Sampath Bank | Annual Report 2013

Financial Contents 200Annual Report of the Board of Directors 211 on the Affairs of the Company 213Directors’ Statement on Internal Control Over Financial Reporting 214Independent Assurance Report to the Board 215 of Directors of Sampath Bank PLC 217Managing Director’s and Group Chief 218 Financial Officer’s Responsibility Statement 219 220Statement of Directors’ Responsibility for 221 Financial Reporting 223 224Independent Auditors’ Report to the 322 Shareholders of Sampath Bank PLC 323 324Income Statement 325Statement of Comprehensive Income 326Statement of Financial Position 327Cash Flow StatementStatement of Changes In EquityNotes to the Financial StatementsIncome Statement In US$Statement of Comprehensive Income in US$Statement of Financial Position in US$Ten Years at a GlanceValue AdditionSources & Distribution of Income Annual Report 2013 Sampath Bank PLC 199

ANNUAL REPORT OFTHEBOARDOFDIRECTORSONTHE AFFAIRSOFTHE COMPANY1. General ‘A+(lka)’. RAM Rating Lanka has reaffirmed Bank’s long term andThe Board of Directors of Sampath Bank PLC has pleasure in short term financial institution ratings at AA and P1 respectively; thepresenting their Annual Report on the State of Affairs of the long term rating carries a stable outlook.Company to the members of Sampath Bank for the financial yearended 31st December 2013, together with the audited Financial The registered office as well as the Head Office of the Bank isStatements of the Bank, Consolidated Financial Statements of located at No 110, Sir James Pieris Mawatha, Colombo 02, Srithe Group for the year and the Auditors’ Report on those Financial Lanka.Statements, conforming to the requirements of the CompaniesAct No 7 of 2007 and the Banking Act No 30 of 1988. The 2. Vision, Values and Corporate ConductFinancial Statements were reviewed and approved by the Board The Bank’s Vision and Values are given in page 3 of the Annualof Directors on 18th February 2014. This report includes the Report. The business activities of the Bank are conducted at a highinformation required by the Companies Act No 7 of 2007, Banking level of ethical standard in achieving its Vision.Act Direction No 11 of 2007 on Corporate Governance for licensedcommercial banks and subsequent amendments thereto, Listing 3 Principal Business ActivitiesRules of the Colombo Stock Exchange and is also guided by the As required by the Section 168 (1) (a) of the Companies Act, therecommended best practices on Corporate Governance. principal business activities of the Bank and the Group during the year are given below.Sampath Bank PLC (Bank) is a licensed commercial bankregistered under the Banking Act No 30 of 1988 (Banking Act) and 3.1 Bankwas incorporated as a public limited liability company in Sri Lanka The principal activities of the Bank include accepting deposits,on 10th March 1986 under the Companies Act No 17 of 1982. corporate and retail banking, project financing, trade financing,The Company was re-registered as per the requirements of the treasury and investment services, issuing of local and internationalCompanies Act No 7 of 2007 (Companies Act) on 28th April 2008 credit and debit cards, off-shore banking, resident and non-residentunder the name Sampath Bank PLC with The Registrar General of foreign currency operations, electronic banking services: such asCompanies. The Re-registration number of the Company is PQ 144. telephone banking, internet banking, mobile banking, payment gateway money remittance facilities etc, pawning, leasing, travelThe ordinary shares of the Bank are listed on the main board of related services and dealing in Government Securities.the Colombo Stock Exchange in Sri Lanka. The Bank’s unsecuredsubordinated redeemable debentures are also listed on the 3.2 SubsidiariesColombo Stock Exchange. Sampath Bank PLC had four Subsidiaries as at 31st December 2013. Names of the Subsidiaries and their principal businessFitch Rating Lanka has affirmed Bank’s National Long Term rating activities are as tabulated belowat ‘AA-(lka)’ with a Stable Outlook and subordinated debentures atEntity Principal business activitiesSampath Centre Ltd Renting of Commercial PropertyS C Securities (Pvt) Ltd Stock BrokingSiyapatha Finance Ltd (formerly Sampath Leasing and Factoring Ltd)* Leasing, Factoring and Accepting Fixed & Savings DepositsSampath Information Technology Solutions Ltd Developing Software Solutions and Maintenance of Hardware* Please refer 4 below.4. Changes to the Group Structure during the year 2013 as required by the Section 168 (1) (a) of theSampath Leasing and Factoring Ltd, 100% owned Subsidiary, Companies Act are contained in the Chairman’s Statement (pageswas converted into a finance company during the year. As a 8 to 11), the Managing Director’s Review (pages 12 to 21) andresult the company was renamed as “Siyapatha Finance Ltd” on the Management Discussion & Analysis (pages 40 to 101). These2nd September 2013. The CBSL licence was received on 25th reports form an integral part of the Annual Report of the Board ofSeptember 2013. This company can now accept term deposits and Directors.savings deposits from the public. 6. Future Developments [Section 168 (1) (a)]5. Review of Operations Three new branches were opened during the year. The BankA review of the Financial and Operational performance of the Bank intends to focus on a business expansion drive through the alreadyand the Group together with important events that took place expanded Branch Network, concentrating mainly on its core banking operations to increase its market share and profitability. This will200

be further supplemented by a more vigorous drive on innovative 9. Auditors’ Reportproduct development, process improvements and staff development, The Auditors of the Bank are Messrs Ernst & Young, Charteredaimed at fulfilling the rapidly changing customer needs in the Accountants. Messrs Ernst & Young carried out the audit on thechallenging market conditions and maximizing the value that we Financial Statements of the Group and the Bank for the yearcreate for all the stakeholders. Further as required under Section ended 31st December 2013 and their report on those Financial168 (1) (a) of the Companies Act, an overview of the future Statements, as required by the Section 168 (1) (c) of thedevelopment of the Bank and the Group is given in the Chairman’s Companies Act is given on page 217.Statement (pages 8 to 11), the Managing Director’s Review (pages12 to 21) and the Management Discussion & Analysis (pages 40 to 10. Significant Accounting Policies101). These reports form an integral part of the Annual Report of The significant accounting policies adopted in the preparation of thethe Board of Directors. Financial Statements are given on pages 224 to 242 and comply with Section 168 (1) (d) of the Companies Act.7. Financial StatementsThe Financial Statements of the Group and the Bank have been The Bank and the Group applied, for the first time, Sri Lankaprepared in accordance with the Sri Lanka Accounting Standards Accounting Standard - LKAS 19 (Employee Benefits) which require(SLFRSs) laid down by the Institute of Chartered Accountants of Sri restatement of previous Financial Statements. A detailed analysis onLanka, and comply with the requirements of the Companies Act and this is given in Note No 6.4 to the Financial Statements.the Banking Act. The aforementioned Financial Statements for theyear ended 31st December 2013 duly signed by the Group Chief 11. Financial Results and AppropriationsFinancial Officer, three of the Directors of the Bank and the Group 11.1 IncomeCompany Secretary are given on pages 218 to 321 which form an The Income of the Group for 2013 was Rs 48,066,173,000/-integral part of this Annual Report of the Board of Directors. (As per (2012: Rs 39,727,737,000/-) while the Bank’s income was Rsthe Section 168 (1) (b) of the Companies Act). 46,525,520,000/- (2012: Rs 38,796,181,000/-). An analysis of the income is given in Note 7 to the Financial Statements.8. Directors’ Responsibility for Financial ReportingThe Directors are responsible for the preparation of Financial 11.2 Profit and AppropriationsStatements of the Group and the Bank to reflect a true and fair The Group has recorded a decline in profit before tax and profitview of its state of affairs. The Directors are of the view that these after tax of 37.4% and 33.1% respectively in 2013. The Bank’sFinancial Statements appearing on pages 218 to 321 have been profit before tax and profit after tax for the year too recorded aprepared in conformity with the requirements of the Sri Lanka decline of 39.3% and 34.4% respectively over 2012. Group’sAccounting Standards, Companies Act, Sri Lanka Accounting Total Comprehensive Income (net of tax) for the year is Rsand Auditing Standards Act No 15 of 1995, the Banking Act and 4,991,242,000/- (2012: Rs 5,113,457,000/-) while the Bankamendments thereto, the Listing Rules of the Colombo Stock has recorded a Total Comprehensive Income (net of tax) of RsExchange and the Corporate Governance Code for Licensed 3,822,000,000/- (2012: Rs 4,903,916,000/-). A detailed breakup ofCommercial Banks issued by the Central Bank of Sri Lanka (CBSL). the profits & appropriations of the Bank is given below:The Statement of Directors’ Responsibility for Financial Reporting isgiven on pages 215 & 216 and forms an integral part of the AnnualReport of the Board of Directors. 2013 2012 Annual Report 2013 Sampath Bank PLC Rs 000 * Restated Rs 000Profit for the year after payment of all operating expenses and provision for depreciation and contingencies 4,491,427 7,400,640Less: Taxation (1,060,960) (2,170,157)Net profit after taxation 3,430,467 5,230,483Other comprehensive income net of income taxActuarial gains & losses on defined benefit plans (460,571) 12,264Deferred tax effect on above 128,960 (3,434) 3,098,856 5,239,313Unappropriated balance brought forward from previous year (net of prior year adjustment) 2,559,909 2,173,999Balance available before appropriation / adjustments 5,658,765 7,413,312Transfer from the risk reserve fund of PDU (correcting entry) 3,659 - 7,416,971 5,658,765 201

ANNUAL REPORT OF THE BOARDOFDIRECTORSONTHEAFFAIRS OFTHE COMPANY 2013 2012 Rs 000 * Restated Rs 000Appropriations (171,523) (256,821)Transfer to Statutory Reserve Fund - (73,302)Transfer to Risk Reserve Fund of Primary Dealer UnitTransfer to Investment Fund Account (908,727) (939,955)Transfer to General Reserve (124,008) (2,160,000)Dividend - (713,505)Final cash dividend paid - 2011 (Rs 4.50 per share) - (713,479)Final scrip dividend paid - 2011 (Rs 4.50 per share) (977,046)Final cash dividend paid - 2012 (Rs 6.00 per share) (977,050) -Final scrip dividend paid - 2012 (Rs 6.00 per share) 2,500,411 -Unappropriated balance carried forward 2,559,909Proposed dividend 1,342,301 -Final cash dividend proposed - 2013 (Rs 8.00 per share) - 1,952,840Final scrip and cash dividend proposed - 2012 (Rs 12.00 per share)* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustment made based on the newly adoptedSri Lanka Accounting Standards: refer Notes to the Financial Statements No 6.4.12. Taxation Further details are given in Note 17 to the Financial Statements.Income tax rate applicable on the Bank’s domestic operations andon-shore and off-shore operations of the off-shore Banking Centre 14. Reservesis 28% (2012: 28%). A summary of the Group’s Reserves is given below:The Bank is also liable for Financial Services VAT at 12% (2012: 2013 201212%) Rs 000 * RestatedThe Group has also provided deferred taxation on all known Rs 000temporary differences under the liability method, as permitted by theSri Lanka Accounting Standard - LKAS 12 (Income Taxes). Statutory Reserve Fund 1,271,913 1,089,349 Risk Reserve Fund - 109,48113. Dividend Investment Fund AccountThe Directors recommend that a final cash dividend of Rs 8.00 per Revaluation Reserve 2,497,983 1,560,771share (2012 : Rs 6.00 per share - cash and Rs 6.00 per share - Available for Sale Reserve 4,202,261 2,876,185scrip) be paid for the financial year ended 31st December 2013. Hedge Reserve 1,966,240 1,465,022 General Reserve (168,014)The cash dividend is subject to Shareholder approval at the Annual Retained Earnings 14,138,985 -General Meeting. Total 3,300,881 13,895,840 27,210,249The Board of Directors was satisfied that the Bank would meet the 3,197,040solvency test immediately after the final dividend proposed which 24,193,688will be paid in April 2014 in terms of the Section 31 (3) of theCompanies Act. The Board provided the Statements of Solvency to * Certain amounts shown here do not correspond to the Financialthe Auditors and obtained Certificates of Solvency from the Auditors Statements - 2012 and reflect adjustment made based on thein respect of the dividend payment conforming to the statutory newly adopted Sri Lanka Accounting Standards: refer Notes to theprovision. With this dividend payment, the Bank is also fulfilling the Financial Statements No 6.4deemed dividend requirement according to the provisions of InlandRevenue Act.202

15. Capital Expenditure The details of the debentures issued during the year and those Annual Report 2013 Sampath Bank PLCThe total capital expenditure on acquisition of property, plant outstanding as at 31st December 2013 are given in Note 37 to theand equipment and intangible assets of the Group and the Bank Financial Statements. These debentures are eligible for the Tier IIamounted to Rs 989,498,000 and Rs 845,168,000 respectively Capital of the Bank.(2012 Group: Rs 1,016,108,000/- and Bank: Rs 918,935,000/-).Details are given in Notes 31 and 32 to the Financial Statements. Sampath Bank PLC had issued a deep discounted zero coupon bond with a maturity value of Rs. 3,458,108,968/- for 20 years.16. Capital Commitments The present paid up value of this bond is Rs 1,494,001,000/-The capital expenditure approved and contracted for, after the year (2012: Rs 1,368,723,000/-) and this forms part of the Tier IIend is given in Note 42.3 to the Financial Statements. Capital. The above Bond was issued in August 2003 and will mature in August 2023. The details are given in Note 37 to the17. Property, Plant and Equipment (PPE) Financial Statements.Details of property, plant and equipment are given on Note 31 tothe Financial Statements. 20. Share Information Information relating to earnings, dividend, net assets and market18. Market Value of Freehold Properties value per share is given in the Financial Highlights on page 4.All freehold land and buildings of the Group and the Bank were Information on the trading of the shares and movement in therevalued as at 30th October 2013 by professionally qualified number of shares of the Bank is given in the Investor Relationindependent valuers, and brought into the Financial Statements. section on pages 328 to 335.The Directors are of the opinion that the revalued amounts arenot in excess of the current market values of such properties. The 21. Shareholdingdetails of freehold properties owned by the Bank are given in Note There were 17,900 registered ordinary shareholders as at 31st31 to the Financial Statements. December 2013 (2012: 17,518). Information on the distribution of shareholding and the respective percentages are given on page19. Stated Capital, Debentures and Bonds 329 of the Annual Report. Details of top twenty shareholders,19.1 Stated Capital percentages of their holdings and percentage holding of the publicThe Stated Capital of the Bank as at 31st December 2013 are given in the Investor Relations section on page 332.amounted to Rs 4,460,339,000/- consisting of 167,787,605ordinary shares (2012: Rs 3,564,172,000/- consisting of 22. Equitable Treatment to Shareholders162,736,665 ordinary shares). The Bank has at all times ensured that all shareholders are treated equitably.The number of shares in issue of the Bank increased from162,736,665 ordinary shares to 167,787,605 ordinary shares as a 23 The Board of Directorsresult of the payment of final Scrip Dividend for 2012 (4,916,007 The Board of Directors of the Bank consists of twelve (2012:ordinary shares) and the exercise of options by employees under twelve) Directors with wide financial and commercial knowledgethe ESOP 2010 (134,933 ordinary shares). and experience. The names of the Directors of the Bank during the period 1st January 2013 to 31st December 2013 are givenThe details of the proportionate increments of the issued shares below as per Section 168 (1) (h) of the Companies Act. Theirare given in Note 16 to the Financial Statements. brief profiles are given on pages 22 to 28 of the Annual Report. The classification of Directors into Executive (ED), Non-Executive19.2 Debt Capital (NED) and Independent (IND) Directors is given against the namesThe Bank had issued 15,000,000 Unsecured, Subordinated, as per Listing Rules and Corporate Governance Rules of ColomboRedeemable 5 year Debentures to the value of Rs Stock Exchange and Banking Act Direction No 11 of 2007 issued1,500,000,000/- as at 31st December 2013 (2012: Rs by the Central Bank of Sri Lanka.1,500,000,000/-), which are listed in the Colombo StockExchange. The par value of a debenture is Rs 100/- and thesedebentures will be redeemed in October 2017. The Bank alsoissued 50,000,000 Unsecured, Subordinated, RedeemableDebentures to the value of Rs 5,000,000,000/- during the year.These debentures too are listed in the Colombo Stock Exchange.The par value of a debenture amounts to Rs 100/- and thesedebentures will be redeemed in December 2018. 203

ANNUAL REPORT OF THE BOARDOFDIRECTORSONTHEAFFAIRS OFTHE COMPANYName of Director Classification RemarksMr Dhammika Perera NED Director since 01.08.2007; Chairman since 01.01.2012Mr Channa Palansuriya NED Director since 01.01.2012; Deputy Chairman since 26.01.2012Mr Sanjiva Senanayake NED / IND Director since 01.01.2012; Senior Director since 26.01.2012Mr Deepal Sooriyaarachchi NED / IND Director since 05.08.2010Prof Malik Ranasinghe NED / IND Director since 30.08.2011Mrs Dhara Wijayatilake NED / IND Director since 30.08.2011Miss Annika Senanayake NED / IND Director since 01.01.2012Mr Deshal De Mel NED Director since 01.01.2012Mr Ranil Pathirana NED Director since 01.01.2012Mrs Saumya Amarasekera NED Director since 01.06.2012Mr Aravinda Perera ED Executive Director since 25.11.2008; Managing Director since 01.01.2012Mr Ranjith Samaranayake ED Director since 01.01.2009Alternate Directors Alternate Director to Mr Deepal Sooriyaarachchi since 15.01.2012 Alternate Director to Prof Malik Ranasinghe since 31.01.2012Prof Malik Ranasinghe Alternate Director to Mr Deshal De Mel since 26.04.2012Mr Deepal Sooriyaarachchi Alternate Director to Mr Channa Palansuriya since 28.03.2013Mr Sanjiva SenanayakeMrs Saumya Amarasekera24. New Appointments and Resignation of Directors 26.3 Siyapatha Finance Ltd (formerly Sampath Leasing andThe Bank has to disclose the new appointments to and resignations Factoring Ltd)from the Board of Directors in the Annual Report of the Board ofDirectors in terms of Section 168 (1) (h) of the Companies Act. Mr I W Senanayake (Chairman) Mr S G WijesinhaThere were no new appointments to the Board of Directors during Mr P M A Sirimanethe year. None of the Directors resigned from the Board during the Dr H S D Soysayear. Mrs M A Karunaratne Mr W M P L De Alwis25. Retirement and re-election / re-appointment of Mr M A Abeynaike Directors Mr Aravinda Perera Mr Ranjith SamaranayakeIn terms of Article No 86 and 87 of the Articles of Association of theCompany, Mr Channa Palansuriya, Mr Deshal De Mel, Miss Annika 26.4 Sampath Information Technology Solutions LtdSenanayake and Mr Ranil Pathirana retire by rotation and being Mr L J K Hettiaratchi (Chairman)eligible, offer for re-election on the unanimous recommendation of Mr D J Gunaratnethe Board Nomination Committee and the Board of Directors. Mr M V Indrasoma Mr K M S P HerathNo existing Director has reached the age of 70 and therefore re-election under Sections 210 and 211 of the Companies Act does 27. Register of Directors and Secretariesnot apply this year. As required under Section 223 (1) of the Companies Act, the Bank maintains a Register of Directors and Secretaries which contain the26. List of Directors of the Subsidiaries of the Bank name, surname, former name (if any), residential address, business,Names of the Directors of Subsidiary companies are as follows: occupation, dates of appointment and dates of resignation (if applicable) of each Director and the Secretary.26.1 Sampath Centre LtdMr I W Senanayake (Chairman) 28. Board Sub CommitteesMr S G Wijesinha The Board while assuming the overall responsibility andMr S P Kannangara accountability for the management oversight of the Bank has alsoMr L R Jayakody appointed Board Sub Committees to ensure that the activities of the Bank at all times are conducted with the highest ethical standards26.2 S C Securities (Pvt) Ltd and the best interests of all its stakeholders. The Board formedMr D J Gunaratne (Chairman) many Sub Committees including the following four mandatory BoardMr N H K Fernando (Executive Director/CEO) Sub Committees as required by the Banking Act Direction No 11 ofDr S Kelegama 2007. The compositions of these four Sub Committees as at 31stMr M N R Fernando December 2013 were as follows:204

