NATIONAL AUDIT OFFICE ae so. I. -uDf a60. LCom My No. INF/B/05/1RCSL/AR/2022 Your No. o August 2023 2 8AUG 2023 Chairman . Insurance Regulatory Commission of Sri Lanka RLCEIVED Report of the Auditor General on the Financial Statements and Other Legal and Regulatory Requirements of the Insurance Regulatory Commission of Sri Lanka for the year ended 31 December 2022 in terms of Section 12 of the National Audit Act, No. 19 of 2018. 1. Financial Statements 1.1 Opinion The audit of the financial statements of the Insurance Regulatory Commission of Sri Lanka ("Commission") for the year ended 31 December 2022 comprising the statement of financial position as at 31 December 2022 and the statement of financial performance, statement of changes in net assets and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, was carried out under my direction in pursuance of provisions in Article 154(1) of the Constitution of the Democratic Socialist Republic of Sri Lanka read in conjunction with provisions of the National Audit Act No. 19 of 2018 and Finance Act No. 38 of 1971. My report to Parliament in pursuance of provisions in Article 154(6) of the Constitution will be tabled in due course. In my opinion, the accompanying financial statements give a true and fair view of the financial position of the Company as at 31 December 2022 and of its financial performance and its cash flows for the year then ended in accordance with Sri Lanka Public Sector Accounting Standards. 1.2 Basis for Opinion I conducted my audit in accordance with Sri Lanka Auditing Standards (SLAuSs). My responsibilities, under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of my report. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. joc 306/72, son) Pn. n den6 @. Q game o. 30672. QuT(Wjo .4. u .irp s,. .amranj W No. 306/72, Poidu-a Road, Bauaramuola Sd L-nk. +94 11 2 88 70 28 - 34 +94 11 2 88 72 23 Q ag@auditorgeneraL.ga.lk O -naosi.gov.1k 1.3 Other information included in the Commission's 2022 Annual Report. The other information comprises the information included in the Commission's 2022 Annual Report but does not include the financial statements and my auditor's report thereon, which is expected to be made available to me after the date of this auditor's report. Management is responsible for the other information. My opinion on the financial statements does not cover the other information and I do not express any form of assurance conclusion thereon. In connection with my audit of the financial statements, my responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or my knowledge obtained in the audit or otherwise appears to be materially misstated. When I read the Commission's 2022 Annual Report, if I conclude that there are material misstatements therein, I am required to communicate that matter to those charged with governance for correction. If further material uncorrected misstatements are existed those will be included in my report to Parliament in pursuance of provisions in Article 154(6) of the Constitution that will be tabled in due course. 1.4 Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Public Sector Accounting Standards, and for such internal control as management determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Commission's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Commission or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Commission's financial reporting process. As per Section 16(1) of the National Audit Act No. 19 of 2018, the Commission is required to maintain proper books and records of all its income, expenditure, assets and liabilities, to enable annual and periodic financial statements to be prepared of the Commission. 1.5 Auditor's Responsibilities for the Audit of the Financial Statements My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sri Lanka Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Sri Lanka Auditing Standards, I exercise professional judgment and maintain professional scepticism throughout the audit. I also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting,,a material misstatement resulting from fraud,is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Commission's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management. * Conclude on the appropriateness of the management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Commission's ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor's report. However, future events or conditions may cause the Commission to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. I communicate with those charged with governance regarding, among other matters, significant audit findings, including any significant deficiencies in internal control that I identify during my audit. 2. Report on Other Legal and Regulatory Requirements 2.1 National Audit Act, No. 19 of 2018 includes specific provisions for following requirements. 2.1.1 I have obtained all the information and explanation that required for the audit and as far as appears from my examination, proper accounting records have been kept by the Commission as per the requirement of section 12 (a) of the National Audit Act, No. 19 of 2018; 2.1.2 The financial statements presented is consistent with the preceding year as per the requirement of section 6 (1) (d) (iii) of the National Audit Act, No. 19 of 2018. 2.1.3 The financial statements presented includes all the recommendations made by me in the previous year as per the requirement of section 6 (1) (d) (iv) of the National Audit Act, No. 19 of 2018. 2.2 Based on the procedures performed and evidence obtained were limited to matters that are material, nothing has come to my attention; 2.2.1 to state that any member of the governing body of the Commission has any direct or indirect interest in any contract entered into by the Commission which are out of the normal cause of business as per the requirement of section 12 (d) of the National Audit Act, No. 19 of 2018; 2.2.2 to state that the Commission has not complied with any applicable written law, general and special directions issued by the governing body of the Commission as per the requirement of section 12(f) of the National Audit Act, No. 19 of 2018 except for; Reference to law/ Description direction (a.) Inland Revenue Act No. The Commission is liable to pay income tax for 24 of 2017 surplus of the Policy- Holder's Protection Fund. However, the commission had not paid income tax since 2018. Therefore, Inland Revenue Department had charged a penalty and the interest over non- payment of income tax for the Year of Assessments of 2018/19 to 2022/23. The total tax liability as of 31 December 2022 was Rs. 909,009,476. (b.) Guideline 2.2.2 (a.) (i.) of The Chairman shall ensure that proper proceedings the Guidelines on are followed during the meetings of the Corporate Governance for Commission. However, the audit has not been State Owned Enterprises provided a documented policy for proceedings of the 2021 meetings in terms of the paragraph 4 (3) and first schedule to the Regulation of Insurance Industry Act No. 43 of 2000. (c.) Guideline 2.2.2 (b) (vi.) The Commission must enter into a performance of the Guidelines on contract with the Director General (DG) which is a Corporate Governance for reflection of the Strategic Plan, against which the State Owned Enterprises DG's performances must be evaluated annually and 2021 the incentives including bonuses must be decided. However, the Commission had not entered into a performance agreement with the DG. Further, it was observed that, annual performance appraisal of the DG had not been carried out by the Commission. Instead, it had been carried out by the Chairman alone and paid performance incentive for the year under review. This may lead to poor division of responsibilities and accountability between two powerful positions in the commission. (d.) Guideline 2.4 of the The members of the Commission should Guidelines on Corporate individually declare their relationship, annually to Governance for State the Secretary to the Board using the format given in Owned Enterprises 2021 the Annexure II to the guideline. However, such a declaration had not been declared by the members of the Commission for the year under review. (e.) Guideline 2.6 of the The board secretary is mainly responsible for Guidelines on Corporate guiding the board on the discharge of its Governance for State responsibilities and should ensure that all procedures Owned Enterprises 2021 are followed in compliance with statutory requirements and industry best practices and must possess the required qualifications stipulated in the guideline. Further, any employee already engaged in another function, should not be appointed as Board Secretary and Board Secretary shall function as the Secretary to Board sub-committees. However, there is no qualified secretary for the Commission. At present, the Director Investigation is functioning as Secretary to the Commission and Assistant Director - Legal is the Secretary to the Audit Committee in addition to their permanent responsibilities in contrary to