Part II Accounts and Operations of the Central Bank of Sri Lanka 1. ACCOUNTS AND FINANCE Activity Report of the Monetary Board Advisory Audit Committee during and relating to the Financial Year 2018 1. Introduction Monetary Board Advisory Audit Committee (AAC) is a subcommittee appointed by the Monetary Board. The AAC advises the Monetary Board on policies and matters relating to the financial reporting, internal controls, risk management systems, compliance, whistleblowing, fraud, internal audit, external audit and any other matter assigned by the Monetary Board. The AAC reports its performance and recommendations to the Monetary Board on a quarterly basis and as and when necessary. 2. Composition of AAC The AAC is chaired by an appointed member of the Monetary Board and comprised of two other external audit professionals. The composition of the AAC as at 31.12.2018 was as follows: i. Mr. A N Fonseka - Chairman ii. Mr. H M A Jayesinghe - Member iii. Mrs. A I Mohotti - Member The Secretary to the Monetary Board is the Secretary to the AAC and the Director of the Internal Audit Department is the Assistant Secretary to the AAC. The Internal Audit Department (IAD) provides secretarial facilitation to the AAC. The Audit Superintendent from the National Audit Office in charge of the external audit of the Central Bank of Sri Lanka (CBSL), the Chief Accountant and the Compliance Officer of the CBSL attend the AAC meetings as observers. Heads of Department of the CBSL are invited by the Chairman of the AAC as and when necessary for discussion. The engagement partner of KPMG, being the Audit Firm appointed by the Auditor General to carry out the external audit also attends when the financial statements of the CBSL are discussed. AAC is required to meet at least six (06) times a year or as may be decided by the Chairman of the the AAC or as directed by the Monetary Board. Meetings of the AAC are convened by the Secretary to the Committee. A quorum for a meeting is two (02) including the Chairman. 3. Activities carried out during and relating to the financial year 2018 The AAC held eight (08) meetings in 2018 and major activities carried out are indicated below. a) Financial reporting and external Audit: AAC reviewed, i. the Report of the Auditor General on the Financial Statements of the CBSL for the year 2016, ii. the Interim Issues Memorandum on the audit of Financial Statements of the CBSL for the period ended 30.09.2017, Management Letter for the year 2017, the responses of the management thereto and the recommendations of the External Auditor, iii. the Audit Plan of KPMG for the year 2018, iv. the Interim Issues Memorandum on the audit of Financial Statements of the CBSL for the period ended 31.12.2018 and v. the Financial Statements of the CBSL for the year 2018. b) Internal controls and risk management systems: AAC, i. reviewed and advised on internal controls and risk management systems of the CBSL. ii. reviewed the implementation progress of the AAC recommendations by the respective Heads of Department. Central Bank of Sri Lanka Annual Report - 2018 Part II - 1 Accounts and Operations of the Central Bank of Sri Lanka Part II c) Internal Audit: AAC, i. reviewed the progress of the implementation of the internal audit plan of 2018. ii. reviewed the implementation status of the recommendations made by IAD through Audits. iii. reviewed the internal audit plan for 2019. iv. reviewed and amended the audit results communication methodology. v. reviewed the staff requirement of IAD. Part II - 2 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Central Bank of Sri Lanka Management Statement For the period ended 31 December 2018 Accountability and the Financial Performance of the Central Bank of Sri Lanka in relation to the Objectives The Central Bank was established as the authority follows that the Central Bank’s objectives of economic responsible for the administration, supervision and and price stability and financial system stability need to regulation of the monetary, financial and payment systems be distinguished and detached from the pure profitability of Sri Lanka under the Monetary Law Act. In accordance objective which should essentially be incidental or academic with this Act, the Bank is charged with the responsibility of only. securing the core objectives of economic and price stability and financial system stability. In this background, the Central Bank’s financial statements record gains and/or deficits in the implementation of its The basis of accountability for the Central Bank and monetary policy operations, exchange rate management, the success of its operations therefore would be the issuing of currency, etc. at the values as realized and hence, effectiveness of its policies and operations leading towards the financial performance as reported in these statements the achievement of its core objectives and not necessarily its needs to be interpreted and understood in that context. profitability. These statutory objectives are the fundamental features that distinguish the Central Bank from any other The Bank is subject to an external audit by the Auditor entity, private or public. Accordingly, profitability related General under the Monetary Law Act sections 42 & 43. approach, if adopted by the Central Bank, could result The Auditor General in turn has obtained the services of a in the Bank pursuing profits while compromising its core firm of Chartered Accountants, M/s KPMG, to carry out an objectives, since it has the unique ability to create its own audit under International Standards of Auditing to ensure profits through its monetary policy activities, which could compliance with the International Financial Reporting influence interest rates and exchange rates. It therefore Standards. Central Bank of Sri Lanka Annual Report - 2018 Part II - 3 Accounts and Operations of the Central Bank of Sri Lanka Part II BAF/H/CBSL/1/18/1 03 April 2019 Part II - 4 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Central Bank of Sri Lanka Annual Report - 2018 Part II - 5 Accounts and Operations of the Central Bank of Sri Lanka Part II Part II - 6 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Central Bank of Sri Lanka Statement of Financial Position As at 31 December 2018 2017 Assets Note Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash Equivalents 9 372,175,176 459,827,641 Securities at Fair Value through Profit or Loss 10 37,467,239 45,264,376 Securities at Fair Value through Other Comprehensive Income/Available for Sale 10 694,876,394 566,228,935 Derivative Financial Instruments 11 750 4,940,455 IMF Related Assets 12 147,427,452 126,842,946 Other Receivables 961,284 3,665,700 Total Foreign Currency Financial Assets 1,252,908,295 1,206,770,053 Local Currency Financial Assets Sri Lanka Government Securities 13 45,031,157 9,704,962 Securities Purchased under Resale Agreements 14 229,454,409 22,375,124 Provisional Advances to Government 15 198,632,571 199,800,871 Loans to Banks 16 95,963 223,702 Equity Investments in Financial and Other Institutions 17 1,381,879 41,095 Other Assets 18 14,783,305 12,882,470 Total Local Currency Financial Assets 489,379,284 245,028,224 Total Financial Assets 1,742,287,579 1,451,798,277 Foreign Currency Non-Financial Assets Gold 19 149,683,439 126,583,727 Non-Financial Assets Inventories 20 6,568,935 6,875,533 Other Receivables and Prepayments 1,914,087 1,534,848 Property, Plant and Equipment 21 16,955,854 17,960,517 Intangible Assets 22 30,437 80,623 Total Non-Financial Assets 175,152,752 153,035,248 Total Assets 1,917,440,331 1,604,833,525 Liabilities and Equity Foreign Currency Financial Liabilities Banks and Financial Institutions 23 19,301,160 8,239,544 Derivative Financial Instruments 11 14,056,460 4,648,449 Asian Clearing Union 24 79,158,977 90,981,712 International Monetary Fund 25 416,988,246 318,995,269 Others 26 134,730,933 64,095,889 Total Foreign Currency Financial Liabilities 664,235,776 486,960,863 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions 27 320,106,183 341,712,198 Deposits of Government and Governmental Entities 28 348,718 324,517 Securities Sold Under Repurchase Agreements 29 28,311,221 40,655,278 Balances of Employee Benefit Plans 30 18,333 4,547 Currency in Circulation 31 640,942,510 598,053,901 Other Payables 32 12,606,431 8,887,156 Total Local Currency Financial Liabilities 1,002,333,396 989,637,597 Total Financial Liabilities 1,666,569,172 1,476,598,460 Other Liabilities Deferred Grants 33 11 45 Pension and Other Post Employment Benefit Plans 34 12,016,804 671,061 Miscellaneous Liabilities and Accruals 35 85,945 211,720 Total Other Liabilities 12,102,760 882,826 Total Liabilities 1,678,671,932 1,477,481,286 Equity Capital Funds 50,000,000 50,000,000 Reserves 36 188,768,399 77,352,239 Total Equity 238,768,399 127,352,239 Total Liabilities and Equity 1,917,440,331 1,604,833,525 The accounting policies and notes on pages 11 through 70 form an integral part of the Financial Statements. The Governor and the Chief Accountant of the Central Bank of Sri Lanka authorised these Financial Statements for issue on 29th March 2019 for and signed on behalf of the Monetary Board. ……………………………………… .....……………………………………… Dr. Indrajit Coomaraswamy – Governor U.L. Muthugala - Chief Accountant Central Bank of Sri Lanka Annual Report - 2018 Part II - 7 Accounts and Operations of the Central Bank of Sri Lanka Part II Central Bank of Sri Lanka Statement of Income For the year ended 31 December 2018 2017 Note Rs. 000 Rs. 000 Operating Income : Income from Foreign Currency Financial Assets Interest Income 38 25,556,932 22,914,716 Gain/(Loss) from Unrealized Price Revaluations 39 (18,259,956) 24,000,475 Gain/(Loss) from Realized Price Changes (4,092,390) 2,772,209 Total Income from Foreign Currency Financial Assets 3,204,586 49,687,400 Expenses on Foreign Currency Financial Liabilities Interest Expense 40 (5,350,155) (2,963,231) Expected Credit Losses on Foreign Currency Financial Assets 41 (19,121) - Total Expenses on Foreign Currency Financial Liabilities (5,369,276) (2,963,231) Net Foreign Exchange Revaluation Gain/(Loss) 146,854,048 (3,808,147) Foreign Currency Investment Income 144,689,358 42,916,022 Income from Local Currency Financial Assets Interest Income 38 8,956,322 18,501,748 Gain from Realised Price Changes 117,771 267,180 Interest Expense 40 (2,880,220) (2,676,116) Expected Credit Losses on Local Currency Financial Assets 41 (10,966) - Total Income from Local Currency Financial Assets 6,182,907 16,092,812 Other Income 42 1,692,994 1,602,664 Total Net Operating Income 152,565,259 60,611,498 Operating Expenses: Personnel Expenses: 43 — Salaries and Wages (5,409,137) (4,112,349) — Defined Contribution Plan Costs (1,536,049) (610,489) — Contribution to Post Employment Benefit Plan Costs (205,147) (744,356) (7,150,333) (5,467,194) Depreciation & Amortization (498,189) (518,716) Cost of Inventory (Cost of new currency issue) (3,999,000) (2,850,823) Administration and Other Expenses 44 (1,850,083) (1,305,649) Impairment Charges on Assets (20,650) (274,773) Total Operating Expenses (13,518,255) (10,417,155) Profit Before Tax 139,047,004 50,194,343 Tax 45 (1,119,286) (1,837,976) Profit for the Year 137,927,718 48,356,367 Figures in brackets indicate deductions The accounting policies and notes on pages 11 through 70 form an integral part of the Financial Statements. Part II - 8 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Central Bank of Sri Lanka Statement of Other Comprehensive Income As at 31 December 2018 2017 Rs. 000 Rs. 000 Profit for the Year 137,927,718 48,356,367 Other Comprehensive Income (OCI) Items that are or may be re-classified subsequently to Profit/(Loss) Net Fair Value Loss on Securities at Fair Value through Other Comprehensive Income/ (877,778) (6,843,970) Available for Sale Net Fair Value Gain on Government Securities at Fair Value through Other Comprehensive Income 5,259 - Expected Credit Losses on FVOCI Investments (1,939) - Items that will not be re-classified subsequently to Profit/(Loss) Post-Employment Benefit Plan Cost Recognized in Other Comprehensive Income (11,823,458) 1,741,622 Net Fair Value Gain on Equity Investments at Fair Value through Other Comprehensive Income 122,747 - Total Comprehensive Income 125,352,549 43,254,019 Figures in brackets indicate deductions The accounting policies and notes on pages 11 through 70 form an integral part of the Financial Statements. Central Bank of Sri Lanka Statement of Changes In Equity For the year ended 31 December Contributed Revaluation Other Retained Total Capital Reserve Reserves Earnings (Note 36) Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Balance as at 1 January 2017 50,000,000 9,022,907 30,530,509 (3,910,215) 85,643,201 Net Profit for the year - - - 48,356,367 48,356,367 Transfer to RTGS Sinking Fund - - 273,918 (273,918) - Post Employment Benefit Plans cost recognized in Other - - - 1,741,622 1,741,622 Comprehensive Income Transfer of Net Foreign Exchange Revaluation Loss (IRR) - - (3,808,147) 3,808,147 - Transfer to CBSL Specific Reserve - - - (166,388) (166,388) Net Fair Value Loss on Available for Sale Securities - - (6,843,970) - (6,843,970) Transfer of Funds from Retained Earnings to Market - - 14,028,792 (14,028,792) - Revaluation Reserve Transfer to General Reserve - - 7,462,613 (7,462,613) - Profit appropriation for the year 2016 - Recovery of - - - (1,378,272) (1,378,272) outstanding GOSL obligations from 2016 profit Transfer of Funds to CBSL Employees and Pensioners Distress - - - (321) (321) Relief Fund Transfer to Reserve for funding purposes of Post-Employment Benefits - - 689,025 (689,025) - Balance as at 31 December 2017 50,000,000 9,022,907 42,332,740 25,996,592 127,352,239 Transition Adjustment on IFRS 9 Reclassification Impact - - 1,287,347 - 1,287,347 Transition Adjustment for Expected Credit Losses on - - 65,588 (117,160) (51,572) FVOCI Investments Adjusted Balance as at 1 January 2018 50,000,000 9,022,907 43,685,675 25,879,432 128,588,014 Net Profit for the year - - - 137,927,718 137,927,718 Transfer to RTGS Sinking Fund - - 291,983 (291,983) - Post Employement Benefit Plans cost recognized in Other - - - (11,823,458) (11,823,458) Comprehensive Income Transfer of Net Foreign Exchange Revaluation Gain (IRR) - - 146,854,048 (146,854,048) - Transfer of funds to Technical Advancement Reserve - - 2,000,000 (2,000,000) - Transfer to CBSL Specific Reserve - - - (171,843) (171,843) Net Fair Value Loss on Fair Value through Other Comprehensive Income - - (877,778) - (877,778) Transfer of Funds from Retained Earnings to Market Revaluation Reserve - - 24,337,841 (24,337,841) - Transfer of Funds to General Reserve - - 5,013,869 (5,013,869) - Profit appropriation for the year 2017 - Recovery of outstanding - - - (15,000,000) (15,000,000) GOSL obligations from 2017 profit Transfer of Funds to CBSL Employees and Pensioners Distress Relief Fund - - - (321) (321) Transfer to Reserve for funding purposes of Post-Employment Benefits - - 5,372,178 (5,372,178) - Disposal Gain on Equity Investments Classified at Fair Value through - - (16,289) 16,289 - Other Comprehensive Income Gain on Market Valuation of Government Securities Classified at - - 5,259 - 5,259 Fair Value through Other Comprehensive Income Gain on Market Revaluation of Equity Investments Classified at Fair - - 122,747 - 122,747 Value through Other Comprehensive Income Expected Credit Losses on FVOCI Investments - - (1,939) - (1,939) Transfer to Retained Earnings - - (21,154,178) 21,154,178 - Balance as at 31 December 2018 50,000,000 9,022,907 205,633,416 (25,887,924) 238,768,399 Figures in brackets indicate deductions The accounting policies and notes on pages 11 through 70 form an integral part of the Financial Statements. Central Bank of Sri Lanka Annual Report - 2018 Part II - 9 Accounts and Operations of the Central Bank of Sri Lanka Part II Central Bank of Sri Lanka Statement of Cash Flows For the year ended 31 December 2018 2017 Cash Flows from Operating Activities Note Rs. 000 Rs. 000 Receipts: Interest Received - Foreign Currency 25,346,571 24,380,250 Interest Received - Local Currency - Others 821,348 843,143 Liquidity Management and Trading Income (3,974,618) 2,772,208 Realised Exchange Loss (9,065,597) (14,514,115) Other Income Received 1,605,833 1,607,790 14,733,537 15,089,276 Disbursements: Interest Paid - Foreign Currency 4,855,646 2,740,357 Interest Paid - Local Currency 2,368,605 2,679,274 Payments to Employees 6,765,420 5,245,612 Payments to Suppliers 3,380,162 4,823,628 Tax Paid 1,100,219 902,864 18,470,052 16,391,735 Net Cash Flows used in Operating Activities 46 (3,736,515) (1,302,459) Cash Flows from Investing Activities Receipts: Net Increase in Other Local Currency Financial Assets (2,487,565) (1,524,155) Disposal/Redemption of Investments in Financial & Other Institutes 19,789 - Principal Recoveries from Loans and Advances to Other Institutions 127,584 487,927 Disposal/Redemption of Investments in Debentures 15,178 - Proceeds on disposal of Property, Plant and Equipment 10,284 3,088 Net Decrease in Securities Purchased under Resale Agreements (12,340,173) (29,394,318) (14,654,903) (30,427,458) Disbursements: Net Increase in Foreign Currency Securities 5,592,252 211,673,611 Net Increase/(Decrease) in Other Foreign Currency Financial Assets (263,842) 355,012 Net Increase/(Decrease) in Other Foreign Currency Financial Liabilities (34,064,176) 60,818,636 Net Decrease in Other Local Deposits and Payables (14,311) (155) Purchase of Property, Plant and Equipment net of Grants 104,362 265,725 Purchase of Intangible Assets 25,484 7,432 Net Decrease in Gold Inventory (19,060,015) - Loans and Advances Granted to Other Institutions - 369,684 (47,680,246) 273,489,945 Net Cash Flows generated from/(used in) Investing Activities 33,025,343 (303,917,403) Cash Flows from Financing Activities Receipts :  Issue of Circulating Currency 796,515,572 628,828,164 Withdrawal of Circulating Currency (753,626,964) (583,552,128) Net Issue of Circulating Currency 42,888,608 45,276,036 Disbursments: Net Issues/(Withdrawals) of Circulating Currency on Government Transactions 47 233,216,924 (220,649,290) Net Issues/(Withdrawals) of Circulating Currency on Transactions with Banks and Financial Institutions 48 23,010,511 (38,460,908) Net Issues/(Withdrawals) of Circulating Currency 256,227,435 (259,110,198) Net Increase/(Decrease) in Circulating Currency (213,338,827) 304,386,234 Disbursements: Repayment of Foreign Currency Term Liabilities (39,813,671) (28,666,576) Payments to Other Funds 321 321 Payments to Pension Fund - 261,625 Transfer of Profits to Consolidated Fund 14,227,097 - (25,586,253) (28,404,630) Net Cash Flows from Financing Activities (187,752,574) 332,790,864 Net Increase/(Decrease) in Cash and Cash Equivalents (158,463,746) 27,571,002 Exchange Rate Effect on Cash and Cash Equivalents 70,882,845 8,472,902 Cash and Cash Equivalents at the Beginning of the Year 459,827,641 423,783,737 Cash and Cash Equivalents as at 31 December 9 372,246,740 459,827,641 Figures in brackets indicate deductions The accounting policies and notes on pages 11 through 70 form an integral part of the Financial Statements. Part II - 10 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Central Bank of Sri Lanka 2. BASIS OF PRESENTATION OF FINANCIAL Notes to the Financial Statements STATEMENTS For the year ended 31 December 2018 2.1 Statement of Compliance These financial statements of the Bank for the year 1. REPORTING ENTITY AND STATUTORY BASE ended 31 December 2018 have been prepared in accordance with International Financial Reporting The Central Bank of Sri Lanka (“Bank” or “CBSL”) is an Standards (IFRS). institution established under the Monetary Law Act No. 58 of 1949 of Sri Lanka as amended (“MLA”), as the This is the first set of the Financial Statements presented authority responsible for the administration, supervision after the first time adoption of IFRS 9 – “Financial and regulation of monetary, financial and payment system Instruments” and IFRS 15 – “Revenue from Contracts with of Sri Lanka. The Bank is domiciled in the Democratic Customers”. Changes to significant accounting policies Socialist Republic of Sri Lanka and situated at No: 30, are described in Note 4. Janadhipathi Mawatha, Colombo 01. 2.2 Basis of Measurement These financial statements were authorised for issue by the Governor and Chief Accountant for and on behalf of The financial statements are prepared on the the Monetary Board on 29th March 2019. historical cost basis, except for the following, 1.1 Principal Activities • Gold is measured at fair value through profit or loss (FVTPL). The Monetary Board of the CBSL is, in addition to determining the policies or measures authorized to be • Derivative financial instruments and non- adopted or taken under Monetary Law Act No. 58 of 1949 derivative financial instruments held at fair of Sri Lanka as amended, vested with the powers, duties value through profit or loss (FVTPL) and fair and functions of the CBSL and are generally responsible value through other comprehensive income for the management, operations and administration (FVOCI) are measured at fair value. of the Bank. The Bank is primarily responsible for the • Land and buildings are measured at cost administration, supervision, regulation of monetary, at the time of acquisition and subsequently financial and payment system of Sri Lanka and also acts at revalued amounts less accumulated as the fiscal agent of the Government. The activities of depreciation and impairment losses. the bank mainly include: • Implementing monetary and exchange rate • Liability for defined benefit obligations is polices. measured as the present value of the defined • Issuing of currency. benefit obligation less the fair value of the plan assets. • Facilitating free competition and stability in the financial system. 2.3 Reporting Format • Licensing and supervision of defined financial institutions. The Bank presents financial assets and financial liabilities, and their associated income and expense • Organization and management of the inter-bank streams, by distinguishing between foreign currency settlement system and promotion of the smooth and local currency operations. In the Statement of functioning of the payment system. Financial Position, assets and liabilities are presented • Providing loans and advances to the Government, broadly in order of liquidity within such distinguished bank and financial institutions under various categories. The Bank considers that this reporting facilities. approach provides appropriate reporting of the • Acting as a depository of the Government under Bank’s activities which are more fully described in specific arrangements with Government and Note 7. agencies acting on behalf of the Government. 2.4 Functional and Presentation Currency The activities carried out in order to achieve its objective of economic, price and financial system stability with a The Financial Statements are presented in Sri Lankan view to encouraging and promoting the development Rupees (LKR), which is the Bank’s functional currency. of the productive resources of Sri Lanka can be broadly Financial information presented in Sri Lankan Rupees segregated into foreign currency and local currency has been rounded to the nearest thousand. There was activities. Results of these activities are taken to Operating no change in the Bank’s presentation and functional Activities in the context of the Statement of Income. currency during the year under review. Central Bank of Sri Lanka Annual Report - 2018 Part II - 11 Accounts and Operations of the Central Bank of Sri Lanka Part II 2.5 Materiality and Aggregation making assumptions about discount rates, future compensation increases, mortality rates and future Each material class of similar item is presented separately pension increases. Due to the long-term nature of these in the Financial Statements. Items of dissimilar nature plans, such estimates are subject to significant uncertainty. or function are presented separately unless they are Assumptions used in the actuarial valuation are disclosed immaterial. in Note 34 to the Financial Statements. 2.6 Offsetting 3.3 Fair Value of Financial Instruments Financial assets and liabilities are offset and the net Where the fair values of financial assets and financial amount presented in Statement of Financial Position liabilities recorded on the Statement of Financial when, and only when, the Bank has a legal right to set Position cannot be derived from active markets, they are off the recognized amounts and it intends either to settle determined using a variety of valuation techniques that on a net basis or to realise the asset and settle the liability include the use of mathematical models. The inputs to simultaneously. these models are derived from observable market data where possible, but if this is not available, judgment is 2.7 Comparative Information required to establish fair values. The judgments include The comparative information is reclassified whenever considerations of liquidity and model inputs such as necessary to conform with the current year’s presentation. volatility for longer–dated derivatives. 4. CHANGES TO SIGNIFICANT ACCOUNTING 3. USE OF ESTIMATES AND JUDGMENTS POLICIES The preparation of the Bank’s financial statements There were no changes to the accounting policies and requires management to make judgements, estimates and accounting policies adopted are consistent with those of assumptions that affect the reported amount of revenues, the previous financial year, except for the IFRS 9 and IFRS expenses, assets and liabilities, and the accompanying 15 related policies mentioned in detail below. disclosures, as well as the disclosure of contingent liabilities. 4.1 IFRS 9 Financial Instruments Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to The financial statements of the Bank have been prepared the carrying amount of assets or liabilities affected in based on the new accounting policies and methods which future periods. have been revised in line with the requirements of the IFRS 9 - Financial Instruments. The Bank complied with IAS 39, Estimates and underlying assumptions are reviewed on Financial Instruments: Recognition and Measurement up an ongoing basis. Revisions to estimates are recognized to 31 December 2017, in the preparation of its annual prospectively. Information about judgements made Financial Statements. in applying accounting policies that have the most significant effects on the amounts recognized in the Changes to Classification and Measurement financial statements are described in the following notes. IFRS 9 requires all financial assets, except equity 3.1 Classification and Impairment of Financial instruments and derivatives, to be assessed based on a Assets (Applicable from 1 January 2018) combination of the entity’s business model for managing the assets and the instruments’ contractual cash flow The Bank used judgements when assessing the business characteristics. The IAS 39 measurement categories of model within which the assets are held and whether the financial assets (fair value through profit or loss (FVTPL), contractual terms of the financial assets are Solely Payment available for sale (AFS), held to maturity, loans and of Principal and Interest (SPPI) on the principal amount of receivables) have been replaced by: the outstanding. The Bank also used judgements when establishing the criteria for determining whether credit • Financial Assets at amortized cost risk on the financial assets has increased significantly since initial recognition, determining methodology • Debt Securities at Fair Value through Other for incorporating forward looking information into Comprehensive Income (FVOCI), with gains or measurement of Expected Credit Losses (ECL) and losses recycling through Statement of Income on selection and approval of models to measure ECL. derecognition 3.2 Pensions and Other Post Employment Benefit • Equity instruments at FVOCI, with no recycling of gains or Plans losses through Statement of Income on derecognition The cost of defined benefit plans is determined using • Financial assets at fair value through profit or loss an actuarial valuation. The actuarial valuation involves (FVTPL) Part II - 12 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka The accounting for financial liabilities remains largely the 5.1 Foreign Currency Translations and Balances same as it was under IAS 39. The Bank’s classification of its financial assets and liabilities and quantitative impact Transactions in foreign currencies are translated to Sri of applying IFRS 9 as at 1 January 2018 is disclosed in Lankan Rupees at the rate of exchange prevailing at the Note 8. dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date Changes to the Impairment Calculation are translated to Sri Lankan Rupees at the rate of exchange prevailing at the reporting date. The foreign currency The adoption of IFRS 9 has changed the Bank’s translation gain or loss on monetary items are taken to the accounting for impairments on financial assets by Statement of Income. For the purposes of retranslation, replacing the incurred loss approach of IAS 39 with a as at the reporting date, the following Sri Lankan Rupee forward-looking expected credit loss (ECL) approach. exchange rates for major currencies were used: Detailed explanation of how the Bank has applied the impairment requirements of IFRS 9 is disclosed in Note 2018 2017 Currency 5.3.4 Rs. Rs. 1 Australian Dollar 128.8113 119.3796 Transition 1 Canadian Dollar 134.0153 121.8598 Changes in accounting policies resulting from the 1 Euro 209.5593 183.1353 adoption of IFRS 9 have been applied retrospectively, 1 Japanese Yen 1.6661 1.3580 except as described below: 1 Special Drawing Rights (SDR) 253.5111 217.1608 1 Sterling Pound 233.0792 206.5221 • The Bank has not restated the comparative 1 United States Dollar 182.7499 152.8548 information for 2017 for financial instruments in 1 Chinese Yuan (Offshore) 26.5988 23.4847 the scope of IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and is not comparable to the information presented for Non-monetary items that are measured in terms of 2018. Differences arising from the adoption of IFRS historical cost in a foreign currency are translated using 9 have been recognized directly in retained earnings the exchange rate at the date of the transaction. as of 1 January 2018 and are disclosed in Note 8 to 5.2 Fair Value Measurement these financial statements. The Bank measures financial instruments, such as, foreign • The following assessments have been made on the securities, derivatives and non-financial assets such as basis of the facts and circumstances that existed at Gold, at fair value at each reporting date. The fair values the date of initial application. of financial instruments measured at amortised cost are – The determination of the business model within disclosed in Note 53. which a financial asset is held. Fair value is the price that would be received to sell an – The designation of certain investments made asset or paid to transfer a liability in an orderly transaction in equity instruments as per the Section 105 A between market participants at the measurement date. of the Monetary Law Act which are not held for The fair value measurement is based on the presumption trading as at FVOCI. that the transaction to sell the asset or transfer the liability takes place either: 4.2 IFRS 15 – Revenue from Contracts with Customers • In the principal market for the asset or liability, or IFRS 15 establishes a comprehensive framework for • In the absence of a principal market, in the most determining, how much and when revenue is recognized. advantageous market for the asset or liability It replaced IAS 18 – “Revenue”, IAS 11 – “Construction The principal or the most advantageous market must be Contracts“ and related interpretations. However, the accessible by the Bank. timing or amount of the Bank’s fee and commission income from contracts with customers was not impacted The fair value of an asset or a liability is measured by the adoption of IFRS 15. Accordingly, there was no using the assumptions that market participants would impact on adoption of the said standard. use when pricing the asset or liability, assuming that market participants act in their economic best interest. 