28.1 Board Audit Committee The Report of the Board Credit Committee is given on pages 153 & Annual Report 2013 Sampath Bank PLCMr Ranil Pathirana (Chairman) 154 and forms an integral part of the Annual Report of the Board ofMr Sanjiva Senanayake Directors.Mr Deepal SooriyaarachchiProf Malik Ranasinghe 28.6 Board Strategic Planning CommitteeMrs Dhara Wijayatilake Mr Dhammika Perera (Chairman) Mr Channa PalansuriyaThe Report of the Board Audit Committee is given on pages 142 to Mr Sanjiva Senanayake145 and forms an integral part of the Annual Report of the Board of Prof Malik RanasingheDirectors. Mr Deshal De Mel Mr Ranil Pathirana28.2 Board Human Resources and Remuneration Committee Mr Aravinda PereraMr Deepal Sooriyaarachchi (Chairman) Mr Ranjith SamaranayakeMr Channa PalansuriyaMiss Annika Senanayake The Report of the Board Strategic Planning Committee is given onMr Deshal De Mel page 155 and forms an integral part of the Annual Report of theMr Aravinda Perera Board of Directors.The Report of the Board Human Resources and Remuneration 28.7 Board Shareholder Relations CommitteeCommittee is given on pages 146 & 147 and forms an integral part Mr Channa Palansuriya (Chairman)of the Annual Report of the Board of Directors. Mr Deshal De Mel28.3 Board Nomination Committee The Report of the Board Shareholder Relations Committee is givenMiss Annika Senanayake (Chairperson) on pages 156 & 157 and forms an integral part of the AnnualMr Dhammika Perera Report of the Board of Directors.Mr Channa PalansuriyaMrs Saumya Amarasekera 28.8 Board Treasury Committee Mr Sanjiva Senanayake (Chairman)The Report of the Board Nominations Committee is given on pages Prof Malik Ranasinghe148 & 149 and forms an integral part of the Annual Report of the Mr Deshal De MelBoard of Directors. Mr Aravinda Perera Mr Ranjith Samaranayake28.4 Board Risk Management CommitteeMrs Dhara Wijayatilake (Chairperson) The Report of the Board Treasury Committee is given on page 158Mr Channa Palansuriya and forms an integral part of the Annual Report of the Board ofMr Sanjiva Senanayake Directors.Mr Aravinda PereraMr Ranjith Samaranayake 28.9 Board Marketing Committee Mr Deepal Sooriyaarachchi (Chairman)The Report of the Board Risk Management Committee is given on Miss Annika Senanayakepages 150 to 152 and forms an integral part of the Annual Report Mr Deshal De Melof the Board of Directors. Mrs Saumya AmarasekeraApart from the above four mandatory Board Sub Committees, the The Report of the Board Marketing Committee is given on pageBoard has also appointed the following five non-mandatory Board 159 and forms an integral part of the Annual Report of the BoardSub Committees: of Directors.28.5 Board Credit Committee The duties, responsibilities and performance of the above board SubProf Malik Ranasinghe (Chairman) Committees are discussed in the respective Board Sub CommitteeMr Channa Palansuriya reports.Mr Sanjiva SenanayakeMiss Annika Senanayake 29. Directors’ MeetingsMr Deshal De Mel The details of Directors meetings which comprise Board meetingsMr Aravinda Perera and the Board Sub Committee meetings and the attendance ofMr Ranjith Samaranayake Directors at these meetings are given in Corporate Governance Report on page 110 of the Annual Report. 205

ANNUAL REPORT OF THE BOARDOFDIRECTORSONTHEAFFAIRS OFTHE COMPANY30. Directors’ Interest Register and Directors’ Interest in 33. Directors’ Interest in Shares and Debentures of Contracts or Proposed Contracts SubsidiariesThe Bank maintains the Directors’ Interest Register as required under Mr Aravinda Perera and Mr Ranjith Samaranayake hold onethe provisions of Section 168 (1) (e) of the Companies Act. Directors share each in Sampath Information Technology Solutions Ltd, asof the Bank have made necessary declarations of their interest in subscribers. These shares are held in trust for Sampath Bank. Mrcontracts or proposed contracts, in terms of the Sections 192 (1) and Aravinda Perera also holds one share each in S C Securities (Pvt) Ltd192 (2) of the Companies Act. These interests have been recorded in and Sampath Centre Ltd for and on behalf of Sampath Bank PLC.the Interest Register which is available for inspection in terms of theAct. The particulars of the Directors’ Interest in Contracts are given on None of the Directors directly hold any debentures in any Subsidiary.pages 209 & 210 of the Annual Report and form an integral part ofthe Annual Report of the Board of Directors. 34. Directors’ Remuneration As required under the Section 168 (1) (f), details of Directors’As a practice, Directors have refrained from voting on matters in emoluments and other benefits paid in respect of the Group and thewhich they were materially interested. The Directors have no direct Bank during the financial year under review are given in Note 14 toor indirect interest in a contract or a proposed contract with the the Financial Statements.Company other than those disclosed. 35. Our Team Members31. Related Party Transactions The Bank believes that its real potential rests on the strength andDirectors have also disclosed transactions if any, that could be capabilities of its team members in a rapidly changing environment.classified as related party transactions in terms of Sri Lanka All efforts are directed at having a motivated and competent team inAccounting Standard - LKAS 24 (Related Party Disclosure) which order to grow and achieve results as projected in the Strategic Planis adopted in preparation of the Financial Statements. Those and the Budget.transactions disclosed by the Directors are given in Note 43 to theFinancial Statements which form an integral part of the Annual As at 31st December 2013, the number of employees on theReport of the Board of Directors. payroll of the Bank was 3,688 (2012: 3,455).32. Directors’ Interest in Ordinary Shares and Debentures 36. ESOPsThe shareholdings of Directors were as follows: 36.1 Employee Share Option Plan (ESOP) 2010 The shareholders approved an Employee Share Option Plan (ESOPMr Dhammika Perera* No of Shares No of Shares 2010) at the Extraordinary General Meeting held on 21st AugustMr Channa Palansuriya as at 31st as at 31st 2010. ESOP 2010 was introduced in the year 2011, havingMr Sanjiva Senanayake December December achieved the targets set for 2010.Mr Deepal Sooriyaarachchi 2013 2012Prof Malik Ranasinghe - - The option exercisable period would be 3 years, from theMrs Dhara Wijayatilake - - entitlement date of 30th June 2011. In the event of optionsMs Annika Senanayake - - being fully exercised by the eligible staff, the Stated Capital ofMr Deshal De Mel - - the Bank would increase by Rs 244,492,720/-, as a result of theMr Ranil Pathirana - - consideration to be paid by the staff under the ESOP.Mrs Saumya Amarasekera - -Mr Aravinda Perera - - No financial assistance will be provided by the Bank to the staff toMr Ranjith Samaranayake - - purchase the share options. The remaining contractual life of share* Following Company is 9,422 6,363 options is 6 months.controlled by Mr Dhammika - -Perera 68,832 18,597 36.2 Employee Share Ownership Plan (ESOP) 2000Vallibel One PLC 21,314 20,690 In 2000 when a hostile takeover attempt was made on the Bank staff created trusts with trustees and shares were bought to the 25,107,454 24,371,697 trusts. The loans with regard to these shares have now been settled by the eligible employees. Based on eligibility these shares are now being transferred to the employees.None of the Directors directly hold any debentures issued by theBank.206

The details of the options offered to the employees as at 31st December 2013 are as follows: 31st Dec 2013 31st Dec 2012 31st Dec 2011Number of options in issue 3,056,159 3,056,159 3,056,159Number of options exercised in previous years (2,725,360) (524,924) -Number of options brought forward 2,531,235Number of options exercised during the year 330,799 (2,200,436) 3,056,159Number of options remaining (134,933) 330,799 (524,924)Option price (Rs) 195,866 2,531,235Weighted average market price (Rs) 80.00 80.00 200.89 80.00 199.83 221.0037. Environmental Protection 42. Donations Annual Report 2013 Sampath Bank PLCTo the best of knowledge of the Board, the Bank has not engaged As required by the Section 168 (1) (g) of the Companies Act,in any activity that is harmful or hazardous to the environment. The information pertaining to donations made by the Bank during theDirectors also confirm that to the best of their knowledge and belief year is given below. During the year the Bank made donations tothe Bank has complied with the relevant environmental laws and the value of Rs 54,009,000/- (2012: Rs 3,922,000/-) in termsregulations. of the resolution passed at the last Annual General Meeting. Donations made by the Group during the year amounted to Rs38. Statutory Payments 54,011,000/- (2012: 3,924,000/-). Out of the aforementionedThe Directors, to the best of their knowledge and belief, are sum, the donations made by the Bank to Government approvedsatisfied that all statutory payments due to the Government, other charities amounted to Rs 49,862,000/- (2012: nil). The Bank doesregulatory bodies and related to the employees have been paid on not make donations for political purposes.a timely basis. 43. Significant Shareholdings in Other39. Outstanding Litigation OrganisationsIn the opinion of the Directors and in consultation with the Bank’slawyers, litigations currently pending against the Bank will not Sampath Bank PLC has a 7.54% shareholding in Union Bank ofhave a material impact on the reported financial results of future Colombo PLC and 9.47% shareholding in LankaBangla Financeoperations of the Bank. Details of litigations pending against the Limited in Bangladesh. Details are given in Note 23 and 28 to theBank are given in Note 42 to the Financial Statements. Financial Statements.40. Events after the Reporting Period 44. Risk Management and Internal ControlNo circumstances have arisen since the Statement of Financial 44.1 Risk ManagementPosition date which would require adjustments to, or disclosure in, The Bank has an ongoing process in place to identify, evaluatethe accounts, except those disclosed in Note 45 to the Financial and manage the risks that are faced by the Bank. This process isStatements. detailed in the Risk Management Report on pages 160 to 187. The Directors on a regular basis review the above mentioned process41. Going Concern through the Board Risk Management Committee.The Directors after making necessary inquiries and reviewsincluding reviews of the budget for the ensuing year, capital 44.2 Internal Controlsexpenditure requirements, future prospects and risks, cash flows The Directors have taken reasonable steps open to them toand such other matters required to be addressed in the Code safeguard the assets of the Bank and the Group and to preventof Best Practice on Corporate Governance issued jointly by the and detect frauds and any other irregularities. For this purpose theInstitute of Chartered Accountants of Sri Lanka and the Securities Directors have instituted effective and comprehensive systems ofand Exchange Commission of Sri Lanka and the Direction on internal controls for identifying, recording evaluating and managingCorporate Governance issued by the Central Bank of Sri Lanka the significant risks faced by the Bank throughout the year andare satisfied that the Bank has adequate resources to continue it is being under regular review of the Board of Directors. Thisoperations into the foreseeable future. Accordingly, they continue comprises internal reviews, internal audit and the whole systemto adopt the going concern basis in preparing the Financial of financial and other controls required to carry on the operationsStatements. in an orderly manner, safeguard the assets, prevent and detect frauds and other irregularities and secure as far as practicable the accuracy and reliability of the records. 207

ANNUAL REPORT OF THE BOARDOFDIRECTORSONTHEAFFAIRS OFTHE COMPANY45. Corporate Governance Further the Group and the Bank paid Rs 6,283,000/- (2012:The Board of Directors is committed towards maintaining an Rs 5,618,000/-) and Rs 6,283,000/- (2012: Rs 5,618,000/-)effective Corporate Governance Framework and implementing respectively to Messrs Ernst & Young as Audit related fee expenses.processes required to ensure that the Bank is compliant with In addition, they were paid Rs 4,929,000/- (2012: Rs 5,419,000/-)the Code of Best Practice on Corporate Governance issued and Rs 4,664,000/- (2012: Rs 4,030,000/-) by the Group and thejointly by the Institute of Chartered Accountants of Sri Lanka and Bank respectively for permitted non-audit related services includingthe Securities and Exchange Commission of Sri Lanka and the tax consultancy services.Direction on Corporate Governance issued by the Central Bank ofSri Lanka. Details are given on Corporate Governance Report on Based on the declaration provided by Messrs Ernst & Young, andpages 102 to 140 of this Annual Report. as far as the Directors are aware, the Auditors do not have any relationship with or interest with the Bank that in our judgement,As required by Section 3(8)(ii)(g) of the Direction No 11 of may reasonably be thought to have a bearing on their independence2007 of the Banking Act on Corporate Governance for Licensed within the meaning of the Code of Professional Conduct and EthicsCommercial Banks, issued by the Central Bank of Sri Lanka, the issued by the Institute of Chartered Accountants of Sri Lanka,Board of Directors confirms that all the findings of the “Factual applicable on the date of this report.Findings Reports” of auditors issued under “Sri Lanka RelatedServices Practice Statement 4750” have been incorporated in the The retiring Auditors, Messrs Ernst & Young, have expressed theirannual Corporate Governance Report on pages 102 to 140 of this willingness to continue in office. Hence they come up for re-electionAnnual Report.. at the Annual General Meeting, with the recommendation of the Board Audit Committee and the Board of Directors. In accordance46. Auditors with the Companies Act, a resolution proposing the re-appointmentThe Auditors of the Bank during the year were Messrs Ernst & of Messrs Ernst & Young, Chartered Accountants, as Auditors isYoung, Chartered Accountants. They also function as the Auditors being proposed at the Annual General Meeting.for the Bank’s Subsidiary companies namely, Sampath Centre Ltd,SC Securities (Pvt) Ltd, Siyapatha Finance Ltd (formerly Sampath 47. Notice of MeetingLeasing and Factoring Ltd) and Sampath Information Technology The 28th Annual General Meeting will be held at the KingsburySolutions Ltd. Audit fees and reimbursement of expenses paid to Hotel, Colombo 1 on 31st March 2014. The Notice of Meeting isMessrs Ernst & Young for the year ended 31st December 2013 given on page 350 of the Annual Report.by the Group and the Bank amounted to Rs 12,516,000/- (2012:Rs. 10,759,000/-) and Rs 8,871,000/- (2012: Rs. 8,544,000/-) As required by Section 168 (1) (k) of the Companies Act the Boardrespectively. of Directors hereby acknowledge the contents of this report.For and on behalf of the Board of Directors.Dhammika Perera Channa Palansuriya Aravinda Perera S SudarshanChairman Deputy Chairman Managing Director Group Company SecretaryColombo, Sri Lanka18th February 2014208

Directors’ Interest in Contracts with the CompanyRelated party disclosures as required by the Sri Lanka Accounting Standard - LKAS 24 (Related Party Disclosures) are detailed in Note 43to Financial Statements. In Addition, the Bank carries out transactions in the ordinary course of business in an arm’s length basis with entitieswhere the Chairman or Director of the Bank is the Chairman or a Director of such entities as detailed below.Also these companies with the requirements of such section 168 of the Companies act No. 7 of 2007 and Directions issued under Section 47( 3), (4) ,(5) & (6) of the Banking Act No 30 of 1988.Company Relationship Nature of the Current Balance Balance facility Limit outstanding OutstandingMr Dhammika PereraDipped Products Ltd Rs 000 as at as atHaycarb PLC 31.12.2013 31.12.2012Hayleys MGT Knitting Mills PLC* Rs 000 Rs 000Horana Plantations PLC Director Overdraft - 25 Cr - Director Overdraft - 2 Cr 2 CrLanka Floor Tiles PLC Saving Deposits - Director Loans & receivables 222,266 4,513 -Royal Ceramic Lanka PLC Foreign Bills 10,000 212,492 65,897The Fortress Resorts Ltd Deputy Margin Deposits -Vallibel Finance PLC Chairman Overdraft 75,000 - -Vallibel One PLC Director 954 -Mr M Y A Perera Deputy Overdraft - 74,937 74,744Siyapatha Finance Ltd** ChairmanInstitute of Bankers of Sri Lanka Chairman Overdraft 80,000 16 -Mr Channa Palansuriya Chairman Loans & receivables 326,028Orit Trading Lanka ( Pvt) Ltd Chairman 70,270 -Mr Deepal Sooriyaarachchi Overdraft - 126,028 -Young Entrepreneurs Sri Lanka Director(Guarantee) Ltd Director Overdraft - 1129 Cr -Prof Malik Kumar Ranasinghe Overdraft - Chairman Overdraft - 19 Cr -Access Engineering PLC Saving Deposits - 14,977 Cr - - Overdraft 52 Cr - Loans & receivables 246 Overdraft 50,000 30,707 Cr 22,580 Cr Overdraft 9,740,000 1,221,112 970,653 Loans & receivables - - 102 Cr - 146 Cr - Annual Report 2013 Sampath Bank PLC 153 18,671 - Director Overdraft - 47 Cr - Independent Overdraft - 32,817 Cr - Non Ex Deposits - 9,955 - Director Margin Deposits - 46,010 - 209

ANNUAL REPORT OF THE BOARDOFDIRECTORSONTHEAFFAIRS OFTHE COMPANYDirectors’ Interest in Contracts with the Company Contd.Company Relationship Nature of the Current Balance Balance facility Limit outstanding Outstanding Rs 000 as at as at 31.12.2013 31.12.2012 Rs 000 Rs 000Mr Ranil Pathirana Director Overdraft 100,000 126 Cr 13 CrStar Packaging ( Pvt) Ltd Deposits - 6 -Star Pack Investments ( Pvt) Ltd DirectorWindforce ( Pvt) Ltd Director Overdraft 75,000 13 106 Cr Loans & receivables - 321 Cr -CKT Apparel ( Pvt) Ltd Director Overdraft 200,000 - - - 7 Cr* Mr Dhammika Perera & Mr Ranil Pathirana are Directors of Hayleys Mgt Knitting Mills PLC** Mr M Y A Perera & Mr Samaranayake are Directors of Siyapatha Finance Ltd210

DIRECTORS’ STATEMENTONINTERNALCONTROLOVER FINANCIAL REPORTINGResponsibility The Internal Audit Division of the Bank checks for compliance Annual Report 2013 Sampath Bank PLCIn line with the Banking Act Direction No 11 of 2007, section 3 (8) with policies and procedures and the effectiveness of the(ii)(b), the Board of Directors present this report on Internal Control internal control systems on an ongoing basis using samplesover Financial Reporting. and rotational procedures and highlight significant findings in respect of any non-compliance. Audits are carried out onThe Board of Directors (“Board”) is responsible for the adequacy all units and branches, the frequency of which is determinedand effectiveness of the internal control mechanism in place at by the level of risk assessed, to provide an independentSampath Bank PLC, (“the Bank”). In considering such adequacy and and objective report. The annual audit plan is reviewed andeffectiveness, the Board recognises that the business of banking approved by the Board Audit Committee. Findings of therequires reward to be balanced with risk on a managed basis and Internal Audit Department are submitted to the Board Auditas such the internal control systems are primarily designed with a Committee for review at their periodic meetings.view to highlight any deviations from the limits and indicators whichcomprise the risk appetite of the Bank. In this light, the system The Board Audit Committee of the Bank reviews internalof internal controls can only provide reasonable, but not absolute control issues identified by the Internal Audit Department, theassurance, against material misstatement of financial information External Auditors, regulatory authorities and the Management:and records or against financial losses or fraud. and evaluates the adequacy and effectiveness of the risk management and internal control systems. They also reviewThe Board has established an ongoing process for identifying, the internal audit functions with particular emphasis on theevaluating and managing the significant risks faced by the Bank scope of audits and quality of the same. The minutes of theand this process includes enhancing the system of internal control Board Audit Committee meetings are forwarded to the Boardover financial reporting as and when there are changes to business on a periodic basis. Further details of the activities undertakenenvironment or regulatory guidelines. The process is regularly by the Board Audit Committee of the Bank are set out in thereviewed by the Board and accords with the Guidance for Directors Board Audit Committee Report on pages 142 to 145.of Banks on the Directors’ Statement on Internal Control issued bythe Institute of Chartered Accountants of Sri Lanka. The Board has In assessing the internal control system over financialassessed the internal control over financial reporting taking into reporting, identified officers of the Bank collated allaccount principles for the assessment of internal control system as procedures and controls that are connected with significantgiven in that guidance. accounts and disclosures of the financial statements of the Bank. These in turn were observed and checked byThe Board is of the view that the system of internal controls over the internal audit department for suitability of design andfinancial reporting in place is sound and adequate to provide effectiveness on an ongoing basis. The Bank adopted thereasonable assurance regarding the reliability of financial reporting, new Sri Lanka Accounting Standards comprising LKASand that the preparation of financial statements for external and SLFRS in 2012. The processes and procedures initiallypurposes is in accordance with relevant accounting principles and applied to adopt the aforementioned Accounting Standardsregulatory requirements. were further strengthened during the year 2013 based on the feedback received from the external auditors, internalThe Management assists the Board in the implementation of the audit department, regulators and the Board Audit Committee.Board’s policies and procedures on risk and control by identifying The Bank is in the process of updating relevant procedureand assessing the risks faced, and in the design, operation and manuals pertaining to these new requirements. The Bank hasmonitoring of suitable internal controls to mitigate and control these also recognised the need to introduce an automated financialrisks. reporting process in order to comply with the requirements of recognition, measurement, classification and disclosureKey Features of the Process Adopted in Applying in Reviewing of the financial instruments more effectively and efficiently.the Design and Effectiveness of the Internal Control System The assessment did not include subsidiary companies of theOver Financial Reporting Bank.The key processes that have been established in reviewing theadequacy and integrity of the system of internal controls with • The comments made by the External Auditors in connection respect to financial reporting include the following: with internal control system over financial reporting in previous years were reviewed during the year and appropriate Various Committees are established by the Board to assist steps have been taken to rectify them. The recommendations the Board in ensuring the effectiveness of Bank’s daily made by the External Auditors in 2013 in connection with the operations and that the Bank’s operations are in accordance internal control system over financial reporting will be dealt with the corporate objectives, strategies and the annual with in the future. budget as well as the policies and business directions that have been approved. 211

