,430

Unquoted equity securities 182,500 - - 182,500 182,500

163,670,930 163,488,430 - 182,500 163,670,930

188,421,471 168,578,973 19,659,998 182,500 188,421,471


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39.2 financial instruments not measured at fair valueThe following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.

As at 31 March 2014 Level 1 Level 2 Level 3 Total Fair Value Total Carrying amount (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)AssetsInvestment securities Government securities - 276,593,750 1,464,638,200 1,741,231,950 1,741,231,950 Others - - 804,087,979 804,087,979 804,087,979 - 276,593,750 2,268,726,179 2,545,319,929 2,545,319,929

Finance lease receivables, hire purchases and operating leases Finance lease receivables - 12,101,227,126 - 12,101,227,126 12,089,856,060 Hire purchase receivables - 1,099,274,179 - 1,099,274,179 617,566,480 - 13,200,501,305 - 13,200,501,305 12,707,422,540

Advances and other loans Advances and loans - 9,834,024,758 - 9,834,024,758 13,059,739,309 Factoring receivables - - - - 1,803,034,055 - 9,834,024,758 - 9,834,024,758 14,862,773,364

Trade and other current assets Other financial assets - - - - 92,617,646 - - - - 92,617,646

- 23,311,119,813 2,268,726,179 25,579,845,992 30,208,133,479

Liabilities Deposits liabilities - 7,319,014,290 - 7,319,014,290 7,678,277,663

Interest bearing borrowings Commercial papers & Promisory Notes - - - - 13,435,289 Short-term loans and others - - - - 1,000,000,000 Long-term borrowings - - - - 12,423,700,115 - - - - 13,437,135,404

Trade and other payables Trade payables - - - - 237,163,463 Other financial liabilities - - - - 715,742,373 - - - - 952,905,836

- 7,319,014,290 - 7,319,014,290 22,068,318,903

154


40 segmenT infoRmATion

Business Segment

Leasing Hire Purchase Loans Factoring Others Total

Rs. Rs. Rs. Rs. Rs. Rs.

For the year ended 31 March 2014Total revenue 3,461,715,538 580,045,622 2,777,733,048 694,703,244 252,729,184 7,766,926,636 Interest cost (1,348,582,693) (68,887,459) (1,424,897,872) (196,722,103) - (3,039,090,127)

Profit before operating expenses 2,113,132,845 511,158,163 1,352,835,176 497,981,141 252,729,184 4,727,836,509 Operating expenses (1,502,209,620) (277,518,084) (860,089,730) (584,573,911) (106,666,316) (3,331,057,661)

Value Added Tax on financial services - (5,199,905) (109,962,910) - - (115,162,815)

Profit from operations 610,923,225 228,440,174 382,782,536 (86,592,770) 146,062,868 1,281,616,033

For the year ended 31 March 2013Total revenue 2,788,729,724 1,145,540,001 1,416,516,160 723,413,630 130,964,745 6,205,164,260 Net interest cost (1,217,273,132) (282,201,493) (774,146,583) (241,251,597) - (2,514,872,806)

Profit before operating expenses 1,571,456,592 863,338,508 642,369,577 482,162,033 130,964,745 3,690,291,454 Operating expenses (987,082,464) (298,808,246) (433,130,882) (260,401,909) (8,562) (1,979,432,063)

Value Added Tax on financial services - (30,181,358) (85,334,230) - - (115,515,588)

Profit from operations 584,374,128 534,348,904 123,904,465 221,760,124 130,956,183 1,595,343,803

For the year ended 31 March 2014Allowance for impairment and write off 513,928,739 38,456,995 227,388,788 351,674,520 - 1,131,449,042

For the year ended 31 March 2013Allowance for impairment and write off 203,472,672 (23,140,173) 35,145,465 57,107,765 - 272,585,729

As at 31 March 2014

Total assets 12,089,856,060 617,566,480 13,059,739,309 1,803,034,055 5,363,717,238 32,933,913,143

Total liabilities 10,313,182,294 526,811,540 10,896,796,746 1,504,417,137 836,497,326 24,077,705,043

As at 31 March 2013

Total assets 11,945,407,087 2,769,314,156 7,829,909,298 2,440,078,100 2,244,543,123 27,229,251,764

Total liabilities 8,953,410,650 2,075,677,009 5,694,081,370 1,774,478,186 894,466,001 19,392,113,216


155


41 finAnciAl Risk mAnAgemenTOverviewThe Company has exposure to the following risks from financial instruments:

1 Credit risk2 Liquidity risk3 Market risk4 Operational risk

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

Risk management frameworkThe board of directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has established the Integrated Risk Management Committee (IRMC), which are responsible for developing and monitoring Company risk management policies in their specified areas. All Board committees have both executive and non-executive members and report regularly to the board of directors on their activities.