the guideline. (f.) Guideline 4.2(d.) of the The Chief Internal Auditor (CIA) of the Line Guidelines on Corporate Ministry could serve as observer of the Audit Governance for State Committee. However, the CIA of the line ministry Owned Enterprises 2021 had not been invited to the Audit Committees for the year 2022. (g.) Guideline 4.2(h.) of the The Audit Committee (AC) should meet at least Guidelines on Corporate once in three months. However, it was observed that Governance for State the Commission had not conducted Audit Owned Enterprises 2021 Committees on regular basis throughout the year under review. This was occurred mainly due to non- availability of a Board Secretary to the Commission with required qualifications in terms of the Section 2.6 of the Guideline. (h.) Section 7 of the Chapter Although the provisions had been made for granting XXIV of the loans through the banks for the purchase of vehicles Establishment Code of for executive category employees, vehicle loans the Government of the amounting to Rs. 1,200,000 had been provided to an Democratic Socialist employee from the commission funds during the Republic of Sri Lanka year under review at the interest rate of 4.2 percent and 9 percent respectively for Rs. 600,000 each tranche, (i.) Article 40 of the National Every auditee entity shall have its own Internal Audit Act No.19 of 2018 Auditor, who is to perform an internal audit duly appointed by the governing body of such auditee entity. Where an Internal Auditor has not been appointed under subsection (1), such appointment shall be made within a period not exceeding two years from the date of operation of this Act. However, an internal auditor had not been appointed by the Commission for the year under review. (j.) Management Services The Circulars instructed that all ministries and other Circular No. 03/2018 relevant authorities should refrain from recruiting dated 18 July 2018 and employees and increasing the salaries and cadres Section 3 of the without prior approval from the General Treasury. Operational Manual for However, one (01) Director, thirteen (13) State Owned Enterprises Managers/Assistant Managers and one (01) Secretary positions had been filled without the approval of the Department of Management Services, General Treasury. 2.2.3 to state that the Commission has not performed according to its powers, functions and duties as per the requirement of section 12(g) of the National Audit Act, No. 19 of 2018 except for; (a.) A performance incentive from the year 20 10 had been paid without approval of the General Treasury. (b.) As per the scheme, incentive payment basis of one (01) month basic salary had been changed to one and half months (1 72) gross salary from the year 2019 onwards without obtaining the approval of the General Treasury. Due to this, the total incentive payment had been increased by Rs. 4,605,381 which is 105 per cent more compared to the previous year. Further, all employees had earned 100 per cent marks for the final evaluation. Therefore, it does not seem that the realistic performance evaluation had been carried out by the commission. 2.2.4 to state that the resources of the Commission had not been procured and utilized economically, efficiently and effectively within the time frames and in compliance with the applicable laws as per the requirement of section 12(h) of the National Audit Act, No. 19 of 2018 except for; (a.) The official activities of the Commission were carried out at an external building, and a sum of Rs. 47,178,758 has been paid in the year 2022 (2021 - Rs. 44,631,663) as lease rent of the building, It was observed that the lease rent had been increased by 6 per cent when compared to the previous year. The commission had rented in 8741 square feet and had incurred Rs. 351 and Rs. 78 per square feet as rent and service charge respectively. Further, the percentage of the lease rent of the building represented 22 per cent of the total expenditure or 13 per cent of the total income for the year 2022. (b.) The Commission is supposed to be an entity, which needs to be closely dealing with public in performing its role as per the Insurance Industry Regulation Act No. 43 of 2000. However, its current location, culture and the entry doors being under strict security conditions make it difficult for the vulnerable general public to access them. Further, it was observed that their website and all the information (except policyholder complaints page) only in English language. Therefore, the Commission had not complied with the official language policy of the Chapter IV of the Constitution of the Democratic Socialist Republic of Sri Lanka. Therefore, it seems that, it may very difficult for the vulnerable groups such as differently abled, IT illiterate persons and persons who has language issues to get the services of the Commission. 2.3 Other Matters (a.) The insurance core principles (ICPs) are globally accepted framework of principles developed by the International Association of Insurance Supervisors (IAIS). Those principles are key to assess the quality of regulatory and supervisory function of the insurance regulators and use as a framework to introduce regulations for the insurance sector in the country. As a member of the IAIS, the Commission had paid Rs. 5,999,664 as a membership fee for the year 2022. The information had been requested during the audit in the year 2021 to identify the way of compliance with insurance core principles by the Commission. However, the requested information had not been submitted for the audit. (b.) The Commission had transferred surplus of the funds of the Commission to the Policy Holders Protection Fund for the respective years until 2020. However, this policy had been suddenly changed in the year 2021 and the surplus of the commission funds had been carried forward as accumulated fund. However, the approval of the Commission in this regard had not been submitted to the audit. (c.) Financial Sector Modernization Project (i.) The amount of USD 945,450 (SDR. 0.67 million) had been allocated for the segregation of National Insurance Trust Fund (NITF)'s Insurance and Reinsurance Business under the supervision of the IRCSL under this project. However, this money had not been utilized for this purpose. (ii.) To achieve the objectives of the project, the experts and the consultants work shall be interrelated. However, it was observed that, the consultants for the project had been recruited from time to time and it was not observed strong interrelationship among those consultants to achieve the common objectives of the project. Due to this weak project management, the expected project objectives and the outcomes had not been achieved and finally had to abandoned the project. (iii.) The Actuary Consultant had terminated his contract with effect from 29 March 2022. According to the report named as "Consultant's Evaluation of the Insurance (Actuarial) Project to date" as at 24 January 2022 by the Actuary Consultant the reasons for termination were actuary had not provided comments for his recommendations by the management, no steps had been taken by the Commission to implement action plans and follow up, component leaders had not responded to his proposals with fair arguments, the actuary's work had been done without any support of insurance experts who required to recruit under this project, the Commission was obligated to provide insurance and IT experts, but not provided and ignore his advices without providing proper explanations by the Commission. Based on the above observations, it was observed that the payment of USD 168,000 for the consultant actuary is an uneconomic transaction. (iv.) According to the information available for audit the actuarial consultant had not issue any report or working for 3 components according to the given work plan. Therefore, the final and draft reports for 14 components out of 17 components had been submitted. As per the detail available for the audit, those reports had not been submitted to the commission and no any evidence was available that those reports had been discussed with relevant parties who are responsible for commenting, developing and making policies as regulator. (v.) According to the work plan Consultant actuary's task had connect with other consultants such as Consultant Insurance and Consultant IT. Therefore, it was observed that the Commission had not facilitated them to coordinate among those consultants. (vi.) According to the task assigned to Human Resources consultant, the final task is the consultant should liaise with other consultants hired under the project in order to obtain views on future developments of the client when performing the consultant's work. According to the project progress only actuarial consultant had been appointed. There is no evidence that, Human Resources consultant had able to contact and discussed with other consultants in this project. Therefore, the project will not be achieved expected results due to no proper coordination and communication among consultants. (vii.) Based on the