5. SIGNIFICANT ACCOUNTING POLICIES A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate The accounting policies have been applied consistently by economic benefits by using the asset in its highest and the Bank, except for the changes in accounting policies best use or by selling it to another market participant that described in Note 4. would use the asset in its highest and best use. Central Bank of Sri Lanka Annual Report - 2018 Part II - 13 Accounts and Operations of the Central Bank of Sri Lanka Part II The Bank uses valuation techniques that are appropriate or sales of financial assets that require delivery of assets in the circumstances and for which sufficient data are within the time frame generally established by regulation available to measure fair value, maximizing the use of or convention in the market place. relevant observable inputs and minimizing the use of unobservable inputs. 5.3.2 (A) Classification All assets and liabilities for which fair value is measured Policy applicable from 1 January 2018 or disclosed in the financial statements are categorised Financial Assets within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the On initial recognition, Bank classifies the financial assets fair value measurement as a whole: as measured at; Level 1 — Quoted (unadjusted) market prices in active • Amortized Cost markets for identical assets or liabilities • Fair Value through Other Comprehensive Income (FVOCI) Level 2 — Valuation techniques for which the lowest level input that is significant to the fair • Fair Value through Profit or Loss (FVTPL) value measurement is directly or indirectly observable. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as Level 3 — Valuation techniques for which the lowest at FVTPL level input that is significant to the fair value • The asset is held within a business model whose measurement is unobservable. objective is to hold assets to collect contractual For assets and liabilities that are recognised in the cash flows; and financial statements on a recurring basis, the Bank • The contractual terms of the financial asset give determines whether transfers have occurred between rise on specified dates to cashflows that are Solely Levels in the hierarchy by re-assessing categorisation Payment of Principle and Interest. (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each A financial asset is measured at FVOCI only if it meets reporting period. both of the following conditions and is not designated as at FVTPL. 5.3 Financial Assets and Financial Liabilities • The asset is held within a business model whose The Bank presents financial assets and liabilities, and the objective is achieved by both collecting contractual associated income and expense streams, by distinguishing cash flows and selling financial assets; and between foreign currency and local currency activities. • The contractual terms of the financial asset give Foreign currency activities mainly arise from the Bank’s rise on specified dates to cashflows that are Solely foreign reserves management function. Local currency Payment of Principle and Interest. activities mainly reflect the assets and liabilities associated with monetary policy implementation, issuing currency On initial recognition of an equity investment that is and banking activities. not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. All other The separate reporting of these activities is considered financial assets are classified as measured at FVTPL. to provide a better presentation of the Bank’s financial position, financial performance and risk profile. The Bank Business Model Assessment considers that the combined reporting of foreign and local currency activities would weaken the informational The Bank makes an assessment of the objective of a value of the financial statements. business model in which an asset is held at a portfolio level because this best reflects the way the business is 5.3.1 Recognition and Initial Measurement managed and information is provided to management. The information considered includes but not limited to: All financial assets and liabilities are initially recognised • How the performance of the business model and at cost, being the fair value of the consideration given the financial assets held within that business model and including acquisition charges associated with the are evaluated and reported to the entity’s key investment. Subsequent measurement bases for individual management personnel. line items of financial assets after initial recognition are described after the policies applicable from 01 January • The risks that affect the performance of the 2018. All regular way purchases and sales of financial business model (and the financial assets held assets and liabilities are recognised on the trade date within that business model) and, in particular, the respectively. Regular way purchases or sales are purchases way those risks are managed. Part II - 14 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka • The frequency, volume and timing of sales in • At fair value through profit or loss and within the prior periods, the reasons for such sales and its category as, expectations about future sales activity. However, information about sales activity is not considered • Held for Trading or in isolation, but as part of an overall assessment of • Designated at fair value through profit or loss. how the Bank’s stated objective for managing the financial assets is achieved and how cash flows Financial Liabilities are realized. The Bank classifies its financial liabilities, as measured at Financial assets that are held for trading or managed and amortized cost. whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held 5.3.3 Derecognition to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Financial Assets Assessment of whether Contractual Cash Flows are Bank derecognizes a financial asset when the contractual Solely Payments of Principal and Interest rights to the cash flows from the financial asset expire or it transfers the rights to receive the contractual cash flows The Bank assesses the contractual terms of Financial in a transaction in which substantially all of the risks and Assets to identify whether they meet the SPPI test. For the rewards of ownership of the financial asset are transferred purpose of this assessment, ‘Principal’ is defined as the or in which the Bank neither transfers nor retains fair value of the financial asset at initial recognition and substantially all of the risks and rewards of ownership and “Interest” is defined as consideration for the time value of it does not retain control of the financial asset. money and for the credit risk associated with the principal amount outstanding during a particular period of time On derecognition of a financial asset, the difference and for other basic lending risks and costs. between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) The most significant elements of interest within a lending and the sum of (i) the consideration received (including arrangement are typically the consideration for the any new asset obtained less any new liability assumed) time value of money and credit risk. To make the SPPI and (ii) any cumulative gain or loss that had been assessment, the Bank applies judgement and considers recognised in OCI is recognised in profit or loss. relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest From 1 January 2018 any cumulative gain/loss rate is set. recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or In contrast, contractual terms that introduce a more loss on derecognition of such securities. Any interest in than the minimum exposure to risks or volatility in the transferred financial assets that qualify for derecognition contractual cash flows that are unrelated to a basic that is created or retained by the Bank is recognised as a lending arrangement do not give rise to contractual cash separate asset or liability. flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset The Bank enters into transactions whereby it transfers is required to be measured at FVTPL. assets recognized on its Statement of Financial Position, but retains either all or substantially all of the risks and Reclassifications rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognized. Financial assets are not reclassified subsequent to their Examples of such transactions are securities lending and initial recognition, except in the period after the Bank sale and repurchase transactions. In transactions in which changes its business model for managing financial assets. the Bank neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset 5.3.2 (B) Classification and it retains control over the asset, the Bank continues Policy applicable before 1 January 2018 to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is Financial Assets exposed to changes in the value of the transferred asset. The Bank classified financial assets in one of the following Financial Liabilities categories under IAS 39, The Bank derecognizes a financial liability when its • Loans and Receivables contractual obligations are discharged or cancelled, or • Held to Maturity expired. • Available for Sale or Central Bank of Sri Lanka Annual Report - 2018 Part II - 15 Accounts and Operations of the Central Bank of Sri Lanka Part II 5.3.4 (A) Impairment of Financial Assets (Policy Loss Given Default (LGD): The Loss Given Default is applicable from 1 January 2018) an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference The Bank recognises loss allowances for ECL on the between the contractual cash flows due and those that following financial instruments that are not measured at the lender would expect to receive, including from the FVTPL: realisation of any collateral. The Bank has an approved internal policy in applying the LGD for different types of • Financial Assets at Fair Value through Other financial assets based on their risk exposure to the bank. Comprehensive Income Economic Factor Adjustment: Bank uses the Economic • Financial Assets at Amortized Cost Factor Adjustment for the conversion of Through the Cycle • Credit guarantee contracts of Regional Development PD to Point in Time PD and the Bank mainly uses GDP Department data as the main economic factor in stimulating the PD. No impairment loss is recognized on equity investments. Assessing the Significant Increase in Credit Risk (SICR) The Bank measures loss allowances at an amount equal Bank will consider that the financial instruments have to 12 months ECL for investments which are in investment significant increase in credit risk (SICR) when doubling of grade (rated Baa3/BBB- and above). Majority of the PD has occurred from initial recognition and any rating investments of the bank which are classified as Fair Value downgrade below BBB- after initial recognition. This is through Other Comprehensive Income and Amortized based on the observation that all ratings downgrades from cost are above Baa3/BBB- rate. Financial instruments for an investment grade rating to a non-investment grade which a 12-month ECL is recognised are referred to as rating, including the marginal one notch downgrade from ‘Stage 1 financial instruments’. Baa3 to Ba1, results in a two-fold or greater increase of PD. Life time ECL is calculated for those instruments which are below the investment grade at initial recognition Credit-impaired financial assets or whose credit risk deteriorates below Baa3/BBB- or At each reporting date, the Bank assesses whether financial when a doubling of the probablity of default has ocurred assets carried at amortized cost, at FVOCI, and credit after initial recognition. Financial instruments for which guarantees, are credit-impaired (referred to as ‘Stage 3 a lifetime ECL is recognised but which are not credit- financial assets’). A financial asset is ‘credit-impaired’ impaired are referred to as ‘Stage 2 financial instruments’. when one or more events that have a detrimental impact Life time ECL would also be computed for credit impaired on the estimated future cash flows of the financial asset assets which would be referred to as ‘Stage 3 financial have occurred. Evidence that a financial asset is credit- instruments’. impaired includes the following observable data: Measurement of ECL • significant financial difficulty of the borrower or issuer; The mechanism of the ECL calculations are outlined below with the key elements. • a breach of contract such as a default or past due event; Probability of Default (PD): The Probability of Default • it is becoming probable that the borrower will enter is an estimate of the likelihood of default over a given bankruptcy or other financial reorganization time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been Presentation of allowance for ECL in the Statement previously derecognized and is still in the portfolio. The of Financial Position bank uses specific equity PD’s of issuers/counterparties from Bloomberg for all its foreign investments at FVOCI Loss allowances for ECL are presented in the Statement of and amoritzed cost and in the absence of equity PDs, Financial Position as follows: the PD’s applicable to the rating of the specific issuer/ • Financial assets measured at amortised cost: as a counterparty from the Bloomberg common PD table at a deduction from the gross carrying amount of the given reporting date. assets. Exposure at Default: The Exposure at Default is an • Investments measured at FVOCI: no loss allowance estimate of the exposure at a future default date, taking is recognised in the Statement of Financial Position into account expected changes in the exposure after the because the carrying amount of these assets is their reporting date, including repayments of principal and fair value. However, the loss allowance is disclosed interest, whether scheduled by contract or otherwise, and is recognised in Other Comprehensive Income. expected draw downs on committed facilities and accrued interest from missed payments. • Credit guarantee contracts: generally, as a provision. Part II - 16 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Write-off instruments classified as available for sale were not recognized in profit. Reversals of impairment losses on Loans and debt securities are written off (either partially debt instruments were reversed through the Statment of or in full) when there is no reasonable expectation of Income, if the increase in fair value of the instrument recovering a financial asset in its entirety or a portion can be objectively related to an event occurring after the thereof. This is generally the case when the Bank impairment loss was recognized in Statment of Income. determines that the borrower does not have assets or sources of income that could generate sufficient cash 5.4 Financial Assets at Fair Value through Profit flows to repay the amounts subject to the write-off. This or Loss assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included Financial assets classified as held for trading are included in ‘impairment losses on financial instruments’ in the in the category “securities at fair value through profit or Statement of Income and OCI. loss”. Upon initial recognition, attributable transaction costs are recognized in the Statment of Income as 5.3.4 (B) Impairment of Financial Assets (Policy incurred. These securities are subsequently valued at applicable before 1 January 2018) quoted market prices. Changes in market values are recognised as an increase or decrease in the value of The Bank assessed at each reporting date whether a the securities in the Statement of Financial Position while financial asset is impaired. If there was objective evidence resulting gains and losses are recognised in the Statement that an impairment loss on loans and receivables carried of Income. at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s Where the security is still owned, the gain or loss is reported carrying amount and the present value of estimated future as “Gain/(Loss) from Unrealised Price Revaluations”. cash flows (excluding future credit losses that have not Where the gain or loss has been realised (through selling been incurred) discounted at the financial asset’s original the security), it is reported as “Gain/(Loss) from realised effective interest rate (i.e. the effective interest rate Price Revaluations”. computed at initial recognition). The carrying amount of 5.5 Financial Assets at Fair Value through Other the asset shall be reduced either directly or through use of an allowance account. The amount of the loss shall be Comprehensive Income recognized in the Statement of Income. Investments at Fair Value through Other Comprehensive The Bank first assessed whether objective evidence of Income are non-derivative investments that are designated as Fair Value through other Comprehensive Income or impairment exists individually for financial assets that are are not classified as another category of financial assets. individually significant, and individually or collectively for Investments at Fair Value through other Comprehensive financial assets that are not individually significant. If it Income comprise equity securities and debt securities. is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether Foreign and Local Currency debt securities at Fair Value significant or not, the asset is included in a group of through Other Comprehensive Income are subsequently financial assets with similar credit risk characteristics valued at quoted market prices. Changes in market value and that group of financial assets is collectively assessed are recognised as an increase or decrease in the value of for impairment. Assets that are individually assessed the Investments at Fair Value through Other Comprehensive for impairment and for which an impairment loss is or Income in the Statement of Financial Position. continues to be recognized are not included in a collective assessment of impairment. The equity investments at Fair Value through Other Comprehensive Income are subsequently valued based If, in a subsequent period, the amount of the impairment on the Net Assets of the respective institutions due to the loss decreased and the decrease can be related non-availability of quoted prices. objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss Gains and losses arising from changes in the market was reversed. Any subsequent reversal of an impairment value of Foreign and Local Currency debt securities loss was recognized in the Statement of Income, to the and Equity Investments at Fair Value through Other extent that the carrying value of the asset did not exceed Comprehensive Income are recognised directly in equity its amortized cost at the reversal date. (Other Comprehensive Income) which is shown under Other Reserves in the Statement of Financial Position until If an Available for Sale asset was impaired, an amount the investment is sold, collected or otherwise disposed comprising the difference between its cost (net of any of, or until the investment is determined to be impaired, principal payment and amortization) and its current fair at which time the cumulative gain or loss previously value, less any impairment loss previously recognized in reported as equity is included in Statement of Income with the Statement of Income, was transferred from equity to the exception of fair value changes in equity investments the Statement of Income. Reversals in respect of equity which will not be recycled to Statement of Income upon Central Bank of Sri Lanka Annual Report - 2018 Part II - 17 Accounts and Operations of the Central Bank of Sri Lanka Part II derecognition. Income. Interest income is recognised in Statement of Income 5.9 Cash and Cash Equivalents using the effective interest method. Cash and cash equivalents comprise cash at foreign 5.6 Instruments held at Amortized Cost banks and financial institutions, short-term deposits and highly liquid financial assets with original maturities of The items classified as Loans and Receivables and Held less than three months, which are subject to insignificant to Maturity instruments under IAS 39 are classified as risk of changes in their fair value, and are used by the Amortized Cost instruments under IFRS 9 and include Bank in the management of its short-term commitments. loans given to banks/government and investments with Cash and cash equivalents are carried at amortized cost fixed or determinable payments and fixed maturity that in the Statement of Financial Position. the bank has the positive intent and ability to hold to maturity. These instruments are subsequently measured at As a part of local currency activities CBSL generates amortized cost using the effective interest method. certain income and incurs expenses, which do not involve in movement of cash. Those activities result in 5.7 Derivative Instruments certain assets and liabilities and mainly comprise of the transactions with the Government of Sri Lanka (GOSL) and The Bank uses derivatives such as cross currency swaps, transactions with domestic banks and financial institutions. currency options, forward foreign exchange contracts, Transactions with GOSL include the purchase of Treasury for risk management purposes and not for speculative bills and bonds that are issued by the Government as a purposes. Derivatives are recorded at fair value and monetary policy mechanism. Such purchases, disposals carried as assets when their fair value is positive and as or interest thereon are reflected as mere book entries in liabilities when their fair value is negative. Changes in the the records of CBSL. These are disclosed separately in fair value of derivatives are included in ‘Gain/(Loss) from Unrealized Price Revaluations’. Note 47 and Note 48 to the Financial Statements. As the sole statutory authority, CBSL issues currency to When the transaction price differs from the fair value of the public in line with Monetary Law Act. Currency issued other observable current market transactions in the same by CBSL represents a claim on the bank in favor of the instrument, or based on a valuation technique whose holder. This is a liability on the part of the CBSL while it variables include only data from observable markets, is an item of cash in the hands of the holder. Movement the bank immediately recognises the difference between in circulation currency is included as part of financing the transaction price and fair value (a Day 1 difference) activities in line with prevailing industry practices among in ‘Gain/(Loss) from Unrealized Price Revaluations’. In those central banks which present cash flow statements. cases where fair value is determined using data which is not observable, the difference between the transaction CBSL through the cash/pay order process disburses cash price and model value is only recognised in the Statement in the form of notes and coins or cheques drawn on CBSL, of Income when inputs become observable, or when the to various drawees including suppliers and employees for instrument is derecognised. goods and services obtained, which is either added to the currency in circulation liability or deposits by banks and 5.8 International Monetary Fund (IMF) Related financial institutions. Such forms of utilization of currency Balances for the purposes of CBSL’s payments form part of cash The Bank transacts with the International Monetary Fund outflows of CBSL. (IMF) in its own right rather than as the depository of the For the purposes of the Statement of Cash Flows, cash Government of Sri Lanka. All transactions by the bank with and cash equivalents consist of cash and cash equivalents the IMF have been included in these financial statements on that basis. as defined above, net of cash/pay order outflows. The bank records the quota with the IMF as an asset and 5.10 Repurchase and Reverse-Repurchase the amount payable to the IMF for quota is recorded as a Transactions liability of the bank. The cumulative allocation of SDRs by the IMF is treated as a liability. All the IMF related assets Securities sold under agreements to repurchase continue and lliabilities are recognized at amortised cost using to be recorded as assets in the Statement of Financial the effective interest method. Exchange gains and losses Position. The obligation to repurchase (Securities Sold arising on revaluation of IMF assets and liabilities at the under Agreements to Repurchase) is recognised as a exchange rate applying at reporting date as published by liability. The difference between the sale and repurchase the IMF are recognised in the Statement of Income. price in repurchase transactions and the purchase price and sale price in reverse-repurchase transactions All other charges and interest pertaining to balances with represents an expense and income respectively and the IMF are recorded immediately in the Statement of recognised in the Statement of Income. Part II - 18 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Securities held under reverse-repurchase agreements of agreed fee and on compensation at market rate (as are recorded as an asset in the Statement of Financial per the market rates communicated to the primary market Position (Securities Purchased under Resale Agreements). participants by the Public Debt Department of the Bank) Both repurchase and reverse-repurchase transactions in events of any failure in delivery. are reported at amortized cost inclusive of any accrued income or expense. The market values of the securities borrowed and not used for the repurchase operations at a particular time 5.11 Standing Deposit and Lending Facilities are recorded as a contingent liability. The commission paid is expensed on accrual basis. With effect from 1 February 2014, Standing Deposit Facility (former Standing Repurchase (Repo) Facility) was Transfer of securities to counterparties under lending converted in to a ‘clean deposit’ with no allocation of transactions is only reflected on the Statement of Financial collateral. Hence, participating institutions invest their Position if the risks and rewards of ownership are also excess funds in the Standing Deposit Facility as a clean transferred. deposit on daily basis at standing deposit facility rate. The procedures of Standing Lending Facility (Formerly 5.17 Staff Loans Standing Reverse Repurchase (Reverse Repo) Facility) are identical to the Standing Reverse Repurchase Facility and Bank employees are entitled to loan facilities under the both are recognized at amortized cost in the Statement concessionary interest rates. These loans which were of Financial Position. granted from 2008 onwards are fair valued as per IFRS 9 using discounted cash flows. 5.12 CBSL Securities Discount rate - The rate compiled by the Economic The Bank issues CBSL Securities from time to time under Research Department of CBSL (ERD) based on the its Monetary Policy operations to absorb excess liquidity long term inflation target on USD –Commercial Interest in the market. Reference Rate (CIRR) plus 1 per cent added for the risk premium as agreed by the Audit Committee of the Bank The securities issued are recorded as a liability. The is used as the discount rate and it varies with the period difference between the issue price and the face value is of the loans. recorded as an expense in the Statement of Income. The difference between the present value of the staff 5.13 Sri Lanka Government Securities loan as at the end of a year and beginning of the year have been amortized yearly to record the expense Sri Lanka Government Securities consists of Treasury incurred by the Bank in providing these loans at bills purchased from GOSL. Investments in Sri Lanka concessionary rates and equivalent amount is recorded Government Securities is recorded in the Statement as other income to record the income that would have of Financial Position at Fair Value through Other been earned by the bank if these loans were granted Comprehensive Income. at market rates. 5.14 Provisional Advances to Government Assumptions used for computation of fair valuation Advances to Government represents direct provisional • The date of staff loan granted is considered as 1 advances made to GOSL under Section 89 of the January. Monetary Law Act No.58 of 1949 of Sri Lanka, as amended. These advances are subsequently measured at • There were no amendments or early settlements. amortized cost. 5.15 Loans to Other Institutions 5.18 Gold Loans granted to Other Institutions are recognized and Section 67 (1) of the Monetary Law Act which specifies carried at amortized cost. the composition of the International Reserve indicates that gold may be held by the CBSL as part of this Reserve. 