Letter of transmittal/ memorandum

RMIT College of Business
Building 80, 445 Swanston Street
Melbourne 3000
Victoria, Australia

March 28, 2014

Name of recipient:
Sekara Hotels Ltd

Dear Sir/ Madame
This report provide information about expansion project in finding a publicly listed subsidiary in Sri Lanka. Our team report has been researched and summarised all the information regarding to the project and attached as a report below.

We recommend you to have a look at the report and consider carefully about seeking international expansion opportunities.

Sincerely,

Vien Nguyen

Executive summary

This report divided into two categories. The first part provided information about the financial reporting requirement for publicly listed company and linkages the influence of Sri Lanka’s cultures in the financial reporting as well as the political factor that impact the process of setting accounting standards. The second categories discussed about the expansion project which Aitkin Spence hotel is believed to meet Sekara Hotel Ltd.’s core competencies in developing and management hotels and resort leisure. A briefly summary information regarding to the hotel financial and non-financial was provided in second part of the report. The impact on the hotel’s stakeholders from Sri Lanka financial reporting environment was mentioned as well.

Table of Contents Introduction 4 Finding 4 Section 1 4 Description of Financial Reporting in Sri Lanka 4 Influence of Culture in Sri Lanka Financial Reporting Framework 5 Political Pressures on Sri Lanka for Setting Accounting Standards 5 Section 2 5 Expansion project recommendations: 5 Influence on company’s stakeholders: 7 Conclusion 8 Reference List 9

Introduction

As one of the country in South Asia, Sir Lanka is an emerging and rapid growing market economy. Tourism and hospitality is also a significant industry in the country. With the beautiful nature environment, Sri Lanka has attract lots of tourists visited for their holidays. Based on the research and the process of deduction, .The primary objective of this report is presenting the development and management about hotels and leisure resorts in Sri Lanka that based on the research and the process of deduction. Providing about the financial reporting requirement for publically listed companies and the likely future changing in Sri Lanka reporting requirement. How the culture influence on financial reporting, the regularity and the political process that are influencing the setting of accounting standards.

Finding

Section 1

Description of Financial Reporting in Sri Lanka

In the early 2000s, along with number growing high-profile accounting failure around the world such as Enrol and WorldCom (US), HMV Group (UK), HIH Insurance (Australia); there were many significant scandals which happened in Sri Lanka that led to the structural reforms in the financial reporting framework, which is now more concentrate on providing the definitions of the elements of the financial statements. Historical cost convention is promoted in order to bringing uniformity with the financial statement. Other conventions of valuation are also allowed.

In Sri Lanka, the official organisation that dealing with setting up accounting standard is called Institution of Chartered Accountants of Sri Lanka ( CA Sri Lanka). The Institution has been gone through two stages during the adoption of the IFRS. In 2011 Sri Lanka Accounting standard has fully in compliant with IFRS (eStandards Forum, 2008, p. 5). It is believe that the adoption of international reporting standard will help to improve the harmonisation of financial reporting throughout the country as well as standardise to comparable globally.

In complying with the Sri Lanka Accounting and Auditing Standards Act, No.15 of 1995, publically listed are required to prepare and present financial reporting statement according to it conceptual framework and compliance with Sri Lanka Accounting Standards, which rely on various assumptions that have based on the norms held by the researchers. Company that publicly listed on the Colombo stock exchange, ratify with these listing rules is compulsory.

Tax system in Sri Lanka has a transparent, low-tax regime, and has signed double taxation relief agreements with more than 35 countries. These agreement provide for reduce tax rates on dividends, interests and royalties. Companies which are quoted and listed less than 5 years have an applicable tax rate of 33 1/3 percent. Company which are quoted and listed more than 5 years have an applicable tax rate of 35 percent. Tax year commences from every 1 April and end on 31 March. (Taxation Law in Sri Lanka)

After undergone several improvements aimed at reinforcement institution framework, from 2012, these changes were further extended, better capacity and required the companies to present the comparatives also in accordance with the new reporting standards (BDO Sri Lanks, 2013) to provide a true and fair view of these statements and aid external users in making decisions.

Influence of Culture in Sri Lanka Financial Reporting Framework

In Sri Lanka, hierarchy system is important. They are conscious of social order and status. According to Hofstede’s cultural dimension, this power distance states the degree to which the less influential members in a society accede and presume that power is distributed unevenly. Therefore in business only top level management at a company will usually make decisions.

As relationship is important in business, Sri Lankans people prefer to have long-term orientation, prudently invest time in relationship-building conversation at the beginning of any meetings is significant and exchanging some background information on your company. Hence creating a trust will eventually improve the relationship with the new partners and maintain it’s trustworthy in public annual reports to the current partners and stakeholders.