Attorney General's opinion the commission had decided their own carder and the salary scheme. By the Memorandum dated 31 May 2019, Director General sought the approval of the chairman to effect the salary adjustment, carder revision, payment of cost-of-living allowance of Rs. 7,800, Competency Allowance of 15 per cent from Basic Salary and Special Living Allowance of Rs.12,500 for the commission staff with effect from 01 July 2018. Even though the commission is an entity subject to the purview of the Ministry of Finance the commission had not obtained the clearance or concurrence from the General Treasury to decide their carder and increase of salaries and allowances. (viii.) The salaries of the commission had increased between 12.98 per cent to 59.73 per cent in the year 2019 based on Attorney General's opinion without obtaining the prior approval of the Management Services Department in contrary to the Management Service circular 03/2018 dated 18 July 2018 and the Good Governance Guideline. The treasury representative who appointed to the board during this period had not taken necessary actions to secure public interest by bringing his independent opinion to the board in this regard. (ix.) The commission had not taken necessary actions to introduce self-contributory insurance scheme for their employees. The commission spent funds of Rs. 6.3 million for the year 2022 (2021 - Rs. 6.2 million) for obtaining insurance cover without any contribution from the employees. However, it was observed that in the year 2017, the National Insurance Trust Fund has extended self-contributory insurance scheme for semi-government sector employees by charging a contribution of Rs. 1000 per employee per month. It was observed that the commission has spent the funds of the commission of Rs. 132,038 per employee for the year 2022 for the medical insurance cover. W.P.C. Wickramaratne Auditor General Financial Statements as at 31st December 2022 INSURANCE REGULATORY COMMISSION OF SRI LANKA INSURANCE REGULATORY COMMISSION OF SRI LANKA STATEMENT OF FINANCIAL POSITION AS AT 31" DECEMBER 2022 Notes As at As at 31.12.2022 31.12.2021 Rs. Rs. ASSETS NON CURRENT ASSETS Property, Plant and Equipment 1 27,301,799 23,827,365 Fixed and Refundable Deposits (PPF) 2 9,593,949 445,593,949 Other non Current Asests 3 12,540,714 9,639,737 Total Non Current Assets 49,436,462 479,061,051 CURRENT ASSETS Inventories 4 535,914 598,430 Policyholders' Protection Fund- Investments & Others 2 9,371,226,885 7,995,830,615 Other Current Assets 5 38,597,160 12,448,937 Investments in Fixed Deposits 228,000,000 - Investments in Government Securities -Repo 103,000,000 220,000,000 Deferred Tax Asset 21 7,137,274 - Cash and Cash Equivalents 6 13,542,583 6,320,185 Total Current Assets 9,762,039,816 8,235,198,168 TOTAL ASSETS 9,811,476,278 8,714,259,219 RESERVES AND LIABILITIES RESERVES & FUNDS Policyholders' Protection Fund 7 9,380,820,835 8,441,424,564 Revaluation Reserve 32,439,194 28,593,684 Accumulated fund 282,996,422 162,942,114 Grant Received from Ministry of Finance - 552,384 Total Reserves & Funds 9,696,256,451 8,633,512,746 LIABILITIES NON CURRENT LIABILITIES Grant 8 5,061,291 5,061,291 Deferred Tax Liability 21 4,672,066 1,898,049 Retirement Benefit Obligation 9 23,790,913 21,614,840 Total Non Current Liabilities 33,524,270 28,574,180 CURRENT LIABILITIES Receipt in Advance 17,685,781 16,380,329 Other Current Liabilities 10 64,009,776 35,791,964 Total Current Liabilities 81,695,557 52,172,293 TOTAL RESERVES & LIABILITIES 9,811,476,278 8,714,259,219 The Members of the Insurance Regulatory Commission of Sri Lanka are responsible for the preparation and presentation of these Financial Statements. The above Statement of Financial position is to be read in conjunction with the accounting policies and notes appearing nr6 to 30. Member C i rman Damayan i Fern do Satiesh Kumar Director General Director - Finance & Administration Colombo, Sri Lanka 17th July 2023 1 Year Ended Year Ended Notes 31.12.2022 31.12.2021 Rs as REVENUE REVENUE FROM NON- EXCHANGE TRANSACTIONS Annual Fees & Renewal Fees 11 307,905,835 272,610,654 Income from FSMP 12 750 255,150 REVENUE FROM EXCHANGE TRANSACTIONS Interest Income 13 58,821,625 12,609,727 Other Income 14 532,554 425,296 TOTAL INCOME 367,260,764 285,900,827 EXPENDITURE Staff Costs 15 (127,680,340) (127,134,065) Professional Charges 16 (227,120) (320,576) Operational Expenses 17 (83,834,958) (71,346,108) FSMP Expenses 18 (750) (255,150) Finance and Others 19 (297,028) (54,613) TOTAL EXPENDITURE (212,040,196) (199,110,512) Net Surplus /(Deficit) Before Tax 155,220,568 86,790,315 Taxation 21 (37,981,891) (16,014,436) Net Surplus /(Deficit) After Tax 117,238,677 70,775,879 Surplus Transferred to Accumulated Fund 120,054,308 70,279,670 Acturial Loss /(Gain) on Retirement Benefit Obligation 9 (2,815,631) 496,209 Net Surplus for the Year 122,869,939 69,783,461 The accounting policies and notes appearing on pages from 6 to 30 form an integral part of the Financial Statements. 2 INSURANCE REGULATORY COMMISSION OF SRI LANKA STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED 31s DECEMBER 2022 Accumulated Resvaluan Surpluses/ Total Reserves (Deficits) Rs. Rs. Rs. Balance at 1st January 2020 17,689,652 - 17,689,652 Deferred Tax impact on Opening Balance (633,973) (633,974) Surplus for the year - 96,001,300 96,001,300 Transferred to PPF - (95,600,233) (95,600,233) Deferred tax impact on actuarial gain 40,716 40,716 Actuarial Loss/ (Gain) - (290,831) (290,831) Reversal of Surplus transferred to PPF for the year 2020 - 93,214,934 93,214,934 Balance at 31st December 2020 17,689,652 92,731,913 17,206,630 Balance at 1 January 2021 17,689,652 92,731,913 17,206,631 Net Surplus for the Year 2021 - 69,783,461 69,783,461 Gain on property revaluation 12,679,107 - 12,679,107 Deferred tax (1,775,075) - (1,775,075) Actuarial Loss/ (Gain) - 496,209 496,209 Deferred tax (69,469) (69,469) Balance at 31 December 2021 28,593,684 162,942,114 191,535,798 Balance at 1 January 2022 28,593,684 162,942,114 191,535,798 Net Surplus for the Year 2022 - 122,869,939 122,869,939 Gain on property revaluation 3,845,510 - 3,845,510 Actuarial Loss/ (Gain) - (2,815,631) (2,815,631) Balance at 31 December 2022 32,439,194 282,996,422 315,435,615 Revaluation reserve represents the surplus/deficit arising on the valuation of Motor Vehicles, Furniture and fittings, Office Equopment and EDP Accumulated Surplus/ Deficits represent the Surplus/ Deficit transferred from the statement of Financial Performance. 3 Year Ended Year Ended NOTES 31.12.2022 31.12.2021 Rs Rs Cash Flow from Operating Activities Surplus/(deficit) for the Period 155,220,568 86,790,315 Provision for Depreciation 1 8,320,725 7,861,456 Provision for Retirement Benefit 9 5,438,479 3,634,057 Payment made- Retirement Benefit 9 (446,775) (1,989,175) Interest Income 13 (58,821,625) (12,609,727) Net Increase before Working Capital Changes 109,711,372 83,686,926 Change of Working Capital (Increase)/Decrease in Inventories 4 62,516 (75,870) (Increase)/Decrease of Receivables 5 (29,049,200) (1,127,676) Increase/(Decrease) of Receipt in Advance 1,305,451 2,240,252 Increase/(Decrease) of Creditors and Accruals 10 (1,129,065) (464,970) Cash Flow used in Operating Activities (28,810,295) 571,736 Income Tax paid 21 (12,998,271) (16,063,744) Net Cash Flows from Operating Activities 67,902,805 68,194,918 Cash Flow from/(used in) Investing Activities Investment in Government Securities 117,000,000 (110,000,000) Investment in Fixed Deposits (228,000,000) 35,000,000 Interest Income 58,821,625 11,638,186 Purchase of Property Plant and Equipments 1 (7,949,650) (3,025,000) Net Cash used in Investing Activities (60,128,025) (66,386,814) Cash Flow from Financing Activities Grant Received from Ministry of Finance (552,384) 244,849 Net Cash Flows from Financing Activities (552,384) 244,849 Net Increase/(Decrease) in Cash and Cash Equivalents 7,222,396 2,052,952 Cash and Cash Equivalents at the beginning of the year 6,320,185 4,267,233 Cash and Cash Equivalents at the end of the year 13,542,582 6,320,185 Cash at Bank and in Hand 6 & 22 Balance at Fund Management Account 13,550,961 5,437,940 Bank of Ceylon FSMP Account - 508,578 Bank of Ceylon 1877 - 373,073 Savings - NSB 614 595 13,551,575 6,320,185 Bank of Ceylon Negative Balance * Bank of Ceylon 1877 - as per Ledger (8,993) - 13,542,582 6,320,185 The accounting policies and notes appearing on pages 6 to 30 form an integral part of the Financial Statements. 