The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Company Audit Committee and the IRMC are responsible for monitoring compliance with the Company’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Company. The Company Audit Committee is assisted in these functions by Enterprise Risk Management division (ERM). ERM undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Company Audit Committee.

Credit riskCredit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s loans and advances to customers and other Company’s, and investment debt securities. For risk management purposes, credit risk arising on trading assets is managed independently.

Management of credit riskFacilities granted to customers (Lease / Hire purchase / Loans)Credit department has a Credit committee formed internally, is responsible for management of the Company’s credit risk, including:

1. Formulating credit policies in consultation with Branch and Regional Heads, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements.

156


2. Establishing the authorization structure for the approval and renewal of credit facilities. Authorization limits are allocated to branch and Regional Heads, Senior Marketing Officers at Head Office. Larger facilities require approval by Company/Group Credit, Head of Company Credit, Company Credit Committee or the board of directors as appropriate.

3. Reviewing and assessing credit risk. Company Credit assesses all credit exposures in excess of designated limits, prior to facilities being committed to customers by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.

4. Limiting concentrations of exposure to counterparties, geographies and industries (for loans and advances), and by issuer, credit rating band and market liquidity (for investment securities).

6. Reviewing compliance of business units with agreed exposure limits, including those for selected industries, country risk and product types. Regular reports on the credit quality of local portfolios are provided to Company Credit who may require appropriate corrective action to be taken.

7. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Company in the management of credit risk.

Each Branch and Regional Head is required to implement Company credit policies and procedures, with credit approval authorities delegated from the Company Credit Committee. Each Branch and Regional Head is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval.

Regular audits of business units and Company Credit processes are undertaken by ERM.

Allowances for impairmentThe Company establishes an allowance for impairment losses on assets carried at amortized cost that represents its estimate of incurred losses in its lease and loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and, for assets measured at amortised cost, a collective loan loss allowance established for groups of homogeneous assets as well as for individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired.

Write-off policyThe Company writes off a loan or an investment debt security balance, and any related allowances for impairment losses, when Board of Directors determines that the loan or security is uncollectible. This determination is made after considering information such as the occurrence of significant changes in the borrower’s/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardized loans, write-off decisions generally are based on a product-specific past due status.


157


Exposure to credit risk1. Lease and hire purchase portfolio Note Finance lease Hire Purchase Total

Carrying amount 14 12,089,856,060 617,566,480 12,707,422,540

Assets at amortized cost

Individually impaired

Gross amount 408,463,271 43,727,622 452,190,893

Allowance for impairment (408,463,271) (43,727,622) (452,190,893)

Carrying amount - - -

for the rest of portfolio where collective impairment is applicable

Gross amount 12,231,875,941 624,500,301 12,856,376,242


Carrying amount 12,089,856,060 617,566,480 12,707,422,540

12,089,856,060 617,566,480 12,707,422,540

2. Advances and other loans Note Advances Factoring Total

and loans receivables

Carrying amount 15 13,059,739,309 1,803,034,055 14,862,773,364

Assets at amortized cost

Individually impaired

Gross amount 75,831,857 608,446,198 684,278,055


Carrying amount - 204,341,485 204,341,485

for the rest of portfolio where collective impairment is applicable

Gross amount 13,098,408,709 1,622,842,784 14,721,251,493


Carrying amount 13,059,739,309 1,598,692,570 14,658,431,879

13,059,739,309 1,803,034,055 14,862,773,364

3. Trade & Other ReceivablesThe Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Company’s customer base, including the default risk of the industry in which customers operate, as these factors may have an influence on credit risk.

The Credit Committee has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, when available, and in some cases Company references. Purchase limits

158


are established for each customer, which represents the maximum open amount without requiring approval from the Credit Committee ; these limits are reviewed quarterly. Customers that fail to meet the Company’s benchmark creditworthiness may transact with the Company only on a prepayment basis.

More than 59 percent of the Company’s customers have been transacting with the Company for over one year. In monitoring customer credit risk, customers are Companied according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale, retail or end-user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties.

4. Cash and cash equivalentsThe Company held cash and cash equivalents of Rs.736 million at 31 March 2014 (2013: Rs.842 million) which represents its maximum credit exposure on these assets.

