The Case Study - Seylan Bank

Seylan Bank PLC Annual Report 2009 161Notes to the Consolidated Financial Statementsloss event has occurred and as a consequence the Bank will not likely receive all amounts owed to it. Loanimpairment is calculated as the difference between the carrying amount of the loan and the present valueof future expected cash flows associated with the loan discounted at the loan’s original effective interestrate. This will be a significant change compared to the current method applied by the Bank for loan lossprovisioning based on the direction issued by the Central Bank of Sri Lanka, which is primarily time based.• Financial liabilities are categorised as either measured at amortised cost using effective interest rate orat fair value through profit or loss.• Financial assets should be carried at fair value, with the exception of loans and receivables, held-tomaturityassets, and in the rare circumstances where the fair value of a financial instrument cannot bereliably measured. Remeasurement to fair value must be performed at each financial reporting date.• Derivatives are always categorised as trading and therefore measured at fair value with changes recordedin the Income Statement, unless the enterprise can establish that an effective hedging relationship exists.• The effect of remeasurement to fair value must be recognised and consistently applied in one of twoways: recognise all changes in fair value in the Income Statement; or recognise changes in fair value ofonly trading instruments in the Income Statement, and available-for-sale instruments as a component ofequity until sold or otherwise disposed.(c) Derivatives and Hedge Accounting• All derivatives must be measured at fair value in the Balance Sheet in situations where these arecategorised as trading, as well as when designated as a hedging instrument.• SLAS 45 provides detailed guidance as to when and how hedge accounting should be applied. The Bankmust designate all of its hedging relationships and document their assessment of effectiveness prior tothe application of hedge accounting.• Hedge accounting is permitted provided that the Bank can establish that the hedging instrument and thehedged item have an effective hedging relationship throughout the financial reporting period.• There are three hedging models under SLAS 45. These are: the fair value hedge, the cash flow hedge andthe hedge of a net investment in a foreign operation. Each of these models is based on accounting for thehedging instruments at fair value.The Bank is currently in the process of evaluating the potential effect of these Standards. However, theimpact of the above requirements has not been quantified. Given the nature of the Bank’s operations, theseStandards are expected to have a pervasive impact on the Group’s Financial Statements.The above Standards are effective for annual periods beginning on or after 1st January 2011.1.4.37 Comparative InformationSeylan Merchant PLC and Seylan Developments PLC audited Financial Statements for the year 2008 werecompleted on 5th November 2009 and 29th June 2009 respectively. Accordingly, comparative figures for2008 have been restated. The comparative information is reclassified wherever necessary to conform withthe current year’s presentation in order to provide a better presentation. The details of restatements aredisclosed in Notes 46 and 47 to the Financial Statements.1.4.38 Directors’ Responsibility StatementThe board of directors of the Bank is responsible for the preparation and presentation of these Financial Statements.Please refer to pages 134 and 135 for the Statement of the Directors’ Responsibility for Financial Reporting.