Notes to the Consolidated Financial Statements - Seylan Bank

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290 North Bound > Seylan Bank Annual Report 2011 Notes to the Consolidated Financial Statements In implementation of new products that invariably rely on technology as well as human involvement, a risk review is an essential aspect that needs both the marketing objectives as well as the Risk Management requirements. The Bank strives to subject such new product introductions to adequate review. The Bank also maintains its policies with regard to access control and data protection and necessary safeguards are constantly introduced and upgraded to ensure the integrity of the information and the data bases. Preventive measures such as firewalls and virus guards among other steps are put in place. (g) Capital Management Capital Adequacy is a measure of a commercial bank’s ability to withstand the associated risks of its business. Regulators find it necessary that every bank holds adequate capital to absorb unexpected losses as a going concern, while they price their products and services to take care of expected risks. Capital Adequacy Ratio (CAR) was measured on the basis of credit and market risk under the Basel I accord and under Basel II, it takes into account the credit, market and operations risks. Keeping with the international standards of Basel Committee on Banking Regulations and Supervisory Practices, Sri Lanka has been following Basel II CAR calculation from January 2008 after conducting parallel calculations in 2007. (g i) Available Capital Basel I and Basel II accords recognise three capital elements, namely, Tier I, Tier II and Tier III capital. Tier I capital includes paid up ordinary share capital, paid up non-cumulative, non-redeemable preference shares, share premium, statutory reserve fund, published retained earnings, general and other reserves, less goodwill. Tier II capital includes 50% of asset revaluation reserves (created by revaluation carried out in every seven years) general provision for advances, hybrid debt/equity instruments and approved subordinated term debts. Tier II capital cannot exceed Tier I capital and subordinated debt cannot exceed 50% of the Tier I capital. Tier III capital will consist only of short-term debt instrument and will be used for calculation of market risk only. Tier III is subject to a maximum of 250% of Tier I capital after meeting the credit and operational risk. Equity investments in unconsolidated banking and financial subsidiaries and investments in capital of other banks/financial associates are deducted from capital in arriving at the capital base. The Bank is required to maintain a minimum total risk-weighted capital ratio of 10% in respect of Domestic Banking Unit (DBU) and Foreign Currency Banking Unit (FCBU) operations. Bank Group Capital Adequacy Details - 31st December 2011 2010 2011 2010 Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Total Tier I Capital 16,625 11,554 17,365 11,936 Total Tier I & II Capital 17,232 13,180 18,011 13,601 Total Risk-Weighted Assets 110,814 109,192 112,628 111,133 Off-Balance Sheet Exposure 5,914 4,934 5,914 5,001 Capital Adequacy Ratios Tier I 15.00% 10.58% 15.42% 10.74% Tier I & II 15.55% 12.07% 15.99% 12.24%
North Bound > Seylan Bank Annual Report 2011 291 3.5.17 New Accounting Standards Issued but not Effective as at Balance Sheet Date The Institute of Chartered Accountants of Sri Lanka (ICASL) has issued a new volume of Sri Lanka Accounting Standards - 2011, applicable for financial periods beginning on or after 1st January 2012. These new Accounting Standards are prefixed both SLFRS and LKAS, which correspond to the relevant IFRS and IAS. These new Standards will be applicable to the Bank from 1st January 2012. The Bank carried out a detailed impact analysis based on the 31st December 2010 account balances. Using these same assumption and methodology the Bank has quantified the potential impact from significant areas of the said Standards. Disclosure requirements arising from SLAS 10.30 and 10.31 have been exempted by the ICASL, however, the Bank has endeavoured to present the key impact areas, in order to inform the users of these financial statements. The disclosures below are based on a preliminary assessment and internal thresholds established to make the required judgments, as at date. Financial Instruments The new LKAS 39 requires all derivative financial instruments to be recorded at fair value on the Balance Sheet. The fair value of derivative financial instruments recognised on the Balance Sheet on transition as at 1st January 2012 will be a net liability of approximately Rs. 6.37 Mn. The additional net liability of approximately Rs. 0.24 Mn. arising on transition resulted in a corresponding net decrease to equity. As required by LKAS 39, 'Impairment of Financial Assets' are to be determined using the incurred loss model based on objective evidence of impairment. Impairment loss is the difference between the carrying amount and the estimated future cash flows discounted at original EIR. In quantifying this impact, individually significant loans will be tested for impairment separately while loans that are not individually significant are collectively assessed for impairment (Portfolio-based impairment) based on credit risk characteristics. The net impact of this process will result in a charge of approximately Rs. 2,455.89 Mn. on transition as at 1st January 2012, net of one significant restricted advance, which is disclosed separately. In addition- • The Restructuring of advances to one significant customer required the preference shares and debentures to be discounted using original effective interest rate since the obligor remains the same. Impairment loss determined of approximately Rs. 225 Mn. will be adjusted with retained earnings. • Equity securities not held for trading are to be classified as Available for Sale and are to be measured at their fair value with the changes in fair value being taken to equity. However, equity securities that are not quoted in an active market and whose fair value cannot be reliably measured can be measured at cost. This would result in approximately Rs. 419.42 Mn. decrease in net assets and retained earnings. • Staff deposits measured at contractual rates of interest, on initial recognition are to be accounted for at their fair value and subsequently will be measured at amortised cost using effective interest rate method. The difference between fair value and transaction price of approximately Rs. 4.73 Mn. at transition date will be amortised over the term of the deposit.
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Notes to the Consolidated Financial Statements - Seylan Bank

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