5. Excessive risk concentrationConcentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographical region, or have economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Company’s performance to developments affecting a particular industry.

In order to avoid excessive concentrations of risk, the Company’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Company to manage risk concentrations at both the relationship and industry levels.

Liquidity riskLiquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

Management of liquidity riskThe Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

Company central Treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Company central Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to Company’s and other inter-Company facilities, to ensure that sufficient liquidity is maintained within the Company as a whole. The liquidity requirements of business units and subsidiaries are met through short-term loans from Company central Treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements.


159


The Company relies on bank borrowings and deposits from customers and Company’s, as its primary sources of funding. While the Company’s bank borrowings have maturities of over one year, deposits from customers and Company’s generally have shorter maturities and a large proportion of them are repayable on demand. The short-term nature of these deposits increases the Company’s liquidity risk and the Company actively manages this risk through maintaining competitive pricing and constant monitoring of market trends.

Exposure to liquidity riskThe key measure used by the Company for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and Treasury bills and Repos maturing with in next financial year. A similar, but not identical, calculation is used to measure the Company’s compliance with the liquidity limit established by the Company’s lead regulator, [Central Bank of Sri Lanka - CBSL]. Details of the reported Company ratio of net liquid assets to deposits from customers at the reporting date and during the year were as follows:

As at 31st March 2014 2013 39.14 38.31 Maturity analysis for financial assets and liabilitiesNote no 34 of the financials statements summarises the maturity profile of the undiscounted cash flows of the Company’s financial assets and liabilities as at 31 March 2014. The w’s expected cash flows on these instruments vary significantly from this analysis.

Market RiskMarket risk is the risk that changes in market prices, such as interest rates, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Management of market risksInterest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The Company’s policy is to continuously monitor positions on a daily basis and hedging strategies are used to ensure positions are maintained within prudential levels.

The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Company’s income statement.

160


If Market rates up by If Market rates drop by 1 % 1 % the effect of the the effect of the same to the same to the Interest Interest Income/(Expense Income/(Expense) Rs. Rs.

Effect on Rate sensitive Assets 131,742,406 (131,742,406)Effect on Rate sensitive Liabilities (101,886,946) 101,886,946

Sensitivity of profit or loss 29,855,460 (29,855,460)

Operational RiskOperational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behavior.

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

The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk in the following areas:

Requirements for appropriate segregation of duties, including the independent authorisation of transactions;

� Requirements for the reconciliation and monitoring of transactions;

� compliance with regulatory and other legal requirements;

� documentation of controls and procedures;

� requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified;

� requirements for the reporting of operational losses and proposed remedial action;

� development of contingency plans;

� training and professional development;

� ethical and business standards; and

� risk mitigation, including insurance where this is effective.


161


Compliance with Company standards is supported by a programme of periodic reviews undertaken by ERM. The results of ERM reviews are discussed with the department heads to which they relate, with summaries submitted to the Audit Committee and senior management of the Company.

42 cAPiTAl mAnAgemenTThe Company’s capital management is performed primarily considering regulatory capital.

The Company’s lead regulator, the Central Bank of Sri Lanka (CBSL) sets and monitors capital requirements for the Company.

The Company is required to comply with the provisions of the Finance Companies (Capital Funds) Direction No.01 of 2003, Finance Companies (Risk Weighted Capital Adequacy Ratio) Direction No.02 of 2006 and Finance Companies (Minimum Core Capital) Direction No.01 of 2011 in respect of regulatory capital.

The Company’s regulatory capital consists primarily of tier 1 capital, which includes ordinary share capital, retained earnings and statutory reserves.

The Company’s policy is to maintain a strong capital base so as to ensure investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Company recognizes the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Company’s regulatory capital under the CBSL guidelines is as follows; In Rs’ Mn In Rs’ Mn As at As at Capital Element 31.03.2014 31.03.2013

Ordinary share capital 1,426 1,426Statutory Reserve 395 348General Reserve 288 288Retained earnings 6,296 5,514Tier I capital / Total Capital 8,405 7,576

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shAReholdeRs As AT 31sT mARch