5.16 Securities Borrowings and Securities Lending Section 67 (2), Monetary Board is required to endeavor Bank borrows Government Securities from time to to hold at least a nuclear reserve in gold or currencies time under its Monetary Policy operations from major freely convertible by the Central Bank, whether directly or institutional investors. The borrowed securities are used indirectly, in to gold as per the MLA. As this gold is part by the bank for repurchase operations to absorb excess of the International Reserve and not used as a commodity liquidity in the market. which is traded during the normal course of business, gold is fair valued and the gains or losses are transferred The securities borrowings is an unconditional blanket to the Statement of Income. Prior to appropriation of guarantee from the Bank for return of securities, payment profits, the unrealised gains from gold are transferred to Central Bank of Sri Lanka Annual Report - 2018 Part II - 19 Accounts and Operations of the Central Bank of Sri Lanka Part II the relevant reserve account. Position, except to the extent that it reverses a revaluation decrease of the same asset previously recognized in 5.19 Inventories Statement of Income, in which case the increase is recognized in Statement of Income. A revaluation deficit 5.19.1 Currency Inventory is recognized in Statement of Income, except that a deficit directly offsetting a previous surplus on the same asset Inventories of the Bank include new currencies that are not is directly offset against the surplus in the Revaluation yet issued to the circulation. Cost related to production Reserve. Upon disposal, any revaluation surplus relating and design of new currency notes and coins are initially to the particular asset being sold is transferred to retained recognized at cost. Cost of new currency notes and coins earnings. which are issued to the circulation is determined on a weighted average basis and at the time of issue it is An item of Property, Plant and Equipment is de- charged to Statement of Income. Allowance is made for recognized upon disposal or when no future economic slow moving inventories. benefits are expected from its use or disposal. Any gain or loss arising on de-recognition of the asset (calculated 5.19.2 Other Inventories as the difference between the net disposal proceeds Other inventories are carried at lower of cost and net and the carrying amount of the asset) is included in realisable value. Cost is determined on a weighted the Statement of Income in the year the asset is de- average basis. recognized. The asset’s residual values, useful lives and methods are reviewed, and adjusted if appropriate, 5.20 Property, Plant and Equipment regularly. Property, Plant and Equipment excluding land & building Capital work-in-progress is stated at cost. These are are stated at cost, less accumulated depreciation and expenses of a capital nature directly incurred in the accumulated impairment in value. Such cost includes construction of buildings, major plant and machinery and the cost of replacing part of such Property, Plant and system development, awaiting capitalisation. Equipment when that cost is incurred if the recognition criteria are met. Land and buildings are measured at 5.21 Intangible Assets revalued amount, being their fair value at the date Computer software not integral to computer hardware of revaluation, less any subsequent accumulated are shown as intangible assets and recognized at cost. depreciation and subsequent accumulated impairment Following initial recognition these intangible assets are losses. carried at cost less any accumulated amortization and Except for the freehold land, depreciation is calculated accumulated impairment. on a straight-line method over the following estimated Subsequent expenditure on software assets is capitalised useful lives. only when it increases the future economic benefits embodied in the specific asset to which it relates. All other Class of Asset Useful Life expenditure is expensed as incurred. Buildings on Freehold Lands Over 50 Years Lower of 50 years or Amortisation is recognised in the Statement of Income on Buildings on Lease hold lands over the lease hold a straight-line basis over the useful life of 4 years, from period the date that it is available for use since this most closely Plant & Plant Integrals 20 Years reflects the expected pattern of consumption of the future Furniture & Equipment 10 Years economic benefits embodied in the asset. Motor Vehicles 5 Years 5.22 Other Assets Motor Vehicles acquired 2014 onwards 10 Years Computer Hardware 4 Years Other assets are carried at expected realisable values. Others 3 Years 5.23 Impairment of Non-Financial Assets The carrying values of Property, Plant and Equipment The Bank assesses at each end of reporting period if are reviewed for impairment when events or changes in events or changes in circumstances indicate that the circumstances indicate that the carrying value may not be carrying value may be impaired, whether there is an recoverable. indication that a non-financial asset may be impaired. If any such indication exists, the bank makes an estimate Policy for revaluation of Land & Building of the Bank is of the asset’s recoverable amount. Where the carrying at least once in five years or at any shorter interval when amount of an asset exceeds its recoverable amount, the a significant valuation adjustment becomes evident. Any asset is considered impaired and is written down to its revaluation surplus is credited to the Revaluation Reserve recoverable amount. Impairment losses are recognized in included in the equity section of the Statement of Financial the Statement of Income. Part II - 20 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 5.24 Provisions 5.29 Grants Provisions are recognised when the Bank has a present Grants recognised at their fair value (where there is a obligation (legal or constructive) as a result of a past event reasonable assurance that the grant will be received and and it is probable that an outflow of resources embodying all attaching conditions, if any, will be complied with) are economic benefits will be required to settle the obligation shown under equity. When the grant relates to an expense and a reliable estimate can be made of the amount of item it is recognised in the Statement of Income over the the obligation. Where the Bank expects a provision to be periods necessary to match them to the expenses it is reimbursed, the reimbursement is recognised as a separate intended to compensate on a systematic basis. Where asset but only when the reimbursement is virtually certain. the grant relates to an asset, the fair value is credited to a deferred government grant account and is released to 5.25 Currency in Circulation the Statement of Income over the expected useful life of Currency issued by the Bank represents a claim on the the relevant asset on a systematic basis consistent with the bank in favour of the holder. The liability for Currency in depreciation policy of the related asset. Circulation is recorded at face value in the Statement of 5.30 Contingent Liabilities and Commitments Financial Position. Contingent liabilities are possible obligations whose 5.26 Pension and Other Post Employment Benefit existence will be confirmed only by uncertain future events Plans or present obligations where the transfer of economic Pension and other Post Employment Benefit Plans benefit is not probable or cannot be reliably measured. operated by the bank are disclosed in Note 34. All guarantees of indebtedness, forward foreign exchange transactions and other commitments, which are not 5.27 Defined Benefit Plans recognized in Statement of Financial Position, are shown under respective headings disclosed as Contingent A defined benefit plan is a post employment benefit Liabilities and Capital Commitments items. Where plan other than a defined contribution plan. Bank applicable, such amounts are measured at best estimates. operates defined benefit schemes for Pension, Widows’ and Orphans’ Pensions (W&OP), Widowers’ and STATEMENT OF INCOME AND OTHER Orphans’ Pensions (WR&OP), Retirement Gratuity COMPREHENSIVE INCOME and Post Employment Medical Benefits. The Bank and eligible beneficiaries make contributions, to separately 5.31 Revenue and Expenses administered funds in respect of the first three schemes. Revenue is recognised to the extent that it is probable that The cost of providing benefits under the defined benefit the economic benefits will flow to the Bank and the revenue plans is determined separately for each plan using the can be reliably measured. Expenses are recognised in the projected unit credit actuarial valuation method. The Bank’s Statement of Income on the basis of a direct association obligation in respect of defined benefit plan is calculated between the cost incurred and the earning of specific separately for each plan by estimating the amount of future items of income. All expenditure incurred in the running benefit that employees have earned in return for their service of the business and in maintaining the property, plant & in the current and prior periods; that benefit is discounted to equipment in a state of efficiency has been charged to determine its present value. Any unrecognised past service income in arriving at the result for the year. costs and the fair value of any plan assets are deducted. The following specific recognition criteria must also be The discount rate is the yield at the valuation date on met before revenue and expenses are recognised: Government Bonds that have maturity dates approximating to the average remaining years of service. All principal 5.31.1 Interest Income and Expenses actuarial assumptions disclosed in Note 34 are revised only when a full actuarial valuation is performed. Interest income and expenses are recognised in the Statement of Income for all interest bearing instruments 5.28 Defined Contribution Plans on an accrual basis using the effective yield method based on the actual purchase price unless collectability is in Employees are eligible for Employees’ Provident Fund doubt. Interest income includes coupons earned on fixed Contributions and Employees’ Trust Fund Contributions income investments and securities and accrued discount in line with respective statutes and regulations. The bank and premium on Treasury bills and other discounted contributes 24% and 3% of employees’ gross emoluments instruments. Interest income is suspended when loans to Employees’ Provident Fund and Employees’ Trust Fund become doubtful of collection. Such income is excluded respectively which are separately administered defined from interest income until received. contribution plans. 5.31.2 Dividends Obligations for contributions to defined contribution plans are recognized as expense in the Statement of Income as Dividend income is recognised when the shareholder’s and when they are due. right to receive the payment is established. Central Bank of Sri Lanka Annual Report - 2018 Part II - 21 Accounts and Operations of the Central Bank of Sri Lanka Part II 5.31.3 Miscellaneous Income and Expenses 6. NEW ACCOUNTING STANDARDS ISSUED BUT NOT EFFECTIVE AS AT REPORTING DATE Miscellaneous income and expenses are recognised on an accrual basis. The following standards and related interpretations issued, but not yet effective which is applicable to the Net gains and losses of a revenue nature on the disposal Bank, up to the date of issuance of the Bank’s financial of Property, Plant & Equipment have been accounted statements is disclosed below. The Bank intends to adopt for in the Statement of Income, having deducted from the following standard, when it becomes effective. proceeds on disposal, the carrying amount of the assets and related selling expenses. 6.1 IFRS 16 Leases Gains and losses arising from incidental activities to the The IASB issued the new standard for accounting for leases main revenue generating activities and those arising - IFRS 16 Leases in January 2016. The new standard from a group of similar transactions which are not does not significantly change the accounting for leases for material, are aggregated, reported and presented on lessors. However, it does require lessees to recognise most a net basis. leases on their balance sheets as lease liabilities, with the corresponding right of use assets. Lessees must apply a 5.31.4 Personnel Expenses single model for all recognised leases, but will have the Personnel Expenses include the full cost of all staff option not to recognise ‘short-term’ leases and leases of benefits. Salaries and related expenses due at year-end ‘low-value’ assets. Generally, the profit or loss recognition are included in other local payables. pattern for recognised leases will be similar to today’s finance lease accounting, with interest and depreciation 5.31.5 Operating Leases expense recognised separately in the Statement of Income. All the lease rentals on the operating leases are recognised IFRS 16 is effective for annual periods beginning on in Statement of Income on a straight line basis over the or after 1 January 2019. Early application is permitted term of the lease. provided the new revenue standard, IFRS 15, is applied on the same date. Lessees must adopt IFRS 16 using either 5.31.6 Income Tax Expense a full retrospective or a modified retrospective approach. The income of the bank is exempted from tax under section The Bank does not anticipate early adopting IFRS 16 and 118 of the Monetary Law Act No. 58 of 1949 as amended is currently evaluating its impact. and as per section 7b (xvi) of Inland Revenue (Amendment) Act No. 10 of 2006 and section 9(1) of Inland Revenue Act 7 NATURE AND EXTENT OF ACTIVITIES No. 24 of 2017. In terms of the Economic Service Charge 7.1 Foreign Currency Activities (amendment) Act No. 07 of 2017, CBSL is liable for ESC commencing from 1 April 2017. However, unrealized Foreign currency activities result mainly from the CBSL’s gain on exchange rate and unrealized marked to market holdings of foreign currency assets under its foreign gain on foreign currency financial assets are exempted reserves management function. The foreign reserves from ESC with effect from October 2018 as per the ESC management portfolio comprises foreign currency assets (amendment) Act No. 33 of 2018. Further, the bank is held for foreign exchange intervention purposes and exempted from Value Added Tax on supply of financial other foreign currency assets held for trading purposes. services as per Value Added Tax (Amendment) Act No.17 The foreign currency assets are held in various currencies. of 2013. The majorities are denominated in United States Dollars, Australian Dollars, Euros, Sterling Pounds, Japanese Yen 5.32 Events Occurring after the Reporting Date and New Zealand Dollars. The financial instruments held All material subsequent events after the reporting date within these foreign currency portfolios consist mainly have been considered and where appropriate adjustments of sovereign securities, securities held under reverse- or disclosures have been made in the respective notes to repurchase transactions or balances held with other central the financial statements. banks, commercial banks and custodial institutions. The Bank also holds, from time to time, foreign currency STATEMENT OF CASH FLOWS assets and liabilities that arise from international market operations. The cash flow statement has been prepared by using the “Direct Method” of preparing of cash flow statement in 7.2 Local Currency Activities accordance with the IAS 7 - Statement of Cash Flow. Local currency activities arise as follows: For the purposes of the Statement of Cash Flows, cash Liquidity (i) management operations: Liquidity and cash equivalents consist of cash and cash equivalents management largely involves the CBSL offsetting the as defined above, net of cash/pay order outflows. daily net flows to or from government or market by Part II - 22 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka advancing funds to or withdrawing funds from the financial statements, as they do not form part of elements banking system. Most of this business is undertaken of financial statements of the Bank. through daily open market operations. (ii) Holding an investment portfolio comprising Sri Lanka 8. TRANSITION DISCLOSURES government securities to support the liability for The following disclosure set out the impact of adopting currency in circulation. The bank’s policy is to hold IFRS 9 on the Statement of Financial Position, retained these investments for monetary operations and not earnings and other reserves including the effect of for trading. expected credit losses. 7.3 Trust and Custodial Activities Amounts administered by the CBSL under custodial and administration arrangements are not included in these 8.1 Reconciliation between the Carrying Amounts under IAS 39 to the Balances Reported under IFRS 9 as at 1 January 2018 IAS 39 Reclassification Re- IFRS 9 Assets/Liabilities Note Amount measurement Amount Category (Rs. 000) Category (Rs. 000) (Rs. 000) (Rs. 000) Cash & Cash Equivalents HTM 459,827,641 - - AC 459,827,641 Less: Expected Credit Losses 8.1.1 - - (50,505) (50,505) 459,777,136 Securities at Fair Value through FVTPL 45,264,376 - - FVTPL 45,264,376 Profit or Loss Securities at Fair Value through - - - FVOCI 566,228,935 Other Comprehensive Income Available for Sale Investments AFS 566,228,935 - - - Derivative Financial Instruments FVTPL 4,940,455 - - FVTPL 4,940,455 IMF Related Assets HTM 126,842,946 - - AC 126,842,946 Less: Expected Credit Losses 8.1.1 - - (3) (3) 126,842,943 Other Receivables L&R 3,665,700 - - AC 3,665,700 Sri Lanka Government Securities 8.1.2 HTM 9,704,962 9,704,962 49,521 FVOCI 9,754,483 (Treasury Bill Holding) Securities Purchased Under HTM 22,375,124 - - AC 22,375,124 Resale Agreements Provisional Advances to Government L&R 199,800,871 - - AC 199,800,871 Loans to Banks L&R 223,702 - - AC 223,702 Less: Expected Credit Losses 8.1.1 - - (642) (642) 223,060 Equity Investments in Financial - - 1,237,826 FVOCI 1,278,921 and Other Institutions Equity Investments in Financial 8.1.3 AFS 41,095 - - - and Other Institutions Other Assets HTM 12,882,470 - - AC 12,882,470 Less: Expected Credit Losses 8.1.1 - - (8) (8) 12,882,462 Reserves 77,352,239 - 1,235,775 78,588,014 8.1.1. The adoption of IFRS 9 has changed the transition to IFRS 9 due to the business model impairment model of the Bank where by all of the Treasury Bill holding. assets calssified as Amortized Cost and FVOCI are subject to expected credit losses. 8.1.3. Bank has certain equity investments in financial and other institutions which were classified as 8.1.2. The Treasury Bill holding of the Bank which is Available for Sale investments under IAS 39. held for open market operations was under the This has been reclassified as FVOCI from the Held to Maturity category under IAS 39. This transition to IFRS 9. has been reclassified as FVOCI through the Central Bank of Sri Lanka Annual Report - 2018 Part II - 23 Accounts and Operations of the Central Bank of Sri Lanka Part II 8.2 The Impact of Transition to IFRS 9 on Retained 9.1 Movement in Expected Credit Losses on Cash Earnings and Other Reserves and Cash Equivalents Other Retained Reserves Earnings 2018 Rs. 000 Rs. 000 Rs. 000 Closing Balance under IAS 39 as Stage 1 42,332,740 25,996,592 at 31 December 2017 Balance as at 1 January - Transition Adjustment on Adjustment on Initial Application of IFRS 9 Reclassifications under IFRS 9 1,287,347 - 50,505 (Note 8.2.2) (Note 8.2.1) Adjusted Balance as at 1 January 50,505 Transition Adjustment on Expected Credit Losses under 65,588 (117,160) Charge during the Year 21,059 IFRS 9 (Note 8.2.2) Balance as at 31 December 71,564 Opening Balance under IFRS 43,685,675 25,879,432 9 as at 1 January 2018 10. INVESTMENTS IN FOREIGN SECURITIES 8.2.1. Reconciliation of the Carrying Values under 2018 2017 IAS 39 and IFRS 9 due to Reclassification Rs. 000 Rs. 000 Category Carrying Re- Carrying Securities at Fair Value Value Under measurement Value under through Profit or Loss IAS 39 IFRS 9 -Investment in Foreign Securities 37,467,239 29,988,753 Rs. 000 Rs. 000 Rs. 000 (Note 10.1) -Gold (Un-Allocated) - 15,275,623 CBSL Treasury Bill Holding 9,704,962 49,521 9,754,483 Equity Investments in 37,467,239 45,264,376 Financial and Other 41,095 1,237,826 1,278,921 Securities at Fair Value through Institutions Other Comprehensive Income/ 9,746,057 1,287,347 11,033,404 Available for Sale -Investment in Foreign Securities 694,876,394 566,228,935 8.2.2. Reconciliation of the Aggregate Opening 694,876,394 566,228,935 Impairment Allowances under IAS 39 to the Total Investment in Foreign 732,343,633 611,493,311 Expected Credit Loss Provision under IFRS 9 Securities Expected Credit Loss on Impairment Re- Impairment Securities at Fair Value through under IAS 39 measurement under IFRS 9 Other Comprehensive Income (Note 10.2) 63,649 - as at as at 31 December 1 January 2017 2018 10.1 Investment in foreign securities classified as Rs. 000 Rs. 000 Rs. 000 securities at fair value through profit or loss includes Cash & Cash Equivalents - 50,505 50,505 the investments made by the Bank during 2016 in Securities at Fair Value through Other - 65,588 65,588 the Reserve Advisory Management Program (RAMP) Comprehensive Income managed by the World Bank. The value of the IMF Related Assets - 3 3 investment with RAMP as at 31st December 2018 Loans to Banks - 642 642 was Rs. 37,467.24 Mn (2017 - Rs. 29,988.75 Mn). Other Assets 151,674 8 151,682 Contingent Liability - Credit 12,600 414 13,014 10.2 Movement in Expected Credit Losses on Gurantee Scheme Securities at Fair Value through Other 164,274 117,160 281,434 Comprehensive Income 2018 9. CASH AND CASH EQUIVALENTS Rs. 000 Stage 1 2018 2017 Rs. 000 Rs. 000 Balance as at 1 January - Cash Balances with Banks 117,035,257 16,518,603 Adjustment on Initial Application of IFRS 9 65,588 (Note 8.2.2) Time Deposits with Banks 92,862,673 269,193,626 Adjusted Balance as at 1 January 65,588 Overnight Placements 162,300,186 173,979,333 Interest Receivable on Cash and Reversal during the Year (1,939) Cash Equivalents 48,624 136,079 Balance as at 31 December 63,649 Cash and Cash Equivalents 372,246,740 459,827,641 for Cash Flow Purpose 11. DERIVATIVE FINANCIAL INSTRUMENTS Less: Expected Credit Losses on Cash and Cash Equivalents (71,564) - (Note 9.1) 11.1 The table below shows the fair values of Total 372,175,176 459,827,641 derivative financial instruments, recorded as assets or liabilities, together with their notional Part II - 24 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka amounts. The notional amount, recorded gross, 12. IMF RELATED ASSETS is the amount of derivative’s underlying asset, reference rate or index and is the basis upon 2018 2017 which changes in the value of derivatives are Rs. 000 Rs. 000 measured. The notional amounts indicate the Holding of Special Drawing 217,126 677,131 volume of transactions outstanding at period end Rights (Note 12.1) and are indicative of neither the market risk nor IMF Quota (Note 12.2) 146,732,242 125,996,456 the credit risk. Deposits with IMF (Note 12.3) 199,965 164,565 Prepaid Charges - IMF Loans 268,456 - 2018 2017 Interest Receivable on IMF Assets Liabilities Notional Assets Liabilities Notional 9,667 4,794 Quota Amount Amount Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Less: Expected Credit Losses on IMF Related Assets (4) - Currency SWAPS - 13,590,145 203,257,715 4,939,919 3,403,868 228,553,847 (Note 12.4) 147,427,452 126,842,946 Forward 750 - 548,250 536 - 132,773 Forex Embedded Derivatives - 466,315 5,299,747 - 1,244,581 13,374,795 12.1 Holding of Special Drawing Rights - Currency Options Holding of Special Drawing Rights (SDR) is potentially a Total 750 14,056,460 209,105,712 4,940,455 4,648,449 242,061,415 claim on the freely usable currencies of IMF members in which holders of SDRs can exchange their SDRs for these 11.2 The above derivatives consisting of Currency currencies. The SDRs value as a reserve asset derives from Swaps, Currency Options and Foreign Exchange the commitments of members to hold and accept SDRs, and Forward Contracts were used for the purpose of to honor various obligations connected with the operation managing market and liquidity risks in international of the SDR system. The IMF ensures that the SDRs claim on reserves held by the Bank in line with the statutory freely usable currencies is being honored in two ways: by objectives of maintenance of international reserves. designating IMF members with a strong external position to In addition, the Bank entered into Swap transactions purchase SDRs from members with weak external positions, with Licensed Commercial Banks (LCBs), Licensed and through the arrangement of voluntary exchanges Specialized Banks (LSBs) and Foreign Central Banks between participating members in a managed market. The in order to maintain international stability of the Sri amount shown above represents the total holding of the Lankan Rupee, to strengthen the financial system of Bank as at the respective reporting dates. the country and to encourage those Banks to bring foreign funds. 12.2 IMF Quota 11.3 Derivatives are financial contracts that derive their The IMF Quotas (capital subscriptions) are the primary value in response to changes in interest rates, source of IMF resources received from its member financial instruments prices, commodity prices, countries. Each country’s quota is determined broadly foreign exchange rates, credit risk and indices. on the basis of the relative economic size of the country. 11.4 A significant part of derivatives portfolio of the Upon joining the IMF, a country must pay 25 per cent of its Bank consists of currency swaps entered into quota in widely accepted foreign currencies or SDRs, and as a strategy to manage the short term liquidity the remaining 75 per cent in its own currency. The IMF requirements. In a currency swap, the Bank pays/ quota represents an asset of the Bank as it transacts with receives a specified amount of a currency on an the IMF on its own account on behalf of the Government agreed date in exchange of another currency at as per Articles of the IMF. agreed rates. The IMF, based on the General Quota Review Agreement, 11.5 From Foreign Exchange Forward contracts, the Bank decided to increase the quotas of each of the IMF’s 189 gets the obligation to buy or sell specific amount members in January 2016. As a result, Sri Lanka’s IMF of foreign currency on an agreed future date at an quota increased to SDR 578.80 Mn on 17 February 2016 agreed rate. from the previous quota amount of SDR 413.40 Mn. 11.6 The Bank’s exposure to derivative contracts is closely The amounts payable in respect of the IMF Quota is monitored as part of the overall risk management shown under the heading Quota Liability in Note 25. A of the Bank to ensure expected benefits from such member’s quota determines that country’s financial and derivatives are crystalized to the Bank. organizational relationship with IMF, including: Central Bank of Sri Lanka Annual Report - 2018 Part II - 25 Accounts and Operations of the Central Bank of Sri Lanka Part II (i) Subscriptions: A member’s subscription to IMF 13. SRI LANKA GOVERNMENT SECURITIES resources is equal to its quota and determines the maximum amount of financial resources the member Portfolio of government securities is acquired and maintained as per Section 90 (2) of the Monetary Law Act is obliged to provide to the IMF. A member must for the purpose of open market operations to be carried pay its subscription in full; up to 25 per cent must be out in the conduct of the monetary policy. paid in reserve assets specified by the IMF (SDRs or usable currencies), and the rest in the member’s own 2018 2017 currency. Rs. 000 Rs.000 Treasury Bills 43,443,802 9,704,962 (ii) Voting power: The quota defines a member’s voting Treasury Bonds 1,542,796 - power in IMF decisions. IMF member’s votes are Interest Receivable 44,559 - comprised of basic votes plus one additional vote for 45,031,157 9,704,962 each SDR 100,000 of quota. The 2008 reform fixed the number of basic vote at 5.50 per cent of total votes. 14. SECURITIES PURCHASED UNDER RESALE AGREEMENTS (iii) Access to financing: The amount of financing a member can obtain from the IMF (access limits) is 2018 2017 Rs. 000 Rs.000 based on its quota. Under Stand-By and Extended Arrangements, for instance, a member can currently Securities Purchased under 229,333,000 22,359,000 Resale Agreements borrow up to 145 per cent of its quota annually and Interest Receivable on 435 per cent cumulatively. Access to finance may be Securities Purchased under 121,409 16,124 higher in exceptional circumstances. Resale Agreements 229,454,409 22,375,124 (iv) SDR allocations: Members’ shares of SDR allocations are established in proportion to their quotas. 