DIRECTORS’ STATEMENT ON INTERNALCONTROLOVERFINANCIAL REPORTINGConfirmationBased on the above processes, the Board confirms that the financialreporting system of the Bank has been designed to provide areasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposesand has been done in accordance with Sri Lanka AccountingStandards and regulatory requirements of the Central Bank of SriLanka.Review of the Statement by External AuditorsThe External Auditors, Messrs Ernst & Young, have reviewed theabove Directors Statement on Internal Control over FinancialReporting included in the Annual Report of the Bank for the yearended 31st December 2013 and reported to the Board that nothinghas come to their attention that causes them to believe that thestatement is inconsistent with their understanding of the processadopted by the Board in the review of the design and effectivenessof the internal control over financial reporting of the Bank. TheirReport on the Statement of Internal Control over Financial Reportingis given on page 213 of this Annual Report.By order of the BoardRanil PathiranaChairman - Board Audit CommitteeDhammika Perera Channa PalansuriyaChairman Deputy ChairmanAravinda Perera S SudarshanManaging Director Group Company SecretaryColombo, Sri Lanka18th February 2014212

INDEPENDENT ASSURANCEREPORTTOTHEBOARD OF DIRECTORSOFSAMPATHBANKPLCIntroduction SLSAE 3050 does not require us to consider whether theWe were engaged by the Board of Directors of Sampath Bank Statement covers all risks and controls or to form an opinion on thePLC (“Bank”) to provide assurance on the Directors’ Statement on effectiveness of the Bank’s risk and control procedures. SLSAEInternal Control over Financial Reporting (“Statement”) included in 3050 also does not require us to consider whether the processesthe annual report for the year ended 31 December 2013. described to deal with material internal control aspects of any significant problems disclosed in the annual report will, in fact,Management’s responsibility remedy the problems.Management is responsible for the preparation and presentationof the Statement in accordance with the “Guidance for Directors Our conclusionof Banks on the Directors’ Statement on Internal Control” issued in Based on the procedures performed, nothing has come to ourcompliance with section 3(8)(ii)(b) of the Banking Act Direction No attention that causes us to believe that the Statement included11 of 2007, by the Institute of Chartered Accountants of Sri Lanka. in the annual report is inconsistent with our understanding of the process the Board of Directors has adopted in the review of theOur responsibilities and compliance with SLSAE 3050 design and effectiveness of internal control over financial reportingOur responsibility is to issue a report to the Board on the Statement of the Bank.based on the work performed. We conducted our engagement inaccordance with Sri Lanka Standard on Assurance Engagements Ernst & Young(SLSAE) 3050 – Assurance Report for Banks on Directors’ Chartered AccountantsStatement on Internal Control issued by the Institute of CharteredAccountants of Sri Lanka. 18th February 2014 ColomboSummary of work performedWe conducted our engagement to assess whether the Statement issupported by the documentation prepared by or for Directors; andappropriately reflected the process the Directors have adopted inreviewing the system of internal control over financial reporting ofthe Bank.The procedures performed were limited primarily to inquiries ofBank personnel and the existence of documentation on a samplebasis that supported the process adopted by the Board of Directors. Annual Report 2013 Sampath Bank PLC 213

MANAGING DIRECTOR’SANDGROUPCHIEFFINANCIALOFFICER’S RESPONSIBILITY STATEMENTThe Financial Statement of Sampath Bank PLC (Bank) and the We confirm, compliance with section 3(8)(ii)(b) of the Banking ActConsolidated Financial Statements of the Bank and its Subsidiaries Direction No 11 of 2007 on Corporate Governance (Internal Control(Group) as at 31st December 2013 are prepared in compliance with Over Financial Reporting - ICOFR) issued by the Central Bank ofthe requirements of the following: Sri Lanka as of 31 December 2013 and that the Bank’s Internal Controls over Financial Reporting is adequate and effective. The Sri Lanka Accounting Standards issued by The Institute of Annual Report of the Directors on pages 200 to 210 has briefly Chartered Accountants of Sri Lanka; covered the Group’s Internal Control over Financial Reporting. In Companies Act No 7 of 2007 (Companies Act); addition, Directors’ Statement on Internal Control Over Financial Sri Lanka Accounting and Auditing Standards Act No 15 of Reporting is provided on pages 211 & 212. The Bank’s External 1995; Auditors, Messrs Ernst & Young, have audited the effectiveness Banking Act No 30 of 1988 and amendments thereto; of the Bank’s Internal Controls Over Financial Reporting and have the Listing Rules of the Colombo Stock Exchange; given an unqualified opinion on page 213 of this Annual Report. the Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka, The Financial Statements of the Group were audited by Messrs the Securities and Exchange Commission of Sri Lanka; and Ernst & Young, Chartered Accountants, the independent External section 3(8)(ii)(g) of the Banking Act Direction No 11 of Auditors. Their report is given on page 217 of this Annual Report. 2007 on Corporate Governance issued by the Central Bank of Sri Lanka. The Audit Committee of the Bank meets periodically with the Internal Auditors and the independent External Auditors toThe formats used in the preparation of the Financial Statements and review the manner in which these auditors are performing theirdisclosures made comply with the formats prescribed by the Central responsibilities and to discuss issues relating to auditing, internalBank of Sri Lanka, which is also in compliance with the disclosure controls and financial reporting issues. To ensure completerequirements of the Sri Lanka Accounting Standard (LKAS 1) independence, the External Auditors and the Internal Auditors have“Presentation of Financial Statements”. full and free access to the members of the Audit Committee to discuss any matter of substance. The Audit Committee report isThe Accounting Policies used in the preparation of the Financial given on pages 142 to 145.Statements are appropriate and are consistently applied by theGroup. The significant accounting policies and estimates that involve The Audit Committee approves the audit and non-audit servicesa high degree of judgment and complexity were discussed with the provided by Messrs Ernst & Young, in order to ensure that theAudit Committee and External Auditors. Comparative information provision of such services does not impair Messrs Ernst & Young’shas been restated wherever necessary to comply with the current independence.presentation and material departures, if any, have been disclosedand explained in the notes to the Financial Statements. We confirm We confirm that to the best of our knowledge:that to the best of our knowledge, the Financial Statements give the Group has complied with all applicable laws, regulationsa true and fair view of the assets, liabilities, financial position, and prudential requirements;results of the operations and the cash flows of the Group. We have there are no material non compliances; andreasonable grounds to believe that the Bank and its Subsidiaries there are no material litigations that are pending againsthave adequate resources to continue in operational existence for the Group other than those disclosed in Note No 42 to thethe foreseeable future. Accordingly, we continue to adopt the going Financial Statements in the Annual Report.concern basis in preparing the Financial Statements. Aravinda Perera Ranjith SamaranayakeThe estimates and judgments relating to the Financial Statements Managing Director Director (Executive)/were made on a prudent and reasonable basis; in order that the Group Chief Financial OfficerFinancial Statements reflect in a true and fair manner, the form Colombo, Sri Lanka.and substance of transactions and that the Bank’s state of affairs 18th February 2014is reasonably presented. To ensure this, the Bank and all of itsSubsidiaries have taken proper and sufficient care in installing asystem of internal controls and procedures for safeguarding assets,preventing and detecting frauds and / or errors as well as otherirregularities which are reviewed, evaluated and updated on anongoing basis. Our Internal Auditors have conducted periodic auditsto provide reasonable assurance that the established policies andprocedures were consistently followed. However, there are inherentlimitations that should be recognised in weighing the assurancesprovided by any system of internal controls and accounting.214

STATEMENT OF DIRECTORS’RESPONSIBILITYFORFINANCIAL REPORTINGThe responsibilities of the Directors in relation to the Financial The Directors are also required to ensure that the Bank and the Annual Report 2013 Sampath Bank PLCStatements of Sampath Bank PLC (Bank) and the Consolidated Group have adequate resources to continue in operation andFinancial Statements of the Bank and its Subsidiaries (Group) to justify applying the going concern basis in preparing theseare set out in the following Statement. The responsibility of the Financial Statements.Auditors in relation to the Financial Statements is set out in theReport of the Auditors given on page 217. Financial Statements for the year 2013, prepared and presented in this Annual Report are consistent with the underlying booksAs per the provisions of the Companies Act No 7 of 2007 of account and are in conformity with the requirements of(Companies Act), the Directors of the Bank are responsible for Sri Lanka Accounting Standards, Companies Act, Sri Lankaensuring that the Bank and the Group keep proper books of Accounting and Auditing Standards Act No 15 of 1995, Bankingaccount of all the transactions and they are required to prepare Act and amendments thereto, the continuing Listing Rules ofFinancial Statements that give a true and fair view of the financial the Colombo Stock Exchange (CSE) and the Code of Bestposition of the Bank and the Group as at end of each financial Practice on Corporate Governance issued jointly by The Instituteyear and place them before a general meeting. The Financial of Chartered Accountants of Sri Lanka (ICASL) & the SecuritiesStatements comprise of the Statement of Financial Position as and Exchange Commission of Sri Lanka (SEC). Further theseat end of the financial year, the Income Statement, Statement Financial Statements comply with the prescribed format issued byof Comprehensive Income, Statement of Changes in Equity, the Central Bank of Sri Lanka (CBSL) for the preparation of annualStatement of Cash Flow for the financial year and notes thereto. financial statements of licensed commercial banks. The Directors accept responsibility for the integrity and objectivity of the FinancialThe Financial Statements are prepared under the supervision of the Statements published in this Annual Report. The Directors confirmGroup Chief Financial Officer who is an Executive Director of the that in preparing the Financial Statements given on pages 218Bank. The Directors confirm that the Financial Statements of the to 321, appropriate accounting policies have been selected andBank and the Group give a true and fair view of: applied based on the new financial reporting framework on a1. the state of affairs of the Bank and the Group as at 31st consistent basis, while reasonable and prudent judgments have been made so that the form and substance of transactions are December 2013: and properly reflected.2. the financial performances of the Bank and the Group for The Directors have taken appropriate steps to ensure that the Bank the financial year ended 31st December 2013. and the Group maintain proper books of account and review the financial reporting system directly by them at their regular meetingsThe Financial Statements of the Bank and the Group have and also through the Board Audit Committee. The Report of thebeen certified by the Group Chief Financial Officer, the officer Board Audit Committee is given on pages 142 to 145. The Boardresponsible for their preparation, as required by the Companies of Directors also approves the Interim Financial Statements prior toAct. The accounts have been circulated and reviewed by the Board their release, following a review and recommendation by the BoardAudit Committee and Board of Directors. Further, the Financial Audit Committee.Statements of the Bank and the Group have been signed by threeDirectors and the Group Company Secretary in conformity with the The Directors have taken all reasonable steps open to them torequirements of the Companies Act. safeguard the assets of the Bank and the Group and to prevent and detect frauds and any other irregularities. For this purpose theIn preparing these Financial Statements, the Directors are required Directors have instituted effective and comprehensive systems ofto ensure that: internal controls for identifying, recording, evaluating and managing1. the appropriate accounting policies have been selected and the significant risks faced by the Bank throughout the year and it is being under regular review of the Board of Directors. This applied in a consistent manner and material departures, if comprises internal reviews, internal audit and the whole system any, have been disclosed and explained; of financial and other controls required to carry on the operations2. the Financial Statements are presented in accordance with in an orderly manner, safeguard the assets, prevent and detect Sri Lanka Accounting Standards (SLFRS/LKAS); frauds and other irregularities and secure as far as practicable the3. reasonable and prudent judgments and estimates have been accuracy and reliability of the records. made so that the form and substance of transactions are properly reflected; Based on their assessment of Internal Control Over Financial4. the Financial Statements provide the information required by Reporting (ICOFR), in compliance with section 3(8)(ii)(b) of the and otherwise comply with the Companies Act, Banking Act Banking Act Direction No 11 of 2007 on Corporate Governance, No 30 of 1988 (Banking Act) and the Listing Rules of the the Directors have concluded that, as of 31st December 2013, the Colombo Stock Exchange. Group’s internal controls over financial reporting are effective. The5. the companies within the Group maintain sufficient Directors’ Statement on Internal Control Over Financial Reporting accounting records to disclose, the financial position of the Bank and the Group with reasonable accuracy. 215

DIRECTORS’ RESPONSIBILITY FORFINANCIAL REPORTINGand Annual Report of the Board of Directors are provided on pages211 & 212 and pages 200 to 210 respectively of this AnnualReport. The External Auditors’ Independent Assurance Reporton the “Directors’ Statement on Internal Control Over FinancialReporting” is given on page 213 of this Annual Report.As required by section 56(2) of the Companies Act, the Directorshave made an assessment of the Solvency of the Bank, immediatelyafter the proposed Dividend and confirm that the Bank satisfies theSolvency Test required by the Section 57 of Companies Act. TheDirectors have also obtained the Certificate of Solvency from theExternal Auditors of the Bank, Messrs Ernst & Young.Messrs Ernst & Young, Chartered Accountants, the ExternalAuditors of the Bank were provided with every opportunity toundertake the inspections they considered appropriate. They haveexamined the Financial Statements made available to them by theDirectors together with all financial records, related data, minutesof the Shareholders’ meetings, Directors’ meetings, Board AuditCommittee meetings and other Board Sub Committee meetings andexpressed their opinion as reported by them in the Annual Reporton page 217.Compliance ReportThe Directors confirm that to the best of their knowledge, all taxes,duties and levies payable by the Bank and its Subsidiaries, allcontributions, levies and taxes payable on behalf of and in respectof the employees of the Bank and its Subsidiaries and all otherknown statutory dues as were due and payable by the Bank and itsSubsidiaries as at reporting date have been paid or, where relevant,provided for, except as specified in Note No 42 to the FinancialStatements covering contingent liabilities. The Directors confirm thatbased on their assessment the accounting controls are adequateand nothing has come to their attention to indicate that anybreakdown in the functioning of these controls, resulting in materialloss to the Bank. The Directors also confirm that the Bank will haveadequate resources to continue in operational existence and as agoing concern for the foreseeable future.The Directors are of the view that they have discharged theirresponsibilities as set out in the above statement.By order of the Board,S SudarshanGroup Company SecretaryColombo, Sri Lanka18th February 2014216

INDEPENDENT AUDITORS’REPORTTOTHESHAREHOLDERS OF SAMPATH BANK PLCReport on the Financial Statements We have obtained all the information and explanations which Annual Report 2013 Sampath Bank PLCWe have audited the accompanying financial statements of to the best of our knowledge and belief were necessary for theSampath Bank PLC (“Bank”), the consolidated financial statements purposes of our audit. We therefore believe that our audit provides aof the Bank and its Subsidiaries (Group), which comprise the reasonable basis for our opinion.statements of financial position as at 31 December 2013, andthe income statements and statements of comprehensive income, Opinionstatements of changes in equity and cash flow statements for the In our opinion, so far as appears from our examination, the Bankyear then ended, and a summary of significant accounting policies maintained proper accounting records for the year ended 31and other explanatory notes set out on pages 218 to 321 of the December 2013 and the financial statements give a true and fairAnnual Report. view of the Bank’s financial position as at 31 December 2013 and its financial performance and cash flows for the year then ended inManagement’s Responsibility for the Financial Statements accordance with Sri Lanka Accounting Standards.Management is responsible for the preparation and fair presentationof these financial statements in accordance with Sri Lanka In our opinion, the consolidated financial statements give a trueAccounting Standards. This responsibility includes: designing, and fair view of the financial position as at 31 December 2013implementing and maintaining internal control relevant to the and the financial performance and cash flows for the year thenpreparation and fair presentation of financial statements that are ended, in accordance with Sri Lanka Accounting Standards, of thefree from material misstatement, whether due to fraud or error; Bank and its subsidiaries dealt with thereby, so far as concerns theselecting and applying appropriate accounting policies; and making shareholders of the Bank.accounting estimates that are reasonable in the circumstances. Report on Other Legal and Regulatory RequirementsScope of Audit and Basis of Opinion These financial statements also comply with the requirements ofOur responsibility is to express an opinion on these financial Sections 151(2) and 153(2) to 153(7) of the Companies Act No 07statements based on our audit. We conducted our audit in of 2007.accordance with Sri Lanka Auditing Standards. Those standardsrequire that we plan and perform the audit to obtain reasonable Ernst & Youngassurance whether the financial statements are free from material Chartered Accountantsmisstatement. 18th February 2014An audit includes examining, on a test basis, evidence supporting Colombo.the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting policies used and significantestimates made by management, as well as evaluating the overallfinancial statement presentation. 217

INCOME STATEMENT Bank GroupFor the year ended 31st December 2013 2012 2013 2012 Rs 000 Restated* Rs 000 Restated* Note Rs 000 Rs 000Gross Income 7 46,525,520 38,796,181 48,066,173 39,727,737Interest income 40,921,433 31,881,948 42,320,239 32,712,018Less: Interest expense 26,555,565 20,269,375 27,225,504 20,672,970Net interest income 8 14,365,868 11,612,573 15,094,735 12,039,048Fee & commission income 3,002,660 2,803,755 3,099,195 2,876,724Less: Fee & commission expense 459,315 654,757 480,449 675,136Net fee & commission income 9 2,543,345 2,148,998 2,618,746 2,201,588Net trading income 10 (69,735) 6,227 (69,735) 6,227Other operating income 11 2,671,162 4,104,251 2,716,474 4,132,768Total operating income 17,872,049 20,360,220 18,379,631 19,510,640Impairment charge / (reversal) for loans & other losses 12 3,490,129 64,883 3,574,075 80,145Net operating income 16,020,511 17,807,166 16,786,145 18,299,486Less: Operating expenses 13 4,417,103 4,009,306 4,672,240 4,180,916Personnel expenses 14 6,216,586 5,239,094 6,393,806 5,289,261Other operating expenses 9,248,400 11,066,046 9,470,177Total operating expenses 10,633,689Operating profit before Value Added Tax (VAT) 5,386,822 8,558,766 5,720,099 8,829,309Less: Value Added Tax on Financial Services 895,395 1,158,126 931,134 1,176,225Operating profit after Value Added Tax (VAT) 4,491,427 7,400,640 4,788,965 7,653,084Less: Income tax expense 15 1,060,960 2,170,157 1,151,300 2,213,060Profit for the year 3,430,467 5,230,483 3,637,665 5,440,024Attributable to: 3,430,467 5,230,483 3,634,957 5,436,682Equity holders of the Bank - - 2,708 3,342Non controlling interest 3,430,467 5,230,483 3,637,665 5,440,024Earnings per share (Rs) 16Earnings per share: Basic (Rs)Earnings per share: Diluted (Rs) 21.67 32.57 21.66 32.54Dividend per share (Rs)** 17Dividend per share: Gross (Rs) 8.00 12.00Dividend per share: Net (Rs) 7.28 10.87The Notes to the Financial Statements from pages 224 to 321 form an integral part of these Financial Statements* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustments made based on the newly adopted Sri Lanka Accounting Standards: refer Note 6.4** Calculated based on proposed dividend, which is to be approved at the Annual General Meeting218

STATEMENT OFCOMPREHENSIVEINCOME Bank GroupFor the year ended 31st December 2013 2012 2013 2012 Rs 000 Restated* Rs 000 Restated* Rs 000 Rs 000Profit for the year 3,430,467 5,230,483 3,637,665 5,440,024Other comprehensive income / (expenses) net of tax 494,561 (348,818) 494,561 (348,818)Gains & Losses arising on re-measuring available for 6,657 16,061 6,657 16,061 sale financial assets 501,218 (332,757) 501,218 (332,757)Exchange difference in translationActuarial gains & losses on defined benefit plans (460,571) 12,264 (462,196) 12,264Deferred tax effect on above 128,960 (3,434) 128,960 (3,434) (331,611) 8,830 (333,236) 8,830Surplus from revaluation of Property, plant & equipment 415,446 (2,640) 1,379,115 (2,640)Deferred tax effect on above (25,506) - (25,506) - 389,940 (2,640) 1,353,609 (2,640)Gains & losses arising from cash flow hedge (168,014) - (168,014) -Other comprehensive income net of tax 391,533 (326,567) 1,353,577 (326,567)Total comprehensive income for the year net of tax 3,822,000 4,903,916 4,991,242 5,113,457Attributable to: 3,822,000 4,903,916 4,961,001 5,110,115Equity holders of the Bank - - 30,241 3,342Non controlling interest 3,822,000 4,903,916 4,991,242 5,113,457The Notes to the Financial Statements from pages 224 to 321 form an integral part of these Financial Statements* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustments made based on the newly adopted Sri Lanka Accounting Standards: refer Note 6.4 Annual Report 2013 Sampath Bank PLC 219