2014 No. of

Shares

% of IssuedCapital

2013 No. of

Shares

% of IssuedCapital

1 Lanka ORIX leasing company PLC 6,308,876,426 98.92 5,778,750,809 90.61

2 Browns Investments PLC 40,000,000 0.63 140,000,000 2.20

3 Chemical Industries (Colombo) Ltd/CIC Charitable & Educational Trust Fund

4,000,000 0.06 126,029,117 1.98

4 Sinharaja Hills Plantation Pvt Limited 3,226,273 0.05 100,000,000 1.57

5 Ceylon Biscuits Limited 2,000,000 0.03 70,000,000 1.10 6 Seylan Developments Plc 2,000,000 0.03 60,000,000 0.94 7 Mr. D.N.N. Lokuge 1,300,000 0.02 40,000,000 0.63 8 Miss N.R. Mather 1,000,000 0.02 33,280,521 0.52 9 Mrs. R.L. Mather 1,000,000 0.02 4,000,000 0.06 10 Mr. S.R. Mather 1,000,000 0.02 2,177,757 0.03 11 Mr. A.N. William 600,000 0.01 2,000,000 0.03 12 Mr. W.V.A.N. Fernando &

Mrs.K.M.M.V.R.Jayasuriya500,000 0.01 2,000,000 0.03

13 Mr. C.P.A. Gunasekera 427,551 0.01 1,768,599 0.03 14 Dr. H.S.D.Soysa 400,100 0.01 1,000,000 0.02 15 Mr. P.B.Jayasundara 260,000 0.00 1,000,000 0.02 16 Mr. S.M.M.Abdul Ghaffoor 200,000 0.00 1,000,000 0.02 17 Mr. R.B.C.Alles 200,000 0.00 600,000 0.01 18 Mr H.E.P.Babapulle 200,000 0.00 500,000 0.01 19 Mr N.B.R.T.Balalle 200,000 0.00 400,000 0.01 20 Mr M.D.M.S.Fernando 200,000 0.00 400,000 0.01

6,367,590,350 99.84 6,364,906,803 99.80

The Public Shareholding as at 31st March 2014 was 1.08%

AnAlysis of oRdinARy shARes As AT 31 mARchRange 2014

No. ofShareholders

No. of

Shares

% of

Shares

2013

No. of

Shareholders

No. of

Shares

% of

Shares

1 - 1,000 356 95,560 - 279 72,157 -

1,001 - 10,000 141 634,110 0.01 86 430,000 0.01

10,001 - 100,000 143 5,781,805 0.09 138 5,788,675 0.09

100,001 - 1,000,000 35 9,796,996 0.16 40 11,413,535 0.18

Over 1,000,000 Shares 7 6,361,402,699 99.74 13 6,360,006,803 99.72

Total 682 6,377,711,170 100.00 556 6,377,711,170 100.00

Shareholder Information

163


HigHESt, lowESt anD CloSing SHaRE PRiCES aS AT 31 mARch

2014Rs.

2013Rs.

Highest 5.00 5.30

Lowest 3.30 2.60

Closing 3.80 4.90

shAReholding As AT 31 mARch

2014 2013

No. ofShares

% ofShares

No. ofShares

% ofShares

Residents 6,377,710,170 100.00 6,377,711,170 100.00

Non Residents 1,000 - - -

Total 6,377,711,170 100.00 6,377,711,170 100.00

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Income Statement (Rs.‘000) 2013/14 2012/13

For the 3 months ended 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar

Gross income 1,745,967 1,890,863 1,932,681 1,944,687 1,458,386 1,486,094 1,503,001 1,548,139

Other Income/(Expenses) 49,835 12,524 18,760 178,748 60,848 4,247 14,798 137,292

Interest Costs (668,517) (661,955) (778,583) (930,036) (532,068) (601,410) (645,435) (735,960)

Profit before operating expenses 1,127,285 1,241,432 1,172,858 1,193,399 987,166 888,931 872,364 949,471

Other operating expenses (719,779) (898,562) (758,113) (1,069,764) (483,862) (526,808) (629,666) (454,611)

Results from operating activities 407,506 342,870 414,745 123,635 503,304 362,123 242,698 494,860

Income tax expense (112,995) (117,453) (129,465) 7,117 (106,716) (83,766) (106,450) (137,599)

Net profit after tax 294,511 225,417 285,280 130,752 396,588 278,357 136,248 357,261

Balance Sheets (Rs.’000)

As at 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar

Assets 28,344,556 29,447,081 31,772,053 32,933,914 25,533,441 25,007,896 25,946,369 27,229,252

Liabilities 20,254,677 21,106,555 23,184,257 24,077,705 18,536,587 17,626,262 18,351,334 19,392,112

