The Case Study - Seylan Bank

Seylan Bank PLC Annual Report 2009 155Notes to the Consolidated Financial Statements1.4.25 Accounting for Operating Lease IncomeSeylan Merchant Bank PLC, a subsidiary until 30th September 2009, rental income is recognised as revenueover the term of lease. However, no accrued rental income is recognised where any portion of capital orinterest is in arrears for six months or more. In such cases interest income is accounted for on a cash basis.1.4.26 Income Tax ExpenseIncome tax expense comprises of current and deferred tax. Income tax expense is recognised in the IncomeStatement except to the extent that it relates to items recognised directly in equity, in which case it isrecognised in equity.1.4.26.1 Current TaxationCurrent tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantivelyenacted on the Balance Sheet date, and any adjustment to tax payable in respect of previous years.Provision for taxation is based on the profit for the year adjusted for taxation purposes in accordance withthe provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto at the rates specifiedin Note 11.1.4.26.2 Deferred TaxationDeferred taxation is provided using the liability method, providing for temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes and the tax base of assets andliabilities, which is the amount attributed to those assets and liabilities for tax purposes. The amount ofdeferred tax provided is based on the expected manner of realisation or settlement of the carrying amountof assets and liabilities, using tax rates enacted or substantively enacted by the reporting date.Deferred tax liabilities are not recognised for the following temporary differences: the initial recognitionof goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combinationand that affects both accounting nor taxable profit and differences relating to investments in subsidiariesto the extent that they probably will not reverse in the foreseeable future. Deferred tax assets, includingthose related to temporary tax effects of income tax losses and credits available to be carried forward, arerecognised only to the extent that it is probable that future taxable profits will be available against which theasset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extentthat it is no longer probable that the related tax benefit will be realised.Seylan Developments PLCSince the Company enjoys 7-year tax holiday from the year of assessment 2003/04, certain temporarydifferences will not reverse for a considerable period.Considering the above tax effect and losses carried forward, temporary differences have been excludedfrom the computation of deferred tax expenses for the period under review.1.4.27 Withholding Tax on DividendsDividend distributed out of taxable profit of the subsidiaries attracts a 10% deduction at source and is notavailable for set-off against the tax liability of the Bank. Thus, the withholding tax deducted at source isadded to the tax in the Consolidated Financial Statements as a consolidation adjustment. Withholding taxthat arise from the distribution of dividends by the Bank are recognised at the same time as the liability topay the related dividend is recognised.