15. PROVISIONAL ADVANCES TO GOVERNMENT These represent advances granted to the Government 12.3 Deposits with IMF – PRGF – HIPC Trust Deposit of Sri Lanka (GOSL) under Section 89 of the Monetary The PRGF – HIPC (Poverty Reduction and Growth Facility Law Act subject to the conditions stated in provision for the Heavily Indebted Poor Countries) Trust Deposit was of advances to finance expenditures authorised to be made under the agreement between the GOSL and the incurred out of the Consolidated Fund. IMF on 21 April 2000 by transferring SDR 788,783 from Sri Lanka’s deposit in the post SCA-2 (Special Contingent 16. LOANS TO BANKS Account) administered account with the IMF. This account These are the loans granted in terms of Part IIIA of was created under the guidance of the IMF by transferring Chapter V of the Monetary Law Act to facilitate lending the balance held in SCA-2 against Sri Lanka when it was for productive purposes. decided to wind up SCA-2 by the IMF. The IMF requested the countries that had balances in the Post SCA-2 account 2018 2017 to consider providing the balances in that account to the Rs. 000 Rs. 000 PRGF/HIPC Trust either as outright grant or as a means Medium & Long Term Credit of providing a subsidy for PRGF/HIPC Loan. Accordingly Scheme GOSL agreed to transfer the funds from Post SCA –2 - Related Parties 26,951 29,146 Provincial Development Credit Loan accounts to PRGF/HIPC Trust account, not as an outright Scheme grant, but as an interest free deposit until 2018. This was - Related Parties - 28,254 later extended until 2024. Saubaghya Loan Scheme - Related Parties 13,122 49,539 - Others 8,345 14,211 12.4 Movement in Expected Credit Losses on IMF Resumption of Economic Activities in Related Assets the East - Related Parties 12,358 41,382 2018 - Others 16,403 35,492 Rs. 000 Repair of Damaged Houses North & East Stage 1 - Related Parties 18,830 24,330 Balance as at 1 January - Awakening North Loan Scheme Adjustment on Initial Application of IFRS 9 (RF Phase II) 3 - Related Parties 108 1,348 (Note 8.2.2) Less: Adjusted Balance as at 1 January 3 Provision for Impairment (Note 16.1) (154) - Charge for the Year 1 Net Receivable 95,963 223,702 Balance as at 31 December 4 Part II - 26 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 16.1 Movement in Provision for Impairment 17.2 The equity investments were carried at fair value as at 31 December 2018 based on Net Assets per Share basis as per the latest available unaudited 2018 2017 financial statements of those companies at the time Rs. 000 Rs. 000 of preparation of the Bank’s financial statements. As at 1 January - 27,302 Accordingly, the Net Asset per Share companies as Reversal during the Year - (27,302) at the following dates were used. Expected Credit Losses on Loans to 154 - Lanka Clear (Private) Limited - 30 November 2018 Banks (Note 16.2) Lanka Financial Services Bureau Limited - 31 As at 31 December 154 - October 2018 Credit Information Bureau of Sri Lanka Limited - 31 16.2 Movement in Expected Credit Losses on Loans December 2018 to Banks 18. OTHER ASSETS 2018 2018 2017 Stage 1 Stage 2 Total Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Financial Assets Balance as at 1 January - - - Investment of Internal Funds 7,955,537 6,730,548 Adjustment on Initial Applica- Less: Provision for Impairment of Assets (163,144) (151,674) 26 616 642 (Note 18.1) tion of IFRS 9 (Note 8.2.2) Net Investment of Internal Funds 7,792,393 6,578,874 Adjusted Balance as at 1 26 616 642 Staff Loans at Amortized Cost 5,780,754 5,036,028 January Receivable from Treasury and Other 18,785 54,490 Reversal during the Year (11) (477) (488) Ministries Other Receivables 126,086 143,276 Balance as at 31 December 15 139 154 13,718,018 11,812,668 Non Financial Assets 17. EQUITY INVESTMENTS IN FINANCIAL AND Deffered asset on Staff Loan 1,065,287 1,069,802 OTHER INSTITUTIONS 14,783,305 12,882,470 These investments are made in terms of Section 105 A of the Monetary Law Act. Under this Section, the Bank is 18.1 Movement in Provision for Impairment of Assets empowered to acquire and hold shares in any company which, in the opinion of the Monetary Board, was formed 2018 2017 for the advancement and promotion of human resources Stage 1 Stage 3 Total and technological development in the Banking and Rs. 000 Rs. 000 Rs. 000 Rs. 000 financial sector or to facilitate clearance of transactions Balance as at 1 January - 151,674 151,674 139,131 among commercial Banks operating in Sri Lanka. Adjustment on Initial Application of IFRS 9 8 - 8 - 17.1 Investment position (Note 8.2.2) Adjusted Balance as at 8 151,674 151,682 139,131 2018 2017 1 January Company Nature of the No. of Carrying No. of Carrying Charge during the Year 84 11,378 11,462 12,543 Business Shares Value Shares Value Balance as at 31 Rs. 000 Rs. 000 92 163,052 163,144 151,674 December Lanka Clear Automated 2,950,000 417,128 2,950,000 29,500 (Private) Limited Clearing 19. GOLD Fitch Ratings Credit Lanka Limited Rating - - 3,500,000 3,500 This is the value of physical gold held as required under Section 67 (1) and Section 67(2) of the Monetary Law Act Lanka Financial Automated Services Bureau Fund 225,000 1,396 225,000 2,250 (MLA) as part of the International Reserve of the Bank. As Limited Transfers per Section 67(2) of MLA, Monetary Board is required Credit Information Provision to endeavor to hold at least a nuclear reserve in gold or Bureau of Sri of Credit 48,244 963,355 48,244 5,845 currencies freely convertible by the Bank, whether directly Lanka Limited Information 1,381,879 41,095 or indirectly, in to gold as per the MLA. Central Bank of Sri Lanka Annual Report - 2018 Part II - 27 Accounts and Operations of the Central Bank of Sri Lanka Part II 20. INVENTORIES 2018 2017 Rs. 000 Rs. 000 Notes for Circulation 2,495,222 4,442,014 Coins for Circulation 2,194,055 1,850,723 Coins in Transit from the Supplier 613,432 - Notes in Transit from the Supplier 1,253,694 568,716 6,556,403 6,861,453 Less: Provision for Slow Moving Items (45,000) (45,000) 6,511,403 6,816,453 Stationery and Sundry Inventory 57,318 58,881 Medical Center Stock 214 199 Total Inventories at Lower of Cost or Net Realizable Value 6,568,935 6,875,533 In 2018, inventories of Rs. 3,999.00 Mn (2017 Rs. 2,850.82 Mn) were recognized as an expense during the year and included in “Cost of Inventory (Cost of new currency issue)”. 21. PROPERTY, PLANT AND EQUIPMENT Cost Land and Plant & Plant Furniture & Vehicles Computers Others Construction 2018 2017 Buildings Integrals Equipment In progress Total Total Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 As at 1 January 16,743,200 1,567,670 1,305,057 614,563 843,365 55,436 28,206 21,157,497 20,920,014 Additions during the year - 10,272 17,537 - 64,328 1,303 11,074 104,514 267,129 Disposals during the year (734,278) (1,278) (11,672) (13,300) (12,143) - - (772,671) (29,646) Transfers/Write off during 106 - 450 - - - (22,958) (22,402) - the year As at 31 December 16,009,028 1,576,664 1,311,372 601,263 895,550 56,739 16,322 20,466,938 21,157,497 Land and Plant & Plant Furniture & Vehicles Computers Others Construction 2018 2017 Depreciation Buildings Integrals Equipment In progress Total Total Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 Rs.000 As at 1 January 251,534 860,947 863,095 410,441 774,790 36,173 - 3,196,980 2,787,624 Depreciation for the year 195,031 78,357 80,725 25,923 40,289 1,126 - 421,451 434,558 Disposals during the year (70,478) (663) (10,866) (13,300) (12,040) - - (107,347) (25,202) As at 31 December 376,087 938,641 932,954 423,064 803,039 37,299 - 3,511,084 3,196,980 Net Book Value 15,632,941 638,023 378,418 178,199 92,511 19,440 16,322 16,955,854 17,960,517 The carrying values of Land and Buildings are recorded at The value of the fully depreciated assets which are still in use fair value. The latest independent valuation was performed as at 31 December 2018 was Rs. 1,611.38 Mn. (2017 - as at 31 December 2016 by FM Valuers, which was Rs. 1,598.17 Mn). recorded as at 31 December 2016. During the financial year, the Bank has charged Rs. 22.40 The properties of the bank at New York and Brazil were sold Mn to the Statement of Income from Construction in to the Ministry of Foreign Affairs at cost in May 2018. progress. During the financial year, the Bank has acquired property, plant and equipment by means of cash with an aggregated cost of Rs. 104.18 Mn (2017 - Rs. 265.73 Mn). Part II - 28 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Information on Valuations of Freehold Land and Buildings and Buildings on Leasehold Land of the Bank Property Name of the Valuation approach Estimated price per Estimated Estimated Outgoing Years chartered perch price per rent per expenses Purchase valuation square foot month surveyor (Rs.) (Rs.) (Rs.) Land & Building Head Office - Colombo 01 A. A. M. Fathihu Market Approach & Cost Approach 12,500,000 9,000 - 15,000 - - - Whiteaways Building - -do- Income Approach 13,500,000 - 6,000,000 40% 16.66 Colombo 01 Lloyds Building - Colombo 01 -do- Income Approach 13,500,000 - 6,750,000 40% 16.66 Central Point Building - -do- Income Approach 14,000,000 - 7,500,000 35% 16.66 Colombo 01 Centre for Banking -do- Market Approach & Cost Approach 2,500,000 - 3,500,000 2,500 - 9,500 - - - Studies - Rajagiriya Bank House - Colombo 07 -do- Market Approach & Cost Approach 7,500,000 3,500 - 8,500 - - - Regional Office - Matara -do- Market Approach & Cost Approach 1,500,000 - 3,000,000 4,000 - 7,500 - - - Regional Office - Matale -do- Market Approach & Cost Approach 100,000 - 500,000 2,500 - 7,500 - - - Holiday Home - -do- Market Approach & Cost Approach 1,000,000 2,000 - 7,000 - - - Nuwara Eliya Holiday Home - Kataragama -do- Market Approach & Cost Approach 200,000 4,500 - 10,000 - - - Building on Leasehold Land Regional Office - Anuradhapura A. A. M. Fathihu Cost Approach - 3,500 - 7,500 - - - Holiday Home - Anuradhapura -do- Cost Approach - 5,500 - - - Regional Office - Kilinochchi -do- Cost Approach - 1,500 - 7,000 - - - Holiday Home - Somawathiya -do- Cost Approach - 10,000 - - - Composition of Land and Buildings 23. BANKS AND FINANCIAL INSTITUTIONS Carrying Value Carrying Value 2018 2017 2018 2017 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Freehold Land 8,930,375 8,976,339 Buildings on Freehold Land 6,449,206 7,250,954 Buildings on Leasehold Land 253,360 264,373 Payable to Foreign Banks 16,864,115 8,237,633 15,632,941 16,491,666 Payable to Other Foreign Financial 2,437,045 1,911 The carrying amount of revalued Land and Buildings that Institutions would have been included in the financial statements had 19,301,160 8,239,544 they been carried at cost less depreciation is Rs. 7,796.82 Mn (2017 - Rs. 8,607.88 Mn). 22. INTANGIBLE ASSETS 24. ASIAN CLEARING UNION The Asian Clearing Union (ACU) was established in 1974 2018 2017 Rs. 000 Rs. 000 at the initiative of the United Nations Economic and Social Computer Software: Commission for Asia and the Pacific (ESCAP) as a mechanism Cost: to settle, on a multilateral basis of payments for intra- As at 1 January 957,204 949,772 Additions during the year 25,484 7,432 regional transactions among participating Central Banks. As at 31 December 982,688 957,204 The participants of ACU are Sri Lanka, Bangladesh, Iran, Amortization: Nepal, Pakistan, India, Bhutan, Myanmar and Maldives. Net As at 1 January 876,581 793,452 settlement position of each ACU participant is calculated Amortization Charge for the Year 75,670 83,129 As at 31 December 952,251 876,581 based on the daily outstanding balance held over the two Net Book Value: months period and settlement will take place within four As at 31 December 30,437 80,623 working days of the following month. Interest rate was spread between 1.45% and 2.28% during the year (2017 - 0.63% The Bank has acquired intangible assets by means of cash and 1.28%). with an aggregated cost of Rs. 25.48 Mn during the year (2017 - Rs. 7.43 Mn). The value of fully amortized intangible assets which are still in use as at 31 December 2018 was Rs. 927.38 Mn. (2017 - Rs. 636.58 Mn). Central Bank of Sri Lanka Annual Report - 2018 Part II - 29 Accounts and Operations of the Central Bank of Sri Lanka Part II 25. INTERNATIONAL MONETARY FUND SDRs to supplement existing official reserve assets such as gold holdings, foreign exchange and reserve 2018 2017 positions in the IMF. Under certain conditions, which Rs. 000 Rs. 000 are set in the Articles of Agreement signed on behalf Interest Bearing Loans 181,318,765 116,996,460 of the Government of Sri Lanka by the Bank, the IMF may allocate SDRs to members in proportion to their Allocation of Special Drawing IMF quotas. An allocation of SDRs by the IMF provides Rights 100,253,563 86,086,013 each member with a costless asset on which interest Other Amounts Payable to IMF 67,352,253 57,467,696 is neither earned nor paid. The Articles of Agreement Quota Liability 68,063,665 58,445,100 also allow for cancellations of SDRs, but to date, this provision has not been used. Increases in Allocation 235,669,481 201,998,809 of SDR represents increases in holding of SDR as 416,988,246 318,995,269 described in Note 12. Members of IMF are obligated to pay to the IMF an amount equal to its net cumulative allocation and any other amounts that may be due Interest bearing Loans consist of the Extended Fund 25.1 and payable because of its participation in the Special Facility (EFF) obtained from the IMF. Drawing Rights Department at the point of termination or liquidation of IMF’s SDR Department. 25.2 Extended Fund Facility (EFF) is a three year facility provided by the IMF to support the Balance of Payments 25.4 Other Amounts Payable to IMF represent amounts and Government’s economic reform agenda. The owed by the Bank to IMF on account of operational IMF approved the EFF fund facility of SDR 1.10 Bn and administrative transactions. (approximately USD 1.50 Bn) in June 2016. This amount is equivalent to 185 per cent of the country’s 25.5 Quota Liability The amounts payable in respect of current quota with the IMF. The first tranche under the the IMF Quota as described in Note 12.2. EFF amounting to SDR 119.89 Mn (approximately USD 168.10 Mn) was made available in June 2016. 26. OTHERS The second tranche to the value of SDR 119.89 Mn (approximately USD 162.56 Mn), third tranche to the value of SDR 119.89 Mn (approximately USD 167.2 2018 2017 Mn), fourth tranche to the value of SDR 177.77 Mn Rs. 000 Rs. 000 (approximately USD 251.4 Mn) and the fifth tranche Moragahakanda Development Project Loan 1,577,068 2,056,009 under Escrow Agreement (Note 26.1) to the value of SDR 177.77 Mn (approximately USD DST - PRP III under Escrow 252 Mn) were disbursed in June 2016, July 2017, Agreement (Note 26.2) 5,968,519 7,588,467 December 2017 and June 2018, respectively. With DST - PRP III Phase II under Escrow 6,242,573 8,094,403 the disbursement of the fifth tranche, a total of USD Agreement (Note 26.3) 1,014 Mn has been received so far by Sri Lanka on DST Special Dollar A/C - Small & account of EFF. The remaining amount is expected to Medium Enterprises (SME) and Green be disbursed in two more tranches over a period of one Energy Global Loan (Note 26.4) - 109,808 year. The interest rate applicable on the EFF comprise DST Special Dollar A/C - Ambatale Water of the basic rate of charge, which is equivalent to the Supply Improvement Project (Note 26.5) - 189,196 SDR interest rate (currently stands at 0.05 per cent per DST - NORAD Waso Asia Project of the annum) plus 100 basis points. University of Peradeniya (Note 26.6) - 10,664 DST’s Dollar Account - Hambantota Port Effective Maturity 2018 2017 (Note 26.7) 91,374,950 44,648,475 interest Rs. 000 Rs. 000 DST Special Dollar A/C 2 (Note 26.8) 29,493,915 - rate % Other Foreign Liabilities 73,908 1,398,867 Extended Fund 1.103 2028 181,318,765 116,996,460 134,730,933 64,095,889 Facility Total Interest bearing loans 181,318,765 116,996,460 26.1 Moragahakanda Development Project Loan under Escrow Agreement 25.3 The Special Drawing Right (SDR) is a reserve asset created by the IMF in order to meet a long-term global This Loan Agreement was signed between China need to supplement existing reserve assets. SDRs are Development Bank and the Government of Sri allocated to member countries in proportion to their Lanka on 28 June 2012 for USD 214.20 Mn. The IMF quotas. SDR allocations can only be made to purpose of this loan agreement is to provide facility countries that participate in the IMF’s SDR Department for financing the construction of a hydroelectric (an accounting unit within the IMF). The IMF created power station in Moragahakanda. This Project has Part II - 30 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka been implemented by the Ministry of Irrigation and 26.5 DST Special Dollar Account - Ambatale Water Water Resources Management. The Bank opened Supply Improvement Project an account in its books of account, as the Banker to this agreement, according to the instructions of the This Credit Facility Agreement was signed between Department of External Resources for the purpose Agence Francaise de Development and the of receiving and disbursing the loan. During the Democratic Socialist Republic of Sri Lanka on year 2018, USD 4.82 Mn was disbursed and the 29 September 2014.The Bank has opened an balance as at 31st December 2018 is USD 8.63 account in its books of account, as the Banker to Mn. this agreement, according to the the instructions of the Department of Treasury Operations for the 26.2 Priority Road Project III under Escrow Agreement purpose of receiving and disbursing the loan. USD 5.0 Mn was received to the above account on 14 This Facility Agreement was signed between the September 2015. China Development Bank and the Government of Sri Lanka on 11 March 2014 for USD 300 Mn. During the year 2018, USD 1.24 Mn was disbursed The purpose of this loan is to finance the cost of and there was no outstanding balance as at 31 improvement and rehabilitation of Priority Road December 2018. Project III-Phase I. As per the Facility Agreement, the Bank has been appointed as the Banker to the 26.6 NORAD Waso Asia Project of the University Government of Sri Lanka. Accordingly, an account of Peradeniya has been opened in its books of account for the The Central Bank of Sri Lanka is maintaining sole purpose of depositing the loan and disbursing USD Account NORAD Waso Asia Project of the such received monies to the Road Project. During University of Peradeniya on behalf of University of the year 2018, USD 16.99 Mn was disbursed and Peradeniya to receive funds from NORAD for the the remaining balance as at 31 December 2018 is Capacity Building Project since 2016. University USD 32.66 Mn. of Peradeniya withdraws the funds in USD or LKR 26.3 Priority Road Project III Phase II under Escrow by submitting the withdrawal applications through Treasury Operation Department. During the year Agreement 2018, USD 0.16 Mn was received to the account The Phase II of this agreement was received on and two transfers totalling USD 0.23 Mn was 24 November 2014 for USD 100 Mn. During the transferred to DST. There was no outstanding year 2018, USD 18.80 Mn was disbursed and the balance as at 31 December 2018. remaining balance as at 31 December 2018 is USD 34.16 Mn. 26.7 DST’s Dollar A/C - Hambantota Port This is a special dollar account maintained on behalf 26.4 SME and Green Energy Global Loan of the Treasury Operations Department crediting the proceeds from China Merchant Port Holdings This is a Finance Contract between the Democratic Co. Ltd, received for handing over the operations Socialist Republic of Sri Lanka and European of Hambantota Port subsequent to the agreement Investment Bank signed on 13 November 2013. signed between Sri Lanka Ports Authority and the As per the Facility Agreement, the Bank has been China Merchant Port Holdings Co. Ltd. Initial appointed as the Banker to the Government of Sri proceeds of USD 292.1 Mn was received on 22 Lanka. Accordingly, an account has been opened December 2017. Second and third proceeds of USD in its books of account for depositing the loan 97.37 Mn and USD 584.19 Mn were received on 24 proceeds and disbursing such received money to January 2018 and 25 June 2018 respectively. The the project. remaining balance as at 31 December 2018 was The second tranche of the above SME and Green USD 500.00 Mn. Energy Global Loan was received in Euro on 09 July 26.8 DST Special Dollar A/C 2 2015.Accordingly, an account has been opened in the books of account of the CBSL for depositing the This is a dollar account maintained on behalf of loan and disbursing such received money to the the Treasury Operations Department in order to project. credit the proceeds received on behalf of Treasury in USD. During the year 2018, the proceeds of During the year 2018, USD 0.71 Mn was disbursed SLDB, FCBU Loans and Term Financing Facility have and there was no outstanding balance as at 31 been credited and utilized for repayment of loans on December 2018. behalf of government. The remaining balance as at 31 December 2018 is USD 161.39 Mn. Central Bank of Sri Lanka Annual Report - 2018 Part II - 31 Accounts and Operations of the Central Bank of Sri Lanka Part II 27. DEPOSITS OF BANKS AND FINANCIAL Repurchase agreements are undertaken for Open Market INSTITUTIONS Operations (OMO) to regulate liquidity in the money market under Sections 90 and 91 of Monetary Law Act as These are the deposits maintained by LCBs for the purpose part of conduct of the monetary policy. These repurchase of meeting Statutory Reserve Requirement under section agreements were engaged only in Government securities 93 of the Monetary Law Act and deposits maintained by on over-night basis or term basis depending on the market LCBs, Primary Dealers and the Employee Provident Fund as liquidity management policies of the Bank, decided from participants of Real Time Gross Settlement System (RTGS) time to time. for honoring payments under the RTGS operated by the Bank as per the provisions of the Monetary Law Act. Under 30. BALANCES OF EMPLOYEE BENEFIT PLANS the scheme, an interest free intra-day liquidity facility, fully collaterized by Government Securities is available to The Bank as a part of normal activities provides current participants to meet payment obligations within the day account facilities for its Employee Benefit Plans. The to facilitate smooth functioning of the settlement system. amounts held in credit of these separately administered Although these deposits are classified as related parties current accounts and inter entity accounts of Employee (i.e., State owned Banks and institutions) and others for Benefit Plans of the Bank, are as follows: the purpose of accounting disclosure requirements, such deposits are maintained in terms of relevant statutory 2018 2017 Rs. 000 Rs. 000 provisions and not because of specific business relationship Balances in CBSL Provident Fund, of the Bank with those state institutions. Pension Schemes and Widows’/ Widowers’ & Orphans’ Pension 18,333 4,547 Schemes 2018 2017 18,333 4,547 Rs. 000 Rs. 000 Deposits by Banks : - Related Parties 192,367,084 215,901,806 31. CURRENCY IN CIRCULATION - Others 127,555,665 125,805,585 319,922,749 341,707,391 The Bank as the sole currency issuing authority in Sri Lanka Deposits by Financial continued to perform the function of issuing legal tender Institutions : currency. The amount of currency issued by the Bank and in - Related Parties 177 94 - Others 183,257 4,713 circulation at respective reporting dates are as follows: 183,434 4,807 Total Deposits by Banks and Denomination 2018 2017 Coins: Rs. 000 Rs. 000 Other Financial Institutions 320,106,183 341,712,198 1 cent 3,631 3,631 2 cent 5,707 5,707 28. DEPOSITS OF GOVERNMENT AND 5 cent 23,260 23,258 GOVERNMENTAL ENTITIES 10 cent 39,232 39,229 25 cent 121,046 121,039 50 cent 185,247 185,590 2018 2017 1 rupee 929,905 898,148 Rs. 000 Rs. 000 2 rupee 1,414,466 1,357,849 Government Deposits 167,537 167,492 5 rupee 4,408,327 4,102,486 Government Agencies and Funds 181,181 157,025 10 rupee 6,101,195 5,402,312 348,718 324,517 Commemorative coins 590,240 587,075 13,822,256 12,726,324 These are the deposits maintained in terms of Section Notes: 106 (1) of the Monetary Law Act since the Bank is the 1 rupee 4,981 4,981 official depository of the Government and/or government 2 rupee 26,694 26,696 agencies or institutions. 5 rupee 37,192 37,193 10 rupee 1,271,474 1,340,240 29. SECURITIES SOLD UNDER REPURCHASE 20 rupee 5,607,149 5,758,265 50 rupee 5,456,882 5,561,352 AGREEMENTS 100 rupee 22,612,502 21,599,562 200 rupee 128,307 130,040 2018 2017 500 rupee 40,093,478 38,153,548 Rs. 000 Rs. 000 1000 rupee 136,787,726 141,832,264 Securities sold under Repurchase 2000 rupee 5,331,902 10,526,029 - 6,503,884 Agreements 5000 rupee 409,761,967 360,357,407 Standing Deposit Facility 28,311,221 34,151,394 627,120,254 585,327,577 28,311,221 40,655,278 Total Currency in Circulation 640,942,510 598,053,901 Part II - 32 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 32. OTHER PAYABLES is open for employees of the Bank who joined after 1 January 1998. Eligible employees under the Widows’ 2018 2017 and Orphans Pension Scheme (old) and Widowers’ and Rs. 000 Rs. 000 Orphans’ Pension Scheme (old) plans who were recruited before 1 August 1994 contribute 5% of the monthly basic Domestic Interest Payable - 1,676 salary & employees who were recruited on or after 1 Provision and Charges 1,706,541 396,531 August 1994 contribute 10% of the monthly basic salary Deposits by RDD 2,082,061 2,306,897 whereas the eligible employees under the new Widows’ Liability against Abandoned Properties and Orphans and Widowers’ and Orphans’ Pension 6,188,502 5,083,171 Received (Note 32.1) Scheme contribute 5.5% of the monthly basic salary. Other Payables 2,629,327 1,098,881 12,606,431 8,887,156 The Bank also provides gratuity benefits to employees who have completed five years of service in the Bank and 32.1 Payable in respect of Abandoned Properties represents who are not eligible for a monthly pension payment under the amounts collected from the Licensed Banks the Employees’ Retirement Pension Schemes. In order to under the Banking Act Direction No.05 of 2009 - meet this liability, a provision is carried forward in the Identifying, Reporting, Transferring & Maintaining Statement of Financial Position, equivalent to the liability Abandoned Property of Licensed Commercial Banks. calculated using the actuarial valuation. In the event of any further claims on Abandoned Properties, Bank is liable to pay deposits so collected The Bank has a Post-Employment Medical Benefit with interest. Hence, the total deposit collected with Scheme which provides reimbursement of certain medical the interest calculated on weighted average Treasury Bill interest rate is recorded as a liability of the Bank. expenses incurred by retired employees on account of themselves or their spouses and by widows/widowers. 33. DEFERRED GRANTS The Bank employed an Independent Actuary M/s K. A. Pandit, Consultant & Actuary (Mumbai) to re-assess 2018 2017 the defined benefit obligations and the current service Rs. 000 Rs. 000 costs attributable to the Employees’ Retirement Pension As at 1 January 45 80 Amortization during the year (34) (35) Schemes, Widows’ and Orphans’ Pension Scheme, As at 31 December 11 45 Widowers’ and Orphans’ Pension Scheme, Gratuity Scheme and Medical Benefit Scheme during the year. The Deferred grant is amortized over the period that matches bank employed the same Independent Actuary to asess with the depreciation policy of such assets. This includes the defined benefit obligations of the new Widows’ and the assets received by the Bank without any consideration. Orphans’ and Widowers’ and Orphans’ Pension scheme The fair value of the assets have been credited to a for the first time during the year. deferred grant account and taken to other income over the useful life of the relevant asset consistent with the Funds of the Employee Retirement Pension Schemes, depreciation policy of the related asset. Widows’ and Orphans’ Pension Scheme, Widowers’ and 34. PENSION AND OTHER POST EMPLOYMENT Orphans’ Pension Scheme are managed separately and BENEFIT PLANS separate books are maintained. However, Gratuity Scheme and Medical Benefit Scheme are not separated from the The Bank operates seven defined benefit plans which cover all eligible employees. Under the Employees’ books of accounts of the Bank. Further, investments and Retirement Pension Scheme (old), employees who joined investment income are recorded separately for these the Bank prior to 1 January 1998 and complete 10 years funds in the Bank books and the income earned from of service become eligible to the scheme. The employees the investments are transferred back to these funds and who have joined the Bank after 1 January 1998 and complete 10 years of service become eligible for the reinvested without being distributed. new pension scheme. These pension schemes are non- contributory pension schemes where the cost of benefits The total present value of all benefit obligations of Rs. is wholly borne by the Bank. The Widows’ and Orphans’ 48,245.66 Mn (2017 – Rs. 38,392.29 Mn) exceeds the Pension Scheme for male employees and Widowers’ total fair value of plan assets of Rs. 38,884.03 Mn (2017 and Orphans’ Pension Scheme for female employees – Rs. 40,816.60 Mn) at the end of the reporting period are open to employees of the Bank who had joined prior to 1 January 1998 whereas the new Widows’ and resulting in a deficit of Rs. 9,361.63 Mn (2017 – surplus Orphans and Widowers’ and Orphans’ Pension Scheme of Rs. 2,424.31 Mn). Central Bank of Sri Lanka Annual Report - 2018 Part II - 33 Accounts and Operations of the Central Bank of Sri Lanka Part II As at 31 December 2018 Benefit (Asset)/Liability Employee Employee Widows’ and Widowers’ Widows’ Gratuity Medical Total Retirement Retirement Orphans’ and Orphans’ and Orphans’ Scheme Benefit Pension Pension Pension Pension and Scheme Scheme Scheme - New Scheme Scheme Widowers’ and Orphans’ Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Present Value of Benefit 35,971,523 1,055,695 6,241,591 1,199,154 718,088 290,932 2,768,680 48,245,663 Obligation Fair Value of Plan Assets/ (26,120,425) (3,519,332) (5,337,743) (2,177,286) (52,204) (243,167) (1,433,872) (38,884,029) Investments Net Benefit (Asset)/ 9,851,098 (2,463,637) 903,848 (978,132) 665,884 47,765 1,334,808 9,361,634 Liability The balance shown under Pension and Other Post Employment Benefit Plans in Statement of Financial Position differs from the net liability as per the actuary due to the following reasons: a) The net asset position of the and Widowers’ and Orphans’ Pension Scheme is not reflected in the accounts due to the remote possibility of distributing any residual balance of the fund to the bank. b) For both gratuity and medical benefit schemes, the accounts represent the gross liability position and not the net liability as per actuary, since the Bank does not keep relevant assets in a separate fund (internally maintained). 