Uncertainty avoidance is also significant in Sri Lanka as ‘face’ is describe as an honour or personal dignity. Sri Lankans would prefer not to be so blunt and may give rather ambiguous or uncommitted answer in order to avoid losing face. Therefor providing a true and fair financial reporting is extremely important in publicly listed company as it represents the business reputations.

Sri Lanka has been a British colony for a long time. Therefore, the British also influenced Sri Lanka education system. This has led Sri Lanka to incline more comfortably towards the IFRS adoption. However, there is a view that Sri Lanka has shifted from capitalism to Communism which reduced the freeway of expression in the nation.

Political Pressures on Sri Lanka for Setting Accounting Standards

Sri Lanka is member of SAFA (South Asian Federation of Accountants), there is a threat to the Institute of Chartered Accountants of Sri Lanka that if they do not make the standards they will be isolated from the region. Big multi nationals have to maintain the uniformity in the financial reporting standards. If Sri Lanka does not follow the international Accounting requirements, then it will discourage the multi nationals from operating in their land.

Also government intervention became more obvious in Sri Lankan society, it started distributing the financial resources by way of banks. This made government more influential on banks, and banks more influential over the economy. This factor influenced the priorities of the financial reporting framework. It is because of this reason that financial sector has been the main target of the financial reporting framework in Sri Lanka (Lalith & Guneratne, 2009).

Stakeholder theory – the right of stakeholders in the firms should be treated fairly; is also apply in Sri Lanka. In 2007, The Companies act, No.07 of 2007 were introduced and replaces the existing Companies Act No.17 of 1982. The Companies Act No.07 is the most substantial regulation governing companies in Sri Lanka. This new Act protects the interests of the shareholders and other stakeholders as well as giving them the power to initiate derivative law suit actions. Directors of public companies are require to meet several criteria before they are appointed to the broad of a public company. (Gunathilake, W., Chandrakumara, A. & Dc Zoysa, A., 2011, legal and regulatory framework).

Section 2

Expansion project recommendations:

Aitken Spence PLC, the member of Sir Lankan blue chip conglomerate with operations in the Middle East Africa, South Asia and the pacific. It also in the list of the Colombo Stock Exchange since 1983. The major interest areas are hotels, maritime services, travel and logistics; hotels is the most important part of Aitken Spence’s income. Aitken Spence operates 23 hotels and resorts in Sri Lanka, Maldives, Oman and India; 2000 rooms of capacity spread over in all of their beach resorts, water villas, holiday resorts and culture resorts. Its range of international award-winning hotels and management expertise has set industry benchmarks for service quality, culinary standards and sustainable tourism.

Financial information:
Annual financial statements highlight:

In 2012 Aitken Space PLC has earned gross revenue of Rs. 9.6 billion and profit after tax is Rs. 2.08 billion compare to last year figures. In 2013, gross revenue earned up to Rs.12 billion and profit after tax is Rs.2.74 billion. This has given a high return on equity from 13.73 % in 2012 to 14.87% in 2013.
The total asset in 2013 is Rs. 22.36 billion which higher than Rs 19.98 billion in 2012. These figures has result in a better in Debt/total asset that decrease from 14.86% to 13.22% in 2012-2013 and current ratios for the two years are increase as well 1.33:1 (2012) to 1.81:1(2013). This means Aitken Spence PLC has a good financial health and the ability to cover up their obligations in the short-term.
Market price per share is also increased from Rs. 70 in 2012 to Rs. 74 in 2013. Dividend payout percentage are incline by 1.7% from 2012 to 2013.

Business strategy in Sri Lanka:

Aitken Spence believe that having a deep knowledge of costumers needs, behaviours, and preferences and performance services create value for the customers and then stimulate their retention and loyalty.

The hotel have to get evolved in the market dynamic and satisfy costumer’s preferences, the organisation concertedly sought to maintain its property development drive whilst also continuing to focus on setting standard in a bid to maintain its position of leadership as a global hospitality provider.

Hence, building infrastructure and support systems to further leverage the latent potential of the destination. Focus on developing land asset is the key in order to attract tourism locations including Trincomalee, Ahungalla, Calle Fort and Beruwela. There are over 350 rooms were updated or are in the process of being update across four resorts in Sri Lanka.

Non-financial:

Sustainability Report

“Life must be characterized by a sense of universal responsibility not only human to human but also human to other forms of life” – Dalai Lama, it is the mission of Aitken Spence Hotel’s sustainability strategy. The hotel has a top-down approach sustainability strategy that seek to generate an organisation-wide culture that in turn will inspire individuals to act as promoters for global change.

Sustainability risk and opportunity assessment:
There are several social risks such human capital unaffected by Group Commercial operations, loss of culture values due to invasion of foreign values, social alienation. In order to minimise these risk, training and development for skill enhancement from Aitken Spence School of Hospitality and internship at hotel properties; bring alive inheritance of Sri Lanka culture through music, art, history, cuisine.