STATEMENT OFFINANCIALPOSITION Bank GroupAs at 31st December 31st December 1st January 31st December 31st December 1st January 2013 2012 2012 2013 2012 2012 Note Rs 000 Restated* Restated* Rs 000 Restated* Restated* Rs 000 Rs 000 Rs 000 Rs 000ASSETS 18Cash & cash equivalents 19 8,302,576 10,432,135 10,736,413 8,340,838 10,442,259 10,746,713Balances with Central Bank of Sri Lanka 20 15,766,967 17,200,792 13,232,130 15,766,967 17,200,792 13,232,130Placements with banks 21 1,791,329 8,788,127 5,337,084 1,791,329 8,788,127 5,337,084Reverse repurchase agreements 18,043,918 3,300,817 4,601,965 18,043,918 3,300,373 4,606,010Derivative financial instruments 22 230,517 279,022 203,732 230,517 279,022 203,732Financial assets held for trading 23 46,974,516 35,181,084 23,052,987 46,974,516 35,181,084 23,052,987Financial assets held for trading pledged as collaterals 24 3,496,141 2,856,321 4,002,777 3,496,141 2,856,321 4,002,777Loans & receivables to banks 25 638,244 816,119 441,938 638,244 816,119 441,938Loans & receivables to other customers 26 259,401,578 208,184,369 169,681,372 265,909,593 212,480,041 171,976,938Other loans & receivables 27 12,150,588 10,515,756 5,736,278 12,150,588 10,224,474 5,736,278Financial investments available for sale 28 2,393,118 1,923,624 2,025,241 2,393,174 1,923,680 2,025,297Financial investments held to maturity 29 1,845,903 - 10,289 1,845,903 9,765 19,411Investment in Subsidiaries 30 1,059,921 1,059,921 1,054,921 - - -Property, plant & equipment 31 5,134,731 4,559,806 4,527,784 8,327,019 6,764,372 6,691,153Intangible assets 32 297,359 311,758 67,294 313,305 316,412 73,372Deferred tax assets 33 308,816 - - 332,949 12,328 2,359Other assets 34 4,205,442 4,000,674 2,945,661 4,748,913 4,459,859 3,419,102Total Assets 382,041,664 309,410,325 247,657,866 391,303,914 315,055,028 251,567,281LIABILITIES 18Due to banks 35 2,211,281 624,784 1,175,672 2,250,372 668,198 1,175,672Derivative financial instrumentsSecurities sold under re-purchase agreements 22 638,724 381,838 310,966 638,724 381,838 310,966Due to other customersDebt issued & other borrowed funds 3,389,684 2,757,117 4,100,864 3,055,257 2,751,332 4,100,864Unclaimed dividendCurrent tax liabilities 36 300,549,350 243,330,990 195,195,074 300,381,786 243,088,236 195,094,359Deferred tax liabilitiesOther provisions 37 38,862,331 28,825,029 19,754,221 44,748,530 32,218,014 21,490,478Other liabilitiesTotal Liabilities 54,981 49,185 37,173 54,981 49,185 37,173 38 2,691,865 3,041,259 1,851,834 2,753,338 3,073,243 1,881,142 33 - 357,474 330,142 59,034 388,201 345,896 39 441,209 342,636 303,824 457,100 355,358 316,863 40 4,783,987 4,055,488 3,254,554 5,145,219 4,262,319 3,503,286 353,623,412 283,765,800 226,314,324 359,544,341 287,235,924 228,256,699EQUITY 41 4,460,339 3,564,172 2,743,780 4,460,339 3,564,172 2,743,780Stated capital 3,673,643 2,702,874 1,432,323 3,769,896 2,759,601 1,461,890Reserves 17,783,859 16,817,570 14,993,440 20,139,472 18,237,047 16,412,917 Statutory reserves 2,500,411 2,559,909 2,173,999 3,300,881 3,197,040 2,632,091 Other reserves 28,418,252 25,644,525 21,343,542 31,670,588 27,757,860 23,250,678 Retained profitTotal equity attributable to equity holders of the Bank 28,418,252 25,644,525 21,343,542 88,985 61,244 59,904Non controlling interest 382,041,664 309,410,325 247,657,866 31,759,573 27,819,104 23,310,582Total Equity 391,303,914 315,055,028 251,567,281Total Liabilities & EquityNet asset value per share (Rs) 169.37 152.96 129.00 188.75 165.57 140.53Commitments & contingencies 42 145,566,776 115,925,743 120,946,802 145,685,243 116,129,397 120,946,802* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustments made based on the newly adopted Sri Lanka Accounting Standards: refer Note 6.4The Notes to the Financial Statements from pages 224 to 321form an integral part of these Financial StatementsI certify that these Financial Statements are presented in compliance with the requirements of the Companies Act No 7 of 2007Ranjith SamaranayakeExecutive Director / Group Chief Financial OfficerThe Board of Directors is responsible for the preparation & presentation of these Financial StatementsDhammika Perera Channa Palansuriya Aravinda Perera S SudarshanChairman Deputy Chairman Managing Director Group Company Secretary18th February 2014Colombo, Sri Lanka220

CASH FLOW STATEMENT Bank GroupFor the year ended 31st December 2013 2012 2013 2012 Rs 000 Rs 000 Rs 000 Rs 000Cash flows from operating activities 38,619,572 29,472,438 40,018,378 30,302,509Interest receipts 2,531,474 2,136,723 2,606,877 2,189,313Commission receiptsInterest payments (25,358,452) (18,434,186) (26,028,391) (18,837,781)Receipts from other operating activities 2,377,258 3,974,818 2,518,443 4,082,176Cash payments to employees and suppliers (6,510,608) (6,358,275) (6,966,632) (6,388,782)Value Added Tax on Financial Services (962,148) (1,137,042) (997,888) (1,155,142)Cash payments to other operating activities (3,241,195) (2,339,412) (3,168,746) (2,474,880)Operating profit before changes in operating assets & liabilities 7,455,901 7,315,064 7,982,041 7,717,413(Increase) / decrease in operating assets 1,433,825 (3,968,662) 1,433,825 (3,968,662)Balance with Central Bank of Sri Lanka (52,672,536) (38,782,036) (54,968,826) (40,789,709)Loans & receivables from customersLoans & receivables from banks 177,874 (378,000) 177,875 (378,000)Other loans & receivables (1,634,832) (2,381,364) (1,926,115) (2,090,082)Other assets (613,380) (849,266) (699,291) (850,010)Increase / (decrease) in operating liabilities (53,309,049) (46,359,328) (55,982,532) (48,076,463)Due to customersDue to banks 56,146,525 46,424,935 56,221,715 46,282,896Other liabilities 1,635,494 (460,783) 1,635,494 (460,783) 750,850 833,801 905,857 798,887 58,532,869 46,797,953 58,763,066 46,621,000Net cash generated from/(used in) operating 12,679,721 7,753,689 10,762,575 6,261,950 activities before income tax (1,973,189) (956,835) (2,017,539) (992,057) 10,706,532 6,796,854 8,745,036 5,269,893Income tax paidNet cash generated from/(used in) operating activities 1,301,148 (14,743,545) 1,305,637 (1,343,743) 303,927 (1,349,528)Cash flows from investing activities (14,743,102) (12,056,074) (12,056,074) Annual Report 2013 Sampath Bank PLC 632,571 1,146,121 (11,517,689) 1,146,121Cash collateral on securities borrowed & reverse (639,819) repurchase agreements (11,517,689) 10,289 9,646 (639,819) (1,836,139)Securities sold under re-purchase agreements (211,766) (211,766)Financial investments held for trading (1,845,903) 10,949 56,823 10,949Financial assets held for trading pledged as collaterals 79,155 71,467 -Net proceeds from sale, maturity and purchase of financial investments 56,823 (5,000) -Net proceeds from sale, maturity and purchase of available 71,467 - 95,872 (576,167) - (671,141) for sale investments (288,032) (808,599) (290,204)Income from investments - (58,311)Dividend received from Subsidiaries (709,064) 23,692 37,141 25,579Investment in Subsidiary (11,909,428) (29,134,744) (12,080,781)Purchase of property, plant and equipment (41,385)Purchase of intangible assets 2,243 - (2,500) (2,002)Proceeds from disposal of property, plant and equipment (261,618) 4,915,623 75,519Net cash flows used in investing activities (28,637,986) (217,750) 722,369 - 7,707,364 9,814,875Cash flows from financing activities - 9,217,653 176,035 5,000,000 10,794 (782,627)Non controlling interest 176,035 (1,068,723) 10,004,169Increase / (Decrease) in Debentures - (782,627) 11,344,808 3,193,281Increase / (Decrease) in Commercial papers 4,912,022 8,349,443 (9,044,900) 15,612,945Increase in borrowed funds 3,236,869 18,806,226 18,806,226Shares issued 10,794 15,602,647 9,761,326Dividend paid (1,068,723) 18,839,516Net cash generated from financing activities 8,854,093Net cash generated / (used in) during the year (9,077,361)Cash and cash equivalents at the beginning of the year 18,839,516Cash and cash equivalents at the end of the year 9,762,155The Notes to the Financial Statements from pages 224 to 321 form an integral part of these Financial Statements 221

CASH FLOW STATEMENTRECONCILIATION STATEMENTFor the year ended 31st December 2013 Bank 2013 Group Rs 000 Rs 000Note (a) 2012 2012Reconciliation of operating profit before changes in Restated* Restated* operating assets and liabilities Rs 000 Rs 000Profit before income tax 4,491,427 7,400,640 4,788,965 7,653,084Profit on disposal of property plant and equipment (1,093) (22,098) (1,093) (22,412)Income from investments (42,021) (42,021)Diminution / (Appreciation) in value of investments (36,536) (72,023) (36,536) (72,023)Dividend received from Subsidiaries (275,744) (79,155) (275,744) -Capital loss / (gain) from sale of shares 31,072 31,072Accruals on personnel expenses (95,872) (44,895) - (44,895)Income from available for sale financial investments (34,931) (35,100) (34,931) (35,100)Depreciation of property, plant & equipment 299,329 535,656 301,895 587,859Amortization of intangible assets (31,755) 43,566 (31,755) 47,163Loss / (gain) on Forward contract revaluation 522,759 (4,419) 563,343 (4,419)Exchange revaluation 47,270 16,061 52,904 16,061Other non-cash expenses 137,377 36,817 137,377 36,820Other non-cash income - -Impairment provision 6,657 136,906 6,657 152,168Interest income accrued on impaired financial assets 12,528 (11,395) 12,528 (11,395)Interest expenses due to other customers (66,754) 73,308 (66,754) 73,308Guarantee Income 3,757,188 (12,275) 3,841,134 (12,275)Accrual for interest receivable (75,777) (75,777)Accrual for interest payable (2,398,114) (2,398,114)Impairment loss on property, plant & equipment 9,489 1,762,533 9,489 1,762,533Gain on cash flow hedge (11,871) (11,871)Operating profit before changes in operating assets/liabilities (2,226,084) - (2,226,084) - 1,187,624 - 1,187,624 - 7,315,064 7,717,413 8,685 8,685 (168,014) (168,014) 7,455,901 7,982,041Note (b) 4,731,387 4,483,580 4,740,751 4,483,791Reconciliation of cash & cash equivalents 2,257,858 1,089,882 2,257,858 1,089,882Local currency in hand 112,777 71,025 141,675 80,937Foreign currency in hand 1,200,554 1,774,914 1,200,554 1,774,915Balances with local banks 3,012,734 3,012,734Balances with foreign banks - 10,432,135 - 10,442,259Money at call and short notice 8,302,576 8,788,127 8,340,838 8,788,127Cash & cash equivalents at the end of the year (Note No 19) 1,791,329 (380,746) 1,791,329 (424,160)Placements with banks (Note No 21) (331,750) 18,839,516 (370,841) 18,806,226Unfavourable Balances with local & foreign Banks (Note No 35) 9,762,155 9,761,326Cash & cash equivalents at the end of the yearThe Notes to the Financial Statements from pages 224 to 321 form an integral part of these Financial Statements* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustments made based on the newly adopted Sri Lanka Accounting Standards: refer Note 6.4222

STATEMENT OFCHANGESINEQUITYBANK Stated Statutory Reserves Other Reserves Retained Shareholders’ Capital Statutory Risk Investment Revaluation Available Hedge General Profit Fund Rs 000 Reserve Reserve Reserve Reserve Fund for Sale Reserve Rs 000 Rs 000 Fund Fund Account Reserve Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000For the year ended 31st December 2012 (Restated*) 2,743,780 805,805 35,706 590,812 1,459,349 1,797,779 - 11,736,312 1,730,572 20,900,115 - - - - - -Balance as at 1st January 2012 - - 443,427 443,427Changes in Accounting policies 2,743,780 805,805 35,706 590,812 1,459,349 1,797,779Restated balance as at 1st January 2012 - - - - - - - 11,736,312 2,173,999 21,343,542Profit for the year - - - -Other Comprehensive income - - - (2,640) (332,757) - - 5,230,483 5,230,483Adjustments - 473 - - -ESOP-2010 176,035 - - - - - - - 8,830 (326,567)Final Cash Dividend Paid 2011 - - - - - -Final Scrip Dividend Paid 2011 - - - - (473) 3,659 3,659Transfer to reserves during the year 644,357 256,821 939,955 - -Balance as at 31st December 2012 - 1,062,626 73,302 1,530,767 - - - 176,035 109,481 1,456,709 1,465,022 3,564,172 - - (713,505) (713,505) - - (713,479) (69,122) - 2,160,000 (3,430,078) - - 13,895,839 2,559,909 25,644,525For the year ended 31st December 2013 3,564,172 1,062,626 109,481 1,530,767 1,456,709 1,465,022 - 13,895,839 2,559,909 25,644,525Balance as at 1st January 2013 - - - - - - - - 3,430,467 3,430,467 - - - - (168,014) - (331,611) 391,533Profit for the year - - - 389,940 501,218 - - 10,794Other Comprehensive income 10,794 - - - - - - - - (977,046)ESOP-2010 - - - - - - - - (977,046) (91,677)Final Cash Dividend Paid 2012 - - - - - (977,050) -Final Scrip Dividend Paid 2012 885,373 - (109,481) - - - - 109,481 9,656Cancellation of Risk reserve - - - - - 9,656 - -Unclaimed Dividend-write back - 171,523 - 908,727 - - (168,014) -Transfer to reserves during the year - 1,234,149 - 2,439,494 124,008 (1,204,258) 28,418,252Balance as at 31st December 2013 1,846,649 1,966,240 14,138,984 2,500,411 4,460,339GROUP Stated Statutory Reserve Other Reserves Retained Shareholders’ Non Total Capital equityFor the year ended Statutory Risk Investment Revaluation Available Hedge General Profit Fund controlling 31st December 2012 (Restated*) Rs 000 Rs 000 Reserves Reserve Fund Reserve for Sale Reserve Reserve interestBalance as at 1st January 2012Changes in Accounting policies Fund Fund Account ReserveRestated balance as at 1st January 2012Profit for the year Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000 Rs 000Other Comprehensive incomeAdjustments 2,743,780 822,531 35,706 603,653 2,878,825 1,797,779 - 11,736,313 2,188,664 22,807,251 59,904 22,867,155ESOP-2010 - - - - - - - - 443,427 443,427 - 443,427Final Cash Dividend Paid 2011 - 11,736,313 2,632,091Final Scrip Dividend Paid 2011 2,743,780 822,531 35,706 603,653 2,878,825 1,797,779 - - 5,436,682 23,250,678 59,904 23,310,582Transfer to reserves during the year - - - - - - - - 8,830 5,436,682 3,342 5,440,024Balance as at 31st December 2012 - - - - - (473) 3,659 (326,567) - (326,567) - - - (2,640) (332,757) --- 3,659 - 3,659For the year ended 31st December 2013 - 473 - - - - - (713,505) 176,035 - 176,035Balance as at 1st January 2013 176,035 - - - - - - - (713,479) (713,505)Profit for the year - - - - - - - 2,160,000 (3,457,238) (69,122) (2,002) (715,507)Other Comprehensive income - - - - 13,895,840 3,197,040 - - (69,122)Adjustments 644,357 266,818 957,118 - - --ESOP-2010 - 1,089,349 73,302 1,560,771 27,757,860Final Cash Dividend Paid 2012 109,481 2,876,185 1,465,022 61,244 27,819,104Final Scrip Dividend Paid 2012 3,564,172Cancellation of Risk reserveUnclaimed Dividend-write back 3,564,172 1,089,349 109,481 1,560,771 2,876,185 1,465,022 - 13,895,840 3,197,040 27,757,860 61,244 27,819,104Transfer to reserves during the year - - - - - - 3,634,957 2,708 3,637,665Balance as at 31st December 2013 - - - - - - 3,634,957 1,326,044 - - 1,326,076 501,218 - 27,533 1,353,577 15 - (15) - - (168,014) - (333,236) 10,794 -- 10,794 - - - - - (977,046) - 10,794 - - - - - - --- (91,677) - - - - - (2,500) (979,546) 885,373 - (109,481) - - - --- 9,656 - (91,677) - - - - - - - -- - - - - - - (977,046) - 9,656 - 182,549 - 937,227 31,670,588 -- 1,271,913 2,497,983 4,202,261 1,966,240 - - (977,050) 4,460,339 88,985 31,759,573 - 109,481 - Annual Report 2013 Sampath Bank PLC - 9,656 - - 124,008 (1,243,784) (168,014) 14,138,985 3,300,881The Notes to the Financial Statements from pages 224 to 321 form an integral part of these Financial Statements* Certain amounts shown here do not correspond to the Financial Statements - 2012 and reflect adjustments made based on the newly adopted Sri Lanka Accounting Standards: refer Note 6.4 223

NOTES TO THE FINANCIALSTATEMENTS1. REPORTING ENTITY 2. BASIS OF PREPARATION1.1 General 2.1 Statement of ComplianceSampath Bank PLC (‘The Bank’), is a domiciled, public limited The Consolidated Financial Statement of the Group and the separatedliability company incorporated in Sri Lanka on 10th March Financial Statement of the Bank, which comprise the Statement1986 under the Companies Act No 17 of 1982. It is a Licensed of Financial Position, Income Statement, Statement of OtherCommercial Bank registered under the Banking Act No 30 of Comprehensive Income, Statement of Changes in Equity, Statement1988 (Banking Act) and amendments thereto. The Company was of Cash Flow, Notes to the Financial Statements have been preparedre-registered with the Registrar General of Companies as per the and presented in accordance with Sri Lanka Accounting Standardsrequirements of the Companies Act No 7 of 2007 (Companies Act) (SLFRSs and LKASs) laid down by the Institute of Charteredon 28th April 2008 under the name of Sampath Bank PLC. The Accountants of Sri Lanka and in compliance with the requirements ofregistered office of the Bank is located at No 110, Sir James Peiris the Companies Act No 7 of 2007. The presentation of the FinancialMawatha, Colombo 02. The shares of the Bank have a primary Statements is also in compliance with the requirements of the Bankinglisting on the Colombo Stock Exchange. The staff strength of the Act No 30 of 1988 and amendments thereto. These FinancialBank as at 31st December 2013 was 3,688 (2012: 3,455). Statements also provide appropriate disclosures as required by the Listing Rules of the Colombo Stock Exchange.The Bank does not have an identifiable parent on its own. SampathBank is the ultimate parent of the Group. 2.2 Approval of Financial Statements by Directors The Financial Statements of the Group and the Bank for the year1.2 Consolidated Financial Statements ended 31st December 2013 were authorized for issue by the BoardThe Consolidated Financial Statements of the Bank as at and for of Directors in accordance with the resolution of the Directors onthe year ended 31st December 2013 comprise the Bank (Parent 18th February 2014.Company) and its Subsidiaries (together referred to as the “Group”and individually as “Group entities”). The Subsidiaries of the Bank as 2.3 Basis of Measurementat 31st December 2013 were Sampath Centre Ltd, S C Securities The Financial Statements of the Group and the Bank have been(Pvt) Ltd, Siyapatha Finance Ltd (formerly known as Sampath prepared on the historical cost basis, except for the followingLeasing & Factoring Ltd) and Sampath Information Technology material items in the Statement of Financial Position:Solutions Ltd. Derivative financial instruments are measured at fair value1.3 Principal Activities and Nature of Operations Available for sale investments are measured at fair value1.3.1 Bank Other financial assets and liabilities held for trading areThe Bank provides a comprehensive range of financial services measured at fair valueencompassing accepting deposits, corporate and retail banking, Financial instruments designated at fair value through profitproject financing, trade finance, treasury and investment services, or loss are measured at fair valueissuing of credit cards and debit cards, off shore banking, resident Land and Buildings which are measured at cost at the time ofand non-resident foreign currency operations, electronic banking acquisition and subsequently at revalued amounts, which areservices such as: telephone banking, internet banking and money the fair values at the date of revaluationremittance facilities, pawning, leasing, travel related services and Liabilities for defined benefit obligations are recognised asdealing in Government securities etc. the present value of the defined benefit obligation less the net totals of plan assets and unrecognised past service cost.1.3.2 SubsidiariesOwnership of Subsidiaries as of 31st December 2013 and 31st December 2012 is as follows.Subsidiary Principal activities 31st December 2013 31st December 2012 97.14%Sampath Centre Ltd Renting of Commercial Property 97.14%S C Securities (Pvt) Ltd Share Broking 100.00% 100.00%Siyapatha Finance Ltd Leasing, Factoring and Accepting Fixed 100.00% 100.00% (formerly known as Sampath & Savings Deposits 100.00% 100.00% Leasing & Factoring Ltd)Sampath Information Developing Software Solutions and Technology Solutions Ltd Maintenance of Hardware224