2018 2017 Rs. 000 Rs. 000 Employee Retirement Pension Scheme 9,851,097 892,685 Employee Retirement Pension Scheme-New (2,463,637) (2,533,060) Widows’ and Orphans’ Pension Scheme 903,848 - Widowers’ and Orphans’ Pension Scheme - - Widows’ and Orphans’ and Widowers’ and Orphans’ Pension Scheme - New 665,884 - Gratuity Scheme 290,932 153,167 Medical Benefit Scheme 2,768,680 2,158,269 12,016,804 671,061 Movement in the Benefit Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Liability/(Asset) Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Pension Pension Pension Pension Widowers’ Scheme Scheme Scheme - New Scheme Scheme and Orphans’ Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 As at 1 January 2018 892,685 (2,533,060) (424,605) (1,279,273) - (22,218) 942,158 (2,424,313) Benefit Expense 283,821 (294,427) (88,343) (176,350) 665,884 14,991 145,554 551,130 Amount recognized in Other 9,059,635 567,448 1,416,796 477,491 - 54,992 247,096 11,823,458 Comprehensive Income Contribution Paid (385,044) (203,598) - - - - - (588,642) As at 31 December 2018 9,851,097 (2,463,637) 903,848 (978,132) 665,884 47,765 1,334,808 9,361,633 Part II - 34 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Movement in the Present Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Value of Projected Benefit Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Obligations Pension Pension Pension Pension Widowers’ Scheme Scheme Scheme - New Scheme Scheme and Orphans’ Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 As at 1 January 2018 29,232,145 718,032 5,218,411 912,262 - 153,167 2,158,269 38,392,286 Interest Cost 3,800,179 93,344 678,393 118,594 - 19,912 280,575 4,990,997 Current Service Cost 167,772 34,871 - - - 17,879 30,481 251,003 Past Service Cost - - - - 718,088 - - 718,088 Benefit Paid From the Fund (2,365,843) (966) (479,098) (30,040) - (5,570) (218,416) (3,099,933) Actuarial Losses on 5,137,270 210,414 823,885 198,338 - 105,544 517,771 6,993,222 Obligations As at 31 December 2018 35,971,523 1,055,695 6,241,591 1,199,154 718,088 290,932 2,768,680 48,245,663 Movement in Fair Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Value of Plan Assets/ Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Investments Pension Pension Pension Pension Widowers’ Scheme Scheme Scheme - New Scheme Scheme and Orphans’ Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 As at 1 January 2018 28,339,459 3,251,092 5,643,016 2,191,535 - 175,385 1,216,111 40,816,598 Interest Income 3,684,130 422,642 733,592 284,900 14,346 22,800 158,094 5,320,504 Contributions by the Employer 385,044 203,598 - - - - - 588,642 Contributions by the Employees - - 33,144 10,044 37,858 - 7,408 88,454 Benefit Paid from the Fund (2,365,843) (966) (479,098) (30,040) - (5,570) (218,416) (3,099,933) Return on Plan Assets, (3,922,365) (357,034) (592,911) (279,153) - 50,552 270,675 (4,830,236) excluding Interest Income As at 31 December 2018 26,120,425 3,519,332 5,337,743 2,177,286 52,204 243,167 1,433,872 38,884,029 There are uncollateralized investments under Pension, Widows’ and Orphans’ fund, Widowers’ and Orphans’ fund, Gratuity and Medical Benefit Scheme fund worth of Rs. 522.23 Mn for which 100% provision has been made and thus not included in the value of plan assets. Even without the value of such investments, the Bank has a net asset position under its pension liability as per actuarial valuation. Expenses Recognised in Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Other Comprehensive Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Income (OCI) for the Pension Pension Pension Pension Widowers’ Scheme Year Ended 31 December Scheme Scheme - New Scheme Scheme and Orphans’ 2018 Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Actuarial (Gains)/Losses on Obligations for the Period Due to Change in Financial 3,809,336 200,760 638,640 156,561 - 76,750 460,701 5,342,748 Assumptions Due to Experience 1,327,934 9,654 185,245 41,777 - 28,794 57,070 1,650,474 Return on Plan Assets, 3,922,365 357,034 592,911 279,153 - (50,552) (270,675) 4,830,236 excluding Interest Income Net (Income)/Expense For the Period Recognized in 9,059,635 567,448 1,416,796 477,491 - 54,992 247,096 11,823,458 OCI Benefit Expense for the Year Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Ended of December 2018 Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Pension Pension Pension Pension Widowers’ and Scheme Scheme Scheme-New Scheme Scheme Orphans’Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Interest Cost on Benefit 3,800,179 93,344 678,393 118,594 - 19,912 280,575 4,990,997 Obligation Interest Income on Plan assets (3,684,130) (422,642) (733,592) (284,900) (14,346) (22,800) (158,094) (5,320,504) Current Service Cost 167,772 34,871 - - - 17,879 30,481 251,003 Past Service Cost - - - - 718,088 - - 718,088 Contributions by the Employees - - (33,144) (10,044) (37,858) - (7,408) (88,454) Benefit Expense 283,821 (294,427) (88,343) (176,350) 665,884 14,991 145,554 551,130 Central Bank of Sri Lanka Annual Report - 2018 Part II - 35 Accounts and Operations of the Central Bank of Sri Lanka Part II Composition of the Plan Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical Total Assets Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Pension Pension Pension Pension Widowers’ and Scheme Scheme Scheme-New Scheme Scheme Orphans’Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Investment in Government 18,951,019 3,138,194 3,665,611 1,682,559 43,131 214,815 1,150,734 28,846,063 Securities Investment in Reverse Repo 219,425 21,471 44,950 26,096 3,883 - 4,013 319,838 Investment in Debentures 761,114 43,004 449,408 20,335 - 6,633 - 1,280,494 Investment in Fixed Deposits 6,173,983 315,885 1,176,978 448,149 4,848 21,719 279,125 8,420,687 Balances Remaining in 14,884 778 796 147 342 - - 16,947 Current Accounts Total Plan Assets as at 31 26,120,425 3,519,332 5,337,743 2,177,286 52,204 243,167 1,433,872 38,884,029 December 2018 As at 31 December 2017 Benefit (Asset)/Liability Employee Employee Widows’ and Widowers’ Gratuity Medical Total Retirement Retirement Orphans’ and Orphans’ Scheme Benefit Pension Pension Pension Pension Rs. 000 Scheme Scheme Scheme-New Scheme Scheme Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Present Value of Benefit Obligation 29,232,145 718,032 5,218,411 912,262 153,167 2,158,269 38,392,286 Fair Value of Plan Assets/Investments (28,339,460) (3,251,092) (5,643,016) (2,191,535) (175,385) (1,216,111) (40,816,599) Net Benefit (Asset)/Liability 892,685 (2,533,060) (424,605) (1,279,273) (22,218) 942,158 (2,424,313) Movement in the Benefit Liability/ Employee Employee Widows’ and Widowers’ Gratuity Medical Total (Asset) Retirement Retirement Orphans’ and Orphans’ Scheme Benefit Rs. 000 Pension Pension Pension Pension Rs. 000 Scheme Scheme Scheme-New Scheme Scheme Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 As at 1 January 2017 2,076,018 (1,834,772) (187,705) (1,002,453) (20,646) 889,590 (79,968) Benefit Expense 480,203 (208,897) (24,402) (130,319) 12,698 144,685 273,968 Amount recognized in Other (1,017,607) (308,404) (180,379) (136,612) (14,270) (84,350) (1,741,622) Comprehensive Income Contribution Paid (645,929) (180,987) (32,119) (9,889) - (7,767) (876,691) As at 31 December 2017 892,685 (2,533,060) (424,605) (1,279,273) (22,218) 942,158 (2,424,313) Benefit Expense for the Year Ended Employee Employee Widows’ and Widowers’ Gratuity Medical Total 31 December 2017 Retirement Retirement Orphans’ and Orphans’ Scheme Benefit Pension Pension Pension Pension Scheme Scheme Scheme-New Scheme Scheme Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Net Interest Cost 269,882 (238,520) (24,402) (130,319) (2,684) 115,647 (10,396) Current Service Cost 210,321 29,623 - - 15,382 29,038 284,364 Benefit Expense 480,203 (208,897) (24,402) (130,319) 12,698 144,685 273,968 Changes in Fair Value of Plan Assets/ Employee Employee Widows’ and Widowers’ Gratuity Medical Total Investments Retirement Retirement Orphans’ and Orphans’ Scheme Benefit Pension Pension Pension Pension Scheme Scheme Scheme -New Scheme Scheme Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 As at 1 January 2017 25,408,311 2,444,748 5,144,789 1,828,245 152,419 1,166,543 36,145,055 Actual Return on Plan Assets/ 4,375,497 627,231 849,631 375,242 37,653 253,174 6,518,428 Investments Contribution Received 645,929 180,987 32,119 9,889 - 7,767 876,691 Benefits Paid (2,090,277) (1,874) (383,523) (21,842) (14,687) (211,373) (2,723,576) As at 31 December 2017 28,339,460 3,251,092 5,643,016 2,191,534 175,385 1,216,111 40,816,598 Part II - 36 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka The principal assumptions used in determining Employee Benefit Obligations for all the plans are shown below: 2018 2017 Discount Rate 12.00% 13.00% Expected Rate of Return on Assets 12.00% 13.00% Future Salary Increases - Medical Benefit Scheme 8.50% 8.50% Rate of Salary Increases - Gratuity, W & OP, WR & OP, Old Pension Schemes 11.50% 8.50% Rate of Salary Increase - Pension New, W & OP and WR & OP New 6.50% 6.50% Future Pension Increases 7.50% 7.50% Attrition Rate 2.00% 2.00% Medical Cost Inflation Rate 4.50% 3.00% Average Remaining years of Service CBSL Pension 26 Years 27 Years CBSL Pension - New 38 Years 41 Years W & OP Pension Scheme 26 Years 27 Years WR & OP Pension Scheme 26 Years 27 Years W & OP and WR & OP Pension Scheme - New 38 Years - Gratuity Scheme 19 Years 20 Years CBSL Medical Benefit Scheme 26 Years 32 Years Retirement Age 60 Years 60 Years Sensitivity Analysis at 0.5% Employee Employee Widows’ and Widowers’ Widows’ and Gratuity Medical (As at 31 December 2018) Retirement Retirement Orphans’ and Orphans’ Orphans’ and Scheme Benefit Pension Pension Pension Pension Widowers’ Scheme Scheme Scheme-New Scheme Scheme and Orphans’ Pension Scheme - New Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Projected benefit obligation on current assumptions 35,971,523 1,055,695 6,241,591 1,199,154 718,088 290,932 2,768,680 Effect of "+" change in discount rate (1,508,089) (106,827) (298,931) (68,243) (79,520) (11,697) (105,627) Effect of "-" change in discount rate 1,628,425 121,759 326,649 74,734 92,308 12,548 114,320 Effect of "+" change in attrition rate - - - - - 55,973 15,155 Effect of "-" change in attrition rate - - - - - (61,945) (16,016) Effect of "+" change in salary escalation rate 188,526 87,724 14,634 5,647 55,034 12,548 - Effect of "-" change in salary escalation rate (183,845) (80,157) (14,279) (5,510) (50,354) (11,799) - Effect of "+" change in Medical Cost - - - - - - 115,653 Inflation Effect of "-" change in Medical Cost Inflation - - - - - - (106,871) Effect of "+" change in Rate of Pension 1,486,502 - 322,830 71,348 - - - Escalation Effect of "-" change in Rate of Pension (1,393,434) - (298,617) (65,954) - - - Escalation 35. MISCELLANEOUS LIABILITIES AND ACCRUALS 36.2 Fixed Asset Revaluation Reserve – This reserve is made up of the revaluation surpluses of Property, Plant Miscellaneous liabilities and accruals include the balances payable in the accounts payable, contract retention, deposits and Equipment as per IAS 16. taken as refundable tender deposits and the penalties payable 36.3 Other Reserves comprise the following; by the Department of Foreign Exchange of Central Bank of Sri Lanka. i). International Revaluation Reserve (IRR) : International Revaluation Reserve is a reserve established 36. EQUITY in accordance with section 41 of the Monetary Law Act Nature of Equity Items which requires that any unrealised gain or loss arising from the revaluation of net assets and liabilities of CBSL 36.1 Capital Funds in gold or foreign currency shall not be considered in Contributed Capital - The capital account represents the computing the net profit of the Bank, instead such profit capital of the Bank in accordance with section 6 of the or loss should be transferred to the IRR. Monetary Law Act (MLA). As per the section 6 of the MLA (Amendment) Act No. 15 of 2014, the capital of the ii). Market Revaluation Reserve (MRR): Market Bank has been increased to Rs. 50.0 Bn. Accordingly, Revaluation Reserve was set up as per the Monetary the Bank has increased its capital up to Rs. 50.0 Bn by Board decision of 30 January 2003, to transfer the capitalizing the Bank’s reserves with the concurrence of price valuation gains from marking to market the Minister of Finance in September 2014. foreign assets, in order to meet any adverse effects Central Bank of Sri Lanka Annual Report - 2018 Part II - 37 Accounts and Operations of the Central Bank of Sri Lanka Part II of volatilities in the international markets leading to vii). Technical Advancement Reserve : This reserve is adverse movements in market prices of the foreign built up from 2007 profits specifically to be used for financial assets. The Monetary Board has decided to technical advancement requirements, modification or build up this reserve to a maximum of 10% of the gross upgrading of the IT systems currently used by the Bank foreign reserves of the Bank. i.e., General Ledger, RTGS,Treasury Management Further, as per the Monetary Board decision MB/DG System and Scriptless Securities Settlement System. (W)/7/1/2016 dated 29 February 2016 on proposed During March 2018, an additional Rs. 2.0 Bn was amendments to the Profit Distribution Policy of the Bank, transferred from 2017 profits to this reserve. where Monetary Board deems necessary, transfer may be made from the MRR to Retained Earnings, in the Provincial Development Credit Scheme : During viii). case of negative Retained Earnings due to significant 2010, the Bank has commenced a refinance credit unrealized marked to market losses. scheme for medium & long term development Accordingly, an amount of Rs.19.43 Bn has been purposes for provinces by creating a fund from the transferred to Retained Earnings from MRR in view of profits, amounting to Rs. 2.90 Bn. Such loans are improving the negative Retained Earnings of the Bank. granted through Bank of Ceylon & People’s Bank. Considering the marked to market gains recorded in ix). Special Credit Guarantee Scheme Reserve : This 2017, an amount of Rs. 24.34 Bn was transferred reserve was set up in the year 2014 by transferring to MRR from Retained Earnings in 2018 as per the Rs. 2.0 Bn from Medium and Long Term Credit Fund, Monetary Board decision BP MB/F/8/34/2018 dated of which Rs. 1.0 Bn is allocated to support restructure 26 February 2018. of Saubaghya Loan Scheme, Awakening North Loan iii). Other Reserves : Other reserves include General Scheme (phase II), Resumption of Economic Activities Reserve, Building Reserve and Credit Guarantee in the East (phase II) and Repair of Damaged Houses Reserve. General Reserve includes the amounts set a in North and East operated by Regional Development side from the retained earnings by the Monetary Board. Department of the Bank. The balance of Rs. 1.0 Bn iv). Net Fair Value Gain/(Loss) on Securities at Fair is allocated to implement a special credit guarantee Value through Other Comprehensive Income: scheme to support lending to Small and Medium Unrealized gains and losses on the revaluation of Enterprises by Commercial Banks. securities and unit investments designated as Fair Value x). Reserve for Funding purpose of Post Employment through Other Comprehensive Income are transferred Benefit Plans : As per Monetary Board decision to this reserve. MB/F/39/20/2016 dated 16 December 2016, it v). RTGS Sinking Fund : This fund is built up with the is proposed to allocate 50 per cent of the benefit charges collected from the participants for the use of expenses of the actuary of a given year (starting from the RTGS system. 2016) to a separate reserve, if there are adequate vi). Pension Fund Reserve : This reserve is made up by distributable profits with a view to compensate the transferring an additional Rs.3.0 Bn from 2007 profits to possible negative impact to the equity attributed to be used to meet any shortfalls in the pension fund given actuarial losses and benefit expenses. Accordingly, the vulnerability of the income generating capacity of CBSL has transferred an amount of Rs. 0.37 Bn the Bank to external risks. Another Rs. 1.0 Bn have been in 2017. An additional amount of Rs. 5.0 Bn was transferred to this reserve from 2011 profits. During June transferred in anticipation of the possible impact to 2015, Rs. 2 .0 Bn has been transferred from Pension Fund the equity of the bank from the Actuarial valuation Reserve to New Pension Liability Account to implement of the guaranteed return of the Employee Provident the new pension scheme as per Board Paper No: MB/ Fund. No transfer had taken place for the year 2018 HR/11/12/2015. as the Bank does not have any distributable profits in 2018. Part II - 38 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka The movements in the other reserves are as follows: Medium Market Other Special RTGS IRR Net Fair Pension Technical Provincial Reserve Total and Long Revaluation Reserves Credit Sinking Value Gain/ Fund Advance- Develop- for Term Reserve Guarantee Fund (Loss) on Reserve ment ment Funding Credit Scheme FVOCI Reserve Credit purposes Reserve Reserve Securities Scheme of Post Fund Employ- ment Benefit Plans Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Balance as at 1,925,000 14,028,792 10,952,533 2,000,000 1,826,818 8,573,729 (3,563,157) 2,000,000 1,000,000 2,900,000 689,025 42,332,740 31 December 2017 Transition Adjustment on IFRS 9 Reclassification - - - - - - 1,287,347 - - - - 1,287,347 Impact Transition Adjustment for Expected Credit Losses on - - - - - - 65,588 - - - - 65,588 FVOCI Investments Adjusted Balance as at 1,925,000 14,028,792 10,952,533 2,000,000 1,826,818 8,573,729 (2,210,222) 2,000,000 1,000,000 2,900,000 689,025 43,685,675 1 January 2018 Transfer to RTGS Sinking - - - - 291,983 - - - - - - 291,983 Fund Transfer of Profits to General - - 5,013,869 - - - - - - - - 5,013,869 Reserve Transfer of Net Foreign - - - - - 146,854,048 - - - - - 146,854,048 Exchange Revaluation Gain Net Fair Value Loss on Securities at Fair - - - - - - (877,778) - - - - (877,778) Value through Other Comprehensive Income Transfer of Funds to Market - 24,337,841 - - - - - - - - - 24,337,841 Revaluation Reserve Transfer to Reserve for funding purposes of Post- - - - - - - - - - - 5,372,178 5,372,178 Employment Benefit Transfer of Funds to Technical - - - - - - - - 2,000,000 - - 2,000,000 Advancement Reserve Market Valuation Reserve - Government Securities Classified at - - - - - - 5,259 - - - - 5,259 Fair Value through Other Comprehensive Income Market Valuation Reserve - Equity Investments Classified - - - - - - 122,747 - - - - 122,747 at Fair Value through Other Comprehensive Income Expected Credit Losses on - - - - - - (1,939) - - - - (1,939) FVOCI Investments Transfer of Funds to Retained - (19,426,472) - - - - (16,289) - - - (1,727,706) (21,170,467) Earnings Balance as at 1,925,000 18,940,161 15,966,402 2,000,000 2,118,801 155,427,777 (2,978,222) 2,000,000 3,000,000 2,900,000 4,333,497 205,633,416 31 December 2018 37. PROFIT DISTRIBUTION losses from Unrealized Price Revaluations (unrealized “marked to market” losses) (As per the Profit In terms of the Monetary Law Act and Monetary Board Distribution Policy of CBSL) approved Profit Distribution Policy of CBSL (effective from 2018), the following adjustments are made to the net profit c) Any other transfers to reserves as per Sec.38 of MLA and any other adjustments arising from Sec. 39 of for the year in order to arrive at the distributable profit. MLA as decided by the Monetary Board. a) Remove the exchange gains. Remove the exchange Further, any other adjustment as required by losses until the accumintated exchangs gains are accounting standards and management decisions sufficient to absorb the losses. Charge any additional exchange losses (as per the Profit Distribution policy are adjusted in arriving at the distributable profit. of CBSL). Based on the above adjustments, the distributable loss b) Remove gains from Unrealized Price Revaluations for the year ended 31 December 2018 is as follows: (unrealized “marked to market” gains) but charge Central Bank of Sri Lanka Annual Report - 2018 Part II - 39 Accounts and Operations of the Central Bank of Sri Lanka Part II Item 2018 40. INTEREST EXPENSE ON FINANCIAL LIABILITIES Rs. 000 2018 2017 Profit for the year 137,927,718 Rs. 000 Rs. 000 Less: Interest Expense on Foreign Transfer of exchange gains to IRR in Currency Financial Liabilities accordance with the MLA 146,854,048 Asian Clearing Union 991,982 467,828 Transfer of “marked to market” gain on IMF Related Liabilities 3,862,093 1,900,742 foreign assets to Market Revaluation Reserve Derivatives 486,325 210,877 (MRR) 1,166,516 Other Foreign Payable 9,755 383,784 Other accounting adjustments 463,842 Total Interest Expense on Foreign Transfer to Other Comprehensive Income (As 11,823,458 Currency Financial Liabilities 5,350,155 2,963,231 per IAS 19 : Employee Benefits) Interest Expense on Local Add: Currency Financial Liabilities Transfer from Reserve for funding purpose of Post Employment Benefit Plans to Retained Securities Sold Under Repurchase Earnings 1,727,706 Agreements 925,379 1,023,720 Distributable Loss as per MLA, Profit Standing Deposit Facility 1,409,287 1,195,866 Distribution Policy of the Bank and other (20,652,440) Bond Borrowing 15,882 1,716 adjustments - Realised Loss Abandoned Property 529,672 454,814 Total Interest Expense on Local Currency Financial Liabilities 2,880,220 2,676,116 Total Interest Expense on 38. INTEREST INCOME FROM FINANCIAL ASSETS Financial Liabilities 8,230,375 5,639,347 2018 2017 Rs. 000 Rs. 000 The Bank has a net sterilization gain of Rs. 10,041.78 Interest Income from Foreign Mn (2017 - Rs. 12,977.01 Mn) in its activities to inject Currency Financial Assets Cash and Short Term Deposits 3,889,162 2,760,599 the liquidity to the market due to the deficit liquidity Financial Assets 13,588,824 6,170,100 position. The sterilization cost is composed of the interest Derivatives 8,078,946 13,984,017 expenses incurred on securities sold under agreement Total Interest Income from to repurchase, interest expense on Bond Borrowing and Foreign Currency Financial 25,556,932 22,914,716 Assets interest expense on Standing Deposit Facility netted off Interest Income from Local with interest income earned on the securities purchased Currency Financial Assets Sri Lanka Government Securities 7,941,274 17,656,195 under agreement to resale (Reverse Repurchase) included Other Loans and Advances 1,015,048 845,553 under interest income from Sri Lanka Government Total Interest Income from Local Securities and USD/LKR Derivative gain included in Currency Financial Assets 8,956,322 18,501,748 Total Interest Income from the Derivative gain under interest income from foreign Financial Assets 34,513,254 41,416,464 currency financial assets, as discussed below: 39. GAIN/(LOSS) FROM UNREALIZED PRICE 2018 2017 Rs. 000 Rs. 000 REVALUATIONS Interest expenses incurred on securities sold under agreement to 925,379 1,023,720 2018 2017 repurchase Rs. 000 Rs. 000 Interest expense on Bond Foreign Securities 214,157 (61,814) 15,882 1,716 Borrowing Gold (4,103,042) 13,949,169 Interest expense on Standing 1,409,287 1,195,866 Forex & Currency SWAPS (14,882,288) 9,702,099 Deposit Facility Less: Currency Options 511,217 411,021 Interest income earned on the Total Gain/(Loss) from Unrealized (18,259,956) 24,000,475 securities purchased under 4,313,387 1,214,298 Price Revaluations agreement to resale USD / LKR Derivative Gain 8,078,946 13,984,017 10,041,785 12,977,013 Part II - 40 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 41. EXPECTED CREDIT LOSSES ON FINANCIAL ASSETS 44. ADMINISTRATION AND OTHER EXPENSES 2018 2017 2018 2017 Rs. 000 Rs. 000 Foreign Currency Financial Assets Rs. 000 Rs. 000 Financial Assets at Amortized Repairs and Maintenance 831,201 796,595 Cost Cash & Cash Equivalents (Note 9.1) (21,059) - Operating Expenses for Reuters, IMF Related Assets (Note 12.4) (1) - Bloomberg, SWIFT etc. 162,735 122,260 Securities at Fair Value through Other Travelling 131,033 114,217 1,939 - Comprehensive Income (Note 10.2) Rental Expenses 3,004 3,325 Total Expected Credit Loss Printing 36,412 27,728 Reversals on Foreign Currency Financial Assets (19,121) - Audit Fees 11,199 10,412 Local Currency Financial Assets Remuneration to Members Financial Assets at Amortized of the Monetary Board 4,510 4,463 Cost Interest Subsidy on CBSL Loans to Banks (Note 16.2) 488 - Provident Fund 85,383 - Other Assets (Note 18.1) (11,462) - 8 - Advertising Cost 104,930 36,045 Credit Gurantee of RDD Total Expected Credit Loss Reversals Consultancy, Communication, on Local Currency Financial Assets (10,966) - Advisory and Professional Fees 102,718 87,020 Total Expected Credit Loss Miscellaneous Expenses 376,958 103,584 Reversals on Financial Assets (30,087) - Total Administration and Other 1,850,083 1,305,649 Expenses 42. OTHER INCOME 45. TAX 2018 2017 The Bank is not liable for the income tax as per section 7b Rs. 000 Rs. 000 (xvi) of Inland Revenue (Amendment) Act No. 10 of 2006 Dividend Income - Related Party 126,111 104,601 and section 9 (1) of Inland Revenue Act No. 24 of 2017. - Others - 2,540 Gain/(Loss) on Disposal of Property, The Withholding Tax paid by the Bank till 31 March 2018 and Economic Service Charge paid by the bank Plant & Equipment 79,373 (732) is treated as the final tax paid to the Inland Revenue Amortization of Deferred Grant 34 34 Department (IRD) as the requirement to pay withholding Licensing Fees of Financial Institutions 580,950 555,975 tax on government securities was removed with effect Rent Income 402,429 485,515 from 1 April 2018 by the Inland Revenue Act No. 24 of Charges collected from RTGS 2017. 123,361 119,606 Participants During the year 2018, Bank paid a total tax of Rs. Miscellaneous Income 380,736 335,125 1,119.29 Mn (2017 - Rs 1,837.98 Mn) in relation to Total Other Income 1,692,994 1,602,664 withholding tax of Rs. 268.08 mn (2017 - Rs. 1,837.98 Mn) and Economic Service Charge of Rs. 851.21 Mn (2017 - nil). 43. PERSONNEL EXPENSES 2018 2017 Rs. 000 Rs. 000 Wages and Salaries 5,409,137 4,112,349 Defined Contribution Plan Costs 1,536,049 610,489 Post Employee Defined Benefit Plan Costs 205,147 744,356 Total Personnel Expenses 7,150,333 5,467,194 Central Bank of Sri Lanka Annual Report - 2018 Part II - 41 Accounts and Operations of the Central Bank of Sri Lanka Part II 46. RECONCILIATION OF OPERATING PROFIT WITH OPERATING CASH FLOWS 2018 2017 Rs. 000 Rs. 000 Reported Profit from Operating Activities 137,927,718 48,356,367 Add / (Less) Non-Cash Items Depreciation & Amortization 498,189 518,716 Interest Received – Local Currency (7,941,272) (17,911,409) – Investment Portfolio Bad Debts written Back - (27,302) Net Provision for Defined Employee 390,483 236,269 Benefit Plans Gross Unrealised Foreign Exchange (149,861,582) (9,595,724) Gain Profit on Sale of Property, Plant and (79,381) - Equipment Provisions and Accruals 2,288,287 489,509 Expected Credit Loss Provision on 30,086 - Financial Assets Deferred Grants (34) (34) Amortization of PRGF Deposit (7,747) (6,804) Write off of Construction in Progress 22,402 - Amortization Expense of Fixed Income 109,525 883,659 Securities Add/ (Less) Movements in Other Working Capital Items (Increase)/Decrease in Inventories 306,597 (760,672) Decrease in Interest Receivable 2,558,796 579,464 Increase /(Decrease) in Miscellaneous (21,325) 906,181 Liabilities Increase in Interest Payable 1,075,371 219,716 Increase in Other Receivable (3,234,520) (79,675) Add /(Less) Investing and Financing Activities Net Unrealised Market Value Changes 12,201,892 (25,110,720) Net Cash Flows from (3,736,515) (1,302,459) Operating Activities 47. NET ISSUES/(WITHDRAWALS) OF CIRCULATION CURRENCY ON GOVERNMENT TRANSACTIONS 2018 2017 Rs. 000 Rs. 000 Purchases/(Sales) of Sri Lanka Government Securities 241,803,062 (315,960,919) Interest Received – Local Currency – Sri Lanka Government Securities (7,393,636) (21,308,838) Increase /(Decrease) in Advances to GOSL (1,168,300) 116,494,100 (Increase) /Decrease in Balances with Government and Government Entities (24,202) 126,367 233,216,924 (220,649,290) 48. NET ISSUES/(WITHDRAWALS) OF CIRCULATION CURRENCY ON BANK AND FINANCIAL INSTITUTIONS TRANSACTIONS 2018 2017 Rs. 000 Rs. 000 (Increase)/Decrease in Deposits by Banks and Financial Institutions 23,010,511 (38,460,908) 23,010,511 (38,460,908) Part II - 42 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 49. CONCENTRATIONS OF FUNDING The Bank’s significant end-of-year concentrations of funding were as follows: Sri Lanka Sri Lanka Sri Lanka Supranational Other Total 49.1 Balance as at 31 December 2018 Government Public Commercial Financial Banks Institutions Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Liabilities Banks and Financial Institutions - - - 811,552 18,489,608 19,301,160 Derivative Financial Instruments - - 12,156,003 - 1,900,457 14,056,460 Asian Clearing Union - - - 79,158,977 - 79,158,977 IMF - - - 416,988,246 - 416,988,246 Other 134,657,025 - - 68,817 5,091 134,730,933 Total Foreign Currency Financial Liabilities 134,657,025 - 12,156,003 497,027,592 20,395,156 664,235,776 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions - - 319,922,749 - 183,434 320,106,183 Deposits of Government and Government Entities 348,681 37 - - - 348,718 Securities Sold Under Repurchase Agreements - - 16,741,679 - 11,569,542 28,311,221 Balances of Employee Benefit Plans - - - - 18,333 18,333 Currency in Circulation - 640,942,510 - - - 640,942,510 Other Payables 103,736 - 2,082,061 - 10,420,634 12,606,431 Total Local Currency Financial Liabilities 452,417 640,942,547 338,746,489 - 22,191,943 1,002,333,396 Total Financial Liabilities 135,109,442 640,942,547 350,902,492 497,027,592 42,587,099 1,666,569,172 Other Liabilities Deferred Grants - - - - 11 11 Pension and Other Post Employment Benefit Plans - - - - 12,016,804 12,016,804 Miscellaneous Liabilities and Accruals 2,562 - - - 83,383 85,945 Total Other Liabilities 2,562 - - - 12,100,198 12,102,760 Total Liabilities 135,112,004 640,942,547 350,902,492 497,027,592 54,687,297 1,678,671,932 49.2 Balance as at 31 December 2017 Foreign Currency Financial Liabilities Banks and Financial Institutions - - - - 8,239,544 8,239,544 Derivative Financial Instruments - - 4,648,449 - - 4,648,449 Asian Clearing Union - - - 90,981,712 - 90,981,712 IMF - - - 318,995,269 - 318,995,269 Other 62,497,163 - 1,193,019 200,757 204,950 64,095,889 Total Foreign Currency Financial Liabilities 62,497,163 - 5,841,468 410,177,738 8,444,494 486,960,863 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions - - 341,707,391 - 4,807 341,712,198 Deposits of Government and Government Entities 324,515 2 - - - 324,517 Securities Sold Under Repurchase Agreements - - 40,655,278 - - 40,655,278 Balances of Employee Benefit Plans - - - - 4,547 4,547 Currency in Circulation - 598,053,901 - - - 598,053,901 Other Payable 45,734 - 2,306,897 - 6,534,525 8,887,156 Total Local Currency Financial Liabilities 370,249 598,053,903 384,669,566 - 6,543,879 989,637,597 Total Financial Liabilities 62,867,412 598,053,903 390,511,034 410,177,738 14,988,373 1,476,598,460 Other Liabilities Deferred Grants - - - - 45 45 Pension and Other Post Employment Benefit Plans - - - - 671,061 671,061 Miscellaneous Liabilities and Accruals 82,328 - - - 129,392 211,720 Total Other Liabilities 82,328 - - - 800,498 882,826 Total Liabilities 62,949,740 598,053,903 390,511,034 410,177,738 15,788,871 1,477,481,286 50. RISK MANAGEMENT In pursuing Central Bank of Sri Lanka’s (CBSL) policy objectives, it The Risk Governance Framework which was approved by the faces various risks, both financial and non-financial in nature. Since Monetary Board in July 2018 comprises both a Risk Governance the materialization of any of these risks could have a severe impact Structure and a Risk Management Structure and covers both, on the financial position and the reputation of CBSL, a properly financial and non-financial risks confronted by the Bank. designed risk management framework is vital for CBSL. Recognizing the strategic importance of an integrated approach to risk The Risk Governance Structure consists of the Monetary Board management, led to the creation of a separate Risk Management (MB), and two Board sub-committees, the Board Risk