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  Accounting Policies
  The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below.
The consolidated financial statements are prepared in accordance with and comply with Sri Lanka Accounting Standards. The consolidated financial statements are prepared under the historical cost convention. Where any item is not covered by Sri Lanka Accounting Standards (SLAS), International Accounting Standards (IAS) are followed.

  1. Subsidiary undertakings
    Subsidiary undertakings, which are those entities in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, have been consolidated. Consolidated financial statements are prepared from the date on which effective control is transferred to the Group and are no longer consolidated from the date of cessation of such control through disposal or otherwise. All intercompany transactions, balances and unrealised surpluses and deficits on transactions between group companies have been eliminated. The accounting policies of the subsidiary are the same as those of the Company. No disclosure of minority interest is made as the subsidiary is wholly owned. The Group repoting dates are set out in Note 22.

  2. Associated undertakings
    Investments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which the Group has between 20% and 50% of the voting rights, and over which the Group exercises significant influence, but which it does not control.

    Equity accounting involves recognising in the Income Statement the Group’s share of the associates’ profit or loss for the year. The Group’s interest in the associate is carried in the Balance Sheet at an amount that reflects its share of the net assets of the associate. The Group’s principal associated undertaking is shown in Note 11.
Foreign currency transactions in Group companies are accounted for at the exchange rates prevailing at the date of the transactions: gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the Income Statement. Such balances are translated at year-end exchange rates unless hedged by forward foreign exchange contracts, in which case the rates specified in such forward contracts are used. All other gains and losses are recognised in the Income Statement to the extent that they are regarded as an adjustment to borrowing cost.

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s shares of the net assets of the acquired subsidiary undertakings at the date of acquisition and is written off in equal amounts, over a period of five years commencing from the date of acquisition.

The carrying amount of goodwill is reviewed annually and written down for permanent impairment where it is considered necessary.

Property, plant & equipment is carried at cost less accumulated depreciation, less a provision for any permanent diminution in value.

Cost includes all costs directly attributable to bringing an asset to working condition for its intended use. Cost in the case of the network comprises all expenditure up to and including the cabling within customers’ premises, undersea cables, contractors’ charges and payments on account of materials, customs duty and borrowing costs. Significant renovations are capitalised if they extend the life of the asset beyond its originally estimated useful life or increase its recoverable value. Maintenance, repairs and minor renewals are charged to income as incurred.

The cost of property, plant & equipment that are disposed of are eliminated from the Balance Sheet, along with the corresponding accumulated depreciation. Any gain or loss resulting from such disposal is included in current income. Gains and losses on disposal of property, plant & equipment are determined by reference to their carrying amount and are taken into account in determining operating profit.

The basis of valuation used on the transfer of assets from SLT to SLTL is explained in Note 9 to the financial statements.

Depreciation is calculated using the most appropriate method to write off the cost of each asset to their residual values over their estimated useful lives. The depreciation methods and useful lives are shown in Note 9 to the financial statements.

Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.

Interest costs on borrowings to finance the construction of property, plant & equipment are capitalised, during the period of time that is required to complete and prepare the property for its intended use, as part of the cost of the asset.

Long-term investments are shown at cost and provision is only made where, in the opinion of the Directors, there is a permanent diminution in value. Where there has been a permanent diminution in the value of an investment, it is recognised as an expense in the period in which the diminution is identified. On disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the Income Statement.

All inventories are held to be used by the Company in providing its services. Inventories are stated at the lower of cost and net realisable value. For this purpose, the cost of inventories is based on the standard cost, which is reduced by the corresponding price variance at the year end. Cost is calculated on a first in first out basis. Provision is made for slow-moving and obsolete inventories, which are not expected to be used internally.

Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts at the year end. Bad debts are written off once decided as irrecoverable after due recovery procedures.

For the purpose of the Cash Flow Statement, cash & cash equivalents comprise cash in hand, deposits held at call with banks, other short-term highly liquid investments.

Dividends on ordinary shares are recognised in equity in the period in which they are declared.