2.4 Functional and Presentation Currency 2.8.1 Going Concern Annual Report 2013 Sampath Bank PLCThe Financial Statements of the Group and the Bank are presented The Directors have made an assessment of the Bank’s abilityin Sri Lanka Rupees, which is the currency of the primary economic to continue as a going concern and are satisfied that it has theenvironment in which Sampath Bank PLC operates. Financial resources to continue in business for the foreseeable future.information presented in Sri Lankan Rupees has been rounded to Furthermore, Board is not aware of any material uncertainties thatthe nearest thousand unless indicated otherwise. may cast significant doubt upon the Bank’s ability to continue as a going concern and they do not intend either to liquidate or to2.5 Presentation of Financial Statements cease operations of the Bank. Therefore, the Financial StatementsThe items of the Group and the Bank presented in their Statements continue to be prepared on the going concern basis.of Financial Position are grouped by nature and listed in anorder that reflects their relative liquidity and maturity pattern. No 2.8.2 Impairment Losses on Loans and Advancesadjustments have been made for inflationary factors affecting the The Group and the Bank review their individually significantFinancial Statements. An analysis on recovery or settlement within loans and advances at each reporting date to assess whether an12 months after the reporting date (current) and more than 12 impairment loss should be recorded in the Income Statement. Inmonths after the reporting date (non-current) is presented in the particular, Management’s judgment is required in the estimation ofNote No 48. the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about2.6 Materiality and Aggregation a number of factors and actual results may differ, resulting in futureIn compliance with Sri Lanka Accounting Standard - LKAS 01, changes to the impairment allowance made.(Presentation of Financial Statements), each material class ofsimilar items is presented separately in the Financial Statements. Loans and advances that have been assessed individually andItems of dissimilar nature or functions too are presented separately found to be not impaired and all individually insignificant loans andunless they are immaterial. advances are then assessed collectively, by categorising them into groups of assets with similar risk characteristics, to determineFinancial assets and financial liabilities are offset and the net whether a provision should be made due to incurred loss eventsamount reported in the Statement of Financial Position only when for which there is objective evidence, but the effects of which arethere is a legally enforceable right to offset the recognized amounts not yet evident. The collective assessment takes account of dataand there is an intention to settle on a net basis, or to realize the from the loan portfolio (such as levels of arrears, credit utilisation,assets and settle the liability simultaneously. Income and expenses loan-to-collateral ratios etc.) and judgement on the effect ofare not offset in the Income Statement unless required or permitted concentrations of risks and economic data (including levels ofby an Accounting Standard. unemployment, inflation, interest rates, exchange rates, sovereign rating etc.).2.7 Comparative InformationThe comparative information is re-classified wherever necessary to 2.8.3 Impairment of Available for Sale Investmentsconform to the current year’s presentation. The Group and the Bank review their debt securities classified as available for sale investments at each reporting date to assess2.8 Significant Accounting Judgments, Estimates and whether they are impaired. This requires similar judgments as Assumptions applied on the individual assessment of loans and advances.The preparation of Financial Statements of the Group and the The Group and the Bank also record impairment charges onBank in conformity with Sri Lanka Accounting Standards requires available for sale equity investments when there has been athe management to make judgments, estimates and assumptions significant or prolonged decline in the fair value below their cost.that affect the application of accounting policies and the reported The determination of what is ‘significant’ or ‘prolonged’ requiresamounts of assets, liabilities, income and expenses. Actual results judgment. The Bank generally treats ‘significant’ as 20% or moremay differ from these estimates. and ‘prolonged’ as greater than six months. In addition the Group and the Bank evaluates, among other factors, historical share priceEstimates and underlying assumptions are reviewed on an ongoing movements, duration and extent up to which the fair value of anbasis. Revisions to accounting estimates are recognised in the investment is less than its cost.period in which the estimate is revised and in any future periodsaffected. 2.8.4 Deferred Tax Assets Deferred tax assets are recognised in respect of tax losses toThe most significant areas of estimation, uncertainty and critical the extent that it is probable that future taxable profits will bejudgments in applying accounting policies that have most available against which such tax losses can be utilised. Judgementsignificant effect on the amounts recognised in the Financial is required to determine the amount of deferred tax assets thatStatements of the Group and the Bank are as follows: can be recognised, based upon the likely timing and level of future taxable profits, together with the future tax-planning strategies. 225

NOTES TO THE FINANCIAL STATEMENTS2.8.5 Defined Benefit Plans of its properties taking into consideration the current use of suchThe cost of the defined benefit plans and the present value of their properties. Currently the Bank does not have any Investmentobligations are determined using actuarial valuations. The actuarial Property.valuation involves making assumptions about discount rates,expected rates of return on assets, future salary increases, mortality 3 SIGNIFICANT ACCOUNTING POLICIES - STATEMENTrates and future pension increases. Due to the long term nature of OF FINANCIAL POSITIONthese plans, such estimates are subject to significant uncertainty. Allassumptions are reviewed at each reporting date. The significant accounting policies applied by the Group and the Bank in preparation of the Financial Statements are includedIn determining the appropriate discount rate, management considers below. The accounting policies set out below have been appliedthe interest rates of Sri Lanka Government bonds with extrapolated consistently to all periods presented in these Financial Statementsmaturities corresponding to the expected duration of the defined of the Group and the Bank, unless otherwise indicated.benefit obligation. 3.1 Basis of ConsolidationThe mortality rate is based on publicly available mortality tables. The Bank’s Financial Statements comprise the amalgamation of theFuture salary increases and pension increases are based on Financial Statements of the Domestic Banking Unit and the Foreignexpected future inflation rates and expected future salary increase Currency Banking Unit, as well as the consolidation of the Financialrate of the Bank. Statements of the Bank and its Subsidiaries in terms of the Sri Lanka Accounting Standard - LKAS 27 (Consolidated and Separate2.8.6 Fair Value of Property, Plant and Equipment Financial Statements).The Land and Buildings of the Group and the Bank are reflectedat fair value. The Group engaged independent valuation specialist 3.1.1 Business Combinations and Goodwillto determine fair value of land and building. When current market Business combinations are accounted for using the Acquisitionprices of similar assets are available, such evidence is considered in method as per the requirements of Sri Lanka Accounting Standard -estimating fair values of these assets. SLFRS 03 (Business Combinations).2.8.7 Useful Life-time of the Property, Plant and Equipment The Group and the Bank measure goodwill as the fair value of theThe Group and the Bank review the residual values, useful lives consideration transferred including the recognised amount of anyand methods of depreciation of Property, Plant and Equipment at non-controlling interest in the acquiree, less the net recognisedeach reporting date. Judgment of the management is exercised in amount (generally fair value) of the identifiable assets acquired andthe estimation of these values, rates, methods and hence they are liabilities assumed, all measured as of the acquisition date. Whensubject to uncertainty. the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.2.8.8 Commitments and ContingenciesAll discernible risks are accounted for in determining the amount of The Group and the Bank elect on a transaction-by-transaction basisall known liabilities. whether to measure non-controlling interest at its fair value, or at its proportionate share of the recognised amount of the identifiable netContingent liabilities are possible obligations whose existence will assets, at the acquisition date.be confirmed only by uncertain future events or present obligationswhere the transfer of economic benefit is not probable or cannot be The consideration transferred does not include amounts relatedreliably measured. Contingent liabilities are not recognised in the to the settlement of pre-existing relationships. Such amounts areStatement of Financial Position but are disclosed unless they are generally recognised in profit or loss.remote. Transaction costs, other than those associated with the issue of2.8.9 Classification of Investment Properties debt or equity securities, that the Group incurs in connection with aManagement requires using its judgment to determine whether business combination are expensed as incurred.a property qualifies as an investment property. The Bank hasdeveloped criteria so it can exercise its judgment consistently. A 3.1.2 Subsidiariesproperty that is held to earn rentals or for capital appreciation or Subsidiaries are entities that are controlled by the Bank. The controlboth and which generates cash flows largely independently of the is presumed to exist when the Bank owns, directly or indirectlyother assets held by the Bank are accounted for as investment through other subsidiaries, more than half of the voting power of anproperties. On the other hand, a property that is used for operations entity. Control is achieved where the Bank has the power to governor in the process of providing services or for administrative purposes the financial and operating policies of an entity so as to obtainand which do not directly generate cash flows as a standalone benefits from its activities.asset are accounted for as property, plant and equipment. TheBank assesses on an annual basis the accounting classification The Financial Statements of Subsidiaries are fully consolidated from the date on which control is transferred to the Bank and continue226

to be consolidated until the date when such control ceases. The 3.2 Foreign Currency Transactions and Balances Annual Report 2013 Sampath Bank PLCFinancial Statements of the Bank’s Subsidiaries are prepared All foreign currency transactions are translated into the Functionalfor the same reporting year as per the Bank, using consistent Currency, which is Sri Lankan Rupees, using the exchange ratesaccounting policies. prevailing at the dates of the transactions were affected.The cost of an acquisition is measured at fair value of the Monetary assets and liabilities denominated in foreign currenciesconsideration, including contingent consideration, given on the date at the reporting date are translated to Sri Lanka Rupees using theof transfer of title. The acquired identifiable assets, liabilities and spot foreign exchange rate ruling at that date and all differencescontingent liabilities are measured at their fair values at the date arising on non-trading activities are taken to ‘Other operatingof acquisition. Subsequent to the initial measurement the Bank income’ in the Income Statement.continues to recognise the investments in Subsidiaries at cost. Non monetary items in a foreign currency that are measured inThe total assets and liabilities of the Subsidiaries as at the reporting terms of historical cost are translated using the exchange ratesdate are included in the Consolidated Statement of Financial as at the dates of the initial transactions. Non monetary items inPosition. The total profit or loss for the year of the Subsidiaries is foreign currency measured at fair value are translated using theincluded in the Consolidated Statement of Comprehensive Income. exchange rates at the date when the fair value was determined.The Non Controlling Interest is presented in the Consolidated Foreign exchange differences arising on the settlement orStatement of Financial Position within equity, separately from reporting of monetary items at rates different from those whichthe equity attributable to the Equity Holders of the Bank. Non were initially recorded are dealt with in the Income Statement.Controlling Interest in the profit or loss of the Group is disclosed inthe Consolidated Statement of Comprehensive Income. Forward exchange contracts are valued at the forward market rates ruling on the reporting date. Resulting net unrealised gains orWhere Subsidiaries have been acquired or sold during the year, losses are dealt with the Income Statement.their operating results have been included from the date ofacquisition or to the date of disposal. 3.3 Financial Instruments - Initial Recognition, Classification and Subsequent MeasurementUpon the loss of control, the Group derecognises the assets andliabilities of the Subsidiary, any Non Controlling interests and 3.3.1 Date of Recognitionthe other components of equity related to the Subsidiary. Any All financial assets and liabilities are initially recognized on thesurplus or deficit arising on the loss of control is recognised in the trade date, i.e., the date that the Group becomes a party to theStatement of Changes in Equity. If the Group retains any interest in contractual provisions of the instrument. This includes ’regularthe previous Subsidiary, then such Interest is measured at fair value way trades’. Regular way trades means purchases or sales ofat the date that control is lost. Subsequently it is accounted for as financial assets that require delivery of assets within the time framean equity-accounted investee or in accordance with the Group’s generally established by regulation or convention in the marketaccounting policy for financial instruments depending on the level place.of influence retained. 3.3.2 Classification and Initial Measurement of FinancialAll Subsidiaries of the Bank have been incorporated in Sri Lanka. Instruments3.1.3 Transactions Eliminated on Consolidation The classification of financial instruments at the initialIntra-group balances and transactions and any unrealised income recognition depends on their purpose and characteristics andand expenses arising from Intra-group transactions are eliminated the Management’s intention in acquiring them. Further details onin preparing the Consolidated Financial Statements. Unrealised classification of financial assets and financial liabilities are givengains arising from transactions with equity accounted investees under 3.3.3 and 3.3.4 respectively.are eliminated to the extent of the Group’s interest in the investeeagainst the investment in the investee. Unrealized losses are All financial instruments are measured initially at their fair value pluseliminated in the same way as unrealized gains, except that they transaction costs that are directly attributable to acquisition or issueare eliminated to the extent that there is no evidence of impairment. of such financial instruments except in the case of financial assets and financial liabilities at fair value through profit or loss as per the3.1.4 Material Gains or Losses, Provisional Values or Error Sri Lanka Accounting Standard - LKAS 39 (Financial Instruments: Corrections Recognition and Measurement). Transaction cost in relation to financial assets and financial liabilities at fair value through profitThere were no material gains or losses, provisional values or error and loss are dealt with through Income Statement.corrections recognised during the year in respect of businesscombinations that took place in previous periods. 3.3.2.1 ‘Day 1’ Profit or Loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument, or 227

NOTES TO THE FINANCIAL STATEMENTSbased on a valuation technique whose variables include only data 3.3.3.1.2 Financial Assets Designated at Fair Value through Profitfrom observable markets, the Group immediately recognises the or Loss (FVtPL)difference between the transaction price and fair value (a ‘Day 1’profit or loss) in ‘net trading income’. The Group designates financial assets at fair value through profit or loss in the following circumstances:3.3.3 Classification and Subsequent Measurement of Financial Assets Such designation eliminates or significantly reduces measurement or recognition inconsistency that wouldAt the inception a financial asset is classified into one of the otherwise arise from measuring the assetsfollowing: The assets are part of a group of financial assets, financiala. Financial assets at fair value through profit or loss liabilities or both, which are managed and their performance evaluated on a fair value basis, in accordance with a i. Financial assets held for trading documented risk management or investment strategy. ii. Financial assets designated at fair value through profit or loss The asset contains one or more embedded derivatives that iii. Financial assets available-for-sale significantly modify the cash flows that would otherwise haveb. Held-to-maturity financial investments been required under the contract.c. Loans and receivables to banks and other customers, Financial assets at fair value through profit or loss are recordedThe subsequent measurement of financial assets depends on their in the Statement of Financial Position at fair value. Changes inclassification. fair value are recorded in ‘net gain or loss on financial instrument designated at fair value through profit or loss’. Interest earned is3.3.3.1Financial Assets at Fair Value through Profit or Loss accrued in ‘interest income’, using the effective interest rate (EIR)A financial asset is classified as fair value through profit or loss if it method, while dividend income is recorded in ‘other operatingis held for trading or is designated at fair value through profit or loss. income’ when the right to the payment has been established. Included in this classification are loans and receivables to customers3.3.3.1.1 Financial Assets Held for Trading which are economically hedged by credit derivatives and do notFinancial assets are classified as held for trading if they are qualify for hedge accounting, as well as notes issued which areacquired principally for the purpose of selling or repurchasing in the managed on a fair value basis.near term or holds as a part of a portfolio that is managed togetherfor short-term profit or position taking. This category also includes The Group has not designated any financial assets upon initialderivative financial instruments entered into by the Group that are recognition as designated at fair value through profit or loss.not designated as hedging instruments in hedge relationships asdefined by Sri Lanka Accounting Standard - LKAS 39 (Financial 3.3.3.1.3 Available for Sale Financial InvestmentsInstruments: Recognition and Measurement). Available for sale investments include equity and debt securities. Equity investments classified as ‘available for sale’ are those whichFinancial assets held for trading are recorded in the Statement of are neither classified as ‘held for trading’ nor ‘designated at fairFinancial Position at fair value. Changes in fair value are recognized value through profit or loss’. Debt securities in this category arein ‘Net trading income’. Interest and dividend income is recorded in intended to be held for an indefinite period of time and may be‘Net trading income’ according to the terms of the contract, or when sold in response to needs for liquidity or in response to changes inthe right to receive the payment has been established. the market conditions. The Group has not designated any loans or receivables as available for sale.The Group evaluates its held for trading asset portfolio, other thanderivatives, to determine whether the intention to sell them in the After initial measurement, available for sale financial investments arenear future is still appropriate. When the Group is unable to trade subsequently measured at fair value. Unrealised gains and lossesthese financial assets due to inactive markets and management’s are recognised directly in Equity through ‘other comprehensiveintention to sell them in the foreseeable future significantly changes, income / expense’ in the ‘available for sale reserve’. When thethe Group may select to reclassify these financial assets. investment is disposed of, the cumulative gain or loss previously recognised in Equity is recognised in the Income Statement inFinancial assets held for trading include instruments such as ‘other operating income’. Where the Group holds more than oneGovernment securities and equity instruments that have been investment in the same security, they are deemed to be disposed ofacquired principally for the purpose of selling or repurchasing in the on a first–in first–out basis. Interest earned whilst holding ‘availablenear term and derivatives, including separated embedded derivatives for sale financial investments’ is reported as ‘interest income’ usingexplained in 3.3.11 unless they are designated as effective hedging the effective interest rate (EIR). Dividend earned whilst holdinginstruments. ‘available for sale financial investments’ are recognised in the Income Statement as ‘other operating income’ when the right ofDetails of ‘financial assets held for trading’ are given in Note 23 to payment has been established. The losses arising from impairmentthe Financial Statements. of such investments are recognised in the Income Statement in228

‘Impairment losses on financial investments’ and removed from the The Group may enter into certain lending commitments where the Annual Report 2013 Sampath Bank PLC‘available for sale reserve’. loan, on drawdown, is expected to be classified as ‘held for trading’ because the intent is to sell the loans in the short term. TheseDetails of ‘financial investments - available for sale’ are given in commitments to lend are recorded as derivatives and measuredNote 28 to the Financial Statements. at fair value through profit or loss. Where the loan, on drawdown, is expected to be retained by the Group, and not sold in the short3.3.3.1.4 Held to Maturity Financial Investments term, the commitment is recorded only when it is an onerousHeld to maturity financial investments are non derivative financial contract that is likely to give rise to a loss.assets with fixed or determinable payments and fixed maturities,which the Group has the intention and ability to hold to maturity. Details of ‘loans and receivables to banks and other customers’ areAfter the initial recognition, held to maturity financial investments given in Note 25 and Note 26 to the Financial Statements.are subsequently measured at amortised cost using the effectiveinterest rate (EIR), less impairment. Amortised cost is calculated 3.3.3.1.6 Cash and Cash Equivalentsby taking into account any discount or premium on acquisition Cash and cash equivalents comprise cash in hand, balances withand fees that are an integral part of the EIR. The amortisation is banks, and money at call and short notice that are subject to anincluded in ‘interest income’ in the Income Statement. The losses insignificant risk of changes in their value.arising from impairment of such investments are recognised in‘impairment gain / loss on loans and receivables’ in the Income Cash and cash equivalents are carried at amortised cost in theStatement. Statement of Financial Position.If the Group were to sell or reclassify more than an insignificant Details of cash and cash equivalents are given in Note 19 toamount of held to maturity investments before maturity [other Financial Statements.than in certain specific circumstances permitted in the SriLanka Accounting Standard - LKAS 39 (Financial Instruments: For the purpose of the Statement of Cash Flow, cash and cashRecognition and Measurement)], the entire category would be equivalents consist of cash and short term deposits as definedtainted and would have to be reclassified as ‘available for sale’. above, net of unfavorable Nostro balances.Furthermore, the Group would be prohibited from classifying anyfinancial asset as ‘held to maturity’ during the following two years. 3.3.3.1.7 Statutory Deposit with Central Bank of Sri Lanka The Monetary Law Act requires that all commercial banksDetails of ‘financial investments - held to maturity’ are given in Note operating in Sri Lanka to maintain a statutory reserve equal to 6%29 to the Financial Statements. (2012: 8%) against all deposit liabilities denominated in Sri Lankan Rupees.3.3.3.1.5 Loans and Receivables to Banks and Other CustomersLoans and receivables to banks and other customers include non The details of statutory deposit with Central Bank are given in Notederivative financial assets with fixed or determinable payments that 20 to the Financial Statements.are not quoted in an active market, other than: 3.3.4 Classification and Subsequent Measurement of Those that the Group intends to sell immediately or in the Financial Liabilities near term and those that the Group, upon initial recognition, designates as fair value through profit or loss At the inception the Group determines the classification of its Those that the Group, upon initial recognition, designates as financial liabilities. Accordingly financial liabilities are classified as: available for sale a. Financial liabilities at fair value through profit or loss (FVtPL) Those for which the Group may not recover substantially all of its initial investment, other than because of credit i. Financial liabilities held for trading deterioration ii. Financial liabilities designated at fair value through profit or lossAfter initial measurement, loans and receivables to banks and other b. Financial liabilities at amortised cost.customers are subsequently measured at amortised cost usingthe effective interest rate (EIR), less allowance for impairment. 3.3.4.1 Financial Liabilities at Fair Value through Profit or LossAmortised cost is calculated by taking into account any discount Financial liabilities at FVtPL include financial liabilities held foror premium on acquisition and fees and costs that are an integral trading and financial liabilities designated upon initial recognition aspart of the EIR. The amortisation is included in ‘interest income’ at fair value through profit or loss. Subsequent to initial recognition,in the Income Statement. The losses arising from impairment are financial liabilities at FVtPL are measured at fair value, and changesrecognised in ‘impairment gain / loss on loans and receivables’ in there in recognized in profit or loss.the Income Statement. Financial liabilities are classified as held for trading if they are acquired principally for the purpose of selling or repurchasing in the near term or holds as a part of a portfolio that is managed together 229