Oversight Department (RMD) at CBSL in 2015 to overcome the conventional Committee (BROC) and the Monetary Board Advisory Audit management of viewing risk in silos. Accordingly, risk management Committee (MBAAC). The MB holds the ultimate responsibility was recognized as a key strategic priority of the CBSL for 2018- for the overall risk management function of the Bank and sets the 2020 and the Bank is in the process of implementing an Enterprise- “Tone at the Top”. Further, MB is responsible for setting the Risk wide Risk Management (ERM) Framework for CBSL. This framework Appetite and Risk Tolerance level for CBSL and approving the risk is intended to promote a culture of informed risk-taking at all levels management/compliance framework. of the Bank. Central Bank of Sri Lanka Annual Report - 2018 Part II - 43 Accounts and Operations of the Central Bank of Sri Lanka Part II The BROC was set up in August 2018 and is chaired by Mr. the CBSL, and any risk-taken beyond the risk appetite of the CBSL, Chrishantha Perera, independent member of the Monetary Board would be recognized, escalated and addressed in a timely manner. and comprises external experts (Mr. Ravi Abeysuriya, Director RMD will work with the operational departments to develop Risk HNB Assurance from 01.08.2018 to 05.10.2018 and Mr. Priyan Fernando, Chairman Brandix and Senior Advisor, Boston Consulting Registers in a phased-out manner. Risk registers would enable Group from 05.10.2018 onwards). The BROC oversees CBSL’s the measurement of risk in a more consistent and uniform manner overall Risk Management and Compliance Functions via a across all the operations in the bank. It would also provide risk formal delegation from the MB, and is responsible for laying the information to the management to enable timely assessment and broad strategy and policies for the Bank’s risk management and treatment of risks. compliance functions. The BROC also assists the MB to ensure a RMD will implement an Incident Reporting Mechanism in early dedicated focus on risk management and compliance at the Bank. 2019, to facilitate reporting of risk incidents affecting the CBSL The Risk Management Structure that has been put in place follows to the management and to ensure that appropriate actions are the Three Lines of Defense model. In the first line of defense, implemented to address the causes of such incidents. This on-line operational departments are expected to identify, assess, control Incident Reporting System, would be accessible to staff at all levels. and mitigate risks and implement internal policies and procedures This would facilitate the development of a central repository of risk to ensure that activities carried out are consistent with the Bank’s events within the CBSL to serve as a basis for analyzing and assessing goals and objectives. The Risk Management Department assists risk incidents, tracking progress on the implementation of corrective in monitoring the implementation of effective risk management actions, identifying possible trends and areas of vulnerabilities and practices by operational management and independently reports improving risk reduction measures. risk related issues to the Risk Governance Structure creating a link between the Risk Management and Risk Governance Structures. With respect to financial risk management, RMD will further The third line of defense, Internal Audit provides assurance on the strengthen the risk management framework of the fund management effectiveness of governance, risk management and internal controls, activities and is in the process of reviewing the investment policies and including the manner in which the first and second lines of defense guidelines for each of the funds managed by CBSL. RMD’s focus achieve risk management and control objectives. Each of these would be on revisiting the credit risk policies and guidelines with a three ‘lines’ plays a distinct role within the Bank’s risk governance view to improving the credit risk management framework of the fund framework. management activities of CBSL, covering CBSL’s counterparties, issuers and custodians. In the meantime, RMD would continue In addition to facilitating non-financial risk management of all to monitor credit and market risks pertaining to investments on an the departments under the three lines of defense model, RMD is ongoing basis to ensure they are within the stipulated limits specified also responsible for the financial risk management of the fund by the Monetary Board approved Strategic Asset Allocation (SAA), management activities of the International Reserves (IR), and the Internal Investment Funds (IIF) of CBSL, as well as the Employees’ IPS and IG and highlight risks to the management at all times. Provident Fund (EPF) which is carried out as an agency function for the Government. RMD revised the Investment Policy Statements 50.1 Credit Risk (IPS) and Investment Guidelines (IG) for the EPF and IIF and set up Investment Oversight Committees (IOCs) to oversee these fund (a) Concentrations of credit Exposure by management activities. RMD also independently monitored market and credit risks pertaining to these fund management activities and geographical area reported risks emanating from them to the management. Market The Bank’s significant end-of-year concentrations of credit exposure and credit risk indicators were presented at the monthly meetings of by geographical area (based on the entity’s country of ownership) the Foreign Reserves Management Committee, where observations, were as follows: from a risk perspective, on investment strategies and global market developments, were conveyed to the Committee. Similar meetings 2018 2017 were convened for the IOCs of the EPF and IIF on a monthly basis, Rs. 000 Rs. 000 where risks and compliance issues pertaining to their investments were discussed. Sri Lanka 489,380,034 249,968,143 USA 665,241,791 643,710,289 In line with the new framework, RMD prepared a Risk Management Japan 95,625,902 18,253,104 Policy Statement (RMPS) for the CBSL, setting out the policies for Britain 9,869,079 28,946,605 implementation of risk management across CBSL. In this process, Europe 118,939,171 94,190,661 CBSL follows accepted standards and guidelines for managing risks, while assigning risk ownership and management among different Supranational 266,277,984 273,831,693 stakeholders with clear accountability. Other 96,953,618 142,897,782 Total Financial Assets 1,742,287,579 1,451,798,277 A survey was conducted amongst the Monetary Board and management of CBSL to determine the top bank-wide non-financial risks impacting the CBSL. The survey results would be used to (b) Concentrations of Credit Exposure by Institutions develop a Risk Taxonomy for CBSL, which would help prioritize the bank-wide non-financial risk categories affecting CBSL and enable The Bank’s significant end-of-year concentrations of credit the management to concentrate on key risk categories that impact exposure by Institution type were as follows: the institution. 2018 2017 Recognizing the importance of creating a risk culture within the Rs. 000 Rs. 000 bank, RMD conducted several risk awareness programs for CBSL Governments 1,340,399,127 958,345,205 staff throughout the year at various fora, with the involvement of Supranational Financial RMD staff and external resource personnel. Institutions 266,277,984 273,831,693 With a view to strengthen the operational risk management function, Foreign Banks and Financial Institutions 121,789,777 201,640,454 RMD would secure technical assistance from the World Bank’s Banks & Financial Institutions Operational Risk Team to enhance risk governance and develop a in Sri Lanka 1,353,647 10,308,545 risk management framework for the CBSL. Other 12,467,044 7,672,380 Going forward, RMD will continue to strive to create an environment Total Financial Assets 1,742,287,579 1,451,798,277 to ensure that emerging risks that will have a material impact on Part II - 44 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka (c) Credit Exposure by Credit Rating The following table represents the credit ratings of respective financial assets or issuers, based on the ratings of Standard and Poor’s and Fitch Ratings. Under Standard & Poor’s ratings and Fitch Ratings, AAA is the highest quality rating possible and indicates the lowest expectations of credit risk. It is assigned only in the case of exceptionally strong capacity for timely payment of financial commitment. AA is very high quality grade, indicating very low expectation of credit risk, and A is an upper medium grade, indicating a low expectation of credit risk; BBB is the lowest investment grade rating, indicating that there is currently a low expectation of credit risk and exhibits adequate protection parameters, ratings lower than AAA can be modified by + or – signs to indicate relative standing within the major categories. NR indicates that Standard and Poor’s or Fitch Rating have not rated the entity. Credit Exposure by Credit Rating Credit 2018 2017 Rating Rs.000 % Rs.000 % Cash & Cash Equivalents Federal Reserve Bank - USA/Reserve Bank of Australia/Bank for International Settlements/Bank of Japan/Deutsche Bundesbank/Bank of 327,240,508 18.78% 310,350,210 21.38% England/Sveriges Riks Bank/Bank of Canada/Reserve Bank of New Zeland AAA - 0.00% 50,158,566 3.45% AA 79,844 0.00% 772,746 0.05% AA- 15,894,101 0.91% 81,500,623 5.61% A+ 28,154,296 1.62% 3,032,823 0.21% A 544,841 0.03% 13,741,004 0.95% A- 51,131 0.00% 84,841 0.01% BBB- 1,572 0.00% 1,505 0.00% NR 208,883 0.01% 185,323 0.01% 372,175,176 21.36% 459,827,641 31.67% Securities at Fair Value through Other Comprehensive Income/ Available for Sale AAA 137,844,494 7.91% 62,060,643 4.27% AA+ 508,501,483 29.19% 464,672,544 32.01% AA 3,892,615 0.22% 1,862,308 0.13% AA- 26,115,880 1.50% 13,360,972 0.92% A+ 13,325,830 0.76% 21,867,283 1.51% A 196,616 0.01% 298,956 0.02% BBB+ 134,539 0.01% - 0.00% NR 4,864,937 0.28% 2,106,229 0.15% 694,876,394 39.88% 566,228,935 39.00% Securities at Fair Value through Profit or Loss AAA 26,605,392 1.53% 23,517,574 1.62% AA+ 2,335,172 0.13% 1,393,767 0.10% AA 4,861,898 0.28% 3,593,798 0.25% AA- 1,385,016 0.08% 1,174,551 0.08% A+ 367,606 0.02% 309,062 0.02% A - 0.00% 15,275,623 1.05% A- (596,292) -0.03% - 0.00% BBB+ 671,554 0.04% - 0.00% NR 1,836,893 0.11% - 0.00% 37,467,239 2.15% 45,264,376 3.12% Derivative Financial Instruments Locally Rated AAA - 0.00% 979,560 0.07% AA - 0.00% 2,749,069 0.19% AA- 750 0.00% 481,327 0.03% A+ - 0.00% 66,030 0.00% A - 0.00% 64,099 0.00% A- - 0.00% 387,706 0.03% B - 0.00% 24,265 0.00% NR - 0.00% 188,399 0.01% 750 0.00% 4,940,455 0.33% IMF Related Assets 147,427,452 8.46% 126,842,946 8.74% 147,427,452 8.46% 126,842,946 8.74% Other Receivables AA+ - 0.00% 3,072,381 0.21% NR 961,284 0.06% - 0.00% Locally Rated NR - 0.00% 593,319 0.04% 961,284 0.06% 3,665,700 0.25% Total Foreign Currency Financial Assets 1,252,908,295 71.91% 1,206,770,053 83.12% Central Bank of Sri Lanka Annual Report - 2018 Part II - 45 Accounts and Operations of the Central Bank of Sri Lanka Part II Credit 2018 2017 Rating Rs.000 % Rs.000 % Local Currency Financial Assets Sri Lanka Government Securities B+ - 0.00% 9,704,962 0.67% B 45,031,157 2.58% - 0.00% Securities Purchased under Agreements to Re-sell B+ - 0.00% 22,375,124 1.54% B 229,454,409 13.17% - 0.00% Provisional Advances to Government B+ - 0.00% 199,800,871 13.76% B 198,632,571 11.40% - 0.00% Loans to Banks AA+ 39,448 0.00% 96,025 0.01% AA - 0.00% 2,056 0.00% AA- 1,233 0.00% 2,493 0.00% A+ 6,904 0.00% 8,218 0.00% A- 2,816 0.00% 14,624 0.00% BBB - 0.00% 1,449 0.00% BBB- 523 0.00% - 0.00% BB+ 17,704 0.00% 39,692 0.00% B - 0.00% 2,140 0.00% NR 27,335 0.00% 57,006 0.00% Equity Investments in Financial and Other Institutions NR 1,381,879 0.08% 41,095 0.00% Other Assets AAA 198,899 0.01% 135,457 0.01% AA+ 996,102 0.06% 919,142 0.06% AA 55,313 0.00% - 0.00% A 6,620 0.00% 6,746 0.00% B+ - 0.00% 5,443,809 0.37% B 6,458,108 0.37% - 0.00% NR 7,068,263 0.41% 6,377,316 0.44% Total Local Currency Financial Assets 489,379,284 28.09% 245,028,224 16.88% Total Financial Assets 1,742,287,579 100.00% 1,451,798,277 100.00% (d) Summary by Major Credit Category Foreign Currency Financial Assets Federal Reserve Bank - USA/Reserve Bank of Australia/Bank for International Settlements/ Bank of Japan/ Deutsche Bundesbank/Bank of England/ Sveriges Riks Bank/Bank of Canada/Reserve Bank of New Zeland 327,240,508 18.78% 310,350,210 21.38% IMF Related Assets 147,427,452 8.46% 126,838,152 8.74% AAA 164,449,886 9.44% 135,741,577 9.35% AA+/- 563,066,009 32.32% 571,403,690 39.36% A+/- 42,044,028 2.41% 54,609,592 3.76% BBB+/- 807,665 0.05% 1,505 0.00% NR 7,871,997 0.45% 2,291,553 0.16% Locally Rated AAA - 0.00% 979,560 0.07% AA - 0.00% 2,749,069 0.19% AA- 750 0.00% 481,327 0.03% A+/- - 0.00% 517,835 0.04% B - 0.00% 24,265 0.00% NR - 0.00% 781,718 0.05% Total Foreign Currency Financial Assets 1,252,908,295 71.91% 1,206,770,053 83.12% Local Currency Financial Assets AAA 198,899 0.01% 135,457 0.01% AA+ 1,035,550 0.06% 1,015,167 0.07% AA 55,313 0.00% 2,056 0.00% AA- 1,233 0.00% 2,493 0.00% A+ 6,904 0.00% 8,218 0.00% A 6,620 0.00% 6,746 0.00% A- 2,816 0.00% 14,624 0.00% BBB - 0.00% 1,449 0.00% BBB- 523 0.00% - 0.00% BB+ 17,704 0.00% 39,692 0.00% B+ - 0.00% 237,324,767 16.35% B 479,576,245 27.53% 2,140 0.00% NR 8,477,477 0.49% 6,475,417 0.45% Total Local Currency Financial Assets 489,379,284 28.09% 245,028,224 16.88% Total Financial Assets 1,742,287,579 100.00% 1,451,798,277 100.00% Part II - 46 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka 50.2 Interest Rate Risk iii) Value at Risk (VaR) (a) Foreign Currency Interest Rate Sensitivity VaR summarizes in a single number the downside risk of the portfolio, under normal market conditions, from financial Interest rate risk is the risk of loss arising from the market movements. Therefore, VaR is the maximum loss changes in interest rates. over a target horizon such that there is a low, pre-specified The interest rate sensitivity of the Fixed Income Securities probability that the actual loss will be larger. VaR gives a portfolio, except the investment in Reserve Advisory number, in terms of money, which can be aggregated across Management Program (RAMP), is measured by the potential risks and positions. The Bank uses Monte Carlo method to gain or loss that could incur due to a change in interest rate by 10 basis points. The interest rate sensitivity of the fixed calculate VaR number for 10 days period at 99% confidence income securities portfolio held under RAMP is meaured by interval for its fixed income securities portfolio except for the the potential gain or loss that could incur due to a change in investment in RAMP. The VaR of the fixed income securities interest by 1 basis point. Sensitivity of the risk exposure of the portfolio held under RAMP is measured using the Monte Carlo segmented Fixed Income Securities Portfolio is given below: method for one month period at 99 % confidence interval. Potential Loss (USD Mn) Portfolio Segment Value at Risk (VaR) (USD) Mn 2018 2017 Portfolio Segment Fair Value through Other 2018 2017 Comprehensive Income/ 7.86 7.55 Fair Value through Other Available for Sale Comprehensive Income/ 19.94 22.98 RAMP 0.03 0.03 Available for Sale RAMP 0.78 0.64 RMD manages the interest rate risk of the foreign assets portfolio by employing the following strategies: iv) Trading & Open Position Limits i) While the interest rate sensitivity measures the effect of a change in interest rates on the foreign assets portfolio, the Bank assigns specific dealer limits on intra-day and Bank uses Modified Duration (MD) as a measurement of overnight position limits for individual dealers by way of interest rate risk which considers interest rates as well as the “Dealing Authority “. duration of an investment. The MD measures the change in price of a security for a 1% change in the interest rates Interest rate risk measures related to the investments in (yield). A higher MD indicates a higher risk. Hence, the the Reserve Advisory Management Program (RAMP) is Bank sets an appropriate MD from time to time considering reported to the Foreign Reserve Management Committee the developments in the financial markets, portfolio on a regular basis. characteristics and the risk appetite of the bond portfolio. The MDs of the foreign assets portfolio are tabulated below: (b) Local Currency Interest Rate Sensitivity Modified Duration The local Treasury Bill portfolio is recorded in the Statement of Financial Position of the Bank at Fair Value through Investment Segment Modified Duration 2018 2017 Other Comprehensive Income as per the Business Model Capital Market (Fixed Income assessment under IFRS 9. This portfolio is not an investment Securities) 2.08 2.02 portfolio, as the Bank does not purchase Treasury Bills with the RAMP 1.41 1.39 intention of earning an interest income. The Bank purchases or sells Treasury Bills to inject rupee liquidity into the domestic ii) Since the MD does not account for large changes in market or to absorb liquidity from the market in the course prices, another measure used for management of interest of carrying out its monetary policy operations in relation to rate risk of the foreign reserves portfolio is convexity. one of its core objectives, maintaining economic and price Convexity measures the extent of deviation in bond price- stability. Hence, the volume of Treasury Bills in the Bank’s yield curve from a straight line representing duration. It portfolio is determined by its monetary policy operations. In allows improving the duration approximation for bond addition, the basic interest rates in the rupee market, the Repo price changes. Convexity is a change in Duration for a change in yield. It measures the predictive error of rate and the Reverse Repo rate are policy rates determined by Modified Duration. In other words, it is the second the Bank in the course of implementing its monetary policy. derivative of a security’s price with respect to its yield. Moreover, the Bank’s actions in injecting rupee liquidity or absorbing liquidity from the market have a significant impact Convexity of the segmented Fixed Income on general rupee market interest rates. Thus, changes in the interest income earned from the Treasury Bill portfolio, which Securities portfolio arise from changes in the volume of the Bank’s Treasury Bill Potential Loss (USD Mn) portfolio, as well as changes in interest rates, are primarily a Portfolio Segment 2018 2017 consequence of the Bank’s monetary policy actions, rather Fair Value through Other than due to investment decisions. Therefore, the Bank does Comprehensive Income/ 0.07 0.07 Available for Sale not consider interest rate sensitivities arising from local RAMP 0.04 0.04 currency assets. Central Bank of Sri Lanka Annual Report - 2018 Part II - 47 Accounts and Operations of the Central Bank of Sri Lanka Part II (c) Assets and liabilities will mature or re-price within the following Periods Foreign Currency Interest Rate Weighted 2018 6 Months 6 to 12 1 to 2 2 to 5 Over 5 Sensitivity Gap: Avg. Int. Total or Less Months Years Years Years Rate % Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Interest Sensitive Foreign Currency Financial Assets Cash & Cash equivalents 1.9645 372,175,176 372,175,176 - - - - Securities at Fair Value through Profit or Loss and Fair Value through Other 2.4936 732,343,633 121,625,585 51,601,808 223,725,010 329,351,259 6,039,971 Comprehensive Income IMF Related Assets 1.0991 12,348,975 12,348,975 - - - - Total Interest Sensitive Foreign 1,116,867,784 506,149,736 51,601,808 223,725,010 329,351,259 6,039,971 Currency Financial Assets Non Interest Sensitive Foreign Currency Financial Assets IMF Related Assets 135,078,477 9,667 - - 199,961 134,868,849 Derivative Financial Instruments 750 750 - - - - Other Receivables 961,284 961,284 - - - - Total non Interest Sensitive Foreign Currency 136,040,511 971,701 - - 199,961 134,868,849 Financial Assets Total Foreign Currency Financial Assets 1,252,908,295 507,121,437 51,601,808 223,725,010 329,551,220 140,908,820 Interest Sensitive Foreign Currency Financial Liabilities IMF 2.1080 181,318,765 - - - 99,568,098 81,750,667 Asian Clearing Union 2.2345 79,158,977 79,158,977 - - - - Total Interest Sensitive Foreign 260,477,742 79,158,977 - - 99,568,098 81,750,667 Currency Financial Liabilities Non Interest Sensitive Foreign Currency Financial Liabilities Banks and Financial Institutions 19,301,160 19,301,160 - - - - Derivative Financial Instruments 14,056,460 11,736,595 1,853,550 - 466,315 - IMF 235,669,481 - - - - 235,669,481 Other Foreign Liabilities 134,730,933 134,730,933 - - - - Total non Interest Sensitive Foreign Currency Financial Liabilities 403,758,034 165,768,688 1,853,550 - 466,315 235,669,481 Total Foreign Currency Financial Liabilities 664,235,776 244,927,665 1,853,550 - 100,034,413 317,420,148 Foreign Currency Interest Rate 856,390,042 426,990,759 51,601,808 223,725,010 229,783,161 (75,710,696) Sensitivity Gap Part II - 48 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Weighted 2018 6 Months 6 to 12 1 to 2 2 to 5 Over 5 Avg. Int. Total or Less Months Years Years Years Rate % Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Interest Sensitive Local Currency Financial Assets Sri Lanka Government Securities 12.8451 45,031,157 43,443,802 407,078 - 886,336 293,941 Securities Purchased under Resale 8.9950 229,454,409 229,454,409 - - - - Agreements Loans to Banks 7.7395 95,963 65,057 16,347 3,571 9,499 1,489 Other Assets - Staff Loans 4.2160 6,846,041 269,780 275,058 563,545 1,810,962 3,926,696 - Others 9.7553 7,792,394 470,308 1,012,421 1,417,860 1,105,413 3,786,392 Total Interest Sensitive Local 289,219,964 273,703,356 1,710,904 1,984,976 3,812,210 8,008,518 Currency Financial Assets Non Interest Sensitive Local Currency Financial Assets Provisional Advances to Government 198,632,571 198,632,571 - - - - Other Assets - Others 144,870 144,870 - - - - Investment in Equity Securities - Fair Value through Other Comprehensive Income 1,381,879 - - - - 1,381,879 Total Non Interest Sensitive Local 200,159,320 198,777,441 - - - 1,381,879 Currency Financial Assets Total Local Currency Financial 489,379,284 472,480,797 1,710,904 1,984,976 3,812,210 9,390,397 Assets Interest Sensitive Local Currency Financial Liabilities Standing Deposit Facility 8.0000 28,311,221 28,311,221 - - - - Total Interest Sensitive Local 28,311,221 28,311,221 - - - - Currency Financial Liabilities Non Interest Sensitive Local Currency Financial Liabilities Deposits of Banks and Financial 320,106,183 320,106,183 - - - - Institutions Deposits of Government and 348,718 348,718 - - - - Government Entities Balances of Employee Benefit Plans 18,333 18,333 - - - - Currency in Circulation 640,942,510 640,942,510 - - - - Other Payables 12,606,431 12,606,431 - - - - Total Non Interest Sensitive Local 974,022,175 974,022,175 - - - - Currency Financial Liabilities Total Local Currency Financial 1,002,333,396 1,002,333,396 - - - - Liabilities Local Currency Interest Rate 260,908,743 245,392,135 1,710,904 1,984,976 3,812,210 8,008,518 Sensitivity Gap Central Bank of Sri Lanka Annual Report - 2018 Part II - 49 Accounts and Operations of the Central Bank of Sri Lanka Part II Comparative figures as at 31 December 2017 were as follows: Foreign Currency Interest Rate Weighted 2017 6 Months 6 to 12 1 to 2 2 to 5 Over 5 Sensitivity Gap: Avg. Int. Total or Less Months Years Years Years Rate % Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Interest Sensitive Foreign Currency Financial Assets Cash & Cash equivalents 1.5150 459,827,641 459,827,641 - - - - Securities at Fair Value through Profit or Loss and Available for Sale 1.9158 596,217,687 87,922,743 76,479,327 118,516,346 313,299,271 - Investments IMF Related assets 0.5392 11,094,542 11,094,542 - - - - Total Interest Sensitive Foreign 1,067,139,870 558,844,926 76,479,327 118,516,346 313,299,271 - Currency Financial Assets Non Interest Sensitive Foreign Currency Financial Assets IMF Related assets 115,748,404 4,794 164,564 - - 115,579,046 Derivative Financial Instruments 4,940,455 4,536,892 403,563 - - - Other Receivables 3,665,700 3,665,700 - - - - Securities at Fair Value through Profit or Loss 15,275,624 15,275,624 - - - - Total Non Interest Sensitive 139,630,183 23,483,010 568,127 - - 115,579,046 Foreign Currency Financial Assets Total Foreign Currency Financial 1,206,770,053 582,327,936 77,047,454 118,516,346 313,299,271 115,579,046 Assets Interest Sensitive Foreign Currency Financial Liabilities IMF 1.5480 116,996,460 - - - 49,873,486 67,122,974 Asian Clearing Union 1.2800 90,981,712 90,981,712 - - - - Total Interest Sensitive Foreign 207,978,172 90,981,712 - - 49,873,486 67,122,974 Currency Financial Liabilities Non Interest Sensitive Foreign Currency Financial Liabilities Banks and Financial Institutions 8,239,544 8,239,544 - - - - Derivative Financial Instruments 4,648,449 1,048,241 2,355,626 448,134 796,448 - IMF 201,998,809 329,937 - - - 201,668,872 Other Foreign Liabilities 64,095,889 62,902,870 - - - 1,193,019 Total Non Interest Sensitive Foreign Currency Financial 278,982,691 72,520,592 2,355,626 448,134 796,448 202,861,891 Liabilities Total Foreign Currency Financial 486,960,863 163,502,304 2,355,626 448,134 50,669,934 269,984,865 Liabilities Foreign Currency Interest Rate 859,161,698 467,863,214 76,479,327 118,516,346 263,425,785 (67,122,974) Sensitivity Gap Part II - 50 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Weighted 2017 6 Months 6 to 12 1 to 2 2 to 5 Over 5 Avg. Int. Total or Less Months Years Years Years Rate % Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Interest Sensitive Local Currency Financial Assets Sri Lanka Government Securities 8.9863 9,704,962 9,704,962 - - - - Securities Purchased under Agreements to Re-sell 8.7500 22,375,124 22,375,124 - - - - Loans to Banks 8.0891 223,702 110,409 44,126 54,599 10,049 4,519 Other Assets - Staff Loans 3.9834 6,105,830 231,580 238,514 486,331 1,543,517 3,605,888 - Others 10.2520 6,579,629 593,501 622,037 1,142,843 1,870,103 2,351,145 Total Interest Sensitive Local Currency Financial Assets 44,989,247 33,015,576 904,677 1,683,773 3,423,669 5,961,552 Non Interest Sensitive Local Currency Financial Assets Provisional Advances to Government 199,800,871 199,800,871 - - - - Other Assets - Others 197,011 197,011 - - - - Investment in Equity Securities - Available for Sale 41,095 - - - - 41,095 Total Non Interest Sensitive Local Currency Financial Assets 200,038,977 199,997,882 - - - 41,095 Total Local Currency Financial Assets 245,028,224 233,013,458 904,677 1,683,773 3,423,669 6,002,647 Interest Sensitive Local Currency Financial Liabilities Securities sold under Repurchase 7.2500 6,503,884 6,503,884 - - - - Agreements Standing Deposit Facility 7.2500 34,151,394 34,151,394 - - - - Total Interest Sensitive Local 40,655,278 40,655,278 - - - - Currency Financial Liabilities Non Interest Sensitive Local Currency Financial Liabilities Deposits of Banks and Financial 341,712,198 341,712,198 - - - - Institutions Deposits of Government and Government Entities 324,517 324,517 - - - - Balances of Employee Benefit Plans 4,547 4,547 - - - - Currency in Circulation 598,053,901 598,053,901 - - - - Other Payables 8,887,156 8,887,156 - - - - Total Non Interest Sensitive Local Currency Financial Liabilities 948,982,319 948,982,319 - - - - Total Local Currency Financial Liabilities 989,637,597 989,637,597 - - - - Local Currency Interest Rate Sensitivity Gap 4,333,969 (7,639,702) 904,677 1,683,773 3,423,669 5,961,552 50.3 Foreign Currency Risk Foreign currency activities result mainly from the Bank’s deciding on the currency allocation, public debt holding of foreign currency assets under its foreign repayment requirements are given due consideration. reserve management function. Volatility of the foreign Accordingly, the Bank holds most major currencies such exchange markets may expose the Bank to exchange risk. as US Dollars, Sterling Pounds, Japanese Yen, Euro, The Monetary Board and Foreign Reserves Management Australian Dollars and New Zealand Dollars. Compliance Committee (FRMC) have set percentage holdings of with limits established for foreign currency positions are different currencies in its International Reserves. In monitored. Central Bank of Sri Lanka Annual Report - 2018 Part II - 51 Accounts and Operations of the Central Bank of Sri Lanka Part II Net Exposure to Foreign Currencies As at 31 December 2018, the net exposure of the Central Bank of Sri Lanka to major currencies were as follows: Currency As at 31 United Euro Japanese Sterling SDR Australian Canadian New Other Total December States Yen Pound Dollars Dollars Zealand Currencies All 2018 Dollars Dollars Currencies Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash 567,599,621 (74,694,623) (152,407,729) 92,299,209 - 130,349,501 (132,506) (10,045,385) (180,721,348) 372,246,740 Equivalents Securities at Fair Value through Profit or Loss and Fair 658,211,280 - 5,303,481 6,251,413 - 32,289,309 - 17,069,668 13,218,482 732,343,633 Value through Other Comprehensive Income Derivative Financial - - - - - - - - 750 750 Instruments IMF Related Assets - - - - 147,427,456 - - - - 147,427,456 Other Receivables 961,284 - - - - - - - 961,284 Total Foreign Currency 1,226,772,185 (74,694,623) (147,104,248) 98,550,622 147,427,456 162,638,810 (132,506) 7,024,283 (167,502,116) 1,252,979,863 Financial Assets Proportion 97.91% -5.96% -11.74% 7.87% 11.77% 12.98% -0.01% 0.56% -13.37% 100% Foreign Currency Financial Liabilities Banks and Financial 19,299,921 444 1 57 - 737 - - - 19,301,160 Institutions Derivative Financial - - 1,900,457 - - - - - 12,156,003 14,056,460 Instruments Asian Clearing 79,158,977 - - - - - - - - 79,158,977 Union IMF 811,552 - - - 416,176,694 - - - - 416,988,246 Other 43,282,075 - - - - - - - 91,448,858 134,730,933 Total Foreign Currency Financial 142,552,525 444 1,900,458 57 416,176,694 737 - - 103,604,861 664,235,776 Liabilities Proportion 21.46% 0.00% 0.29% 0.00% 62.65% 0.00% 0.00% 0.00% 15.60% 100% Net Foreign 1,084,219,660 (74,695,067) (149,004,706) 98,550,565 (268,749,238) 162,638,073 (132,506) 7,024,283 (271,106,977) 588,744,087 Currency Exposure Cash and Cash Equivalents include the foreign transactions entered into for buying and selling of various currencies of which the trade dates have been occurred in the current financial year and value dates to be fallen in the next financial year. Those transactions were as follows: As at 31 December 2018 Sri Lanka United States Euro Sterling Japanese Australian Rupees Dollars Pound Yen Dollars Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Purchases 123,164,315 