4 Year Ended Year Ended 31.12.2022 31.12.2021 Rs Rs Cash Flow from Operating Activities Net Increase of Policyholders' Protection Fund 939,396,269 972,710,329 Net Increase before Working Capital changes 939,396,269 972,710,329 Change of Working Capital (Increase)/Decrease of Interest Receivable on Government Securities (1,581,250,000) (35,502,718) (Increase)/Decrease of Cess Receivable 6,815,722 (20,875,866) Increase/(Decrease) of payable 884,809,359 - Increase/(Decrease) of Amount to be Transferred from PPF (540,000) 87,981,414 (690,164,919) 31,602,829 Net Cash Increase/(Decrease) from Operating Activities 249,231,350 1,004,313,159 Cash Flow from/(used in) Investing Activities Investments in Fixed Deposits (224,970,912) (1,153,407,500) Net Cash Increase/(Decrease) from Investing Activities (224,970,912) (1,153,407,500) Net Increase/(Decrease) in Cash and Cash Equivalents 24,260,438 (149,094,341) Cash and Cash Equivalents at the beginning of the year 1,301,693 150,396,035 Cash and Cash Equivalents at the end of the year 25,562,131 1,301,693 Balance at Current Account 1,000,000 1,000,000 Balance at Fund Management Account 24,562,131 301,693 25,562,131 1,301693 5 ACO U GUOISCI 1. SIGNIFICANT ACCOUNTING POLICIES 1. 1 Reporting Entity 1.1.1 Legal Form Insurance Regulatory Commission of Sri Lanka is established under the Regulation of Insurance Industry Act, No. 43 of 2000, which came into operation with effect from 01 March 2001 by Government Gazette Notification No 1172/27, dated 23 February 2001. The registered office of the Commission is located at Level 11, East Tower, World Trade Centre, Colombo 01. 1.1.2 Principle activities and nature of operations The object and responsibility of the Commission shall be, to ensure that insurance business in Sri Lanka is carried on with integrity and in a professional and prudent manner with a view to safeguarding the interest of the policyholders and potential policyholders. Powers, duties and function of the Commission, which are cited in the Act, are as follows: (a) register as insurers persons carrying on insurance business in Sri Lanka; (b) register persons as insurance brokers; (c) advice the Government on the development and regulation of the insurance industry; (d) implement the policies and programmes of the Government with respect to the insurance industry; (e) employ such officers and servants as may be necessary for the purpose of exercising, performing and discharging the powers, duties and functions of the commission; (f) acquire and hold any property, movable or immovable and sell, lease mortgage or otherwise dispose of the same; (g) enter into such contracts as may be necessary for the exercise, performance and discharges of its' powers, duties and functions; and (h) do all such other acts as may be necessary for the due exercise, discharge and performance of its'powers, duties and functions under this Act. 1.2 BASIS OF PREPARATION 1. 2.1 Statement of Compliance The Financial Statements of the Insurance Regulatory Commission of Sri Lanka comprise the Statement of Financial Position, Statement of Financial Performance, Statement of Changes in Equity /Net Assets and Cash Flows together with the Notes to the Financial Statements and have been prepared in accordance with the Sri Lanka Public Sector Accounting Standards and are in compliance with the said standards. These Financial Statements were authorized for issue by the Commission members on 17t July 2023. 6 INSURANCE REGULATORY COMMISSION OF SRI LANKA ACCOUNTING POLICIES 1.2.2 Basis of Measurement The Financial Statements have been prepared under the historical cost convention and applied consistently with no adjustment being made for inflationary factors affecting the Financial Statements except for the following; -defined benefit obligations are measured at its present value based on an Actuarial Valuation as explained in note 3.1.1. Where appropriate, accounting policies are disclosed in succeeding notes. 1.2.3 Going Concern When preparing the Financial Statements, the Members of the Commission assessed the ability of the Commission to continue as a going concern. The Members of the Commission have a reasonable assurance that IRCSL will continue in operation and meet its statutory obligations for the foreseeable future. The IRCSL does not foresee a need for liquidation or cessation of operations, after taking in to account, all available information about the future, Accordingly, the IRCSL continues to adopt the going concern basis in preparing the Financial Statements. 1.2.4 Functional and Presentation Currency The Financial Statements of the Commission are presented in Sri Lankan Rupees, which is the Commission's functional currency. All financial information presented in Rupees has been rounded to the nearest Rupee. 1.2.5 Comparative Information The presentation and classification of the Financial Statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year. 1.2.6 Materiality and Aggregation Each material class of similar item is presented separately in the financial statements. Items of dissimilar nature or function are presented separately unless they are immaterial. 1.2.7 Significant Accounting 3udgements, Estimates an Assumptions The preparation of Financial Statements in conformity with SLPSAS requires management to make judgements, estimates and assumptions that affect the application of Accounting Policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about critical judgements in applying accounting policies that have a significant effect on the amounts recognized in the Financial Statements is included in the following notes: 7 INSURANCE REGULATORY COMMISSION OF SRIANKA ACCOUNTING POLICIES Assessment of impairment-Key Assumptions used in Discounted Cash Flow Projections The Commission assesses at each reporting date whether there is objective evidence that an asset or a portfolio of assets is impaired. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. In assessing the value in use, the estimated future cash flows are discounted to its present value using appropriate discount rates that reflects the current market assessments of the time value of money and risk specific to the asset. Depreciation Judgement is required in determining the method of depreciation, useful life and residual values. Deferred Taxation Management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the level of future taxable profits together with future tax planning strategies. Defined Benefit Plans The assessment of the liability of defined benefit obligations involves a significant element of assumptions; including discount rates, future salary increases and mortality rates and due to the long term nature of these plans, such estimates are subject to uncertainty. Current Taxation Current tax liabilities are provided for in the Financial Statements applying the relevant tax statutes and regulations which the management believes reflect the actual liability. There can be instances where the stand taken by the Commission on transactions is contested by Revenue Authorities. Any additional costs on account of these issues are accounted for as a tax expense at the point the liability is confirmed on the Commission. 1.2.8. Events after the Reporting Period All material events after the reporting date are considered and appropriate adjustments or disclosures are made in the Financial Statements where necessary. 1.3 Conversion of Foreign Currency All foreign currency transactions are converted at the rate of exchange prevailing at the time of the transactions were affected. Assets and Liabilities in foreign currencies are translated at the rates of exchange prevailing at the Balance Sheet date. The resulting gains and losses are dealt within the Income and Expenditure Account. 1.4 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Commission's financial liabilities comprise receipt in advance and other payables. Financial liabilities are the income receivables and other receivables and cash and other short- term investments that arrive directly from its operations. 8 INSURANCE REGULATORY COMMISSION OF SRI LANKA. ACCOUNTING POLICIES 1.4.1 Market Risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices comprise of two types of risk: interest rate risk and currency risk. Financial instruments affected by market risk include deposits with financial institutions. 1.4.1.1 Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Commission's exposure to the risk of changes in market interest rates relates primarily to the Commission's obligations with floating interest rates. 1.4.1.2. Liquidity risk is that the Commission monitors its risk to a shortage of funds using continuous cash flow forecasts & cash budgeting. 2. ASSETS & BASES OF VALUATION 2. 1 PROPERTY, PLANT & EQUIPMENT OWNED PROPERTY PLANT& EQUIPMENT All the Property, Plant and Equipment are stated at cost/ revaluation amount less accumulated. depreciation and impairment losses. The cost of Property, Plant & Equipment is the cost of acquisition with any expenses incurred in bringing the assets to their working condition for the intended use. Where an asset is acquired in a non-exchange transaction for nil or nominal consideration, the asset is initially measured at its fair value. Subsequent cost incurred for the purpose of acquiring, extending or improving assets of a permanent nature in order to carry on or flow future economic benefits associated with the item to the Commission has been treated as capital expenditure. All other repairs and maintenance are charged to the statement of Financial Performance during the financial period in which they are incurred. Revaluation model is applied for Motor Vehicles, which are revalued once in three years and thereafter to comply with requirements of revaluation model under SLPSAS 7. Office equipment, furniture and fittings are revalued annually. DEPRECIATION Depreciation is charged on the straight-line basis over the estimated useful life of the asset at following rates. The useful life, depreciating methods and residual values are assessed annually or in an earlier date where any circumstances indicates such assessment is required. Asset 0/o per annum Motor Vehicles 25 Furniture, Fixtures and Fittings 12.5 Office and EDP Equipment 25 Training Equipment 25 Depreciation is provided from the date of purchase up to the date of disposal. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount. 9 INSURANCE REGULATORY COMMISSION OF SRI LANKA ACCOUNTING POLICIES 2.2 INVESTMENTS Investments are made in fixed deposits and short term investments at Licensed Government Banks, in Government Treasury Bills and Government Treasury Bonds which are stated at cost and interest accrued up to the date of the reporting period. These investments are stated at cost plus accrued interest up to the reporting period. Therefore, there is no risk arisen on financial instruments to which the IRCSL is exposed at the end of the financial year. 2.3 INVENTORIES Inventories are stated at lower of cost or net realizable value. The cost of inventories is valued on first-in- first- out (FIFO) basis. 2.4 RECEIVABLES Receivables are carried at expected realizable value after making provision for impairment. All receivables are assessed for specific impairment by considering objective evidences. 2.5 IMPAIRMENT OF NON- FINANCIAL ASSETS At the end of each financial period the Commission assesses events or changes in circumstances indicate that there is an indication that a non- financial assets maybe impaired. If such indication exists, the Commission makes an estimated recoverable amount of the asset. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and written down to its recoverable amount. 2.6 CASH AND CASH EQUIVALENTS For the purpose of cash flow statement, cash and cash equivalents consist of cash at banks and cash in hand, deposits on call and liquid investments with an original maturity of three months or less, which are readily convertible to known amounts of cash and are subject to insigniflcant risk of changes in value. 3. LIABILITIES AND PROVISIONS All material liabilities as at the balance sheet date are included in the financial statements and adequate provision has been made for liabilities, which are known to exist. All known liabilities have been accounted at cost in preparing the financial statements. 3.1 Liabilities classified as Current Liabilities in the Statement of Financial Position are those which will fall due for payment on demand or within one year from the Reporting Date. 3.2 Liabilities classified as Non- Current Liabilities in the Statement of Financial Position are those which will fall due for payment after one year from the Reporting Date. 10 INSURANCE REGULATORY COMMISSION OF SRI LANKA' ACCOUNTING POLICIES - 3.3 A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Commission, or a present obligation that is not recognized because it is not probable that an outflow of resources will be required to settle the obligation. 3.4 Provisions are recognized when the Commission has a legal or constructive obligation at present as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and reliable estimate can be made of the amount of the obligation. 3.5 Nature and purpose of reserves The IRCSL creates and maintains reserves in terms of specific local requirements. (a) Accumulated Reserve The surplus/deficit of the Commission is transferred to the Accumulated Fund (b) Revaluation Reserve Gain/loss on revaluation of assets are transferred to the Revaluation Reserve. 3.1 RETIREMENT BENEFITS 3.1.1 DEFINED BENEFIT PLANS - GRATUITY The Commission has adopted the retirement benefit plan as required under the payment of Gratuity Act, No.12 of 1983 for all eligible employees. The retirement benefit plan defines an amount of benefit that an employee will receive on retirement. The liability recognized in the statement of Financial Position in respect of defined benefit plan is calculated annually by the Commission using the Projected Unit Credit method. prescribed in Sri Lanka Public Sector Accounting Standard - SLPSAS 19: Employee Benefits. At the beginning of financial year 2022 21,614,840 Current Service Cost 2,529,452 Past Service Cost (Due to retirement age change) 531,395 Interest Cost 2,377,632 Actuarial losses / (gains) (2,815,631) Charged to profit and loss of the statement comprehensive income 2,622,848 Benefits paid (446,775) At the end of financial year 2022 23,790,913 11 INSURANCE REGULATORY COMMISSION OF SRI LANKA ACCOUNTING POLICIES Gains and losses arising from changes due to over or under provision in the previous year are charged to Statement of Financial Performance in the period in which they arise. The Obligation for the year has recognized immediately in statement of Financial Performance. The principal actuarial assumptions used were as follows: Discount Rate 18% per annum Rate of salary increase 15% Retirement Age 60 years 3.1.2 DEFINED CONTRIBUTION PLANS - EPF AND ETF All employees are eligible for Employees' Provident Fund Contributions and Employees' Trust Fund Contributions in line with the respective statutes and regulations. The Commission contributes 12% and 3% of gross emoluments of employees to Employees' Provident Fund and Employees' Trust Fund respectively. 3.2 GRANT 3.2.1 Policyholders' Protection Fund Capital Expenditure transferred from Policyholders' Protection Fund is treated as grant and recognized on the estimated useful life of the asset. However, this process was discontinued due to the surplus in the Commission Fund. 3.2.2 Financial Sector Modernization Project (FSMP) Grants are recognized in the Financial Statements at their fair value. When the grant related to an expense, it is recognized as an income over the period necessary to match it with the cost, which it is intended to compensate for on a systematic basis. Grant received from Ministry of Finance for Result Based Financing (Disbursement Linked Indicator (DLI) recognized-as income. Grant received for Investment Project Financing recognized as an income according to the cost incurred. 3.3 Related parties The IRCSL regards a related party as a person or an entity with the ability to exert control individually or jointly, or to exercise significant influence over the IRCSL, or vice versa. Members of key management are regarded as related parties and comprise the Line Ministry and Members of the Commission. 12 INSURANCE REGULATORY COMMISSION OF'SRI LANKA ACCOUNTING POLICIES 4. INCOME & EXPENDITURE 4.1 REVENUE RECOGNITION 4.1.1 REVENUE FROM NON-EXCHANGE TRANSACTIONS Fees and Taxes The IRCSL recognizes revenue from fees and taxes when the event occurs and the asset recognition criteria are met. Other non-exchange revenues are recognized when it is probable that the future economic benefits or service potential associated with the asset will flow to the entity and the fair value of the asset can be measured reliably. IRCSL revenue consists of Annual fees, Renewal fees, Registration fees and sale of publications, etc. 4.1.2 REVENUE FROM EXCHANGE TRANSACTIONS Interest income Interest income has been recognized on a time proportion basis that took into account the effectively yield on the assets. Sale of Assets Revenue from the sale of assets is recognized when the significant risks and rewards of ownership have been transferred to the buyer, usually on delivery of the goods. 4.2 EXPENDITURE RECOGNITION All expenditure incurred in maintaining the Commission has been charged to revenue in ascertaining the income over expenditure. 4.2.1 INTEREST INCOME AND EXPENSES Interest expenses are recognized in the Statement of Financial Position on an accrual basis. 4.3 INCOME TAX EXPENSES Current Taxation Commission's tax expense is made up of current taxation and deferred tax gain or loss during the year. Provision for taxation is based on the profit/surplus for the year adjusted for taxation purposes. Deferred Tax Deferred Taxation is provided using the Balance Sheet liability, method providing for temporary differences. between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognized only to the extent that is probable that future taxable profits would be available against which the assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 13 INSURANCE REGULATORY COMMISSION OF SRI LANKA; ACCOUNTING POLCIES 4.4 CASH FLOW STATEMENT The Cash Flow Statement has been prepared using the indirect method. 