Insurance premium paid by the Company to secure foreign loans under the 150K Project Scheme has been deferred on the grounds that the benefit of this expenditure is not exhausted in the period in which it is incurred and will be written off to the Income Statement over the repayment period of the loans.

Borrowing costs are written off to the Income Statement as incurred, unless they relate to borrowings which fund significant capital projects, in which case they are capitalised with the relevant qualifying asset up to the date of commissioning, and written off to the Income Statement over the period during which the asset is depreciated. Borrowing costs include interest charged, commitment fees, guarantee premium and exchange differences on foreign loans to the extent that they are regarded as an adjustment to interest costs.

Taxes on income are accounted for using the liability method. Under this method the expected tax effect of temporary differences between the figures used for financial reporting and income tax reporting purposes are recorded as deferred taxes at the rates that are expected to apply when the temporary differences reverse.

Deferred income tax is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax.

Under this method the Group is required to make provision for deferred income taxes on revaluations, if any, of non current assets and, in relation to an acquisition, on the difference between the fair values of the net assets acquired and their tax base. Provision for taxes, mainly withholding taxes, which could arise on the remittance of retained earnings, principally relating to subsidiaries, is only made where there is a current intention to remit such earnings.

The principal temporary differences arise from depreciation on property, plant & equipment, revaluations of certain non-current assets, provisions for retirement benefits and tax losses carried forward. Deferred tax assets relating to the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable profit will be available against which the deferred tax assets can be utilised.

SLTL as a matter of policy obtains an actuarial valuation of the retirement benefit liability once in three years.

An actuarial valuation was carried out by an independent professional valuer to ascertain the full liability arising in terms of the Payment of Gratuity Act No. 12 of 1983, in respect of all employees of SLTL as at 31 December 2003. The valuation was made adopting the Projected Unit Credit Method as recommended by the Sri Lanka Accounting Standards No. 16, Retirement Benefit Costs.

The assumptions based on which the results of the actuarial valuation was determined, are included in Note 20 to the financial statements. The liability is not funded externally.

All employees of the Company are members of the Employees’ Provident Fund of SLTL and the Employees’ Trust Fund to which SLTL contributes 15% and 3% respectively of such employees’ basic salary and allowances.

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.

Revenue is recognised on an accrual basis when it is probable that the economic benefits will flow to the Company and the revenue and associated costs can be reliably measured. Revenue is measured at the amount of consideration net of discounts and taxes.

The specific criteria used for recognition of revenue are as follows:

  1. Domestic and international call revenue and rental income
    The customers are billed for calls and rental on monthly cycle based on the calendar months. Customers are charged Government taxes at the applicable rates but accounted for as a liability. Revenue is recognised net of such taxes based on the amounts billed.

  2. Revenue from other network operators and international settlements
    Revenue is received from other network operators, local and international, for the use of SLTL network for completing connections. These revenues are recognised, net of taxes, based on traffic minutes and stipulated rates.

  3. Revenue from other telephony services
    Revenue is recognised on an accrual basis based on the usage of these services.

  4. Connection fees
    These are initially recognised as deferred income and subsequently recognised as revenue by amortising over a period of 15 years.

  5. Equipment sales
    Revenue on equipment sales is recognised, net of taxes, on completion of sales transaction.

  6. Interest income
    Interest income is derived from short-term investments of excess funds and is recognised on an accrual basis.

Expenses are recognised on accrual basis. All expenditure incurred in the running of the business and in maintaining property, plant & equipment in a state of efficiency has been charged to income in arriving at the profit for the period.

For the purpose of presentation of the Income Statement information nature of expense method is used.

The Company hedges a portion of exchange risks of loans obtained in foreign currency using future net foreign earnings.

The Company hedges between 50% to 75% of anticipated net foreign earnings for 5 years. Approximately 75% (2002 - 75%) of projected net foreign earnings qualified as ‘highly probable' for which hedge accounting was used in 2003.

The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategies for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to forecast transactions. The Company also documents its assessment, both at the hedge inception and on an on going basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.
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