Net Assets 8,089,879 8,340,526 8,587,796 8,856,209 6,996,854 7,381,634 7,595,035 7,837,140

Share capital & reserves 8,089,879 8,340,526 8,587,796 8,856,209 6,996,854 7,381,634 7,595,035 7,837,140

Share capital 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947 1,425,947

Reserves 6,663,933 6,914,579 7,161,849 7,430,262 5,570,908 5,955,687 6,169,088 6,411,193

Summarised Quarterly Statistics

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For the year ended 31st December 31st March

(Rs. ‘Mn) 2004 2005 2006 2007 2008/09 2010 2011 2012 2013 2014

Operating Results

Profit before interest 546 766 1,053 1,399 2,146 1,722 2,047 5,405 4,110 4,321

Profit before tax 236 313 368 406 514 362 741 3,245 1,603 1,289

Profit after tax 165 209 268 328 415 354 664 2,964 1,168 936

Assets

Total assets 4,215 5,927 7,745 7,976 9,451 12,534 21,351 26,398 27,229 32,934

Liabilities

Total Liabilities 3,600 5,321 6,708 6,681 7,776 10,505 17,656 19,635 19,392 24,078

Shareholders’ Funds

Stated capital 121 261 418 418 418 418 1,426 1,426 1,426 1,426

Reserves 494 344 620 878 1,257 1,612 2,269 5,337 6,411 7,430

Shareholders’ funds 615 605 1,038 1,296 1,675 2,030 3,695 6,763 7,837 8,856

Investor Ratios

Long term borrowings to shareholders funds 1.42:1 2.25:1 2.22:1 2.02:1 0.94:1 0.69:1 1.85:1 1.43:1 0.58:1 0.83:1

Total borrowings to shareholders funds 5.38:1 6.18:1 5.63:1 4.1:1 4.64:1 4.55:1 4.19:1 2.73:1 1.87:1 1.62:1

Book value per share (Rs.) -Adjusted 0.10 0.09 0.16 0.20 0.26 0.32 0.58 1.06 1.23 1.39

Earnings per share(Rs.)-Adjusted 0.03 0.03 0.04 0. 05 0.07 0.06 0.10 0.46 0.18 0.15

Return on equity(%) 27 28 26 25 28 19 23 57 16 11

Return on assets(%) 4 4 3 4 2 3 4 12 4 3

Gross dividends(Rs. Mn) 70.58 79.41 70.58 70.58 35.29 - - - - -

Non Financial Information

Number of branches 9 10 11 11 22 26 40 50 53 53

Number of employees 151 188 211 221 276 388 413 511 539 610

Ten Year Summary

166


2007 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000

Sources of income

Lease income 889,209 771,110 510,411 854,536 1,837,041 2,591,200 3,162,957

Hire purchase income 955,694 1,571,718 1,414,179 1,633,327 1,708,993 1,055,987 495,423

Loan income - 7,323 113,129 292,738 732,975 1,330,038 2,645,630

Vehicle hire income 48,380 56,241 42,242 34,133 16,583 13,189 14,046

Factoring income 113,867 270,410 304,777 460,887 830,050 723,414 694,703

Interest on overdue rentals 60,659 147,073 110,733 126,866 191,754 281,793 445,595

Collection from contracts written off 55,843

Other income 23,169 116,001 116,001 177,757 2,205,055 217,184 259,867

2,090,978 2,939,876 2,611,472 3,580,244 7,522,451 6,212,805 7,774,064

Distribution of income

To banks and other lenders 1,000,460 1,640,440 1,362,588 1,309,331 2,167,290 2,514,873 3,039,090

To government as taxation 472,061 166,050 166,050 224,778 366,115 550,047 467,958

To employees as emoluments 134,165 214,870 253,183 381,732 411,034 464,518 571,070

To providers of services 100,162 228,494 386,355 847,652 1,299,046 1,185,150 1,573,991

To shareholders as dividends 70,583 35,292 - - - -

Depreciation 51,012 66,023 52,636 44,047 47,360 57,178 54,546

Provision for doubtful debts 53,527 80,454 85,436 115,414 267,322 272,586 1,131,450

Reserves (including provision for deferred taxation) 209,008 508,253 305,224 657,290 2,964,284 1,168,453 935,959

2,090,978 2,939,876 2,611,472 3,580,244 7,522,451 6,212,805 7,774,064

Sources and Distribution of Income

167


2013/14 (%) 2012/13 (%) (Rs.’000) (Rs. ‘000)