4.5 BUDGET INFORMATION The annual budget is prepared on the accrual basis; that is, all planned costs and income are presented in a single statement to determine the needs of the IRCSL. These budget figures are those approved by the Commission at the beginning of the Financial Year. 5 POLICY HOLDERS PROTECTION FUND 5.1 Legal Form The Policy Holders Protection Fund of Insurance Regulatory Commission of Sri Lanka is established in terms of Section 103(1) of the Regulation of Insurance Industry Act No.43 of 2000 (RII Act) which reads as 'There shall be a fund to be known as the Policy Holders Protection Fund to which shall be credited the CESS charged under Section 7 of the RII Act.' 5.2 Principle activities and nature of operations According to the Section 103(1) of the Regulation of Insurance Industry Act No.43 of 2000 (RII Act), the funds lying to the credit of this fund shall be utilized for the general protection of the policy holders and for any other specific purpose as may be determined by the Commission by rules made in that behalf. Further, any money which is not immediately required for any of the purposes referred to above, shall be invested by the Commission in such prudent manner as would yield a good return and safeguard the investment There were no changes in the nature of the objects of the Policy Holders Protection Fund during the financial period under review. Utilization In terms of Sec 103(2) of the RII Act , the PPF should be utilized for the general protection of Policy holders and for other specific purposes as may be determined by the Commission, by the Rules made in that behalf. In terms of Rule No 10 of the gazette Extraordinary No 1412/30 dated 29h September 2005, money lying to the credit of the PPF, may be utilized for the following specific purposes in so far as it would be for the policyholders and potential policy holders. a. Defraying the expenditure incurred in creating awareness of the insurance industry amongst the public and other expenditure incurred in the development of the insurance industry: and b. Defraying the expenditure incurred by the commission in the exercise, and discharge and performance of its powers, functions and Duties. 5.3 Basis of Measurement The Financial Statements have been prepared under the historical cost convention and applied consistently with no adjustment being made for inflationary factors affecting the Financial Statements. 14 PN51)RNCE7RGULATORY G-OMMISSIQO F.SRlItANKA " NOTES TO THE FINANCIAL STATEMENTS 1 Property, Plant & Equipment Furniture, Office motor Equipment Training Software Total Vehicles Fitures & (EDP & Equipment Sfwr oa Fittings Others) RS. Rs. Rs. RS. Rs. Rs. COST/REVALUATION Balance as at 1st January 2019 10,300,000 14,152,432 26,635,537 141,450 51,229,419 Additions - 1,508,944 3,392,354 - 4,901,298 Disposals - (18,895) (2,271,627) - (2,290,522) Balance as at 31st December 2019 10,300,000 15,642,481 27,756,264 141,450 53,840,195 Balance as at I January 2020 10,300,000 15,642,481 27,756,264 141,450 53,840,195 Additions - 1383081 4,390,440 -57735 Balance as at 31st December 2020 10,300,000 17,025,562 32,146,704 141,450 59,13,716 Balance as at I" January 2021 10,300,000 17,025,562 32,146,704 141,450 59,613,716 Additions - - 3,025,000 - 3,025,000 Disposals - Impact on Revaluation 2,500,000 (7,950,627) (11,817,033) -_(17,267,660) Balance as at 31t December 2021 12,800,000 9,074,935 23,354,671 141,450 45,371,056 Balance as at 15t January 2022 12,800,000 9,074,935 23,354,671 141,450 45,371,056 Additlons 6,190,600 1,759,050 7,949,650 Disposals Impact on Revaluation 2,364,409 194,205 - - 2,558,614 Balance as at 31t December 2022 12,800,000 11,439,343 29,739,476 141,450 1,759,050 55,879,319 ACCUMULATED DEPRECIATION Balance as at 1st January 2019 - 12,675,881 22,722,663 141,450 35,539,995 Charge for the year 2,575,000 533,646 1,790,844 - 4,899,489 Disposals - (18,895) (2,271,627) - (2,290,522) Balance as at 31st December 2019 2,575,000 13,190,632 22,241,880 141,450 38,148,962 Balance as at 1st January 2020 2,575,000 13,190,632 22,241,880 141,450 38,148,962 Charge for the year 2,575,000 580,890 2,324,151 - 5,480,041 Disposals - - Balance as at 31st December 2020 5,150,000 13,771,522 24,566,031 141,450 43,629,003 Charge for the year 2,575,000 1,499,751 3,786,704 - 7,861,456 Disposals - Impact on Revaluation (7,725,000) (9,878,066) (12,343,701) (29,946,767) Balance as at 31st December 2021 - 5,393,207 16,009,034 14450 21,543,691 Charge for the year 3,200,000 1,165,427 3,803,532 - 151,767 8,320,725 Disposals - - Impact on Revaluation (1,054,538) (232,358) (1,286,896) Balance as at 31st December 2022 3,200,000 5,504,096 19,580,208 141,450 151,767 28,577,520 WRITTEN DOWN VALUE AS AT 31s DECEMBER 2022 9,60000 5,935,248 10,159,268 - 1,607,283 27,301,799 WRITTEN DOWN VALUE AS AT 31ST DECEMBER 2021 12,800,000 3,681,727 7.345,638 - - 23,827,365 Fully Depreciated Assets as at 31.12.2022 amounting to 36,393,384 are still in use. Revalued amount Is Rs. 3,845,510 The Board of Survey has inspected the condition of these assets and has re- estimated the useful life time. The resulting Impact would be adjusted prospectively . Motor vehicles were revalued by professional valuer, Automobile Association of Ceylon during May 2021 15 Notes As at As at 31.12.2022 31.12.2021 Rs. Rs. 2 POLICYHOLDERS' PROTECTION FUND INVESTMENTS AND OTHERS NON CURRENT ASSETS Rent and Electricity Deposits 9,593,949 9,593,949 Fixed Deposits - 436,000,000 9,593,949 445,593,949 CURRENT ASSETS Investment in Fixed Deposits 9,030,350,000 7,449,100,000 Interest Receivable on the Government Securities and Fixed Deposits 1,045,737,393 384,766,481 CESS Receivable 154,386,720 161,202,441 Balance at Fund Management Account 24,562,131 301,693 Balance at Bank 1,000,000 1,000,000 10,256,036,244 7,996,370,615 Less Amount to be transferred from PPF - 540,000 Tax provision on PPF interest income 21 (b) 884,809,359 - 9,371,226,885 7,995,830,615 Total Assets 9,380,820,834 8,441,424,564 3 OTHER NON CURRENT ASSETS Refundable Deposit for rent 2,688,246 2,688,246 Prepayments 332,247 775,242 Staff Loans * 9,520,222 6,176,249 12,540,714 9,639,737 4 INVENTORIES Printing, Stationery and Computer Accessories 527,655 519,010 Stamps 8,259 79,420 535,914 598,430 5 OTHER CURRENT ASSETS Receivable from non Exchange transations Other Receivables 270,954 239,953 Receivable from Exchange transations Amount to be transferred from PPF - 540,000 Provision for Acquisition 5.1 - 2,200,000 Staff Loans * 3,311,546 2,292,955 Festival advance* 1,190,100 1,170,100 Advance and Pre-payments 3,707,402 4,101,974 VAT Control 1,807,933 581,313 Deposits 5.2 285,120 228,686 Interest Receivable - Government Securities 28,024,105 1,093,957 38,597,160 12,448,937 5.1 provision for Acquisition is in respect of Laptop computers which was awarded in December 2021 5.2 Deposits represent fuel deposit and NSB deposit for safety locker *Loans Granted to Staff (Staff loan and Festival Advance) Balance as at 1st January 2022 9,639,304 8,758,228 Loans Granted during the year 9,051,101 7,257,500 18,690,405 16,015,728 Repayments during the year (4,668,537) (6,376,424) Balance as at 31st December 2022 14,021,868 9,639,304 16 E~r4. 1VANC,A#L % -TA-EP '- %T$ r;~ a '~t*tv EJ~,l M &~ Notes As at 31.12.2022 As at 31.12.2021 Rs. RS. 6 CASH & CASH EQUIVALENTS Cash at Banks Balance at Fund Management Account 22 13,550,961 5,437,940 Bank of Ceylon 1877 - 373,073 Bank of Ceylon FSMP Account 27 b - 508,578 Savings Account - NSB 614 595 13,551,576 6,320,185 Bank of Ceylon Negative Balance * Bank of Ceylon 1877 - as per Ledger 22 (8,993) - 13,542,583 6.320,185 7 POLICYHOLDERS' PROTECTION FUND Opening Balance 8,441,424,564 7,468,719,235 Cess Received during the year 587,757,528 543,906,322 Interest on Repo 3,505,521 334,087 Interest on Fixed Deposits 1,231,844,234 515,764,257 Interest on Fund Management Account 1,100,267 150,009 10,265,632,115 8,528,873,909 Less: Reversal of Surplus transferred to PPF - 87,446,414 Income tax provision on interest income of PPF 21 884,809,359 - Total transfers- Policyholders' Protection Fund 884,809,359 87,446,414 Bank charges 1,922 2,932 884,811,282 87,449,347 Closing Balance 9,380,820,835 _,441,424,564 8 GRANT Balance at the beginning of the year 5,061,291 10,829,811 Capital Expenditure from Policyholders' Protection Fund - (5,773,521) Less: Amortized during the year - - Balance at the end of the year 5,061,291 5,061,291 Note - Recognition of Grant The grant has been recognized in the Statement of Financial Performance as income at the following rates: (i.e. systematic basis over the useful life of the related asset) However, Capital Expenditure transferred from Policyholders' Protection Fund was discontinued due to the surplus in the Commision Fund. Last year figures has been adjusted to reflect the current year presentation. Motor Vehicle 25% 25% Office Equipment - Others & EDP 25% 25% Furniture Fixtures & Fittings 12.5% 12.5% Training Equipments 25% 25% 17 As at As at 31.12.2022 31.12.2021 Rs. R5. 9 RETIREMENT BENEFIT OBLIGATIONS Balance at the beginning of the year 21,614,840 19,473,749 Provision made during the year 5,438,479 3,634,057 Actuarial (Gain)/ loss (2,815,631) 496,209 (-)Payment made during the year (446,775) (1,989,175) Balance at end of the year 23,790,913 21,614,840 Discount Rate 18% 11% Future Salary Increment Rate 15% 9% Future Salary 9.1 SENSITIVITY OF ASSUMPTIONS USED Discount Rate Increment Rate A percentage change in the assumptions would have the following effects. 