For environment risk minimisation, the organisation has reduce emission by using substitute energy usage, zero influent on green policy implementation. Adopting organic farming techniques, waste water recycling, and non-use of ground water as well as measuring carbon footprint accumulation.

In economic risk, the hotel has chosen to source a fixed radius of hotel property by undertaking sourcing/supplier policy. Recruitment is taking at village level and local purchases are prefer over imports.

Influence on company’s stakeholders:

The combination of moderate uncertainty avoidance and a feminine culture also explains the focus on sustainability innovations in long-term. The value that is placed on quality of life can be seen in the way that the hotel company wants to reassure regulators, investors and customers alike in their annual statement that they are attentive to the sustainability risks and wish to do something proactive and substantial about it.

Regulators will be able to access the hotel to see if the accounting standards have been complying to provide a true and fair view in relate to the annual report. This assist stakeholders such as bank, creditors, and suppliers can rely on the information provided and allow them to make decisions such as lending money, the ability to prepay its commitments. Tax officers also recognise the true amount of tax obligations that the hotel owed.

Shareholders protection law that release in 2007 in the Company Act No. 07. This act is provided in order to protect the shareholder rights and their power in the company. Moreover, the tasting system in Sri Lanka has reduce it tax on dividends based on the agreement of double taxed system. Because of that shareholders will be able to purchase more shares with the extra money from low – tax regime.

Conclusion

It can be seen that Sri Lanka has fully adopted the International Financial Reporting Standard in 2011 after been through two stages. The Institute Chartered of Accountants in Sri Lanka is responsible for update and provide these standards which complied with the IFRS. The hierarchy system and uncertainty avoidance culture of the country has significantly impact on business meetings. The important political and law changing also influent on making standards.

Aitken Spence Hotel is one of the leading organisation in hotels and resort leisure industry. Its business strategy in upgrading infrastructure and expanding its business has resulted proficiency financial information. On top of that the hotel also has a strong and trust worthy sustainability report that meeting society’s expectation. Aitken Spence Hotel’s development and management hotel is believed to meet the core business competencies of Sekara Hotel Ltd.

Reference List

* Aitken Spence Hotel Holding PLC, 2012

* BDO Sri Lanks. (2013, July 13). BDO Tax Alert,< http://www.bdo.lk/wp-content/uploads/2013/07/TAX-Imlication-on.pdf > * Delegation of the European Union to Sri Lanka and the Maldive. (2005, january 1). Delegation of the European Union to Sri Lanka and the Maldive < http://ec.europa.eu/europeaid/documents/case-studies/srilanka_mine-risk-education_en.pdf > * Delegation of the European Union to Sri Lanka and the Maldives. (2014). Trade,< http://eeas.europa.eu/delegations/sri_lanka/eu_sri_lanka/trade_relation/index_en.htm > * EStandardsForum. (2008). Best Practice Report – Sri Lanka.

* Gunathilake, W., Chandrakumara, A. & Dc Zoysa, A., 2011, Corporate governance in Sri Lanka: the status quo. Issues in global research in business and economics (pp.97-117). Dubai: Global Academy of Business and Economics Research * Gyasi, A. K. (2009). Adoption of International Financial Reporting Standards in Developing Countries,< https://www.theseus.fi/bitstream/handle/10024/15526/ANTWI_KOFI_GYASI.pdf?sequence=1 > * Help line law legal solution worldwide, Taxation Law in Sri Lanka, viewed by 31 March 2014, < http://www.helplinelaw.com/article/sri%20lanka/168 > * ICAS. (2011, December 5). Sri Lanka Accounting and Auditing Standards. < http://documents.gov.lk/Extgzt/2011/PDF/Dec/1735_25/PG%201312%20(E)%20(1-708.pdf > * ICAS. (2014). Australian financial expert elaborates on the future of financial reporting for Sri Lanka. Retrieved from < http://www.casrilanka.com/casl/index.php?option=com_content&view=article&id=280:australian-financial-expert-elaborates-on-the-future-of-financial-reporting-for-sri-lanka-&catid=3:member-news&Itemid=212 > * Kwintessential, ‘Sri Lanka - Language, Culture, Customs and Etiquette’ blog, viewed by 31 March 2014, < http://www.kwintessential.co.uk/resources/global-etiquette/srilanka.html > * Lalith, S., & Guneratne, W. (2009). Financial Reforms In Sri Lanka And Their Influence On The Banking Industry. Banks and Bank Systems, 4 (4), 23-35. * Sri Lanka Accounting and Auditing Standards monitoring Board. (2000). Significant cases Detected,< http://www.slaasmb.org/significant_cases_detected1.htm > * U.S. Department of State. (2008). 2008 Investment Climate Statement – Sri Lanka. * UN. (2008, January 1). Practical Implementation of Financial Reporting Standards,< http://unctad.org/en/docs/diaeed20081_en.pdf > * World Bank. (2004). Sri Lanka: Report on the Observance of Standards and Codes – Accounting and Auditing.