Value addedIncome 7,514,197 5,995,621 Other income 259,867 217,184 7,774,064 6,212,805 Cost of services (1,573,991) (1,185,150)Provision for losses (1,131,450) (272,586) 5,068,623 4,755,069

Distribution of value addedTo employees 11% 10%Remuneration and other benefits 571,070 464,518

To government 9% 11%Income tax,value added tax and VAT on financial services 467,958 550,047

To banks and other lenders 60% 53%Interest and bank charges on borrowings 3,039,090 2,514,873

To expansion and growth 20% 26%

Depreciation 54,546 57,178 Retained profits 935,959 1,168,453 5,068,623 100% 4,755,069 100%

Statement of Value Added

Employees

Government

Banks and other lenders

Expansion and growth

2013/1411%

9%

60%

20%

2012/1310%

11%

53%

26%

168


AAccounTing PoliciesThe specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

AccRuAl bAsisRecognizing the effects of transactions and events when they occur, without waiting for receipt or payment of cash or cash equivalents.

aSSoCiatE ComPany-EqUity AccounTed invesTeeAn associate is an entity in which the investor has significant influence and which is neither a subsidiary nor an interest in a joint venture

availaBlE- FoR-SalE FinanCial AsseTsNon derivative financial assets that are designated as available for sale or are not classified as (a)Loans and receivables,(b) Held to maturity investments or(c) Financial assets at fair value through profit or loss.

ccAsh bAsisRecognising the effects of transactions and events when receipts or payments of cash or cash equivalent occur.

cAsh equivAlenTsShort term highly liquid investment that are readily convertible to known amount of cash and which are subject to an insignificant risk in change in value.

conTingenciesA condition or situation existing on the statement of financial position where the outcome will be confirmed only by occurrence or non occurrence of one or more future event.

coRPoRATe goveRnAnceThe process by which corporate entities are governed. It covers the way in which power is exercised over the

Glossary Terms

management and direction of entity ,the supervision of executive actions and accountability to owners and others.

cRediT RiskCredit Risk is the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms & conditions.

ddefeRRed TAxATionSum set aside for tax in the financial statements that may become payable/receivable in a financial year other than the current financial year.

dePReciATionDepreciation is the allocation of the depreciable amount of an asset over its estimated useful life.

eexecuTionsAdvances granted to customers under leasing, hire purchase and loan facilities.

ffAiR vAlueFair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

finAnciAl AsseTsAny asset that is cash, an equity instrument of another entity or contractual right to receive cash or another financial asset from another entity.

finAnce leAseA contract where by a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortise the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all the risk and rewards incidental to ownership of the asset to the lessee.

finAnciAl liAbiliTyIs a contractual obligation to deliver cash or another financial asset to another entity

ggRoss PoRTfolioTotal rental receivable of the advances granted to customers under leasing, hire purchase and loan facilities.

hhiRe PuRchAseA hire purchase is a contract between hirer and financier where the hirer takes on hire a particular article from the financier, with the option to purchase the article at the conclusion of the agreed rental payments.

iimPAiRmenTAmount by which the carrying amount of an asset or cash generating unit exceeds its recoverable amount.

inTeResT cosTThe sum of monies accrued and payable to the sources of borrowed working capital.

invesTmenT PRoPeRTyinvestment Property is a property (land or a building - or part of a building -or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both rather than for use in the production or supply of goods or services or for administrative purposes or sale in the ordinary course of business.

kkey mAnAgemenT PeRsonnelKey Management Personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly.

169


nneT PoRTfolioTotal rental instalment receivable excluding interest of the advances granted to customers under leasing, hire purchase and loan facilities.

non PeRfoRming PoRTfolioFacilities granted to customers who are in default for more than six months.

ooPeRATing leAseAn operating lease is a lease other than a finance lease.

PPRovisionAmount set aside against possible losses or net receivable of facilities granted to customers, as a result of them becoming partly or wholly uncollectible.

RRelATed PARTiesParties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions.

RelATed PARTy TRAnsAcTionsA transfer of resources or obligations between related parties, regardless of whether a price is charged.