1% Increase 22,251,194 25,652,749 1% Decrease 25,505,636 22,099,027 An acturial valuation of the retirement gratuity obligation was carried out as at December 31, 2022 by a professional Actuary, Acturial Management Services (Pvt) Ltd. The valuation method used by the Actuary to value the liability is the "Projected Unit Credit Method (PUC)", a method recommended by the Sri Lanka Public Sector Accounting StandardSLPSAS 19 on "Employee Benefit". As at As at 31.12.2022 31.12.2021 10 OTHER CURRENT LIABILITIES Rs. Rs. Accrued Expenses 26,369,239 25,008,338 EPF Payable 1,265,775 1,247,337 ETF Payable 189,868 187,102 PAYE Payable 43,545 35,068 Retention Payable 36,228 36,228 SSCL Payable 51,558 - Income Tax payable 35,295,147 5,948,270 Refunds & Other payables 758,416 3,329,621 64,009,776 35,791,964 11 REVENUE FROM NON- EXCHANGE TRANSACTIONS Annual Fees from Insurance Companies 290,823,507 257,764,270 Registration and Renewal Fees 17,082,329 14,846,384 307,905,835 272,610,654 12 INCOME FROM FSMP FSMP - Non DLI Grant 750 255,150 750 255,150 18 As at As at 31.12.2022 31.12.2021 Rs. Rs. 13 REVENUE FROM EXCHANGE TRANSACTIONS Interest on Fixed Deposit 41,262,360 5,514,050 Interest on Fund Management Account 1,121,610 201,853 Interest on Savings Account 19 41 Interest on Repos 16,437,636 6,893,783 58,821,625 12,609,727 14 Other Income Interest on Vehicle Loan 291,708 274,395 Interest on Distress Loan 235,236 149,012 Sundry Income 5,611 1,890 532,554 425,296 15 Staff Costs Staff Salaries 77,625,084 77,422,627 EPF 12% 9,303,310 9,293,499 ETF 3% 2,325,828 2,323,376 Chairman - Allowance 1,200,000 1,200,000 Chairman - Fuel Allowance 594,935 241,050 Commission Members - Sitting Allowance 1,754,354 1,384,859 Interns Allowance 1,877,000 242,000 Overtime 426,546 527,240 Staff Medical Expenses 2,681,572 2,773,703 Staff Medical Insurance 2,785,293 2,328,894 Insurance Fire and Personal 498,166 587,977 Staff Welfare 867,855 4,459,324 Staff Training Local & Subscription 1,168,025 921,188 Performance Based Incentives 9,291,626 9,096,187 Advertising Recruitment 95,000 732,740 Directors Telephone Residence 665,203 786,390 Leave Encashment 744,985 1,796,425 Vehicle Operating Lease Charges 485,016 1,455,048 Directors Vehicle Allowance 4,487,603 4,570,890 Directors Fuel Allowance 3,364,460 1,356,590 Staff Gratuity 5,438,479 3,634,057 127,680,340 127,134,065 16 PROFESSIONAL CHARGES Tax & gratuity valuation Fee 227,120 320,576 227,120 320,576 19 As at - As at 31.12.2022 31.12.2021 Rs. Rs. 17 OPERATIONAL EXPENSES Rent & Service Charge 48,254,736 44,182,960 Parking Fees 777,830 763,550 Telephone Expenses & Internet 1,463,367 1,690,919 Electricity 1,367,225 1,626,825 Office Upkeep 572,855 618,023 Printing & Stationary 1,560,693 2,764,004 Public Awareness 8,570,966 1,814,843 Traveling - Local 94,875 58,840 Office Equipment Maintenance EDP & Others 2,969,581 2,103,839 Intemational Membership of IAIS 5,999,664 4,516,334 Advertising - Others 163,520 355,255 Meeting Expenses 537,250 290,520 Subscription Newspapers & Library Books 194,998 164,694 Postage & Courier Charges 87,426 62,438 Audit Fees-Auditor General 550,000 504,000 Audit Fees-Internal 1,300,000 1,262,200 Depreciation 8,320,725 7,861,456 Trade Tax 70,000 - General Expenses 104,435 112,778 Legal Expenses 55,755 - Investigation Expenses 13,070 12,921 Supervision Expenses 2,830 - Vehicle Maintenance 459,196 223,973 Vehicle Insurance 81,088 96,464 Vehicle Running Charges 262,872 259,272 83,834,958 71,346,108 18 FSMP Expenses Advertising for recruitment - 253,150 Bank charges - 2,000 Visa expenses 750 - 750 255,150 19 FINANCE &OTHER EXPENSES Bank Charges 297,028 54,613 297,028 54,613 20 COMPARISON OF ACTUAL INCOME AND EXPENDITURE Actual Budget Variance AGAINST THE BUDGET 2022 2022 RS. Rs. Income Annual Fees from Insurance Companies 290,823,507 285,830,000 2% Registration and Renewal Fees 17,082,329 14,290,000 20% Less: Expenditure Staff Costs 127,680,340 148,955,000 14% Professional charges & operational 84,062,078 122,956,000 32% Finance and Others 38,279,669 9,500,000 -303% 20 M at As at 31.12.2022 31.12.2021 Rs. RS. 21 TAXATION a. Commission Fund Current Income Tax Current Income tax charge 42,345,148 16,443,952 Deferred Tax Relating to origination and reversal of temporory differences (4,363,257) (429,516) Income tax expense reported in the statement of Finacial Performance 37,981,891 16,014,436 The IRD has increased the standard rate of Income tax from 24% to 30% with effective from 1st October 2022 (IRD Ammendmend Act No 45 of 2022).Accordingly the tax computation has been carried out. Reconciliation 9 months 3 months Total A. Business Income Profit before Tax 116,415,426 38,805,142 155,220,568 Add: Deductions not allowed Accounting depreciation on PPE 6,240,544 2,080,181 8,320,725 Provision for retirement contributions (Gratuity) 4,078,859 1,359,620 5,438,479 Directors Telephone Residence 498,902 166,301 665,203 Less: Allowable Deductions Capital allowances on depreciable assets 2,294,965 764,988 3,059,953 Gratuity paid - 446,775 446,775 124,938,767 41,199,481 166,138,247 Total Business Income Tax payable @24% and 30% 24% 30% Current Year Tax 29,985,304 12,359,844 42,345,148 Total Tax 42,345,148 Deferred Tax As at As at Accelarated Depreciation for tax purposes 31.12.2022 31.12.2021 Balance as at 1st January 1,898,049 483,021 Originating/(reversing ) during the year (4,363,257) 1,415,028 Balance as at 31st December (2,465,208) 1,898,049 Deferred Tax provision as at the year end is made up as follows Deferred Tax Provision from temporary differences of - Property Plant and Equipment 4,672,066 2,197,895 - Gratuity (7,137,274) (299,847) - Revaluation surplus (2,465,208) 1,898,048 14 As at As at 31.12.2022 31.12.2021 B. Rs. b. Policy Holders Protection Fund The IRCSL was catergorized under Section 7 of the Inland Revenue Act, No 10 of 2006 and profit and income, other than profit and income from dividend or interest was exempted from income tax, However, with the introduction of Inland Revenue Act, No. 24 of 2017, the said exemption was removed.Considering the above fact and impact on same,IRCSL had discussions with the Ministry of Finance and with the IRD.However, the IRCSL now received a letter from the IRD to pay tax on interest income of the PPF.Accordingly following provisions have been made in the armintr Year Interest Income Tax rate Tax 2018 455,331,220 28% 127,492,742 2019 574,484,713 28% 160,855,720 2020 622,183,692 24% 149,324,086 2021 516,248,353 24% 123,899,605 561,572,152 2022 9 months 794,963,330 24% 190,791,199 3 months 441,486,692 30% 132,446,008 1,236,450,022 323,237,207 884,809,359 22 INSURANCE REGULATORY COMMISSION OF SRI LANKA , NOTES TO THE FINANCIAL STATEMENTS 5 22. FUND MANAGEMENT ACCOUNTS, LEDGER BALANCES & BANK BALANCES IRCSL operates two Fund Management Account linked to our current account for the Commission and accordingly, over and above favorable balance of Rs. 1,000,000/- prevailed in the current account (in bank records) will automatically be transferred to Fund Management Account. Since the cheques that have already been issued by the IRCSL are not presented immediately, bank balance appeared in the ledger may get negative after entering the transactions with the Fund Management Accounts. The bank balances as at 311 December 2022 are as follows. Balance of Fund Management Account Rs. 13,550,961 Balance of Current Account Rs. ( 8,993) Total Rs. 13,541,968 23. CAPITAL COMMITMENTS There were no capital commitments as at 31st December 2022. 24. CONTINGENT LIABILITIES & CONTINGENT ASSETS All contingent liabilities are disclosed as a note to the financial statements unless the outflow of resources is remote. Contingent liability recognized initially measured at its fair value. The IRCSL was categorized under Section 7 of the Inland Revenue Act, No. 10 of 2006 and profit and income, other than profit and income from dividend or interest was exempted from Income Tax. However, with the introduction of Inland Revenue Act, No. 24 of 2017, the said exemption was removed. Considering the above fact and impact on same, IRCSL had discussions with the Ministry of Finance and with the IRD. The IRCSL has received the following assessments on the 19/01/2023 and 17/02/2023 to pay tax on interest income of the PPF with penalty and interest. Year of Assessment Penalty Interest 2018/19 25,752,129 79,187,797 2019/20 36,757,586 74,434,113 Tax provision has been made in the accounts as per the tax assessment issued by the IRD. Penalty and interest are to be recognized once the IRD confirms on waiver of the same. 25. EVENTS AFTER THE REPORTING PERIOD No circumstances have arisen since the reporting date other than mentioned in the note 24, which would require adjustments to or disclosure in the Financial Statements. 23 26. TAXATION The Provision for Income Tax has been computed in accordance with the provisions of the Inland Revenue Act No. 24 of 2017 and subsequent amendments. Description 2022. 12. 