Financial Times

NTB annual report in a mess: shareholders forgo dividends
Nations Trust Bank (NTB), the banking subsidiary of Sri Lanka’s largest conglomerate John Keells Holdings (JKH) denied its shareholders entitlement to receive a dividend for the year ended December 31, 2005 by misinterpreting the accounting treatment for goodwill and the Banking Act in its latest annual report released to the shareholders, stockmarket analysts said.

Ajit Gunewardene, Chairman of the Bank in his statement to the shareholders stated that “the bank has merged with Mercantile Leasing Limited (MLL) which resulted in the increase in goodwill, a tangible assets to Rs. 232 million.
As a result the bank cannot declare a dividend while it has intangible assets on its balance sheet as per the Banking Act”. We expect to write-off goodwill during the course of the new financial year and pay dividend thereafter.”
However, the analysts said, the merger with the MLL in fact took place only in January 2006 and not in the financial year ended December 31, 2005. This fact has been clearly stated in the notes to the financial statements as well as confirmed by the directors in their director’s report as “post balance sheets events”.

The directors report states that “the merger of the MLL with NTB took place with effect from January 1, 2006, with court sanction” with the same details also mentioned in note number 32 to the financial statements as a post balance sheet event. This confirms the accounting treatment for the merger does not affect the financial statement released for the year 2005.
According to Sri Lanka Accounting Standards (SLAS) “Post balance sheet events” are the events, both favourable and unfavourable, that occur between the balance sheet date and the date on which the financial statements are authorized for issue.

Assets and liabilities should not be adjusted for, but disclosure should be made of those events occurring after the balance sheet date that does not affect the conditions of assets or liabilities at the balance sheet date.

This is important since the non disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions. Accordingly since the merger with MLL took place in January 1, 2006 it does not constitute an adjustment in the financial statements for the year ended December 31, 2006. This eventually rules out the claim made by the chairman as above.

According to Section 22 of the Banking Act No 30 of 1998 and the amendments thereafter, “no licensed commercial bank incorporated established within Sri Lanka by or under any written law shall pay any dividend on its shares until all its capitalized expenses, including preliminary expenses and other items of expenditure not represented by tangible assets, have been completely written off”. This section cannot be applied in the MLL merger as it does bring any adjustment in the financial statements for goodwill.

A further investigation into the prior year accounts of the Bank reveals that the bank has also contravened the Banking Act by paying dividends amounting to Rs. 42.5 million in 2003, when its audited financial statements showed an unwritten off goodwill amounting to Rs. 77 million in the same year.

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