ResiduAl vAlueThe estimated amount that is currently realisable from disposal of asset, after deducting estimated cost of disposal, if the asset was already of the age and in the condition expected at the end of its useful life.

ssegmenTAl AnAlysisAnalysis of information by different products

SHaREHolDERS’ FUnDS(EqUity)Total of issued and fully paid ordinary share capital and reserves.

sTATed cAPiTAlAll amount received by the Company or due and payable to the Company-(a) In respect of the issue of shares , (b) In respect of calls on shares.

subsTAnce oveR foRmThe consideration that the accounting treatment and the presentation in Financial Statements of transactions and the events should be governed by their substance and financial reality and not merely by legal form.

uuneARned incomeUnearned interest is an accounting method used by lending institutions to deal with long-term, fixed-income securities. Initially recorded as a liability, the unearned interest will eventually be recorded as income in the lending institution’s books over the life of the loan as time passes and the interest is earned.

vvAlue AddiTionValue of wealth created by providing leasing and other related services considering the cost of providing such services.

RATiosMethod of computation and indicates

dDEBt to EqUity(gEaRing)RatioTotal debts divided by equity. The extent to which debt contributes to fund total assets, compared to the contribution from equity.

eEaRningS PER SHaRE (EPS)Profit attributable to ordinary shareholders divided by the weighted average number of

ordinary shares outstanding during the year. Share of current year’s earnings attributable to an ordinary shares in use.

iinTeResT coveREarnings before interest and tax divided by interest expense. Ability to cover or service interest charges of the debt holders.

mmARkeT cAPiTAlisATionNumber of ordinary shares in issue multiplied by market value of a share. Total market value of all ordinary shares in issue.

nneT AsseTs vAlue PeR oRdinARy shAReOrdinary shareholders’ funds divided by the number of ordinary shares in issue. Book value of an ordinary share.

non PeRfoRming RATioTotal gross non-performing portfolio divided by total gross portfolio. Percentage of total gross non-performing portfolio against the total gross portfolio.

PPRiCE EaRningS Ratio (PER Ratio)Market price of a share divided by earnings per share (EPS). Number of years that would be taken to recoup shareholders’ capital outlay in the form of earnings.

RREtURn on aSSEtS(Roa)Net profit expressed as a percentage of average total assets. Overall effectiveness in generating profit with available assets; earning power of invested total capital.

REtURn on EqUity (RoE)Net profit, less preference share dividends if any, expressed as a percentage of average ordinary share holders’ funds. Earning power on shareholders’ book value of investment (equity).

170


NOTICE IS HEREBY GIVEN THAT THE 22nd ANNUAL GENERAL MEETING of the above Company will be held on 30th

September 2014 at 11.00am at the LOLC Auditorium, No. 100/1, Sri Jayawardenapura Mawatha, Rajagiriya for the

following purposes:

1. To receive and consider the Report of the Directors and Statement of Accounts for the year ended 31st March, 2014, with the Report of the Auditors thereon.

2. To re-elect as Director Dr. H Cabral, PC who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

3. To re-elect as a Director Mr. P D J Fernando, who retires by rotation in terms of Article 75 of the Articles of Association of the Company.

4. To re-appoint as auditors M/s KPMG, Chartered Accountants at a remuneration to be fixed by the Directors

BY ORDER OF THE BOARDCommercial Leasing & Finance PLC

LOLC Corporate Services (Private) Limited Secretaries

27th August 2014Rajagiriya (in the greater Colombo)

NOTE:1) A member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and vote instead of

him/her. A Proxy need not be a member of the Company

2) The completed Form of Proxy should be deposited at the registered office of the Company, 68, Bauddhaloka Mawatha, Colombo 04, not later than 11.00am on 28th September 2014.

3) A Form of Proxy accompanies this Notice

Notice of Meeting

171


Form of Proxy

I / We ……………………….………………………………………………………………………………………………………………………………..…..................................

of…………………………………………………………………………………………………………………………………….……………………………being a member/

members of the above named Company hereby appoint …..…………………………………………………………………………………………………

………………………………………………………………of …………………………………………………………………………………………………………………………………

… ….whom failing

Mr. Ishara Chinthaka Nanayakkara of Colombo or failing him

Mr. Waduthanthri Dharshan Kapila Jayawardena of Colombo or failing him

Mrs. Kalsha Upeka Amarasinghe of Colombo or failing her

Mr. Priyantha Damian Joseph Fernando of Colombo or failing him

Dr. Harsha Cabral, PC of Colombo or failing him

Mr. Don Manuwelge Don Krishan Thilakaratna of Colombo

as my/our proxy to represent me/us * and vote on my/our behalf at the Annual General Meeting of the Company

to be held on 30th September 2014 and at any adjournment thereof and at every poll which may be taken in consequence of the aforesaid Meeting. For Against

1 To receive and consider the Report of the Directors and Statement of Accounts

for the year ended 31st March, 2014 with the Report of the Auditors thereon.