31 9 months 3 months A. Business Income Profit before Tax 116,415,426 05,142 Add: Deductions not allowed Accounting depreciation on PPE 6,240,544 2,080,181 Provision for retirement contributions (Gratuit 4,078,859 1,359,620 Directors Telephone Residence 498,902 166,301 Less: Allowable Deductions Capital allowances on depreciable assets 2,294,965 764,988 Gratuity paid - 446,775 Total Business Income 124,938,767 41,199,481 Tax payable 24% 30% ,985,304 12,359,844 Total 42,345,148 Less: Tax Credits B/F Income tax 5948,270 WHT - Self -Assessments paid (12, 998,271) Balance Payable 35,295,147 24 INSURANCE REGULATORY COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS 4 27. SRI LANKA FINANCIAL SECTOR MODERNIZATION PROJECT (FSMP) The Government of Sri Lanka has sought the support of development partners such as the World Bank to provide technical and financial support to activities aimed at developing the financial sector. The World Bank agreed to support "Sri Lanka Financial Sector Modernization Project (FSMP)" over a period of five (5) years, with the three (3) financial sector regulators as the implementing partners. The Project Development Objective (PDO) is to contribute to increasing financial market and insurance sector efficiency and use of financial/ insurance services among micro, small and medium enterprises (MSMEs) and individuals. The project will achieve the PDO through modernizing financial market infrastructure, upgrading the legal and regulatory framework for the financial system and strengthening the institutional capacity of financial sector regulators; the Central Bank of Sri Lanka (CBSL), the Securities and the Exchange Commission of Sri Lanka (SEC) and the Insurance Regulatory Commission of Sri Lanka (IRCSL). Accordingly, a Financial Agreement has been signed between the Democratic Socialist Republic of Sri Lanka and International Development Association (Credit Number 6006-LK), a credit in an amount equivalent to SDR 55,400,000 (Approx. USD 75 Mn). From the Loan proceeds, the Government signed a subsidiary agreement with the IRCSL to provide by way of grant in SDR 6,650,000 (Approx USD 9 Mn) and SDR 708,333 (Approx. USD IMn) as the respective Disbursement Linked Indicators (DLIS) are achieved by IRCSL. SDR - Special Drawing Rights a. World Bank has remitted followings to the Ministry of Finance. (i) FSMP investment project financing Strengthening regulators' institutional capacity upgrading the legal and regulatory framework and modernizing financial market infrastructure. Date Amount (USD) 14/01/2019 523,000 Payments (322,041) 200,959 (ii) Result Based Financing Provision of support to finance the eligible expenditure programme against achieving Disbursement Linked Results. Date Amount (USD) 27/03/2019 261,163.13 25/05/2019 64,677.66 09/10/2019 64,039.69 17/12/2019 64,803.28 12/02/2020 64,208.44 b. Balance available in the FSMP bank account (BOC 73613) amounting to Rs 507,827.74 was transferred to the "deputy Secretary to the Treasury" on the 18th of November 2022, to settle the DA account as all payments had been completed of the FSMP project. 25 INSURANCE REGULATORY COMMISSION OF SRI LANKA 1NOTES TO THE FINANCIAL STATEMENTS 28. RELATED PARTY DISCLOSURES Mr. Razik Zarook, PC was appointed as the Chairman of the IRCSL with effect from 3rd January 2020. Mr. A.K.Seneviratne was appointed as an EX-officio member by virtue of him holding office as Deputy Secretary to the General Treasury with effect from 26th August 2022. Mrs. T.M.J.Y.G Fernando was appointed as an EX-officio member by virtue of her holding office as Deputy Governor to the Central Bank of Sri Lanka with effect from 1t January 2021. Mr. Sanjeewa Dissanayake was appointed as an EX-officio member by virtue of him holding office as Registrar of Companies to the Department of Registrar of Companies with effect from 8th July 2021. Mr. Haris Salpitikorala was appointed as a Member of the Commission with effect from 3rd January 2020. Mr. Raja Goonaratne was appointed as a Member of the Commission with effect 3rd January 2020. Ms. Indra Baduge was appointed as a Member of the Commission with effect from 3 January 2020. The following Ex-officio Members of the Commission ceased to hold office as stated below: Mr. R.M.P. Rathnayake who held office as an Ex-officio member by virtue of him holding office as Deputy Secretary to the General Treasury ceased to be a member with effect from 01st March 2022. Mr. S.S.S.Fernando who held office as an Ex-officio member by virtue of him holding office as Deputy Secretary to the General Treasury ceased to be a member with effect from 151 August 2022. 26 INSURANCE REGULATORY COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS 28.1 The following table depicts the relationships held by the Members of the Commission who held office during the year under review. Name of the Member Name of Related Institution Relationship Mr. Razik Zarook Finance Commission Member (1s January 2022 to 313 December 2022) BMICH Member (13 January 2022 to 31st December 2022) Mr. R.M. P. Rathnayake Bank of Ceylon (BOC) Ex-Officio member (15 January 2022 to 31t December 2022) Chairman (Acting) 3rd February 2022 Lotus Tower Management Company to 31s December 2022) (Pvt) Limited Ex-Officio Member 15 January 2022 to 3Pt December 2022) Securities and Exchange Commission Ex-Officio member (1s January 2022 to 28" February 2022) Local Loan & Development Fund (LLDF) Mr. A.K.Seneviratne Civic Aviation Authority Director (8th August 2022 to 31st December 2022) The Victoria Home for Incurable Director (15h August 2022 to 31S December 2022) Mr. Sanjeewa Sri Lanka Accounting & Auditing Standards Ex- Officio Member (1 January Dissanayaka monitoring Board 2022 to December 2022) Accounting Standards Committee Ex- Officio Member (1 January 2022 to December 2022) Mrs. T.M.J.Y.G Fernando Central Bank of Sri Lanka Deputy Governor (13 January 2022 to 31s December 2022) Chairperson (1t January 2022 to Credit Information Bureau of Sri Lanka 313 December 2022) (CRIB) Institute of Bankers of Sri Lanka Chairperson (1t January 2022 to (IBSL) 31s December 2022) Securities and Exchange Commission Commissioner (11th October 2022 to 31t December 2022) Member of Board of Management Api Wenuwen Api Fund (06th May 2022 to 21t December 2022) 27 INSURANCE REGULATORY COMMISSION OF SRI ]LANKA NOTES TO THE FINANCIAL STATEMENTS,41 Mr. Haris Salpitikorala Nil Nil Mr. Raja Goonaratne Nil Nil Ms. Indra Baduge Nil Nil 28. 2 Other than the following transactions in the ordinary course of business at market rates, no transactions were recorded with the above mentioned institutions during the year under review. The IRCSL maintains the following two Current Accounts and three savings accounts at Bank of Ceylon (BOC) and the bank balances are tabulated below; Name of the Account Account Number Balance as at Balance as at 31.12.22 31.12.2021 Bank of Ceylon 1877 Rs. 8,993 Rs. 373,073 Bank of Ceylon 74236358 Rs. 13,550,961 Rs. 5,437,940 Bank of Ceylon 83094438 Rs. Nil Rs. 508,578 Bank of Ceylon 1886 Rs. 1,000,000 Ps. 1,000,000 Bank of Ceylon 74236394 Rs. 24,562,130 Rs. 301,963 28 INSURANCE REGULATORY COMMISSION OF SRI LANKA NOTES TOTHE FINANCIAL STATEMENTS 28. 3 The following investments were channeled through BOC during the year 2022: Commission Fund Investment Type Investments during the year (Rs.) Balance as at 31.12.2022 (Rs.) Repo Rs. 1,168,000,000 Rs. 107,000,000 Fixed Deposits Rs. 148,000,000 Rs. 148,000,000 PPF Investment Type Investments during the year (Rs.) Balance as at 31.12.2022 (Rs.) Repo Rs. 4,725,800,000 - Fixed Deposits Rs. 3,777,000,000 Rs 3,777,000,000 28.4 Other than the transactions in the ordinary course of business no other transactions were recorded by the Insurance Regulatory Commission of Sri Lanka, with the governing body may consist of elected or appointed representatives of the Ministry of Finance, Finance Minister and Secretary to the Treasury during the year. 28.5 Transactions with Key Management Persons (KMP) As per the Sri Lanka Public Sector Accounting Standard - SLPSAS 14 on "Related Party Disclosures", the KMPs include those who are having authority and responsibility for planning, directing and controlling the activities of the entity. 28.5.1 Remuneration to Key Management Personnel (KMPs) Members of the governing body Aggregate remuneration including transport cost (7 Members) Rs. 3,549,289 Medical insurance premium for 3 members Rs. 160,440 Chief Executive and Senior Management Group Aggregate remuneration for 6 persons Rs. 25,629,600 Non cash benefits Rs. 1,316,286 Medical insurance premium for 6 persons Rs. 307,210 29 INSURANCE REGULATOkY COMMISSION OF SRI LANKA NOTES TO THE FINANCIAL STATEMENTS 29. Comparative Information The IRCSL initiated the application of deferred taxation as per the requirement of LKAS 12 - Income Taxes. Previously IRCSL did not provide temporary timing differences, which amounts to a change in the accounting policy. As such, the previous two years (From 2020) have been reinstated in order to comply with the requirements of SLPSAS 3 - Accounting Policies, Change in Accounting Estimates and Errors. 30