NOTES TO THE FINANCIAL STATEMENTSfor short-term profit or position taking. This category includes Reclassifications are recorded at fair value at the date ofderivatives financial instruments entered into by the Group that are reclassification, which becomes the new amortised cost.not designated as hedging instruments in hedge relationships asdefined by the Sri Lanka Accounting Standard - LKAS 39 (Financial For a financial asset reclassified out of the ’available for sale’Instruments: Recognition and Measurement). category, any previous gain or loss on that asset that has been recognised in Equity is amortised to profit or loss over the remainingSeparated embedded derivatives are also classified as held for life of the investment using the effective interest rate (EIR). Anytrading unless they are designated as effective hedging instruments. difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using theGains or losses on liabilities held for trading are recognised in the EIR. If the asset is subsequently determined to be impaired, then theIncome Statement. amount recorded in Equity is recycled to the Income Statement.The Group has not designated any financial liabilities upon initial The Group may reclassify a non derivative trading asset out ofrecognition as at fair value through profit or loss. the ‘held for trading’ category and into the ‘loans and receivables’ category if it meets the definition of loans and receivables and the3.3.4.2 Financial Liabilities at Amortised Cost Group has the intention and ability to hold the financial asset for theFinancial Instruments issued by the Group that are not designated foreseeable future or until maturity. If a financial asset is reclassified,at fair value through profit or loss, are classified as liabilities under and if the Group subsequently increases its estimates of future‘due to banks’, ‘due to other customers’ and ‘debt issued and cash receipts as a result of increased recoverability of those cashother borrowed funds’ as appropriate, where the substance of the receipts, the effect of that increase is recognised as an adjustmentcontractual arrangement results in the Group having an obligation to the EIR from the date of the change in estimate.either to deliver cash or another financial asset to the holder, or tosatisfy the obligation other than by the exchange of a fixed amount Reclassification is at the election of management, and is determinedof cash or another financial asset for a fixed number of own equity on an instrument by instrument basis.shares at amortised cost using the EIR method. The Group has not reclassified any financial assets during the year.After initial recognition, such financial liabilities are substantiallymeasured at amortised cost using the EIR method. Amortised 3.3.6 Derecognition of Financial Instrumentscost is calculated by taking into account any discount or premium 3.3.6.1 Derecognition of Financial Assetson the issue and costs that are an integral part of the EIR. The The Group derecognises a financial asset (or, where applicable aEIR amortisation is included in ‘interest expenses’ in the Income part of a financial asset or part of a group of similar financial assets)Statement. Gains and losses are recognised in the Income when:Statement when the liabilities are derecognised as well as throughthe EIR amortisation process. the rights to receive cash flows from the asset have expired; orThe details of the Group’s financial liabilities at amortised cost are the Group has transferred its rights to receive cash flowsshown in Note 35, Note 36, Note 37 and Note 40 to the Financial from the asset or has assumed an obligation to pay theStatements. received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement and either the3.3.5 Reclassification of Financial Instruments Group has transferred substantially all the risks and rewardsThe Group does not reclassify any financial instrument into the ‘fair of the asset or the Group has neither transferred nor retainedvalue through profit or loss’ category after initial recognition. Also substantially all the risks and rewards of the asset, but hasthe Group does not reclassify any financial instrument out of the ‘fair transferred control of the asset.value through profit or loss’ category if upon initial recognition it wasdesignated as at fair value through profit or loss. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass–through arrangement, andThe Group reclassifies non derivative financial assets out of the has neither transferred nor retained substantially all of the risks and‘held for trading’ category and into the ‘available for sale’, ‘loans rewards of the asset nor transferred control of the asset, the assetand receivables’, or ’held to maturity’ categories as permitted by the is recognised to the extent of the Group’s continuing involvementSri Lanka Accounting Standard - LKAS 39 (Financial Instruments: in the asset. In that case, the Group also recognises an associatedRecognition and Measurement). In certain circumstances the Group liability. The transferred asset and the associated liability areis also permitted to reclassify financial assets out of the ‘available measured on a basis that reflects the rights and obligations that thefor sale’ category and into the ’loans and receivables’, ‘held for Group has retained.trading’ or ‘held- to-maturity’ category. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying230

amount of the asset and the maximum amount of consideration which case the obligation to return the securities is recorded as a Annual Report 2013 Sampath Bank PLCthat the Group could be required to repay. trading liability and measured at fair value with any gains or losses included in ‘net trading income’.3.3.6.2 Derecognition of Financial LiabilitiesA financial liability is derecognised when the obligation under the 3.3.9 Offsetting of Financial Instrumentsliability is discharged or cancelled or expired. Financial assets and financial liabilities are offset and the net amount presented in the Statement of Financial Position when, andWhere an existing financial liability is replaced by another from only when, the Group has a legal right to set off the recognisedthe same lender on substantially different terms, or the terms of amounts and it intends either to settle on a net basis or to realisean existing liability are substantially modified, such an exchange the asset and settle the liability simultaneously.or modification is treated as a derecognition of the original liabilityand the recognition of a new liability. The difference between the Income and expenses are presented on a net basis only whencarrying value of the original financial liability and the consideration permitted under LKASs / SLFRSs, or for gains and losses arisingpaid is recognised in profit or loss. from a group of similar transactions such as in the Group’s trading activity.3.3.7 Repurchase and Reverse Repurchase AgreementSecurities sold under agreements to repurchase at a specified 3.3.10 Impairment of Financial Assetsfuture date are not derecognised from the Statement of Financial The Group assesses at each reporting date, whether there is anyPosition as the Group retains substantially all of the risks and objective evidence that a financial asset or a group of financialrewards of ownership. The corresponding cash received is assets not carried at fair value through profit or loss is impaired.recognised in the Statement of Financial Position as an asset with A financial asset or a group of financial assets is deemed to bea corresponding obligation to return it, including accrued interest impaired if, and only if, there is objective evidence of impairment asas a liability within ‘cash collateral on securities lent and repurchase a result of one or more events that have occurred after the initialagreements’, reflecting the transaction’s economic substance as a recognition of the asset (an ‘incurred loss event’) and that lossloan to the Group. The difference between the sale and repurchase event (or events) has an impact on the estimated future cash flowsprices is treated as interest expense and is accrued over the life of the financial asset or the group of financial assets that can beof agreement using the EIR. When the counterparty has the right reliably estimated.to sell or repledge the securities, the Group reclassifies thosesecurities in its Statement of Financial Position to ‘financial assets 3.3.10.1 Impairment of Financial Assets carried at Amortised Costheld for trading pledged as collateral’ or to ‘financial investments For financial assets carried at amortised cost, such as amountsavailable for sale pledged as collateral’, as appropriate. due from banks, loans and advances taken by customers, held to maturity investments etc., the Group first assesses individuallyConversely, securities purchased under agreements to resell whether objective evidence of impairment exists for financialat a specified future date are not recognised in the Statement assets that are individually significant, or collectively for financialof Financial Position. The consideration paid, including accrued assets that are not individually significant. In the event the Groupinterest, is recorded in the Statement of Financial Position, within determines that no objective evidence of impairment exists for‘cash collateral on securities borrowed and reverse repurchase an individually assessed financial asset, it includes the asset inagreements’, reflecting the transaction’s economic substance as a a group of financial assets with similar credit risk characteristicsloan by the Group. The difference between the purchase and resale and collectively assesses them for impairment. However assetsprices is recorded in ‘net interest income’ and is accrued over the that are individually assessed for impairment and for which anlife of the agreement using the EIR. impairment loss is, or continues to be, recognised are not included in a collective assessment of impairmentIf securities purchased under agreement to resell are subsequentlysold to third parties, the obligation to return the securities is 3.3.10.1.1 Individually Assessed Financial Assetsrecorded as a short sale within ‘financial liabilities held for trading’ The criteria used to determine whether there is objective evidenceand measured at fair value with any gains or losses included in ‘net of impairment include:trading income’. Known cash flow difficulties experienced by the borrower;3.3.8 Securities Lending and Borrowing Past due contractual payments of either principal or interest;Securities lending and borrowing transactions are usually Breach of loan covenants or conditions;collateralised by securities or cash. The transfer of the Securities The probability that the borrower will enter bankruptcy orto counterparties is only reflected on the Statement of Financial other financial realisation; andPosition if the risks and rewards of ownership are also transferred. A significant downgrading in credit rating by an externalCash advanced or received as collateral is recorded as an asset or credit rating agency.liability. Securities borrowed are not recognised in the Statementof Financial Position, unless they are then sold to third parties, in If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured by discounting 231

NOTES TO THE FINANCIAL STATEMENTSthe expected future cash flows of a financial asset at its original The collective impairment allowance is determined after taking intoeffective interest rate and comparing the resultant present value account:with the financial asset’s current carrying amount. The impairmentallowances on individually significant accounts are reviewed more Historical loss experience in portfolios of similar credit risk;regularly when circumstances require. This normally encompasses andre-assessment of the enforceability of any collateral held and the Management’s experienced judgment as to whether currenttiming and amount of actual and anticipated receipts. Individually economic and credit conditions are such that the actual levelassessed impairment allowances are only released when there is of inherent losses at the reporting date is likely to be greaterreasonable and objective evidence of a reduction in the established or less than that suggested by historical experience.loss estimate. Homogeneous groups of financial assetsWhen impairment losses are determined for those financial assets Statistical methods are used to determine impairment losses on awhere objective evidence of impairment exists, the following factors collective basis for homogeneous groups of financial assets. Lossesare considered: in these groups of financial assets are recorded on an individual basis when individual financial assets are written off, at which point Bank’s aggregate exposure to the customer; they are removed from the group. The viability of the customer’s business model and their capacity to trade successfully out of financial difficulties and Two alternative methods are used to calculate historical loss generate sufficient cash flow to service debt obligations; experience on a collective basis: The amount and timing of expected receipts and recoveries; The extent of other creditors’ commitments ranking ahead When the group of financial assets by nature long term, of, or pari-passu with, the Bank and the likelihood of other the Group uses Probability of Default method. Under this creditors continuing to support the company; methodology the movements in number of customers into bad The complexity of determining the aggregate amount and categories over the periods are used to estimate the amount ranking of all creditor claims and the extent to which legal of financial assets that will eventually be written off as a result and insurance uncertainties are evident; of the events occurring before the reporting date which the The realisable value of security (or other credit mitigants) and Group is not able to identify on an individual financial asset likelihood of successful repossession; basis, and that can be reliably estimated. The likely deduction of any costs involved in recovery of When the group of loan by nature short term, the Group amounts outstanding; uses Net Flow Rate method. Under this methodology the The ability of the borrower to obtain, and make payments in, movement in the outstanding balance of customers into bad the currency of the loan if not denominated in local currency; categories over the periods are used to estimate the amount and of financial assets that will eventually be written off as a result The likely dividend available on liquidation or bankruptcy; of the events occurring before the reporting date which the Group is not able to identify on an individual loan basis, and3.3.10.1.2 Collectively Assessed Financial Assets that can be reliably estimated.Impairment is assessed on a collective basis in two circumstances: Under both methodologies, loans are grouped into ranges according To cover losses which have been incurred but have not yet to the number of days in arrears and statistical analysis is used been identified on loans subject to individual assessment; and to estimate the likelihood that loans in each range will progress For homogeneous groups of loans that are not considered through the various stages of delinquency, and ultimately prove individually significant. irrecoverable.Incurred but not yet identified impairment Current economic conditions and portfolio risk factors are alsoIndividually assessed financial assets for which no evidence of loss evaluated when calculating the appropriate level of allowancehas been specifically identified on an individual basis are grouped required to cover inherent loss. These additional macro and portfoliotogether according to their credit risk characteristics for the purpose risk factors may include:of calculating an estimated collective loss. This reflects impairmentlosses that the Group has incurred as a result of events occurring Recent loan portfolio growth and product mix,before the reporting date, which the Group is not able to identify on Unemployment rates,an individual loan basis, and that can be reliably estimated. These Gross Domestic Production (GDP) growth,losses will only be individually identified in the future. As soon as Inflation,information becomes available which identifies losses on individual Exchange rates,financial assets within the group, those financial assets are removed Interest ratesfrom the group and assessed on an individual basis for impairment. Changes in Government laws and regulations232 3.3.10.1.3 Reversals of Impairment If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event

occurring after the impairment was recognised, the excess is at amortised cost. However, the amount recorded for impairment Annual Report 2013 Sampath Bank PLCwritten back by reducing the financial asset impairment allowance is the cumulative loss measured as the difference between theaccount accordingly. The write-back is recognised in the Income amortised cost and the current fair value, less any impairment lossStatement. on that investment previously recognised in the Income Statement. Future interest income is based on the reduced carrying amount3.3.10.1.4 Write-off of Financial Assets carried at Amortised Cost and is accrued using the rate of interest used to discount the futureFinancial assets (and the related impairment allowance accounts) cash flows for the purpose of measuring the impairment loss. Theare normally written off, either partially or in full, when there is no interest income is recorded as part of ‘Interest income’. If, in arealistic prospect of recovery. Where financial assets are secured, subsequent period, the fair value of a debt instrument increasesthis is generally after receipt of any proceeds from the realisation and the increase can be objectively related to a credit eventof security. occurring after the impairment loss was recognised in the Income Statement, the impairment loss is reversed through the Income3.3.10.1.5 Impairment of Rescheduled Loans and Advances Statement.Where possible, the Group seeks to restructure loans ratherthan to take possession of collateral. This may involve extending In the case of equity investments classified as available for sale,the payment arrangements and the agreement of new loan objective evidence would also include a ‘significant’ or ‘prolonged’conditions. Once the terms have been renegotiated, any impairment decline in the fair value of the investment below its cost. Whereis measured using the original EIR as calculated before the there is evidence of impairment, the cumulative loss measuredmodification of terms and the loan is no longer considered past as the difference between the acquisition cost and the currentdue. Management continually reviews renegotiated loans to ensure fair value, less any impairment loss on that investment previouslythat all criteria are met and that future payments are likely to occur. recognised in the Income Statement is removed from equity andThe loans continue to be subjected to an individual or collective recognised in the Income Statement. However, any subsequentimpairment assessment, calculated using the loan’s original EIR. recovery in the fair value of an impaired available for sale equity security is recognised in Other Comprehensive Income.3.3.10.1.6 Collateral ValuationThe Group seeks to use collateral, where possible, to mitigate its The Group writes-off certain Financial Investments - Available forrisks on financial assets. The collateral comes in various forms Sale when they are determined to be uncollectible.such as cash, gold, securities, letters of credit/guarantees, realestate, receivables, inventories, other non-financial assets and 3.3.11 Derivative Financial Instruments and Hedgecredit enhancements such as netting agreements. The fair value Accountingof collateral is generally assessed, at a minimum, at inception andbased on the guidelines issued by the Central Bank of Sri Lanka. Derivatives are financial instruments that derive their value in response to changes in interest rates, financial instrument prices,To the extent possible, the Group uses active market data for commodity prices, foreign exchange rates, credit risk and indices.valuing financial assets, held as collateral. Other financial assets Derivatives are categorized as trading unless they are designatedwhich do not have readily determinable market value are valued as hedging instruments.using models. Non-financial collateral, such as real estate, is valuedbased on data provided by third parties such as independent All derivatives are initially recognized and subsequently measuredvaluers, Audited Financial Statements and other independent at fair value, with all revaluation gains recognized in the Incomesources. Statement (except where cash flow or net investment hedging has been achieved, in which case the effective portion of changes in3.3.10.1.7 Collateral Repossessed fair value is recognized within Other Comprehensive Income).The Group’s policy is to determine whether a repossessed assetis best used for its internal operations or should be sold. Assets Fair values may be obtained from quoted market prices in activedetermined to be useful for the internal operations are transferred markets, recent market transactions, and valuation techniques,to their relevant asset category at the lower of their repossessed including discounted cash flow models and option pricing models,value or the carrying value of the original secured asset. as appropriate. Where the initially recognized fair value of a derivative contract is based on a valuation model that uses inputs3.3.10.2 Impairment of Financial Assets - Available for Sale that are not observable in the market, it follows the same initialFor available for sale financial investments, the Group assesses recognition accounting policy as for other financial assets andat each reporting date whether there is objective evidence that an liabilities. All derivatives are carried as assets when fair valueinvestment is impaired. is positive and as liabilities when fair value is negative. Certain derivatives embedded in other financial instruments, such as theIn the case of debt instruments classified as available for sale, the conversion option in a convertible bond held, are valued as separateGroup assesses individually whether there is objective evidence of derivatives when their economic characteristics and risks are notimpairment based on the same criteria as financial assets carried closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded 233

NOTES TO THE FINANCIAL STATEMENTSderivatives are measured at fair value, with changes in fair value arrangement is dependent on the use of a specific asset or assetsrecognized in the Income Statement. Embedded derivatives continue and the arrangement conveys a right to use the asset.to be presented with the host contract and are not separatelydisclosed or included within derivatives. 3.4.1 Finance Lease Agreements which transfer to counterparties substantially all theThe method of recognizing the resulting fair value gain or loss risks and rewards incidental to the ownership of assets, but notdepends on whether the derivative is designated as a hedging necessarily legal title, are classified as finance leases. When theinstrument, and if so, the nature of the item being hedged. The Bank is the lessor under finance leases the amounts due underGroup designates certain derivatives as either: the leases, after deduction of unearned charges, are included in(1) hedges of the fair value of recognised assets or liabilities or ‘loans and advances to banks’ or ‘loans and advances to customers’, as appropriate. The finance income receivable is recognised in firm commitments (fair value hedge); ‘net interest income’ over the periods of the leases so as to give a(2) hedges of highly probable future cash flows attributable to a constant rate of return on the net investment in the leases. recognised asset or liability, or a forecast transaction (cash When the Bank is a lessee under finance leases, the leased assets flow hedge); or are capitalised and included in ‘property, plant and equipment’ and(3) hedges of the net investment of a foreign operation (net the corresponding liability to the lessor is included in ‘other liabilities’. investment hedges). A finance lease and its corresponding liability are recognised initially at the fair value of the asset or, if lower, the present value of theHedge accounting is used for derivatives designated in this way minimum lease payments. Finance charges payable are recognisedprovided certain criteria are met. The Group documents, at the in ‘net interest income’ over the period of the lease based on theinception of the transaction, the relationship between hedging interest rate implicit in the lease so as to give a constant rate ofinstruments and hedged items, as well as its risk management interest on the remaining balance of the liability.objective and strategy for undertaking various hedge transactions.The Group also documents its assessment, both at hedge inception 3.4.2 Operating Leaseand on an ongoing basis, of whether the derivatives that are used All other leases are classified as operating leases. When acting asin hedging transactions are highly effective in offsetting changes in lessor, the Bank includes the assets subject to operating leases infair values or cash flows of hedged items. ‘property, plant and equipment’ and accounts for them accordingly. Impairment losses are recognised to the extent that residual valuesDetails of the derivative financial instruments held by the Group, are not fully recoverable and the carrying value of the assets isincluding those held for hedge accounting are provided in Note 22 thereby impaired.to the Financial Statements. When the Bank is the lessee, leased assets are not recognised on3.3.11.1 Cash Flow Hedge the Statement of Financial Position. Rentals payable and receivableThe effective portion of changes in the fair value of derivatives under operating leases are accounted for on a straight-line basisthat are designated and qualify as cash flow hedging instruments over the periods of the leases and are included in ‘other operatingis recognised in Equity. The gain or loss relating to the ineffective expenses’ and ‘other operating income’, respectively.portion is recognized immediately in the Income Statement. 3.5 Gold InventoryAmounts accumulated in Equity are reclassified to the Income The gold inventory is valued at lower of cost and net realizable value.Statement in the periods in which the hedged item affects profit or Cost includes all costs of purchase, costs of conversion and otherloss. When a hedging instrument expires or is sold, or when a hedge costs incurred in bringing the inventory to its present location andno longer meets the criteria for hedge accounting, any cumulative condition. Net realizable value is the estimated selling price in thegain or loss existing in Equity at that time remains in Equity and is ordinary course of business less the estimated cost necessary torecognised when the forecast transaction is ultimately recognised make the sale.in the Income Statement. When a forecast transaction is no longerexpected to occur, the cumulative gain or loss that was reported in 3.6 Property, Plant and EquipmentEquity is immediately transferred to the Income Statement. Property, plant and equipment are tangible items that are held for use in the production or supply of goods or services, for rental to3.3.11.2 Derivatives that do not qualify for Hedge Accounting others or for administrative purposes and are expected to be usedChanges in the fair value of any derivative instruments not qualifying during more than one period. The Group applies the requirements offor hedge accounting are recognized immediately in the Income the Sri Lanka Accounting Standard - LKAS 16 (Property, Plant andStatement. Equipment) in accounting for these assets.3.4 Finance and Operating LeasesThe determination of whether an arrangement is a lease, or itcontains a lease, is based on the substance of the arrangementand requires an assessment of whether the fulfillment of the234