2 To re-elect as a Director Dr. H Cabral, PC who retires by rotation in terms of Article

75 of the Articles of Association of the Company.

3 To re-elect as a Director Mr. P D J Fernando, who retires by rotation in terms

of Article 75 of the Articles of Association of the Company.

4 To re-appoint as auditors M/s KPMG Chartered Accountants at a remuneration

to be fixed by the Directors

dated this ……….………………….. day of ……………., Two Thousand Fourteen

……………………………………… Signature of Shareholder

NOTE:

1) a proxy need not be a member of the company

2) Instruction as to completion appear on the reverse hereof

172


INSTRUCTIONS AS TO COMPLETION

1 Please return the completed Form of Proxy after filling in legibly your full name and address, signing on the space provided and filling in the date of signature.

2 The completed Form of Proxy should be

deposited at the registered office of the Company, 68, Bauddhaloka Mawatha, Colombo 04 not less than 48 hours before the time appointed for the holding of the Meeting.

Corporate Information

ContentsHighlights of 2013/2014 4Financial Highlights 6Chairman’s Message 10Director’s Review 14Director/Chief Executive Officer’s Review 18Board of Directors 22Management Team 28Regional Management Team 30Operational Review 34Branch Network 39Financial Review 40Sustainability Report 44Corporate Governance 48Risk Management 84

Directors Report 90Audit Committee Report 94Integrated Risk Management Committee Report 95Remuneration Committee Report 96Directors’ Statement on Internal Control over Financial Reporting 97Chief Executive Officer’s and Chief Financial Officer’s Responsibility Statement 98Independent Auditor’s Report 99Statement of Financial Position 100Statement of Comprehensive Income 101Statement of Changes in Equity 102Statement of Cash Flows 103Accounting Policies 105Notes to the Financial Statements 126Shareholder Information 162Summarised Quarterly Statistics 164Ten Year Summary 165Sources and Distribution of Income 166Statement of Value Added 167Glossary 168Notice of the Meeting 170Form of Proxy 171

Name of the Company Commercial Leasing & Finance PLC

Country of Incorporation Sri Lanka

Legal Form A quoted public company with limited liability

Date of Incorporation 22nd April 1988

Company Registration No. PQ 131/PB/PQ

Stock Exchange Listing The ordinary shares of the Company were listed on the Diri Savi Board of the Colombo Stock Exchange on 5th June 2012.

Credit Rating ICRA Lanka assigned the company an issuer rating of (SL)A- (Stable).

Registered Office and Head Office No. 68, Bauddhaloka Mawatha, Colombo 04. Tel: 011 4526500/526 Fax:011 4526 559 Website: www.clc.lk

Directors Mr I C Nanayakkara – Non-Executive Chairman (alternate to W D K Jayawardena) Mr W D K Jayawardena – Non-Executive Director (alternate to I C Nanayakkara) Mrs K U Amarasinghe – Non - Executive Director Mr P D J Fernando – Senior Independent Director Dr H Cabral, PC – Independent Director Mr D M D K Thilakaratne – Executive Director/ CEO

Secretaries Chrishanthi S. Emmanuel, FCIS, FCCS (stepped down w.e.f. 2nd May 2014)

LOLC Corporate Services (Private) Limited (appointed w.e.f. 2nd May 2014) 100/1 Sri Jayewardanapura Mawatha Rajagiriya Tel: 011 5880354/7 0115880880 (general)

Auditors KPMG, Chartered Accountants

Lawyers Julius & Creasy, Attorneys-at-Law Nithya Partners

Registrars PW Corporate Secretarial (Private) Ltd No. 3/17 Kynsey Road, Colombo 8. Tel: 011 4897733-5

Principal Activities During the year the principal activities of the Company com-prised provision of leasing, hire purchase, loans and mobiliz-ing of fixed and savings deposits.

Bankers Bank of Ceylon Standard Chartered Bank PLC Citi Bank N A Hatton National Bank PLC Hongkong and Shanghai Banking Corporation Ltd Deutsche Bank Nation Trust Bank PLC Commercial Bank of Ceylon PLC NDB Bank Seylan Bank PLC MCB Bank Sampath Bank PLC DFCC Vardhana Bank Union Bank of Colombo PLC People’s Bank Habib Bank

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Digital Plates & Printing by Printel (Pvt) LtdPhotography by Taprobane Street & Danush De Costa


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