71,072,884 - - - - Sales - (132,733,080) - - (72,973,340) - FX Forward Contra Account - Near Leg - - - - - - Forward contra account 11,469,221 - - - - - Part II - 52 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka As at 31 December 2017, the net exposure of the Central Bank of Sri Lanka to major currencies were as follows: Currency As at 31 United Euro Japanese Sterling SDR Australian Canadian New Other Total December States Yen Pound Dollars Dollars Zealand Currencies All 2017 Dollars Dollars Currencies Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash 133,266,127 (50,974,866) (58,292,654) 92,771,973 - 124,864,455 390,378 (6,412,537) 224,214,765 459,827,641 Equivalents Securities at Fair Value through Profit or Loss and 532,783,747 3,676,937 6,297,818 5,302,523 - 34,445,694 - 11,011,941 17,974,651 611,493,311 Available for Sale Investments Derivative Financial 536 - - - - - - 4,939,919 4,940,455 Instruments IMF Related Assets - - - - 126,842,946 - - - - 126,842,946 Other Foreign 3,665,700 - - - - - - - - 3,665,700 Receivables Total Foreign Currency 669,716,110 (47,297,929) (51,994,836) 98,074,496 126,842,946 159,310,149 390,378 4,599,404 247,129,335 1,206,770,053 Financial Assets Proportion 55.50% -3.92% -4.31% 8.13% 10.51% 13.20% 0.03% 0.38% 20.48% 100% Foreign Currency Financial Liabilities Banks and Financial 8,237,608 12 - - - - - - 1,924 8,239,544 Institutions Derivative Financial - - - - - - - - 4,648,449 4,648,449 Instruments Asian Clearing 90,981,712 - - - - - - - - 90,981,712 Union IMF - - - - 318,995,269 - - - - 318,995,269 Other 19,241,566 - - - - - - - 44,854,323 64,095,889 Total Foreign Currency Financial Liabilities 118,460,886 12 - - 318,995,269 - - - 49,504,696 486,960,863 Proportion 24.33% 0.00% 0.00% 0.00% 65.50% 0.00% 0.00% 0.00% 10.17% 100% Net Foreign 551,255,224 (47,297,941) (51,994,836) 98,074,496 (192,152,323) 159,310,149 390,378 4,599,404 197,624,639 719,809,190 Currency Exposure Cash and Cash Equivalents include the foreign transactions entered into for buying and selling of various currencies of which the trade dates have been occurred in the current financial year and value dates to be fallen in the next financial year. Those transactions were as follows: As at 31 December 2017 Sri Lanka United States Sterling Japanese Australian Rupees Dollars Euro Pound Yen Dollars Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Purchases 260,379,629 (18,113,664) 131,788 (62,622) (4,876) (6,352,618) Sales (24,459,676) (231,780,079) 5,375,438 19,321,868 4,876 30,444 FX Forward Contra Account - Near Leg (1,667) - - - - - Forward contra account (4,468,841) - - - - - Central Bank of Sri Lanka Annual Report - 2018 Part II - 53 Accounts and Operations of the Central Bank of Sri Lanka Part II 50.4 Contractual maturities of un-discounted cash flows of Financial Assets and Liabilities As at 31 December 2018, Contractual maturities of un-discounted cash flows of Financial Assets and Liabilities are as follows, Less than 6 Months 1-2 Yrs 2-5 Yrs Over 5 Total As at 31 December 2018 6 months -1 Yr Yrs Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash Equivalents 372,175,176 - - - - 372,175,176 Securities at Fair Value through Profit or Loss 38,478,059 - - - - 38,478,059 Securities at Fair Value through Other Comprehensive Income 86,972,038 58,347,392 236,273,635 341,808,636 9,636,712 733,038,413 IMF Related Assets 12,358,642 - - 199,961 134,868,849 147,427,452 Other Receivables 961,284 - - - - 961,284 Total un-discounted Foreign Financial Assets 510,945,199 58,347,392 236,273,635 342,008,597 144,505,561 1,292,080,384 Local Currency Financial Assets Sri Lanka Government Securities 42,861,171 1,928,480 128,960 1,150,405 384,130 46,453,146 Securities Purchased under Resale Agreements to 229,504,446 - - - - 229,504,446 Provisional Advances to Government 198,632,571 - - - - 198,632,571 Loans to Banks 66,536 17,009 4,119 10,333 1,520 99,517 Equity Investments in Financial and Other Institutions - - - - 1,381,879 1,381,879 Other Assets 14,716,611 1,729,014 2,777,236 4,487,198 11,525,061 35,235,120 Total un-discounted Local Financial Assets 485,781,335 3,674,503 2,910,315 5,647,936 13,292,590 511,306,679 Total un-discounted Financial Assets 996,726,534 62,021,895 239,183,950 347,656,533 157,798,151 1,803,387,063 Foreign Financial Liabilities Banks and Financial Institutions 19,301,160 - - - - 19,301,160 Asian Clearing Union 79,158,977 - - - - 79,158,977 IMF 2,429,189 2,481,530 7,459,381 80,131,608 363,326,740 455,828,448 Other 134,730,933 - - - - 134,730,933 Total un-discounted Foreign Financial Liabilities 235,620,259 2,481,530 7,459,381 80,131,608 363,326,740 689,019,518 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions 320,106,183 - - - - 320,106,183 Deposits of Government and Governmental Entities 348,718 - - - - 348,718 Securities Sold Under Repurchase Agreements 28,311,221 - - - - 28,311,221 Balances of Employee Benefit Plans 18,333 - - - - 18,333 Currency in Circulation 640,942,510 - - - - 640,942,510 Other Payables 12,606,431 - - - - 12,606,431 Total un-discounted Local Financial Liabilities 1,002,333,396 - - - - 1,002,333,396 Total un-discounted Financial Liabilities 1,237,953,655 2,481,530 7,459,381 80,131,608 363,326,740 1,691,352,914 Net un-discounted Financial Assets/ (Liabilities) (241,227,121) 59,540,365 231,724,569 267,524,925 (205,528,589) 112,034,149 Less than 6 Months 6 months -1 Yr As at 31 December 2018 Rs. 000 Rs. 000 Derivative Financial Assets 103,671,375 18,943,940 Derivative Financial Liabilities 114,165,546 19,919,739 Foreign Currency Conversions All future cash flows related to Foreign Currency Financial Assets & Liabilities are converted to reporting currency using the rate of exchange prevailing at the reporting date. Part II - 54 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka As at 31 December 2017, Contractual maturities of un-discounted cash flows of Financial Assets and Liabilities are as follows, Less than 6 Months 1-2 Yrs 2-5 Yrs Over 5 Total As at 31 December 2017 6 months -1 Yr Yrs Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash Equivalents 459,827,641 - - - - 459,827,641 Securities at Fair Value through Profit or Loss 21,369,496 4,465,690 13,178,459 8,851,636 - 47,865,281 Available for Sale Investments 46,372,253 94,705,246 126,493,457 322,848,221 - 590,419,177 IMF Related Assets 11,099,336 - - 164,565 115,579,046 126,842,947 Other Receivables 3,665,700 - - - - 3,665,700 Total un-discounted Foreign Financial Assets 542,334,426 99,170,936 139,671,916 331,864,422 115,579,046 1,228,620,746 Local Currency Financial Assets Sri Lanka Government Securities 9,907,506 - - - - 9,907,506 Securities Purchased under Resale Agreements 22,380,499 - - - - 22,380,499 Provisional Advances to Government 199,800,871 - - - - 199,800,871 Loans to Banks 114,827 46,409 56,593 11,274 4,697 233,800 Equity Investments in Financial and Other Institutions - - - - 41,095 41,095 Other Assets 14,901,062 1,189,827 2,713,417 4,296,510 8,129,740 31,230,555 Total un-discounted Local Financial Assets 247,104,765 1,236,235 2,770,010 4,307,784 8,175,531 263,594,325 Total un-discounted Financial Assets 789,439,191 100,407,171 142,441,927 336,172,205 123,754,577 1,492,215,071 Foreign Financial Liabilities Banks and Financial Institutions 8,239,544 - - - - 8,239,544 Asian Clearing Union 90,981,712 - - - - 90,981,712 IMF 1,254,051 1,348,974 2,678,505 38,063,211 298,604,658 341,949,399 Other 62,902,870 - - - 1,193,019 64,095,889 Total un-discounted Foreign Financial Liabilities 163,378,177 1,348,974 2,678,505 38,063,211 299,797,677 505,266,544 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions 341,712,198 - - - - 341,712,198 Deposits of Government and Government Entities 324,517 - - - - 324,517 Securities Sold Under Repurchase Agreements 40,663 - - - - 40,663 Balances of Employee Benefit Plans 4,547 - - - - 4,547 Currency in Circulation 598,053,901 - - - - 598,053,901 Other Payables 9,189,166 - - - - 9,189,166 Total un-discounted Local Financial Liabilities 949,324,992 - - - - 949,324,992 Total un-discounted Financial Liabilities 1,112,703,169 1,348,974 2,678,505 38,063,211 299,797,677 1,454,591,536 Net un-discounted Financial Assets/ (Liabilities) (323,263,978) 99,058,197 139,763,422 298,108,994 (176,043,100) 37,623,535 Less than 6 Months 6 months -1 Yr As at 31 December 2017 Rs. 000 Rs. 000 Derivative Financial Assets 178,883,331 57,169,395 Derivative Financial Liabilities 171,988,417 56,697,667 Central Bank of Sri Lanka Annual Report - 2018 Part II - 55 Accounts and Operations of the Central Bank of Sri Lanka Part II 50.5 Liquidity Risk • Liquid asset ratios based on the liquidity characteristics of securities held Liquidity risk is the difficulty that an entity will encounter in raising funds at short notice to meet commitments associated • Limits on maximum proportion of reserves that may be with financial instruments. Liquidity risk is also the risk that held in one currency and with one counterparty an entity will have to sell a financial asset quickly at much less than its fair value b) In order to reduce the level of liquidity risk arising out a) Liquidity is a key consideration in determining the of the local currency activities, particularly open market composition of the Bank’s foreign currency assets. operations, the Bank uses highly liquid marketable This reflects the potential requirement to liquidate instruments such as Treasury Bills and Treasury Bonds as foreign reserves for intervention purposes and to settle collateral. It manages the daily liquidity position of the other commitments such as public debt and IMF Loan repayments when the need arises. The Bank has adopted banking system by way of infusing into or withdrawal from the following measures aimed at ensuring quick access to the system, using instruments such as repo / reverse repo, funds: CBSL securities and USD /LKR Swaps. 51. MATURITY ANALYSIS OF ASSETS & LIABILITIES As at 31 December 2018 Less than Over 12 Total 12 months months Rs. 000 Rs. 000 Rs. 000 Assets Cash & Cash Equivalents 372,175,176 - 372,175,176 Securities at Fair Value through Profit or Loss 9,975,116 27,492,123 37,467,239 Securities at Fair Value through Other Comprehensive Income 80,991,450 613,884,944 694,876,394 Derivative Financial Instruments 750 - 750 IMF Related Assets 12,358,642 135,068,810 147,427,452 Other Foreign Receivables 961,284 - 961,284 Sri Lanka Government Securities 43,874,997 1,156,160 45,031,157 Securities Purchased under Resale Agreements 229,454,409 - 229,454,409 Provisional Advances to Government 198,632,571 - 198,632,571 Loans to Banks 81,396 14,567 95,963 Equity Investments in Financial and Other Institutions - 1,381,879 1,381,879 Other Assets 2,513,732 12,269,573 14,783,305 Gold - 149,683,439 149,683,439 Inventories - 6,568,935 6,568,935 Other Receivables and Prepayments 1,789,376 124,712 1,914,088 Property, Plant and Equipment - 16,955,853 16,955,853 Intangible Assets - 30,437 30,437 Total Assets 952,808,899 964,631,432 1,917,440,331 Liabilities Banks and Financial Institutions 19,301,160 - 19,301,160 Derivative Financial Instruments 14,056,460 - 14,056,460 Asian Clearing Union 79,158,977 - 79,158,977 IMF - 416,988,246 416,988,246 Other 134,730,933 - 134,730,933 Deposits by Banks and Financial Institutions 320,106,183 - 320,106,183 Balances with Government and Government Entities 348,718 - 348,718 Securities Sold Under Agreement to Repurchase 28,311,221 - 28,311,221 Balances with Employee Benefit Plans 18,333 - 18,333 Currency in Circulation 640,942,510 - 640,942,510 Other Payables 12,606,431 - 12,606,431 Deferred Grants 6 5 11 Pension and Other Post Employment Benefit Plans - 12,016,804 12,016,804 Miscellaneous Liabilities and Accruals 49,224 36,721 85,945 Total Liabilities 1,249,630,156 429,041,776 1,678,671,932 Net (296,821,257) 535,589,656 238,768,399 Part II - 56 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka As at 31 December 2017 Less than Over 12 Total 12 months months Assets Rs. 000 Rs. 000 Rs. 000 Cash & Cash Equivalents 459,827,641 - 459,827,641 Securities at Fair Value through Profit or Loss 23,416,953 21,847,423 45,264,376 Available for Sale Investments 134,413,318 431,815,617 566,228,935 Derivative Financial Instruments 4,940,455 - 4,940,455 IMF Related Assets 11,099,336 115,743,610 126,842,946 Other Foreign Receivables 3,665,700 - 3,665,700 Sri Lanka Government Securities 9,704,962 - 9,704,962 Securities Purchased under Resale Agreements 22,375,124 - 22,375,124 Provisional Advances to Government 199,800,871 - 199,800,871 Loans to Banks 154,536 69,166 223,702 Equity Investments in Financial and Other Institutions - 41,095 41,095 Other Assets 2,180,722 10,701,748 12,882,470 Gold - 126,583,727 126,583,727 Inventories - 6,875,533 6,875,533 Other Receivables and Prepayments 1,369,157 165,691 1,534,848 Property, Plant and Equipment - 17,960,517 17,960,517 Intangible Assets - 80,623 80,623 Total Assets 872,948,775 731,884,750 1,604,833,525 Liabilities Banks and Financial Institutions 8,239,544 - 8,239,544 Derivative Financial Instruments 4,648,449 - 4,648,449 Asian Clearing Union 90,981,712 - 90,981,712 IMF - 318,995,269 318,995,269 Other 62,902,870 1,193,019 64,095,889 Deposits by Banks and Financial Institutions 341,712,198 - 341,712,198 Balances with Government and Government Entities 324,517 - 324,517 Securities Sold Under Agreement to Repurchase 40,655,278 - 40,655,278 Balances with Employee Benefit Plans 4,547 - 4,547 Currency in Circulation 598,053,901 - 598,053,901 Other Payables 8,887,156 - 8,887,156 Deferred Grants 34 11 45 Pension and Other Post Employment Benefit Plans - 671,061 671,061 Miscellaneous Liabilities and Accruals 160,398 51,322 211,720 Total Liabilities 1,156,900,541 320,580,745 1,477,481,286 Net (285,951,766) 411,304,605 127,352,239 Central Bank of Sri Lanka Annual Report - 2018 Part II - 57 Accounts and Operations of the Central Bank of Sri Lanka Part II 52.1 Classification of Financial Assets and Financial Liabilities The following table provides a reconciliation between line items in the Statement of Financial Position and categories of Financial Instruments Mandatorily FVOCI - FVOCI - Amortized Total at FVTPL Debt Equity Instru- Cost As at 31 December 2018 Instruments ments Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash Equivalents - - - 372,175,176 372,175,176 Securities at Fair Value through Profit or Loss 37,467,239 - - - 37,467,239 Securities at Fair Value through Other - 694,876,394 - - 694,876,394 Comprehensive Income Derivative Financial Instruments 750 - - - 750 IMF Related Assets - - - 147,427,452 147,427,452 Other Receivables - - - 961,284 961,284 Total Foreign Currency Financial Assets 37,467,989 694,876,394 - 520,563,912 1,252,908,295 Local Currency Financial Assets Sri Lanka Government Securities - 45,031,157 - - 45,031,157 Securities purchased under Resale Agreements - - - 229,454,409 229,454,409 Provisional Advances to Government - - - 198,632,571 198,632,571 Loans to Banks - - - 95,963 95,963 Equity Investments in Financial and Other Institutions - - 1,381,879 - 1,381,879 Other Assets - - - 14,783,305 14,783,305 Total Local Currency Financial Assets - 45,031,157 1,381,879 442,966,248 489,379,284 Foreign Currency Financial Liabilities Banks and Financial Institutions - - - 19,301,160 19,301,160 Derivative Financial Instrument 14,056,460 - - - 14,056,460 Asian Clearing Union - - - 79,158,977 79,158,977 IMF - - - 416,988,246 416,988,246 Other - - - 134,730,933 134,730,933 Total Foreign Currency Financial Liabilities 14,056,460 - - 650,179,316 664,235,776 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions - - - 320,106,183 320,106,183 Deposits of Government and Government Entities - - - 348,718 348,718 Securities Sold Under Repurchase Agreements - - - 28,311,221 28,311,221 Balances of Employee Benefit Plans - - - 18,333 18,333 Currency in Circulation - - - 640,942,510 640,942,510 Other Payables - - - 12,606,431 12,606,431 Total Local Currency Financial Liabilities - - - 1,002,333,396 1,002,333,396 Part II - 58 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Trading Available Loans & Held to Total for Sale Receivables Maturity As at 31 December 2017 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Foreign Currency Financial Assets Cash & Cash Equivalents - - - 459,827,641 459,827,641 Securities at Fair Value through Profit or Loss 45,264,376 - - - 45,264,376 Securities at Available for Sale - 566,228,935 - - 566,228,935 Derivative Financial Instruments 4,940,455 - - - 4,940,455 IMF Related Assets - - - 126,842,946 126,842,946 Other Receivables - - 3,665,700 - 3,665,700 Total Foreign Currency Financial Assets 50,204,831 566,228,935 3,665,700 586,670,587 1,206,770,053 Local Currency Financial Assets Sri Lanka Government Securities - - - 9,704,962 9,704,962 Securities purchased under Resale Agreements - - - 22,375,124 22,375,124 Provisional Advances to Government - - 199,800,871 - 199,800,871 Loans to Banks - - 223,702 - 223,702 Equity Investments in Financial and Other Institutions - - - 41,095 41,095 Other Assets - - - 12,882,470 12,882,470 Total Local Currency Financial Assets - - 200,024,573 45,003,651 245,028,224 Foreign Currency Financial Liabilities Banks and Financial Institutions - - - 8,239,544 8,239,544 Derivative Financial Instruments 4,648,449 - - - 4,648,449 Asian Clearing Union - - - 90,981,712 90,981,712 IMF - - - 318,995,269 318,995,269 Others - - - 64,095,889 64,095,889 Total Foreign Currency Financial Liabilities 4,648,449 - - 482,312,414 486,960,863 Local Currency Financial Liabilities Deposits of Banks and Financial Institutions - - - 341,712,198 341,712,198 Deposits of Government and Government Entities - - - 324,517 324,517 Securities Sold Under Repurchase Agreements - - - 40,655,278 40,655,278 Balances of Employee Benefit Plans - - - 4,547 4,547 Currency in Circulation - - - 598,053,901 598,053,901 Other Payables - - - 8,887,156 8,887,156 Total Local Currency Financial Liabilities - - - 989,637,597 989,637,597 53. FAIR VALUE DISCLOSURES of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and 53.1 Fair Value of Assets and Liabilities other risks affecting the specific instrument. The fair value hierarchy of financial instruments is given below: ‘Fair Value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction Level 1: Fair value measurements using quoted prices between market participants at the measurement date in (unadjusted) in active markets for identical assets or the principal or, in its absence, the most advantageous liabilities; market to which the Bank has access at that date. The fair Level 2: Fair value measurements using inputs other than value of a liability reflects its non-performance risk quoted prices included within Level 1 that are observable The determination of fair value for financial assets and for the asset or liability, either directly (i.e. as prices) or liabilities for which there is no observable market price indirectly (i.e. derived from prices); and requires the use of valuation techniques as described in accounting policy Note 5.2 For financial instruments Level 3: Fair value measurements using inputs for the that trade infrequently and have little price transparency, asset or liability that are not based on observable market fair value is less objective, and requires varying degrees data (i.e. unobservable inputs). Central Bank of Sri Lanka Annual Report - 2018 Part II - 59 Accounts and Operations of the Central Bank of Sri Lanka Part II The following table shows an analysis of assets and liabilities recorded at fair value hierarchy: 31 December 2018 Level 1 Level 2 Level 3 Total Rs. 000 Rs. 000 Rs. 000 Rs. 000 Financial Assets Securities at Fair Value through Profit or Loss 37,467,239 - - 37,467,239 Securities at Fair Value through Other Comprehensive Income 694,876,394 - - 694,876,394 Derivatives - 750 - 750 732,343,633 750 - 732,344,383 Foreign Currency Non-Financial Assets Gold 149,683,439 - - 149,683,439 149,683,439 - - 149,683,439 Local Currency Financial Assets Sri Lanka Government Securities 44,986,598 - - 44,986,598 Equity Investments in Financial and Other Institutions - - 1,381,879 1,381,879 44,986,598 - 1,381,879 46,368,477 Other Non-Financial Assets Land - - 8,930,375 8,930,375 Building - - 6,702,567 6,702,567 - - 15,632,942 15,632,942 Financial Liabilities Embedded Derivatives - Currency Options - - 466,315 466,315 Derivatives - 13,590,145 - 13,590,145 - 13,590,145 466,315 14,056,460 31 December 2017 Level 1 Level 2 Level 3 Total Rs. 000 Rs. 000 Rs. 000 Rs. 000 Financial Assets Securities at Fair Value through Profit or Loss 45,264,376 - - 45,264,376 Available for Sale Investments 566,228,935 - - 566,228,935 Derivatives - 4,940,455 - 4,940,455 611,493,311 4,940,455 - 616,433,766 Foreign Currency Non-Financial Assets Gold 126,583,727 - - 126,583,727 126,583,727 - - 126,583,727 Local Currency Financial Assets Sri Lanka Government Securities 9,754,483 - - 9,754,483 9,754,483 - - 9,754,483 Other Non-Financial Assets Land - - 8,976,339 8,976,339 Building - - 7,515,327 7,515,327 - - 16,491,666 16,491,666 Financial Liabilities Embedded Derivatives - Currency Options - - 1,244,581 1,244,581 Derivatives - 3,403,868 - 3,403,868 - 3,403,868 1,244,581 4,648,449 Equity Investments in Financial and Other Institutions Fair value of the equity investments were calculated using the Net Assets per Share valuation technique. Significant unobservable input used Net Asset Value per Share (NAVPS) Sensitivity Analysis A 10% increase in the NAVPS would increase the fair value by 10%. 2018 2017 Rs. 000 Rs. 000 Balance as at 1 January 41,095 41,095 Fair Value Gain Recognised in the Other Comprehensive Income 1,360,573 - Disposals during the Year (19,789) - Balance as at 31 December 1,381,879 41,095 Part II - 60 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Land & Buildings Deferred Asset on 2018 2017 Embedded Derivatives Rs.000 Rs. 000 Valuation Method Balance as at 1 January 369,455 4,625,665 Land is valued using market approach with direct comparison Premium Amortised during the year (267,049) (4,256,210) method, whereby assets are compared to recent sales with Balance as at 31 December 102,406 369,455 no added or nominal added improvement value, making adjustments for points of difference to derive the fair value. Depreciated Current Replacement Cost (DRC) method is 53.2 Repurchase and Resale Agreements used in valuing all the buildings except Central Point, White The reported value of repurchase and resale agreements Aways and Lloyds Building, considering that the assets is considered to approximate their fair value due to short controlled by the public sector entities that provide service term nature of the agreements. The carrying value of the to the community are not traded on an open liquid market. provided Standing Deposit Facility as at 31 December Income approach is used to value the other buildings which 2018 was Rs. 28,311.22 Mn (2017 - Rs. 34,151.39 Mn) values the property based on estimated future income, profits and the carrying value of Sri Lanka Government Securities or cash flow that are converted (discounted) to a single purchased under resale agreements as at 31 December current amount. 2018 was Rs. 229,454.41 Mn (2017 – Rs. 22,375.12 Under the Market Approach, estimated fair value would get Mn). There was no outstanding Sri Lanka Government increased/(decreased) if; Securities sold under repurchase agreements as at 31 December 2018 (2017 – Rs. 6,503.88 Mn). Price per perch would get higher/(lower) Price per square foot would get higher/(lower) 53.3 Currency in Circulation Depreciation rate for building would get lower/(higher) Under Income Approach, estimated fair value would get The fair value of Currency in Circulation is considered to increased/(decreased) if; be its face value as reported in the Financial Statements. Gross annual rentals would get higher/(lower) 53.4 Deposits Years purchase would get higher/(lower) The carrying value of deposits are considered to approximate Derivatives their fair value as they are payable on demand. Derivative valuation models use forward prices (calculated 53.5 Determination of Fair Value and Fair Value by extrapolating the forward points available in the market) and discount rates calculated based on zero coupon yield Hierarchy curves of the respective currencies as of the valuation Set out below is a comparison, by class, of the carrying date. If the instrument that is valued contains a margin, value and fair value of Bank’s financial assets and adjustments are made to the forward prices and/or the liabilities other than those with carrying values that are interest rates to represent the impact of the margin rate. reasonable approximation of fair value. Carrying Amount Fair Value Embedded Derivatives - Currency Options 2018 2017 2018 2017 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Fair Value of the Embedded Derivative Products was Foreign Currency calculated using Black- Scholes model Financial Assets Foreign Currency 2018 2017 Trading/Securities Rs.000 Rs.000 at Fair Value through Other 732,343,633 611,493,311 732,343,633 611,493,311 Balance as at 1 January 1,244,582 5,911,813 Comprehensive Income/Available for Fair Value Loss recognised in Sale Securities (778,266) (4,667,231) the Statement of Income Derivative Financial 750 4,940,455 750 4,940,455 Instruments Balance as at 31 December 466,316 1,244,582 Local Currency Financial Assets Sri Lanka Significant unobservable inputs used Government 45,031,157 32,080,086 45,031,157 32,129,607 Discount Rate 10% Securities Loans to Banks 95,963 223,702 92,601 214,077 Volatility 4% Other Assets 14,783,305 12,882,470 12,947,767 9,702,999 Foreign Currency Sensitivity Non Financial Discount Rate Volatility Analysis Assets 9% 11% 3% 5% Allocated Gold 149,683,439 126,583,727 149,683,439 126,583,727 Rs.000 Rs.000 Rs.000 Rs.000 Foreign Currency Embedded Financial Derivatives Liabilities 475,893 457,048 466,305 466,578 Derivative Financial - Currency 14,056,460 4,648,449 14,056,460 4,648,449 Instruments Options Central Bank of Sri Lanka Annual Report - 2018 Part II - 61 Accounts and Operations of the Central Bank of Sri Lanka Part II 54. COMPARATIVE INFORMATION 54.1 Interest receivable on the IMF Quota amounting 2017 to Rs. 4.79 Mn which was classified under Other As reported previously: Rs. 000 Receivables in 2017 have now been included under Foreign Currency Financial Assets IMF Related Assets for better presentation. IMF Related Assets 126,838,152 Outstanding balance of the reverse repurchase 54.2 Other Receivables 3,670,494 transactions and the Standing Lending Facility Local Currency Financial Assets transactions amounting to Rs. 22,375.12 Mn Sri Lanka Government Securities 32,080,086 which was classified under Sri Lanka Government Foreign Currency Financial Liabilities Securities in 2017 have now been disclosed under Banks and Financial Institutions 8,683,033 Securities Purchased under Agreements to Re-sell. Asian Clearing Union 90,868,160 54.3 Interest payables relating to IMF liabilities and ACU IMF 318,665,332 liabilities amounting to Rs. 329.94 Mn and Rs. Income form Local Currency 113.55 Mn respectively that was presented under Financial Assets Banks and Financial Institutions in 2017 have now Interest Income 18,768,928 been disclosed under liabilities of IMF and the Asian Clearing Union. Current Presentation: Note 2018 2017 Rs. 000 Rs. 000 54.4 The realised gain on secondary sale of Sri Lanka Foreign Currency Financial Government Securities amounting to Rs. 267.18 Mn Assets IMF Related Assets 54.1 147,427,452 126,842,946 that was presented under Interest Income from local Other Receivables 961,284 3,665,700 Currency Financial Assets have new been disclosed Local Currency Financial under Gain from Realised Price changes. Assets Sri Lanka Government 55. RELATED PARTIES 54.2 45,031,157 9,704,962 Securities Securities Purchased under 229,454,409 22,375,124 Resale Agreements 55.1 Transactions with State and State Controlled Foreign Currency Financial Entities Liabilities Banks and Financial In the normal course of its operations, the Bank enters into 54.3 19,301,160 8,239,544 transactions with related parties. Related parties include Institutions Asian Clearing Union 79,158,977 90,981,712 the Government of Sri Lanka (State as the ultimate owner IMF 416,988,246 318,995,269 of the CBSL), various government departments, and State controlled entities. Particulars of transactions, and Income form Local Currency arrangements entered into by the Bank with the State and Financial Assets Interest Income 54.4 8,956,322 18,501,748 State controlled entities which are individually significant Gain from Realised price 117,771 267,180 and for other transactions that are collectively, but not changes individually, significant as per IAS 24 -Amended Related Party Disclosures are as follows: Part II - 62 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Nature of the Transaction 2018 2017 Rs. 000 Rs. 000 Transactions: Outright purchases of Government Securities 20,458,308 - Outright sales of Government Securities 58,674,669 74,237,317 CBSL and Government Securities Purchased/Sold under Agreement to Repurchase/Sales 4,800,410,194 4,311,989,631 Interest income/expenses on CBSL and Government Securities Purchased/Sold under Agreement 2,426,510 1,210,183 to Repurchase/Sales Funds received on behalf of Government (Note 26.1 - 26.9) 1,188,003,197 44,676,985 Funds disbursed on behalf of Government (Note 26.1 - 26.9) 1,144,407,670 17,346,423 Cost of Printing currency notes, for the year ended 31 December (Note 55.1.3) 1,605,463 1,906,625 Payments for Goods, Services and Taxes, during the year ended 31 December (Note 55.1.4) 2,234,657 2,744,815 Gross Foreign Exchange Transactions during the period (Note 55.1.6) Sales 89,011,978 5,337,500 Purchases 25,078,570 85,719,851 USD/LKR Derivatives 221,347,285 751,569,889 Funds Received in respect of Abandoned Property, during the year 118,989 123,394 Rent Income 395,682 412,206 Other Transactions (Note 55.1.10) 1,392,785 996,174 Balances: Sri Lanka Government Securities held by CBSL (Note 55.1.7) 45,031,157 9,704,962 Provisional Advances to Government, (Note 15) 198,632,571 199,800,871 Loans given under Susahana Phase I and II, Provincial Development Credit Scheme, Saubaghya Loan Scheme, Awakening North Loan Scheme (phase II), Resumption of Economic Activities in - 28,254 the East (phase II) and Repair of Damaged Houses in North and East Government Securities held for specific purposes 7,524,488 6,443,984 RTGS Balances with Banks and Financial Institutions (Note 27) 192,367,084 215,901,806 Nostro Balance with BOC London 209,155 185,324 Receivable from Treasury and other Ministries - 54,490 Payable to Treasury and other Ministries (Note 26) 134,657,025 62,576,551 Current Account Balances with Government and Government Entities as at 31 December (141,802) 84,833 Abandoned Property balances 2,571,814 2,257,579 Other Balances (Note 55.1.10) 212,877 599,623 55.1.1 Empowered by the sections 28-33 of the MLA 55.1.3 The Bank has the sole right and authority to the Bank Supervision Department of the Bank carries out issue currency in Sri Lanka as per section 49 of the regulatory and supervisory functions of the banks licensed by MLA. Accordingly, the Currency Department of the Bank the Monetary Board of CBSL. As at 31 December 2018, 06 functions as the sole issuing authority of the legal tender Licensed Commercial Banks and 01 Licensed Specialised in Sri Lanka. Printing of the currency notes is carried Bank which had been funded by the Government or has a out by De La Rue Lanka Currency and Security Print significant influence which are classified as related parties (Pvt) Ltd., of which 40% shareholding is owned by the of the Central Bank of Sri Lanka. Government. The Department of Supervision of Non-Bank Financial 55.1.4 In carrying out the normal operations, the Bank Institutions of the Bank carries out its regulatory and enters into transactions to obtain various goods and supervisory functions in respect of Non-Bank Financial services with Government entities or entities in which Institutions. Accordingly, related entities of state controlled Government has significant influence or control. or Government funded Non-Bank Financial Institutions are under the supervision of this department. 