3.6.1 Recognition be reliably measured. The costs of day to day servicing of property,Property, plant and equipment are recognised if it is probable that plant and equipment are charged to the Income Statement asfuture economic benefits associated with the asset will flow to the incurred. Costs incurred in using or redeploying an item is notGroup and the cost of the asset can be reliably measured. included under carrying amount of an item.3.6.2 Measurement 3.6.6 DerecognitionAn item of property, plant and equipment that qualifies for The carrying amount of an item of property, plant and equipment isrecognition as an asset is initially measured at its cost. Cost derecognised on disposal or when no future economic benefits areincludes expenditure that is directly attributable to the acquisition of expected from its use or disposal. The gain or loss arising from de-the asset and cost incurred subsequently to add to, replace part of, recognition of an item of property, plant and equipment is includedor service it. The cost of self constructed assets includes the cost in the Income Statement when the item is derecognised.of materials and direct labour, any other costs directly attributableto bringing the asset to a working condition for its intended use and When replacement costs are recognised in the carrying amountthe costs of dismantling and removing the items and restoring the of an item of property, plant and equipment, the remainingsite on which they are located. Purchased software that is integral carrying amount of the replaced part is derecognised. Majorto the functionality of the related equipment is capitalised as part of inspection costs are capitalised. At each such capitalisation, thecomputer equipment. remaining carrying amount of the previous cost of inspections is derecognised.3.6.3 Cost ModelThe Group applies cost model to property, plant and equipment 3.6.7 Depreciationexcept for freehold land and buildings and records at cost of The Group provides depreciation from the date the assets arepurchase or construction together with any incidental expenses available for use up to the date of disposal, at the following rates onthereon less accumulated depreciation and any accumulated a straight line basis over the periods appropriate to the estimatedimpairment losses. Such cost includes the cost of replacing part of useful lives based on the pattern in which the asset’s futurethe equipment when that cost is incurred, if the recognition criteria economic benefits are expected to be consumed by the Group ofare met. the different types of assets. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale3.6.4 Revaluation Model or the date that the asset is derecognised. Depreciation does notThe Group applies the revaluation model to the entire class of cease when the assets become idle or is retired from active usefreehold land and buildings. Such properties are carried at a unless the asset is fully depreciated.revalued amount, being their fair value at the date of revaluationless any subsequent accumulated depreciation and subsequent Asset Category Depreciation Rateaccumulated impairment losses. Freehold land and buildings of per annumthe Group are revalued every three years on a roll over basis to Freehold buildings 2% - 2.5%ensure that the carrying amounts do not differ materially from Leasehold properties and improvements 10% - 25%the fair values at the reporting date. On revaluation of an asset, Computer equipment 5% - 20%any increase in the carrying amount is recognised in ‘Other Motor vehicles 12.5%Comprehensive Income’ and accumulated in Equity, under capital Office equipment 5% - 20%reserve or used to reverse a previous revaluation decrease relatingto the same asset, which was charged to the Income Statement. 3.6.8 Changes in Estimates Annual Report 2013 Sampath Bank PLCIn this circumstance, the increase is recognised as income to the Depreciation methods, useful lives and residual values areextent of the previous write down. Any decrease in the carrying reassessed at each reporting date and adjusted if appropriate.amount is recognised as an expense in the Income Statement ordebited in the Other Comprehensive Income to the extent of any During the year ended 31st December 2013 the Group conductedcredit balance existing in the capital reserve in respect of that an operational efficiency review and concluded that there is noasset. The decrease recognised in Other Comprehensive Income requirement to change estimates.reduces the amount accumulated in Equity under capital reserves.Any balance remaining in the revaluation reserve in respect of an 3.6.9 Capital Work in Progressasset is transferred directly to Retained Earnings on retirement or Capital work-in-progress is stated at cost. These are expenses ofdisposal of the asset. a capital nature directly incurred in the construction of buildings, major plant and machinery and system development, awaiting3.6.5 Subsequent Cost capitalisation. Capital work-in-progress would be transferred toThe subsequent cost of replacing a component of an item of the relevant asset when it is available for use, i.e. when it is in theproperty, plant and equipment is recognised in the carrying amount location and condition necessary for it to be capable of operating inof the item if it is probable that the future economic benefits the manner intended by management. Capital work-in-progress isembodied within that part will flow to the Group and its cost can stated at cost less any accumulated impairment losses. 235

NOTES TO THE FINANCIAL STATEMENTS3.6.10 Borrowing Costs Asset Category Useful lifeBorrowing costs that are directly attributable to the acquisition, Yearsconstruction or production of a qualifying asset have been Computer software 2-6capitalised as part of the cost of the asset in accordance with Licenses 5 - 20Sri Lanka Accounting Standard - LKAS 23 (Borrowing Costs).Capitalisation of borrowing costs ceases when substantially all the 3.8 Fiduciary Assetsactivities necessary to prepare the qualifying asset for its intended The Group provides fiduciary services that result in the holdinguse are completed. of the assets on behalf of its customers. Assets held in fiduciary capacity are not reported in the Financial Statements, as they are3.7 Intangible Assets not assets of the Group.An intangible asset is an identifiable non monetary asset withoutphysical substance held for use in the production or supply of goods 3.9 Impairment of Non-financial Assetsor services, for rental to others or for administrative purposes. The Group and the Bank assess at each reporting date whether there is an indication that an asset may be impaired. If any indication3.7.1 Basis of Recognition exists, or when annual impairment testing for an asset is required,An intangible asset is recognised if it is probable that the future the Group estimates the asset’s recoverable amount. An asset’seconomic benefits that are attributable to the asset will flow to recoverable amount is the higher of an asset’s or Cash Generatingthe entity and the cost of the assets can be measured reliably. An Unit’s (CGU’s) fair value less costs to sell and its value in use. Whereintangible asset is initially measured at cost. the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its3.7.2 Computer Software recoverable amount.Cost of purchased licenses and all computer software costsincurred, licensed for use by the Group, which are not integrally In assessing value in use, the estimated future cash flows arerelated to associated hardware, which can be clearly identified, discounted to their present value using a pre–tax discount rate thatreliably measured and it’s probable that they will lead to future reflects current market assessments of the time value of money andeconomic benefits, are included in the Statement of Financial the risks specific to the asset. In determining fair value less costs toPosition under the category Intangible Assets and carried at cost sell, an appropriate valuation model is used. These calculations areless accumulated amortisation and any accumulated impairment corroborated by valuation multiples, quoted share prices for publiclylosses. traded subsidiaries or other available fair value indicators.3.7.3 Subsequent Expenditure For assets excluding goodwill, an assessment is made at eachExpenditure incurred on software is capitalised only when it is reporting date as to whether there is any indication that previouslyprobable that this expenditure will enable the asset to generate recognised impairment losses may no longer exist or may havefuture economic benefits in excess of its originally assessed decreased. If such indication exists, the Group estimates the asset’sstandard of performance and this expenditure can be measured and or CGU’s recoverable amount. A previously recognised impairmentattributed to the asset reliably. All other expenditure is expensed as loss is reversed only if there has been a change in the assumptionsincurred. used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that3.7.4 Derecognition of Intangible Assets the carrying amount of the asset does not exceed its recoverableThe carrying amount of an item of intangible asset is derecognised amount, nor exceeds the carrying amount that would have beenon disposal or when no future economic benefits are expected from determined, net of depreciation, had no impairment loss beenits use. The gain or loss arising from de-recognition of an item of recognised for the asset in prior years. Such reversal is recognisedintangible asset is included in the Income Statement when the item in the Income Statement.is derecognised. Impairment losses relating to goodwill are not reversed in future3.7.5 Amortisation of Intangible Assets periods.Intangible assets, except for goodwill, are amortised on a straightline basis in the Income Statement from the date when the asset 3.10 Dividend Payableis available for use, over the best estimate of its useful economic Provision for final dividend is recognized at the time the dividendlife based on a pattern in which the asset’s economic benefits are recommended and declared by the Board of Directors, is approvedconsumed by the Group. Amortisation methods, useful lives and by the shareholders. Interim dividend payable is recognisedresidual values are reviewed at each financial year-end and adjusted when the Board approves such dividend in accordance with theif appropriate. The Group and the Bank assume that there is no Companies Act No 7 of 2007.residual value for its intangible assets.236

Dividend for the year that are declared after the reporting date are eligible for pension resign before retirement age, the Bank is Annual Report 2013 Sampath Bank PLCare disclosed in Note No 45 to the Financial Statements as an liable to pay gratuity to such employees.Event after the Reporting Period in accordance with the Sri LankaAccounting Standard - LKAS 10 (Events after the Reporting Period). An actuarial valuation is carried out at every year end to ascertain the full liability under the Fund. The valuation was carried out3.11 Employee Benefits as at 31st December 2013 by Messrs Piyal S. Goonetilleke &3.11.1 Defined Benefit Plans Associates, a qualified actuary.A defined benefit plan is a post employment benefit plan other thana defined contribution plan’ as defined in the Sri Lanka Accounting Recognition of Actuarial gains and losses: The Bank recognisesStandard - LKAS 19 (Employee Benefits). Please refer 3.11.2 for the total actuarial gains and losses that arise in calculating thethe definition of defined contribution plan. Bank’s obligation in respect of the plan in Other Comprehensive Income during the period in which it occurs.3.11.1.1 Pension FundThe Bank has a Pension Fund for all members who joined the Bank Expected Return on Assets: Expected return on assets is zero asfor permanent employment before 1st June 2003. A member is the plan is not pre funded.eligible for a monthly pension after attainment of 55 years of ageand completion of 10 years uninterrupted service. Funding Arrangements: The Gratuity liability is not externally funded.The Bank measures the present value of the Pension obligation,which is a defined benefit plan with the advice of an independent All Subsidiary companies carry out actuarial valuations to ascertainprofessional actuary using the Projected Unit Credit method their respective gratuity liabilities.(PUC) as required by Sri Lanka Accounting Standard - LKAS 19(Employee Benefits) 3.11.1.3 Other Long-term Employee Benefits The Bank’s net obligation in respect of long-term employeeAn actuarial valuation is carried out at every year end to ascertain benefits other than the pension fund and gratuity is the amountthe full liability under the Fund. The last such valuation was carried of future benefit that employees have earned in return for theirout as at 31st December 2013 by Messrs Piyal S. Goonetilleke & service in the current and prior periods; that benefit is discountedAssociates, a qualified actuary. to determine its present value. The discount rate is the yield at the reporting date on government bonds that have maturity datesRecognition of Actuarial Gains and Losses: Actuarial gains and approximating to the terms of the Bank’s obligation. The calculationlosses occur when the actual plan experience differs from the is performed using the Projected Unit Credit method. Any actuarialassumed. The Bank recognises the total actuarial gains and losses gains and losses are recognised in profit or loss in the period inthat arise in calculating the Bank’s obligation in respect of the which they arise. The Bank’s liability towards the portion of theplan in Other Comprehensive Income during the period in which it accumulated leave which is expected to be utilised beyond oneoccurs. year from the end of the reporting period is treated as other long- term employee benefits.Expected Return on Assets: Expected return on assets is theexpected return on pension fund at the assumed rate of return. 3.11.2 Defined Contribution Plans A defined contribution plan is a post employment benefit plan underFunding Arrangements: The assets of the fund are held which an entity pays fixed contributions into a separate entity (aseparately from those of the Bank’s assets and are administered fund) and will have no legal or constructive obligation to pay furtherindependently. contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current andThe Subsidiaries do not operate pension funds. prior periods’ as defined in the Sri Lanka Accounting Standard - LKAS 19 (Employee Benefits).3.11.1.2 GratuityIn compliance with the Gratuity Act No 12 of 1983 provision is The contribution payable to a defined contribution plan is inmade in the accounts from the first year of service for gratuity proportion to the services rendered to the Group by the employeespayable to employees who joined the Bank on or after 1st June and is recorded as an expense under ‘personnel expenses’ as and2003, as they are not in pensionable service of the Bank. when they become due. Unpaid contributions are recorded as a liability.Provision is not made in the accounts for gratuity payable toemployees who joined prior to 1st June 2003 and complete five 3.11.2.1 Employees’ Provident Fundor more years of continuous service, as the Bank has its own non- The Bank and the Employees contribute 12% and 8% respectivelycontributory pension scheme in force. However, if employees who on the salary of each employee to the approved private Provident 237

NOTES TO THE FINANCIAL STATEMENTSFund. All Subsidiary companies and their employees contribute 12% The amount recognised as a provision is the best estimate of theand 8% respectively on the salary of each employee to Employees’ expenditure required to settle the present obligation as at theProvident Fund. reporting date, taking into account the risks and uncertainties that surround the events and circumstances that affect the provision.3.11.2.2 Employees’ Trust FundThe Group contributes 3% of the salary of each employee to the 4. SIGNIFICANT ACCOUNTING POLICIES - RECOGNITIONEmployees’ Trust Fund. OF INCOME AND EXPENSES3.11.3 Share Based Payment Transactions Revenue is recognised to the extent that it is probable that the3.11.3.1 Equity Settled Share Based Payments Granted Prior to 1st economic benefits will flow to the Group or Bank and the revenue can be reliably measured. The following specific recognition criteria January 2012 must also be met before revenue is recognised.In respect of employee share options granted prior to 1st January2012, Sri Lanka Accounting Standard - SLFRS 2 (Share-based 4.1 Interest Income and Interest ExpensePayment) standard is not applicable. For all financial instruments measured at amortised cost, interest bearing financial assets classified as available for sale and financialThe shareholders approved an Employee Share Ownership Plan instruments designated at fair value through profit or loss, interest(ESOP 2010) at the Extraordinary General Meeting held on 21st income or expense is recorded using the effective interest rate EIRAugust 2010. ESOP 2010 was introduced in the year 2011, having (method). EIR is the rate that exactly discounts estimated futureachieved the targets set for 2010. The total number of share cash payments or receipts through the expected life of the financialoptions available to the eligible employees is 3,056,159. The option instrument or a shorter period, where appropriate, to the net carryingexercisable period would be 3 years, from the entitlement date of amount of the financial asset or financial liability.30th June 2011. The calculation of EIR takes into account all contractual terms of3.12 Provisions the financial instrument (for example, prepayment options) andProvisions are recognised when the Group or Bank has a present includes any fees or incremental costs that are directly attributableobligation (legal or constructive) as a result of a past event, and it is to the instrument and are an integral part of the EIR, but not futureprobable that an outflow of resources embodying economic benefits credit losses.will be required to settle the obligation and a reliable estimate canbe made of the amount of the obligation. The expense relating The carrying amount of the financial asset or financial liability isto any provision is presented in the Income Statement net of any adjusted if the Group revises its estimates of payments or receipts.reimbursement. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as ’interest3.13 Financial Guarantees income’ for financial assets and ’interest expense’ for financialIn the ordinary course of business, the Bank gives financial liabilities. However, for a reclassified financial asset for which theguarantees, consisting of letters of credit, guarantees and Group subsequently increases its estimates of future cash receiptsacceptances. Financial guarantees are initially recognised in the as a result of increased recoverability of those cash receipts, theFinancial Statements (within ‘other liabilities’) at fair value, being effect of that increase is recognised as an adjustment to the EIRthe premium received. Subsequent to initial recognition, the Bank’s from the date of the change in estimate.liability under each guarantee is measured at the higher of theamount initially recognised less cumulative amortization recognised Once the recorded value of a financial asset or a group of similarin the Income Statement, and the best estimate of expenditure financial assets has been reduced due to an impairment loss,required to settle any financial obligation arising as a result of the interest income continues to be recognised using the rate ofguarantee. interest used to discount the future cash flows for the purpose of measuring the impairment loss.Any increase in the liability relating to financial guarantees isrecorded in the Income Statement in ‘impairment gain or loss on 4.2 Fee and Commission Incomeloans and receivables’. The premium received is recognised in the The Group earns fee and commission income from a diverse rangeIncome Statement in ‘net fees and commission income’ on a straight of services it provides to its customers. Fee income can be dividedline basis over the life of the guarantee. into the following two categories:3.14 Operational Risk Events 4.2.1 Fee Income Earned from Services that are provided overProvisions for operational risk events are recognised for losses a Certain Period of Timeincurred by the Bank which do not relate directly to amounts ofprincipal outstanding for loans and advances. Fees earned for the provision of services over a period of time are accrued over that period. These fees include professional fees, trade service fees, commission income and asset management238

fees, loan commitment fees for loans that are likely to be drawn Accordingly, provision for taxation is based on the profit for the year Annual Report 2013 Sampath Bank PLCdown and other credit related fees are deferred (together with any adjusted for taxation purposes in accordance with the provisionsincremental costs) and recognised as an adjustment to the EIR on of the Inland Revenue Act No 10 of 2006 and the amendmentsthe loan. When it is unlikely that a loan will be drawn down, the loan thereto at the rates specified in Note 15 to the Financialcommitment fees are recognised over the commitment period on a Statements.straight line basis. 5.2 Deferred Taxation4.2.2 Fee Income from Providing Transaction Services Deferred tax is provided on temporary differences at the reportingFees arising from negotiating or participating in the negotiation date between the tax bases of assets and liabilities and theirof a transaction for a third party, such as the arrangement of the carrying amounts for financial reporting purposes for all Groupacquisition of shares or other securities or the purchase or sale entities. Deferred tax liabilities are recognised for all taxableof businesses, are recognised on completion of the underlying temporary differences, except:transaction. Fees or components of fees that are linked to a certainperformance are recognised after fulfilling the corresponding Where the deferred tax liability arises from the initialcriteria. recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the4.3 Fee and Commission Expenses time of the transaction, affects neither the accounting profitFee and commission expense relate mainly to transaction and nor taxable profit or loss.services fee, which are expensed as the services are received. Fee In respect of taxable temporary differences associated withand commission expenses are recognised on an accrual basis. investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is4.4 Net Trading Income probable that the temporary differences will not reverse inNet trading income includes all gains and losses from changes the foreseeable future.in fair value and related dividend for financial assets and financialliabilities ‘held for trading’ other than interest income. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax4.5 Dividend Income losses (if any), to the extent that it is probable that taxable profit willDividend income is recognised when the Group’s right to receive be available against which the deductible temporary differences,the payment is established. and the unused tax credits and unused tax losses carried forward can be utilised except:4.6 Customer Loyalty ProgrammesAward credits under customer loyalty programmes are accounted Where the deferred tax asset relating to the deductiblefor as a separately identifiable component of the transaction in temporary difference arises from the initial recognition ofwhich they are granted. The fair value of the consideration received an asset or liability in a transaction that is not a businessin respect of the initial sale is allocated between the award combination and, at the time of the transaction, affectscredits and the other components of the sale. Expense incurred neither the accounting profit nor taxable profit or loss.from customer loyalty programmes is charged to ‘other operating In respect of deductible temporary differences associatedexpenses’. with investments in Subsidiaries, deferred tax assets are recognised only to the extent that it is probable that the5. SIGNIFICANT ACCOUNTING POLICIES - TAX EXPENSE temporary differences will reverse in the foreseeableAs per Sri Lanka Accounting Standard - LKAS 12 (Income Taxes), future and taxable profit will be available against which thetax expense is the aggregate amount included in determination temporary differences can be utilised.of profit or loss for the period in respect of current and deferredtaxation. Income tax expense is recognised in the Income The carrying amount of deferred tax assets is reviewed at eachStatement except to the extent it relates to items recognised reporting date and reduced to the extent that it is no longerdirectly in ‘Equity’ or ‘other comprehensive income (OCI)’, in which probable that sufficient taxable profit will be available to allowcase it is recognised in Equity or in OCI. all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are5.1 Current Taxation recognised to the extent that it has become probable that futureCurrent tax assets and liabilities consist of amounts expected to taxable profit will allow the deferred tax asset to be recovered.be recovered from or paid to the Commissioner General of InlandRevenue in respect of the current year and any adjustment to tax Deferred tax assets and liabilities are measured at the tax ratespayable in respect of prior years. The tax rates and tax laws used that are expected to apply in the year when the asset is realised orto compute the amount are those that are enacted or substantially the liability is settled, based on tax rates (and tax laws) that haveenacted by the reporting date. been enacted or substantively enacted at the reporting date. 239

NOTES TO THE FINANCIAL STATEMENTSCurrent tax and deferred tax relating to items recognised directly each segment and assess its performance, and for which discretein Equity are also recognised in Equity and not in the Income financial information is available.Statement. For management purposes, the Bank has identified four operatingDeferred tax assets and deferred tax liabilities are offset if a legally segments based on products and services, as follows:enforceable right exists to set off current tax assets against currenttax liabilities and the deferred taxes relate to the same taxable entity Bankingand the same taxation authority. Leasing Dealing/Investment5.3 Value Added Tax (VAT) on Financial Services OthersVAT on Financial Services is calculated in accordance with ValueAdded Tax Act No 14 of 2002 and subsequent amendments Management monitors the operating results of its business unitsthereto. The base for the computation of Value Added Tax on separately for the purpose of making decisions about resourceFinancial Services is the accounting profit before VAT and income allocation and performance assessment. Segment performancetax adjusted for the economic depreciation and emoluments of is evaluated based on operating profits or losses which, in certainemployees computed on prescribed rate. respects, are measured differently from operating profits or losses in the Consolidated Financial Statements. Income taxes are managed5.4 Withholding Tax (WHT) on Dividend on a group basis and are not allocated to operating segments.Dividend distributed out of taxable profit of the local Subsidiariesattracts a 10% deduction at source and is not available for set Interest income is reported net as management primarily reliesoff against the tax liability of the Bank. Thus, the WHT deducted on net interest revenue as a performance measure, not the grossat source is added to the tax expense of the Subsidiaries in the income and expense. Transfer prices between operating segmentsConsolidated Financial Statements as a consolidation adjustment. are on an arm’s length basis in a manner similar to transactions with third parties.WHT that arise from the distribution of dividend by the Bank arerecognised at the same time as the liability to pay the related No revenue from transactions with a single external customer ordividend is recognised. counterparty amounted to 10% or more of the Bank’s total revenue in 2013 or 2012.5.5 Economic Service Charge (ESC)As per provisions of the Economic Service Charge (ESC) Act No 6.3 Cash Flow Statement13 of 2006 and subsequent amendments thereto, ESC is payable The cash flow statement has been prepared by using ‘The Directonly on exempt turnover of the Bank at 0.25% and is deductible Method’ in accordance with the Sri Lanka Accounting Standard -from income tax payable. ESC is not payable on turnover on which LKAS 7 (Statement of Cash Flows), whereby gross cash receiptsincome tax is payable. and gross cash payments of operating activities, finance activities and investing activities have been recognised. Cash and cash6 OTHER equivalents comprise short term, highly liquid investments that are6.1 Earnings per Share (EPS) readily convertible to known amounts of cash and are subject to anThe Group presents Basic and Diluted Earnings per Share (EPS) insignificant risk of changes in value. The cash and cash equivalentdata for its ordinary shares. Basic EPS is calculated by dividing the include cash in hand, balances with banks, placements with banks,profit or loss attributable to ordinary shareholders of the Bank by money at call and short notice.the weighted average number of ordinary shares outstanding duringthe period. Diluted EPS is determined by adjusting the profit or loss 6.4 Changes in Accounting Policies and Disclosures:attributable to the ordinary shareholders and the weighted average New and Amended Standards and Interpretationsnumber of ordinary shares outstanding for the effects of all dilutivepotential ordinary shares, which comprise share options granted to Sri Lanka Accounting Standard – LKAS 19 (Employeeemployees. Benefits) The Bank and the Group applied, for the first time, Sri Lanka6.2 Segment Reporting Accounting Standard - LKAS 19 (Employee Benefits) and thisAn operating segment is a component of the Group that engages necessitates restatement of previous Financial Statements.in business activities from which it may earn revenues andincur expenses, including revenues and expenses that relate to In accordance with the transitional provisions set out in LKAS 19,transactions with any of the Group’s other components, whose the Bank and the Group applied the Standard with retrospectiveoperating results are reviewed regularly by the chief operating effect. The opening Statement of Financial Position of the earliestdecision maker to make decisions about resources allocated to comparative period is 1st January 2012 and therefore the comparative figures have been restated with effect from 1st January 2012.240

