Significant Cases Detected

Kapila Heavy Equipments Limited had not made provisions for other than temporary decline in value of investments is in its subsidiaries, Walker Sons & Co. (Engineering) Ltd., and Walker Sons & Co. (Distributors) Ltd., totalling to Rs. 5 mn in the financial statements for the year ended 31st March 2004. The auditors, D H P Munaweera & Co. had not qualified their report in this respect.

On an agreement reached with the Board, Kapila Heavy Equipments Limited made the appropriate provisions in the Company’s separate financial statements for the year ended 31st March 2005

During the year ended 31 March 2003 Kelani Tyres Limited (KTL) accounted for results of its joint venture under equity method. When doing so, results of the subsidiaries of the joint venture were recognised under equity method (instead of using consolidated results). This has resulted in losses of Rs. 30 million not being absorbed, which in turn, resulted in overstatement of net assets of the joint venture by Kelani Tyres Limited. Auditors had not qualified their audit report in this regard.

KTL with consultation of the Urgent Issues Task Force of the Institute of Chartered Accountants of Sri Lanka, gave an undertaking to Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) that the appropriate accounting treatment would be adopted for the financial statements for the year ended 31 March 2004.

However, when the Company presented its financial statements for the year ended 31 March 2004 adopting the appropriate accounting treatment, the audit report contained a qualification disagreeing with it. Therefore, the Auditors, PricewaterhouseCoopers were issued a letter of warning by SLAASMB.

The Company had overstated the net assets by Rs. 31 million in the financial statements for the year ended 31 March 2004 by not converting foreign currency loans and interest payable at the closing rate, not writing off preliminary and pre-operational expenses to the Income Statement and carrying finished goods at a valuation in the Balance Sheet. The auditors, Carter de Costa & Co. had not qualified their reports in this respect.

Despite Radiant Gems International Limited giving an undertaking to the Board to make the appropriate adjustments in the financial statements for the year ended 31 March 2005, the Company had adjusted only the foreign currency liabilities in the financial statements for the year ended 31 March 2005. On a subsequent undertaking obtained from the Company, the other adjustments were made in the financial statements for the year ended 31 March 2006.

The Board issued a direction to Senkadagala Finance Company Limited to send a notification to all parties who received the annual audited financial statements explaining a related party transaction that was not adequately disclosed in their financial statements.

In response to an inquiry made by the Board, the Company informed that it disposed 300,000 shares of Senkadagala Hotels Limited at Rs. 15.50 per share during the year ended 31st March 2003 to a related party.  The Company also informed the Board of its intention of selling a further 400,000 shares to the same related party during the year ended 31st March 2004 at the same price.  By selling the said shares the Company had made a book profit of Rs. 1.31million in the year ended 31st March 2003.  However, part of the investment in above shares is valued at Rs. 50 per share, which is significantly higher than the price the shares were sold for.  On further inquiries made by the Board, the Company informed that Rs. 15.50 is the forced sale value of disposing these shares in order to comply with regulatory requirements and Rs. 50 is the share valuation based on the market value of the assets of the investee company.

Since the above information was not adequately disclosed in the financial statements for the year ended 31st March 2003, the Board issued a direction to the Company to send a notification to all parties who received the annual audited financial statements explaining the above related party transaction.

1st media release – on 26th April 2006

The Sri Lanka Accounting and Auditing Standards Monitoring Board has determined that the estimates of fair value of biological assets used by Touchwood Investments Limited in its financial statements for the years ended 31 March 2005 and 31 March 2006 are clearly unreliable. The Company has also not been able to provide the Board with any other estimates which are reliable. Further, the method of valuation used for the year ended 31 March 2005 was not in accordance with International Accounting Standard, IAS 41 Agriculture, which the company has purportedly adopted.

As the company has purportedly adopted International Accounting Standard, IAS 41 Agriculture, the Board has concluded that the biological assets should have been valued at a value which approximates cost in accordance with paragraph 24 (b) of IAS 41 or at cost less accumulated impairment in accordance with paragraph 30 of IAS 41. Based on such valuation the company would not show a net profit for the relevant financial periods.

As the impact on the financial statements is substantial the Board has decided to refer the non-compliance to the Attorney General. The Board has also decided to investigate the compliance with auditing standards by the auditors in relation to the audit of the financial statements of the Company.

2nd media release – 19th March 2007

Sri Lanka Accounting and Auditing Standards Monitoring Board (SLAASMB) has noted a media release reported to have been issued by Touchwood Investments Limited. SLAASMB has also observed an article titled “SLAASMB’s ruling on Touchwood challenged.” SLAASMB has also received inquiries from stakeholders relating to the level of unreliability of the valuations.

In response, SLAASMB clarifies that the method of valuation used by Touchwood Investments Limited for the year ended 31 March 2005 was not in accordance with International Accounting Standard, IAS 41 Agriculture. The model used for valuation in respect of the year ended 31 March 2006 gives a valuation in excess of Rs.5,000 per plant at the time of planting, whereas the replacement cost is likely to be around Rs 500. The standard indicates that cost may approximate fair value, particularly when the impact of the biological transformation on price is not expected to be material. In this connection IAS 41 provides the example of the initial growth in a 30-year pine plantation production cycle.

Touchwood Investments Limited were also not able to justify the discount rate of 12% per annum used to discount the proceeds on maturity of the trees even though the model is highly sensitive to the discount rate used. In comparison the rate used by Touchwood Investments Limited to discount future expenses is 22% per annum, and the weighted average cost of  contracts entered in to by Touchwood Investments Limited is even higher. IAS 41 requires the use of a market determined pre-tax rate to discount the net cash flow. In addition IAS 41 requires the entity to use a discount rate which excludes any increases in value from additional biological transformation and future activities of the entity. The standard also requires the possibility of variation in cash flows to be recognized in determining the discount rate and the expected cash flows.

Having considered the relevant factors and the explanations provided by Touchwood Investments Limited SLAASMB has determined that the estimates of fair value of biological assets used by Touchwood Investments Limited in its financial statements for the years ended 31 March 2005 and 31 March 2006 are clearly unreliable.

SLAASMB is the statutory authority in Sri Lanka to monitor compliance with Accounting Standards and Auditing Standards in relation to listed companies and other specified business enterprises in Sri Lanka.

When reviewing the financial statements for the year ended 31st March 2000, the Board noted that the Company had not provided for depreciation in respect of Furniture, Fixtures and Fittings, and Soft Furnishings / Base Stock, but had maintained a replacement reserve to meet the cost of replacement. The auditors had not qualified their report in this respect.

As a result of the inquiries made by the Board, the company agreed to provide for depreciation with effect from the dates of acquisition and to reflect the same in financial statements issued thereafter. The additional depreciation charge made by the Company in respect of the year ended 31st March 2000 as a result of the agreement was Rs.20 Million, and in respect of prior years Rs. 174 Million. The Company reversed transfers to the replacement reserve made in year ended 31st March 2000 of Rs. 38 Million, and transfers made in prior years of Rs. 164 Million.

10. W.M. Mendis & Company Limited

W.M. Mendis & Company Limited had not issued consolidated financial statements for the year ended 31st March 2003, consolidating the financial statements of Mendis Carbon (Pvt) Limited which became a subsidiary during the year.  The auditors have not qualified their report in this respect.

Users of the financial statements of a parent of a group of companies need to be informed about the financial position, results of operations and changes in financial position of the group as a whole.  This need is served by consolidated financial statements.

Company agreed to consolidate the financial statements of Mendis Carbon (Pvt) Limited and to issue consolidated financial statements of W.M. Mendis & Company Limited for the year ended 31st March 2004.