55.1.5 The Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or 55.1.2 As per Section 113 of the MLA, the Monetary placing of assets and liabilities on behalf of Government, Board and the Bank are vested with the function of trusts, retirement benefit plans and other institutions, as public debt management. Accordingly, as the agent of explained in Note 58. the Government, Public Debt Department (PDD) of the bank issues securities to the domestic market to meet 55.1.6 In accordance with the provisions of the MLA, the budgetary requirements and services both foreign International Operations Department of the Bank monitors and domestic debt. The PDD deals with public debt the development in the domestic foreign exchange market management and debt market development. It manages and overnight net foreign exchange open positions of the Government debt to ensure that financing needs of the commercial banks. In monitoring the domestic foreign Government and its payment obligations are met. exchange market developments, the Bank is on both Central Bank of Sri Lanka Annual Report - 2018 Part II - 63 Accounts and Operations of the Central Bank of Sri Lanka Part II sides of the market to moderate the excessive volatility in 55.4 Other Transactions with Key Management the exchange rate of Sri Lankan Rupee. The amounts of Personnel purchases and sales of foreign exchange represents results 2018 2017 of such monitoring activities. Rs. 000 Rs. 000 55.1.7 The Domestic Operations Department of the Loans to Key Management Personnel 71,459 73,141 Bank performs its direct functions of implementing the Bank’s monetary policy mainly through open market All the loans are adequately secured and carry interest operations as per sections 90-92 of the MLA No. 58 rates ranging from 2% - 7% depending on the loan of 1949 (amended) and enforcing Statutory Reserve category and are repayable monthly. Requirement as per sections 93-98 of MLA and functions as the banker to both commercial banks where 55.5 Transactions with Post-Employment Benefit Plans Government has shareholdings and certain other financial institutions and Governmental entities. The aggregate 2018 2017 balances arising from this function as at 31 December Rs. 000 Rs. 000 2018 are given in Notes 28 and 29. Interest earned on Contributions paid and payable 82,798 69,573 the Government securities is given in Note 38. 55.1.8 The Bank also has custodial arrangements with The Bank contributed various amounts to Pension and one State-controlled bank, for which no charges were Other Post Retirement Plans as disclosed in Note 34 and levied. paid Rs. 718.71 Mn (2017 – Rs. 542.58 Mn) to Employees 55.1.9 As per the circular issued by Director of Bank Provident Fund. In the normal course of business, the Supervision, the banks that do not maintain the minimum Bank provides banking and financial services to its post advance limit of 10% to agriculture, contribute the employment plans. Amounts of balances with such plans shortfall to Refinance Fund operated by RDD of the bank. are given in Note 30. As at 31 December 2018, no loans were outstanding under the specified refinance scheme (as at 31 December 56. CONTINGENT LIABILITIES AND 2017, Rs. 6.83 Mn loans were outstanding under the COMMITMENTS refinance scheme from People’s Bank - Rs. 2.46 Mn, Bank of Ceylon - Rs. 1.88 Mn, Pradeshiya Sanwardana 56.1 Financial Guarantee Contracts Bank - Rs. 0.63 Mn and Lankaputhra Development Bank The Bank acting as an agent of the Government or its - Rs.1.86 Mn) for which RDD has received an interest of agencies and institutions, provides guarantees to various Rs. 99.36 Mn (as at 31 December 2017 Rs. 99.19 Mn). parties on the strength of counter guarantees issued 55.1.10 Other Balances and transactions include to Bank by the General Treasury. There were no such the transactions carried out with the Government, outstanding guarantees as at 31 December 2018. Government departments and state controlled entities that are not individually significant. 56.2 Credit Guarantees 55.2 Transactions with Key Management Personnel The Regional Development Department (RDD) of the Bank performs the functions of providing refinance Key Management Personnel of the Bank are the members out of loan proceeds from external lines of credit to of the Monetary Board that includes Governor, Deputy participating financial institutions for financing small Governors and Assistant Governors. Particulars of and medium enterprises, issuing credit guarantees on transactions with Key Management Personnel were as loans to such enterprises, collecting guarantee premia, follows: administering credit guarantee funds and undertaking 55.3 Compensations to the Key Management post credit inspection and follow up action to ensure Personnel proper utilization of loan funds with a view of preventing 2018 2017 defaults. During the year, RDD continued to provide Rs. 000 Rs. 000 refinance facilities under which the Bank provided Short Term Employee Benefits 161,833 123,072 guarantees against losses arising to a participating credit institution, which grants credit under this In addition to above compensation, the Bank also arrangement. This is not a guarantee on default by provides non cash benefits to Key Management Personnel recipient of loans but against loss, which means that in terms of the employment contracts with them. participating credit institutions should submit claims only in respect of amounts in loss after having pursued recovery action. The amount of contingent liabilities arising out of this arrangement are given below. Part II - 64 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Local commercial banks - in respect of credit guarantees. The Bank transfers financial assets that are not derecognised in their entirety or for which the Bank has continuing Outstanding Guarantee Amount involvement primarily through the following transactions: 2018 2017 Securites Sold under Agreements to Repurchase Rs. 000 Rs. 000 Securities Lending Related Parties 784 1,798 Securities Pledged Total Credit Guarantees 784 1,798 Transferred Financial Assets that are not 57.1 derecognized in their Entirety a. Securities Sold under Agreements to Repurchase The Bank has recorded an expected credit loss of Rs. 0.40 Mn as at the year ended 31 December 2018 Securities sold under agreements to repurchase (Rs. 0.41 Mn as at 1 January 2018) in respect of the transactions are performed as part of the Monetary credit guarantees on local commercial banks. Policy operations of the Bank and continues to be recognized in their entirety under “Sri Lanka 56.3 Fiduciary Activities Government Securities” in the Statement of Financial Position because it retains substatially all of the risks The Bank carries out fiduciary activities under the and rewards of ownership. The cash consideration to be provisions of the MLA. Acting in such capacity results in paid and the interest accured there on are recognized holding or placing of funds on behalf of various parties. under Securities sold under repurchase agreements in However, the Bank does not expect any liability to arise the local financial liabilities of the Statement of Financial on account of such activities. Position. 56.4 Legal Claims b. Securities Lending There were number of legal proceedings outstanding Securities lending describes the established market against the Bank as at 31 December 2018 and no practice by which, for a fee, securities are transferred provision has been made as the Bank is of the opinion that temporarily from one party (the lender, i.e. CBSL), to it is unlikely that any significant loss will arise. another (the borrower); the borrower is obliged to 56.5 Commitments return them either on demand or at the end of any agreed term. Currently a selected Clearing House (CH) a) As at 31 December 2018, the Bank has capital functions as the custodian for the supranational bonds commitments amounting to Rs. 577.99 Mn, in respect of and bonds issued by different issuers. CBSL has signed the acquisition of Property, Plant and Equipment. an agreement which enable CH to lend at their wish depending on the demand for those bonds. Since the b) As at 31 December 2018, outstanding forward exchange lending does not involve CBSL and CH lends them transactions are as follows: directly to the borrowers, the process is called auto bond lending. At the end of each month, custodian will send 2018 2017 fee income for auto bond lending, if any for the bonds Forward exchange contracts which they lent under auto bond lending programme. ‘000 ‘000 Forward Exchange Sales The Bank continues to recognize the securities in their USD 726,310 1,850,735 entirety in the Statement of Financial Position because EUR - 2 it retains substantially all of the risks and rewards Forward Exchange Purchases of ownership. These securities are presented in the USD 388,908 5,000 Statement of Financial Position as “Securities at Fair Value through Other Comprehensive Income”. EUR - 400 c. Securities Pledged In order to facilitate the securities settlement 57. TRANSFERS OF FINANCIAL ASSETS process, securities amounting to AUD 35.0 Mn In the ordinary course of business, the Bank enters into were pledged by CBSL to Euroclear and obtained transactions that result in the transfer of financial assets, a credit facility of USD 30.0 Mn until 30 January primarily both foreign and local currency denominated debt 2017. The pledged securities are held in a seperate securities. In accordance with the accounting policy set out account at Euroclear. in Note 5.3.3, the transferred financial assets continue to Following a review of the activity in CBSL accounts and be recognised in their entirety or to the extent of the Bank’s with reference to the General Conditions Governing continuing involvement or are derecognised in their entirety. Extensions of Credit to participants in the Euroclear Central Bank of Sri Lanka Annual Report - 2018 Part II - 65 Accounts and Operations of the Central Bank of Sri Lanka Part II System, Bank’s credit facility was decreased to USD maintaining proper accounts of registered members 20.0 Mn with effect from 31 January 2017. of EPF, investing surplus funds and payment of benefits to the members. Bank conducts these transactions under the terms that are usually based on the “Collateral Agreement The bank administered the Deposit Insurance 58.3 Governing Secured Borrowings by Participants in the Scheme, which was a voluntary deposit insurance Euroclear System” and “General Conditions Governing scheme opened to banking institutions licensed Extensions of Credit to Participants in the Euroclear by the CBSL and cooperative societies registered System” guidelines. under the Cooperative Societies Law No. 5 of 1972, which carry on banking business and with The Bank continues to recognise the securities in their effect from 1 October 2010 funds of this scheme entirety in the Statement of Financial Position because have been transferred to the Sri Lanka Deposit it retains substaially all of the risks and rewards of Insurance scheme which was formed as per gazette ownership and these securities are presented in the No. 1673/11 dated 28 September 2010. Statement of Financial Position as “Securities at Fair Value through Other Comprehensive Income”. As per the Gazette No. 1673/11 dated 28 58.4 September 2010 (as amended), the Bank has The following table sets out the carrying amounts and established a Mandatory Deposit Insurance Scheme fair values of all financial assets transferred that are not named Sri Lanka Deposit Insurance Scheme with derecognized in their entierty and associated liabilites. effect from 1 October 2010 as an act of national interest to protect the funds of depositors. 2018 2017 Financial Financial Financial All Licensed Commercial Banks (LCBs), Licensed Assets at Assets at Liabilities at Specialized Banks (LSBs) and Licensed Finance FVOCI AFS Amortized Companies (LFCs) shall be the members of this Cost Scheme. Accordingly, 76 institutions are members Rs. 000 Rs. 000 Rs. 000 of this Scheme. The deposits to be insured include Assets the demand, time, savings deposit liabilities of the Securities Sold under member institutions and value of the shares of - 6,366,710 - Agreement to Repurchase shareholders who were initially deposit holders, Securities Lending 3,714 2,466 - whose deposits were converted into equity under Securities Pledged 4,841,397 4,583,944 - Carrying Amount of the directions of the Monetary Board in 2010 and 4,845,111 10,953,120 - 2011 as part of the business restructuring plans Assets implemented prior to 1 January 2012 and exclude Associated Liabilities Securities Sold under all borrowing instruments and specific exclusions as - - 6,503,884 per section 5.2 of the said gazette notification. Agreement to Repurchase Carrying Amount of - - 6,503,884 The deposit insurance fund has been created with Associated Liability the transfer of Rs. 350.20 Mn of the investments of Voluntary Deposit Insurance Scheme and Rs. 58. TRUST AND CUSTODIAL ACTIVITIES 1,168.31 Mn of investments made out of collections The bank commonly acts as trustees and in other fiduciary of abandoned property of LCBs. As at 31 December capacities that result in the holding or placing of assets and 2018, the fund size is Rs. 53.3 Bn (provisional). liabilities on behalf of the GOSL, trusts, retirement benefit Currently, the amount of compensation payable per- plans and other institutions. The significant trust activities depositor per-institution is limited to Rs. 600,000 or performed by the Bank are as follows: its equivalent in the case of foreign currency deposits. The payment of compensation shall not be a liability of 58.1 The bank handles disbursements and repayments the Monetary Board or the Bank and shall be limited to of various foreign loans and grants under foreign funds available or raised in the deposit insurance fund funded development projects and credit schemes including any borrowings permitted and contributions on behalf of the GOSL. It also collects counterparty received. The Monetary Board and the Bank shall not funds under various foreign loans and grants be responsible for any liability that exceeds the total on behalf of the GOSL and invests such funds in amount lying to the credit of the fund. Treasury bills on requests made by donor agencies. With effect from 22 November 2013, this scheme The bank is the custodian of the Employees 58.2 was renamed as “Sri Lanka Deposit Insurance Provident Fund (EPF). In terms of the statute, the and Liquidity Support Scheme” and the Deposit functions of the Monetary Board consist of receiving Insurance Fund was renamed as “Sri Lanka Deposit contributions, surcharges, income from investments, Insurance and Liquidity Support Fund”. Part II - 66 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka The Deposit Insurance Unit (DIU) established in of such companies, with the Monetary Board as a the Resolution and Enforcement Department, is form of security. responsible for operation & management of the As per the Circular issued by Director Bank 58.6 scheme under the instructions and supervision Supervision, the banks who do not maintain the of the Director of Resolution and Enforcement in minimum advance limit of 10% to agriculture are terms of Directions/Regulations and policies as required to contribute the shortfall to Refinance approved by the Monetary Board from time to time Fund operated by RDD of the Bank. RDD refinances and shall maintain books and accounts distinctly such amounts collected through Bank of Ceylon, separate from the Financial Statements of the Peoples’ Bank, Pradeshiya Sanwardena Bank and Bank. The Auditor General shall be the Auditor of Lankaputhra Development Bank to agriculture under this Scheme. Viskam Refinance Scheme. As of 31 December 58.5 The Bank carries out regulatory and supervisory 2018, all such collected funds have been refunded functions in respect of LFCs and attends to related to banks and no loans were outstanding under matters under the authority delegated to it by the the refinance scheme (2017 - Rs. 6.83 Mn) and Monetary Board. While carrying out such functions, received an interest of Rs. 0.17 Mn for such loans with respect to failed LFCs, various actions are during 2018 (Rs. 1.83 Mn during 2017). Further, taken including the vesting of assets of persons Rs. 28.12 Mn (2017 - Rs. 84.72 Mn) of income was responsible for the unviable and insolvent condition earned from the investments. Central Bank of Sri Lanka Annual Report - 2018 Part II - 67 Accounts and Operations of the Central Bank of Sri Lanka Part II 58.7 On behalf of the Monetary Board of the Bank, RDD acts as the exclusive agent of the GOSL with regard to the projects funded by GOSL and foreign donors. RDD also implements the CBSL funded projects. Concluded Projects Name of the Project Total Allocation of Purpose of the Loan Refinance Salient Features the Fund (Mn.) Granted to PFI s (Rs. Mn.) Tea Development Project USD 24.50 To increase tea smallholders' income and improve the natural environment in the project areas. 2,550.90 Second Perennial Crop SDR 11.56 To commercialize the perennial crops sector, increase production, nursery development post 1,453.11 Development Project harvest handling, processing and marketing. Plantation Sector Reform USD 40.00 To support policy and institutional reforms in the plantation sub-sector to increase the 5,200.00 Project productivity and profitability and maintain the competitive advantage of the plantation industry of Sri Lanka. Susahana Finance & Leasing LKR 352.69 To provide credit facilities to the resumption of enterprises affected by Tsunami. 351.06 Company Small Business Revival LKR To provide credit facilities to the resumption of Small and Medium Enterprises (SMEs) affected 2,663.40 Programme 2,656.00 by Tsunami. Small Business Revival LKR 150.00 To provide credit facilities to the resumption of SMEs affected by Tsunami. 122.72 Programme – Revolving Fund Skill Development Project LKR 94.31 To improve quality and relevance of skill training programmes to build high quality workforce 94.59 and address skill mismatching. Urban Environment USD 4.00 To improve environmental facilities, health and sanitary conditions of the people living in 369.15 Infrastructure Development urban and semi–urban areas. Project Housing Guarantee Low USD 25.00 To assist low income community in the country to build houses and renovate and expand their 1,362.00 Collection of recoveries Income Housing Shelter Project residencies. from Participating Financial Institutions Urban Development Low SDR 15.10 To provide capital to support low income households for housing improvement. 1,915.76 (PFIs) as per scheduled Income Housing Project date to be transferred North Western Province USD 1.80 To improve economic, social and nutritional well-being of the people living in the project 102.76 to Deputy Secretary to Water Resource areas. Treasury (DST). Development Project Matale Regional Economic SDR 2.00 Permanent rising and sustaining of income of small entrepreneurs. 249.06 Advancement Project Mid Country Perennial Crop SDR 11.56 To provide credit facilities to the production of perennial crops in the mid country area. 642.00 Development Project Agriculture Rehabilitation SDR 17.05 To rehabilitate persons and property affected by the civil disturbances in the Northern and 843.00 Project Eastern provinces and five bordering Districts. Smallholder Tea USD 12.60 To develop smallholder tea sector and rehabilitate tea facilities. 645.93 Development Project Poverty Alleviation Micro YEN To set up an effective credit delivery mechanism for channeling formal credit to income generating 1,402.45 Finance Project 1,368.00 activities. Small Farmers Landless USD 17.40 To establish a cost effective and sustainable micro credit delivery system to generate employment 345.69 Credit Project and improve saving habits among the low income receiving people. Kegalle Integrated Rural SDR 1.50 To uplift the standard of living of people in the project areas by promoting income 148.00 Development Project generating activities. Southern Province Rural SDR 27.90 To improve the quality of life of the people in the Southern Province. 564.00 Development Project EIB Contract B EUR 10.00 To reconstruct SMEs directly affected by Tsunami. 1,553.27 Susahana LKR 3,000.00 To provide credit facilities to resume Micro, Small and Medium Enterprises (MSMEs) affected 2,750.00 Collection of recoveries by Tsunami. from PFIs as per scheduled date to be Susahana Phase II LKR 500.00 To provide credit facilities to resume MSMEs affected by the Tsunami. 105.54 transferred to Finance Department (FD). Awakening North LKR To extend credit to agriculture, livestock, micro and small enterprises in the Northern 2,000.00 Collection of recoveries 2,000.00 Province. from PFIs as per Resumption of Economic LKR To grant loans to SME sector activities in the Eastern Province. 1,000.00 scheduled date to be Activities in the Eastern 1,000.00 transferred to relevant Province A/Cs of the RDD Awakening North - Phase II LKR 2,154.25 To extend credit to agriculture, livestock, micro and small enterprises in the Northern 2,361.00 Province. Second Perennial Crops LKR To provide credit facilities to develop the perennial crops sector in the country. 1,199.82 Development Project - 1,200.00 Revolving Fund Matale Regional Economic LKR 77.00 To raise the income of rural and farm families and to provide funds for medium scale 77.00 Advancement Project - entrepreneurs to create non-farm enterprises and to expand existing projects in the Matale Revolving Fund District. Sabaragamuwa Province LKR 100.00 To enhance and start new income generating activities in the Sabaragamuwa Province. 100.00 Integrated Rural Development Project - Revolving Fund Part II - 68 Central Bank of Sri Lanka Annual Report - 2018 Part II Accounts and Operations of the Central Bank of Sri Lanka Construction Sector EUR 9.00 To strengthen the financial and technical capacities of private local businesses to effectively 1,399.73 Development Project participate in construction and public work in post Tsunami reconstruction. Sabaragamuwa Province LKR 70.00 To enhance and start new income generating activities in the Sabaragamuwa Province. 70.00 Integrated Rural Development Project - Phase II Post Tsunami Coastal SDR 2.09 To assist communities adversely affected by Tsunami disaster to recover their assets and 190.77 Rehabilitation Resource re-establish the foundation of their usual economic activities, while diversifying into new Management Project profitable income generating activities. Poverty Alleviation Micro YEN To enhance the living standard of households whose monthly income is less than Rs. 3,213.20 Finance Project II (Probodini) 2,381.00 15,000/= in project location. Self Employment Promotion LKR 250.00 To provide financial assistance to trained youth who passed out from recognized vocational 232.39 Initiative training institutions in the country for establishment of their own self employment projects. Viskam (Special Loan LKR 1,325.60 To ensure the availability of credit for investment, diversification and improvement of 881.00 When the mandatory Scheme for Agriculture commercial agri-business in the country. requirements are fulfilled Sector Development) by contributory banks, funds will be returned Provincial Development LKR 2,900.00 To provide credit facilities to medium and long term projects in the SME sector in the country. 2,900.00 Collection of recoveries Credit Scheme from PFIs as per scheduled date to be transferred to FD. Dry Zone Livelihood Support LKR 252.95 To provide facilities to income generating activities in Anuradhapura, Moneragala, 252.95 & Partnership Programme Kurunegala and Badulla Districts. Resumption of Economic LKR To extend credit to agriculture, livestock, micro and small enterprises in the Eastern Province. 1,000.00 Activities in the Eastern 1,078.27 Province - Phase II Resumption of Economic LKR To extend credit to agriculture, livestock, micro and small enterprises in the Eastern Province. 1,428.47 Activities in the Eastern 1,000.00 Province - Phase III Repair of Damaged Houses LKR 600.00 To provide credit facilities for repairing the damaged houses that were damaged during the 600.00 in the North and East conflict in the Northern and Eastern Provinces. National Agribusiness USD 32.90 To assist smallholder producers and the landless, especially the youth by increasing the income 113.13 Development Programme of the beneficiaries in the market / value chain development and providing financing and training for employment. Small Plantation SDR 2.60 To enhance the living standard of the low income communities in Monaragala, Kandy, 487.66 Entrepreneurship Kegalle, and Nuwara-Eliya. Development Project National Agribusiness LKR 1,049.84 To improve income level and social conditions of the poor in selected project areas. 1,049.84 Development Programme (NADeP) - Microfinance Value Chain Development LKR 135.69 To increase the production, productivity, quality and value addition of agriculture produce. 135.69 Capital Agriculture Loan Scheme under the "Out Grower Farmers Loan scheme" of the National Agribusiness Development Programme (NADeP) Value Chain Development LKR 302.04 To increase the production, productivity, quality and value addition of agriculture produce. 302.04 Seasonal Agriculture Loan Scheme under the "Out Grower Farmers Loan scheme" of the National Agribusiness Development Programme (NADeP) Post-Disaster Economic LKR 134.58 To support borrowers (individual or group of individuals) in their post disaster recovery efforts 134.58 Activity Recovery Loan of the business/small enterprises affected by recent floods/drought by providing the fund Scheme (PEARL) requirements to resume their businesses or income generating activities. NADeP- "Tharuna Diriya" LKR 288.48 Reach village level poor youth to enhance the skill levels and capacity building by providing 288.48 Youth Empowerment and credit facilities to small business and other forms of self-employment projects. Employment Programme Dry Zone Livelihood Support LKR 252.90 To provide facilities to income generating activities in Anuradhapura, Monaragala, Kurunegala 252.89 & Partnership Programme - and Badulla Districts. Revolving Fund Small Farmers and Landless LKR 345.69 To promote the intensification of agricultural production by small farmers and the establishment of 1,564.75 Credit Project - Revolving small scale non-farming rural enterprises. Fund Poverty Alleviation Micro- LKR 2,764.84 To improve income levels of the poor and enhance inclusive formal financial services for them by 7,016.86 finance Project II (Probodini) providing credit for income generating activities. – Revolving Fund Central Bank of Sri Lanka Annual Report - 2018 Part II - 69 Accounts and Operations of the Central Bank of Sri Lanka Part II Ongoing Projects Name of the Project Total Allocation of the Purpose of the Loan Refinance Salient Features Warranties Special Fund (Mn.) Granted to & Conditions PFI s Assurance (Rs. Mn.) Tea Development Project – LKR 1,100.00 To provide credit facilities to develop the tea sector in the country. 964.87 Revolving Fund Swashakthi Loan Scheme LKR 4,000.00 To generate employment opportunities via providing financial support for 2,522.20 both new and existing entrepreneurs. "Athwela"-Resumption of Economic LKR 2,000.00 To provide financial facilities to eligible sub-borrowers to resume any 1,599.74 Activities affected by Disasters economic activity affected by any disaster as informed by the GOSL. (READ) Poverty Alleviation Micro-finance LKR 1,031.00 To assist in setting up an effective credit delivery mechanism for income 4,821.16 Project RF (Probodini) generating activities conducted by the rural poor who has no access to formal credit. "Smallholder Agribusiness Partnership USD 1.10 67.84 Programme (SAPP) 4P Capital" To contribute to Sri Lanka's smallholders' poverty reduction & competitiveness "Smallholder Agribusiness Partnership USD 2.45 & increase the income & quality of diet of 57,500 smallholders involved in 254.15 Programme (SAPP) commercially oriented production & marketing systems, achieving through 4P Seasonal" a process of forming & building capacity of producer groups, organizations "Smallholder Agribusiness Partnership USD 6.00 & strengthening the network under the partnerships with the private sector. 106.42 Programme (SAPP) 4P RF Income Generation" Saubagya Loan Scheme LKR 26,725.60 To extend credit to MSMEs and disaster affected MSMEs. 26,725.60 Collection of recoveries from PFIs as per scheduled date to Self Employment Promotion Initiative LKR 225.00 To provide financial assistance to trained youth who completed certificate or 352.09 be transferred to Phase II (SEPI II) Diploma in National Vocational Qualification (NVQ) relevant A/Cs of the RDD 59. EVENTS OCCURING AFTER THE REPORTING DATE There were no material events occurring subsequent to reporting date that require adjustment or disclosure in the financial statements. Part II - 70 Central Bank of Sri Lanka Annual Report - 2018