Some of the key changes that impacted on the Financial The interest cost and expected return on plan assets usedStatements include the following: in the previous Standard was replaced with a net interest amount under LKAS 19, which is calculated by applying the All past service costs are recognised at the earlier of when discount rate to the net defined benefit liability or asset at the amendment / curtailment occurs or when the related the commencement of each Annual Reporting Period. In view restructuring or termination costs are recognised. Hence of this change, Rs 133.5 Mn was recognised as a credit to the unvested past services cost can no longer be deferred the Bank’s Retained Earnings as at 31st December 2012 to be recognised over the future vesting period. As at 1st on account of the Pension Fund and Rs 4.1 Mn was charged January 2012, the over recognition of the Pension Fund to its Retained Earnings as at that date on account of other service cost by the Bank amounted to Rs 572.6 Mn, while the Retirement Benefit Plans. unrecognised service cost on account of other Retirement LKAS 19 has been applied retrospectively with the following Benefit Plans amounted to Rs 179.3 Mn (net of tax Rs 129.1 permitted exceptions: Mn). Upon transition to LKAS 19, on 1st January 2012, the over provided service cost on Pension Fund was credited to The carrying amount of other assets has not been the Retained Earnings and under provided service cost on adjusted for changes in employee benefit costs that other Retirement Benefit Plans was charged to the Retained were included before 1st January 2012 Earnings. Sensitivity disclosures for the defined benefit obligation for comparative period (year ended 31st December 2012) have not been provided as the sensitivity analysis for 2012 has been done based on the previous Accounting Standard.Impact on profit and OCI [increase/(decrease) in profit/OCI] 2013 2012 Rs Mn Rs MnIncome Statement * 148.38Personnel Expenses * 148.38Operating profit before Value Added Tax (VAT) * (15.42)Less: Value Added Tax on Financial Services * 132.97Operating profit after Value Added Tax (VAT) * (41.55)Less: Income tax expense * 91.42Profit for the yearStatement of Other Comprehensive Income (460.57) 12.26Remeasurement gain & losses on defined benefit plans 128.96 (3.43)Deferred tax effectOther comprehensive income net of tax (331.61) 8.83Total comprehensive income for the period net of tax (331.61) 100.25 Annual Report 2013 Sampath Bank PLCAttributable to: (331.61) 100.25Equity holders of the Bank - -Non controlling interestThe transition did not have any impact on Cash Flow Statement. There is no significant impact on the basic and diluted EPS.* Impact on application of new accounting standards to the profit and loss can not be separately recognized due to practical difficulties as actuarial valuations are carried out only under new accounting standards. 241

NOTES TO THE FINANCIAL STATEMENTSImpact on equity [increase/(decrease) in net equity]: 31st December 31st December 1st January 2013 2012 2012As at Rs Mn Rs Mn Rs MnRecognition of unrecognised past service costsLess: Value Added Tax on Financial Services 93.29 553.86 393.21Consequential deferred tax impact (15.42) (15.42)Net Increase / (decrease) in equity 134.20 50.22 212.07 5.24 443.43Attributable to 543.68Equity holders of the BankNon-controlling interests 212.07 543.68 443.43 - - -6.5 Standards issued but not yet effective SLFRS 11 removes the option to account for jointly controlledThe following Sri Lanka Accounting Standards were issued by the entities (JCEs) using proportionate consolidation method. Instead,Institute of Chartered Accountants of Sri Lanka and is effective for JCEs that meet the definition of a joint venture must be accountedthe periods commencing on or after of 1st January 2014. for using the equity method.6.5.1 SLFRS 9 - Financial Instruments: Classification and The impact on the implementation of the above Standard was Measurement assessed as at the reporting date and concluded that there is no impact on the Bank’s Financial Statements.SLFRS 9, as issued, reflects the first phase of work on replacementof LKAS 39 and applies to classification and measurement of 6.5.4 SLFRS 12 - Disclosure of Interests in Other Entitiesfinancial assets and liabilities as defined in LKAS 39. SLFRS 12 includes all of the disclosures that were previously in LKAS 27 (Consolidated and Separate Financial Statements)SLFRS 9, was issued in 2012 and effective date of this standard related to consolidated financial statements, as well as all of thehas been deferred until further notice. disclosures that were previously included in LKAS 31 (Interests in Joint Ventures) and LKAS 28 (Investments in Associates).6.5.2 SLFRS 10 - Consolidated Financial Statements These disclosures relate to an entity’s interest in subsidiaries, jointSLFRS 10 replaces the portion of LKAS 27 (Consolidated and arrangements, associates and structured entities.Separate Financial Statements) that addresses the accountingfor consolidated financial statements. It also addresses the issues The impact on the implementation of the above Standard wasraised in SIC 12 (Consolidation Special Purpose Entities). assessed as at the reporting date and concluded that there is no impact on the Bank’s Financial Statements.SLFRS 10 establishes a single control model that applies to allentities including special purpose entities. The changes introduced 6.5.5 SLFRS 13 - Fair Value Measurementby SLFRS 10 will require the management to exercise significant SLFRS 13 establishes a single source of guidance under SLFRS forjudgment to determine which entities are controlled and therefore all fair value measurements. SLFRS 13 does not change when anare required to be consolidated by a parent. entity is required to use fair value, but rather provides guidance on how to measure fair value under SLFRS when fair value is requiredThe impact on the implementation of the above Standard was or permitted. Use of principles of measurement in this standard isassessed as at the reporting date and concluded that there is no currently encouraged.impact on the Bank’s Financial Statements. Pending the completion of full study of this standard, the financial6.5.3 SLFRS 11 - Joint Arrangements impact is not yet known and reasonably estimable.SLFRS 11 replaces LKAS 31 (Interests in Joint Ventures) and SIC13 (Jointly Controlled Entities).242

7 GROSS INCOME Bank GroupInterest income (Note 8.1) 2013 2012 2013 2012Fee & commission Income Rs 000 Rs 000 Rs 000 Rs 000Net trading income (Note 10)Other operating income (Note 11) 40,921,433 31,881,948 42,320,239 32,712,018 3,002,660 2,803,755 3,099,195 2,876,724 (69,735) 6,227 (69,735) 6,227 2,671,162 4,104,251 2,716,474 4,132,768 46,525,520 38,796,181 48,066,173 39,727,7378 NET INTEREST INCOME Bank Group8.1 Interest Income 2013 2012 2013 2012Placements with other banks Rs 000 Rs 000 Rs 000 Rs 000Financial investments: held for tradingLoans & receivables from other customers 215,215 367,212 215,214 387,484Other loans & receivables 4,684,190 3,051,101 4,684,190 3,051,101Interest income accrued on impaired financial assets 34,583,221 27,639,099 35,984,402 28,447,444Securities borrowed & reverse repurchase agreementsFinancial investments: held to maturity 885,619 494,010 882,209 494,298 75,777 78,717 76,690 78,717 450,503 127,655 449,399 127,945 26,908 124,154 28,135 125,029 31,881,948 32,712,018 40,921,433 42,320,2398.2 Interest Expense Bank GroupDue to other customers 2013 2012 2013 2012Term borrowings Rs 000 Rs 000 Rs 000 Rs 000Refinance borrowingsSecurities lend & repurchase agreements 24,421,479 18,217,669 24,388,404 18,210,896Due to banks 1,002,213 1,112,733 1,653,147 1,464,021Debentures 391,074 333,269 391,074 333,269 314,830 281,031 306,860 281,031 125,279 114,774 125,279 129,385 300,690 209,899 360,740 254,368 26,555,565 20,269,375 27,225,504 20,672,9708.3 Net Interest Income from Sri Lanka Government Securities Bank Group Annual Report 2013 Sampath Bank PLC 2013 2012 2013 2012 Rs 000 Rs 000 Rs 000 Rs 000Interest income 5,496,476 3,593,567 5,497,702 3,594,729Less: Interest expense 314,830 281,031 306,860 281,031Net interest income 5,181,646 3,312,536 5,190,842 3,313,698Notional tax credit on secondary market transactionsAccording to section 137 of the Inland Revenue Act No 10 of 2006, Net Interest Income of the Bank derived from the secondary markettransactions in treasury bills and treasury bonds (Interest income accrued or received on outright or reverse repurchase transactions on suchsecurities, bonds or bills less interest expenses on repurchase transaction with securities, treasury bonds or treasury bills from which suchinterest income was earned) for the period 1st January 2013 to 31 st December 2013 has been grossed up by Rs 81.995 Mn (2012:Rs 21.433 Mn) for the notional tax credit, consequent to the interest income on above instruments being subjected to withholding tax. 243

NOTES TO THE FINANCIAL STATEMENTS9 NET FEE AND COMMISSION INCOME Bank GroupTrade related services 2013 2012 2013 2012Foreign remittance related services Rs 000 Rs 000 Rs 000 Rs 000Credit & debit card servicesOther banking services 631,961 565,614 631,961 565,614 134,195 106,767 134,195 106,767 949,767 800,659 949,767 800,659 827,422 675,958 902,823 728,548 2,543,345 2,148,998 2,618,746 2,201,58810 NET TRADING INCOMENet Income / (Expense) from Financial Instruments Held for Trading & Derivative Financial Instruments Bank Group 2013 2012 2013 2012 Rs 000 Rs 000 Rs 000 Rs 000Net income / (expense) arising on: (137,377) 4,419 (137,377) 4,419Forward exchange contract revaluation gain / (loss) (Note A) 34,931 (31,072) 34,931 (31,072)Capital gain / (loss) from dealing securities & unit trusts (Note B) 32,711 32,880 32,711 32,880Income from dealing securities (Note C) (69,735) (69,735) 6,227 6,227Note A - Forward exchange contract revaluation gain/(loss) includes profit or loss arising from forward rate fluctuations.Note B - Capital gain / (loss) from dealing securities & unit trusts includes the income arising from buying & selling transactions & changes in the fair value of equity securities.Note C - Income from Dealing Securities includes the dividend received from the dealing securities.11 OTHER OPERATING INCOME Bank GroupDividend income from available for sale financial investments 2013 2012 2013 2012Income from investment securities Rs 000 Rs 000 Rs 000 Rs 000Dividend income from SubsidiariesExchange income: currency notes 31,755 35,100 31,755 35,100Exchange income: revaluation 3,825 9,141 3,825 9,141Bad debt recoveries - -Profit on disposal of property, plant & equipment 95,872 79,155Rental & other income 381,082 345,204 381,082 345,204Charges recovered 276,556 1,804,189 276,556 1,804,189Others 558,584 782,731 557,383 782,167 1,093 22,098 1,093 22,412 9,333 6,165 85,822 74,708 837,358 840,547 475,704 654,897 538,411 662,022 2,671,162 365,571 2,716,474 397,825 4,104,251 4,132,768244

12 IMPAIRMENT CHARGE / (REVERSAL) FOR LOANS AND OTHER LOSSES Group Bank 2013 2013 2012 Rs 000 2012 Rs 000 Rs 000 Rs 000To Banks (12,498) 3,819 (12,498) 3,819To other Customers - - - 744,555 Individual impairment 798,313 729,202 775,282 - Collective impairment - Pawning 3,509,121 - 3,511,230 Collective impairment - Other loans & advances (572,024) (490,649) (611,206)To other debtors (596,115) 15,000Loss on gold inventory - - 23,493 -Financial investment 34,276 - 34,276 (72,023)Impairment loss on property, plant & equipment (275,744) (275,744) - (72,023) 80,145 8,685 - 8,685 3,490,129 3,574,075 64,88313 PERSONNEL EXPENSES Bank GroupSalaries & bonus 2013 2012 2013 2012Contributions to defined contribution plan Rs 000 Rs 000 Rs 000 Rs 000Contributions to defined benefit planOthers 3,441,193 3,153,418 3,660,543 3,302,432 378,088 332,695 396,918 345,700 142,777 128,217 145,343 127,557 455,045 394,976 469,436 405,227 4,417,103 4,009,306 4,672,240 4,180,91614 OTHER OPERATING EXPENSES Bank 2012 Group 2012 Rs 000 Rs 000Directors’ emoluments 2013 2013Auditors’ remuneration (Note 14.1) Rs 000 Rs 000Professional & legal expensesDepreciation of property, plant & equipment 42,791 37,985 59,144 51,179 Annual Report 2013 Sampath Bank PLCAmortisation of intangible assets 19,818 18,192 23,728 21,796Deposit insurance premium 66,065 61,868 87,452 70,877Donations 522,759 535,656 563,343 587,859Office administration & establishment 47,270 43,567 52,904 47,163Others 304,680 260,021 304,680 260,021 54,009 54,011 2,766,360 3,922 2,652,257 3,924 2,392,834 2,127,578 2,596,287 2,127,578 6,216,586 2,150,305 6,393,806 2,118,864 5,239,094 5,289,261 245

NOTES TO THE FINANCIAL STATEMENTS14 OTHER OPERATING EXPENSES CONTD. Bank Group14.1 Auditors’ Remuneration 2013 2012 2013 2012Audit fees & expenses Rs 000 Rs 000 Rs 000 Rs 000Audit related fees & expensesNon - audit expenses 8,871 8,544 12,516 10,759 6,283 5,618 6,283 5,618 4,664 4,030 4,929 5,419 19,818 18,192 23,728 21,79615 INCOME TAX EXPENSES Bank GroupIncome taxation 2013 2012 2013 2012 - Taxation based on profits for the year (Note 15.1) Rs 000 Rs 000 Rs 000 Rs 000 - (Over) / under provision in respect of previous year 1,978,564 2,189,860 2,052,403 2,234,650Deferred taxation (354,769) (43,600) (354,769) (50,492) - Transfers to / (from) deferred taxation (Note 15.2) 1,623,795 1,697,634 2,146,260 2,184,158Total tax charge (562,835) (546,334) 1,060,960 23,897 1,151,300 28,902Effective tax rate 2,170,157 2,213,060Effective tax rate (excluding deferred tax ) 23.6% 24.0% 36.2% 29.3% 35.4% 28.9% 29.0% 28.5%15.1 Reconciliation of the Accounting Profit to Income Tax ExpenseA reconciliation between the taxable income and the accounting profit multiplied by income tax rate for the years ended 31st December 2013and 2012 is given below: Bank Group 2013 2012 2013 2012 Rs 000 Rs 000 Rs 000 Rs 000Profit before tax 4,491,427 7,400,640 4,788,965 7,653,084Add: Disallowable expenses 4,767,176 2,086,294 4,877,731 2,131,400Less: Tax deductible expenses (1,207,092) (960,133) (1,344,861) (1,076,489) (985,210) (705,870) (889,338) (620,525) Exempt income (114,482) Elimination of profit liable for Turnover based tax - - (86,449) 7,972,988Adjusted profit / (loss) for tax purposes 7,066,301 7,820,931 7,346,048Income from other sources 1,326Assessable income - - 1,368 7,974,314Less: Qualifying payments 7,066,301 7,820,931 7,347,416 Tax losses (50,417)Net taxable income - - - -Taxable losses carried forward to future periods - - (71,855)Taxable income 7,066,301 7,820,931 7,275,561 7,923,897 - - 41,764 43,440 7,066,301 7,820,931 7,317,325 7,967,337Turnover liable for income tax - - 177,580 189,823Income tax @ 28% 1,978,564 2,189,860 2,048,851 2,230,854Income tax @ 2% on liable turnover - - 3,552 3,796Income tax on current year’s profit 1,978,564 2,189,860 2,052,403 2,234,650246

15.1.1 Applicable Rates of Tax 2013 2012Income tax on Sampath Bank 28% 28%Income tax on S C Securities (Pvt) Ltd. 28% 28%Income tax on Siyapatha Finance Ltd 28% 28%Income tax on Sampath Information Technology Solutions Ltd 28% 28%15.1.2 Income Tax on Sampath Centre Ltd.Sampath Centre Ltd, is a company approved under BOI Law and the company was exempted from taxation for a period of seven yearscommencing from the first year of assessment. The first year of assessment is the year in which the company commenced making profitsin relation to its transactions in that year, or any year of assessment not later than five years from the date of its first commercial operations,whichever is earlier. Accordingly, Sampath Center Ltd is liable for taxation at the rate of 2.0% of the rental income commencing from the yearof assessment 2006 / 2007. Income other than rental income is liable for tax at 28%.15.1.3 Notional Tax Credit on Secondary Market TransactionsAny company which derived income from the secondary market transactions involving any security or treasury bonds or treasury bills on whichthe income tax has been deducted at the rate of 10% at the time of issue of such security, such company is entitled to a notional tax creditat 10% of the grossed up amount of net interest income from such secondary market transaction to an amount of one ninth of the same.Accordingly, the net interest income earned by the Bank from above transactions has been grossed up in the Financial Statements for the yearended 31st December 2013 and the notional tax credit amounts to Rs 81.995 Mn (2012 Rs 21.433 Mn).15.2 Deferred Tax Expense / (Income )The following table shows deferred tax expense recorded in the Income Statement arising from changes in the deferred tax assets and liabilities. Bank 2012 Group 2012 Rs 000 Rs 000 2013 2013 Rs 000 Rs 000Deferred tax liability 115,693 1,657 105,037 6,376Depreciation of property, plant & equipment 65,161 33,320 95,146 36,782Depreciation of lease assets 34,977 43,158 180,854 200,183Deferred tax asset 721,047 - 730,281 - Annual Report 2013 Sampath Bank PLCUnclaimed impairment provision - loans & receivables - - - (59,282)Unclaimed impairment provision - investment - 62,747Tax losses 12,629 7,866 5,450Defined benefit obligation 24,816 3,214 25,589 7,578Others (14,803) 11,080 (14,803) 3,213 743,689 23,897 746,517 14,256Deferred tax expense for the year (562,835) (546,334) 28,902 247

NOTES TO THE FINANCIAL STATEMENTS16 EARNINGS PER ORDINARY SHARE16.1 Earnings per Share: BasicBasic Earnings per Share has been calculated by dividing the profit for the year attributable to equity holders of the Bank by the weightedaverage number of ordinary shares on issue during the year, as per Sri Lanka Accounting Standard - LKAS 33 ( Earnings per Share). Group 2012 2013Amount used as the numerator 3,634,957,281 5,436,681,587Profit for the year of the Group attributable to equity holders (Rs)No of ordinary shares used as the denominator 167,738,569 166,912,785Weighted average number of ordinary shares (Note 16.1.1) 21.67 32.57Basic earnings per ordinary share (Rs )Weighted average number of ordinary sharesWeighted average number of ordinary shares held as at 31st December 2012 was 161,996,778. However, it was restated as 166,912,785 inthe comparative column as the change in number of ordinary shares due to final scrip dividend paid for 2012 does not effect a correspondingchange in resources.16.1.1 Weighted Average Number of Ordinary Shares for Basic EPS 2013 Outstanding Group Outstanding Weighted 2012 Average Weighted AverageNumber of shares held as at 1st January 162,736,665 162,736,665 156,854,190 156,854,190Add: Number of shares issued due to final scrip dividend 2011 - - 3,682,039 3,682,039Add: Number of shares issued due to final scrip dividend 2012 4,916,007 4,916,007 4,916,007 4,916,007Add : Number of shares issued under ESOP 2010 167,652,672 167,652,672 165,452,236 165,452,236Number of shares held as at 31st December 2,200,436 1,460,549 134,933 85,897 167,787,605 167,738,569 167,652,672 166,912,78516.2 Earnings per Share: Diluted Group 2012 2013Amount used as the numeratorProfit for the year of the Group attributable to equity holders (Rs) 3,634,957,281 5,436,681,587No of ordinary shares used as the denominatorWeighted average number of ordinary shares (Note 16.2.1) 167,856,022 167,096,644Diluted Earnings per Ordinary Share (Rs) 21.66 32.54248