Impairment allowances Fair value of financial instruments

Year ended 31 December 2012 15 Please refer to Note 39.2 for disclosures on hedging derivatives.

2.19 Employee benefits Employee benefits, which include base pay, cash

bonuses, share-based compensation, contribution to defined contribution plans such as the Central Provident Fund and other staff-related allowances, are recognised in the income statement when incurred. For defined contribution plans, contributions are made to publicly or privately administered funds on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment obligations. Employee entitlement to annual leave is recognised when they accrue to employees. A provision is made for the estimated liability for annual untaken leave as a result of services rendered by employees up to the balance sheet date. 2.20 Share-based compensation Employee benefits also include share-based compensation, namely the DBSH Share Ownership Scheme the Scheme, the DBSH Share Option Plan, the DBSH Share Plan and the DBSH Employee Share Plan the Plans. The details of the Scheme and Plans are described in Note 40. Equity instruments granted and ultimately vested under the Plans are recognised in the income statement based on the fair value of the equity instrument at the date of grant. The expense is amortised over the vesting period of each award. Monthly contributions to the Scheme are expensed off when incurred. 2.21 Current and deferred taxes Current income tax for current and prior periods is recognised at the amount expected to be paid or recovered from the tax authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. The Group considers uncertain tax positions generally at the level of the total tax liability to each tax authority for each period. The liability is determined based on the total amount of current tax expected to be paid, taking into account all tax uncertainties, using either an expected value approach or a single best estimate of the most likely outcome. Tax assets and liabilities of the same type current or deferred are offset when a legal right of offset exist and settlement in this fashion is intended. This applies generally when they arise from the same tax reporting group and relate to the same tax authority. Deferred income tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Temporary differences are not recognised for goodwill that is not deductible for tax purposes and for the initial recognition of assets or liabilities that neither affects accounting nor taxable profit, other than a business combination. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted by the balance sheet date. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising from investments in subsidiaries, branches, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not be reversed in the foreseeable future. Deferred tax related to fair value re-measurement of available-for-sale investments, which are recognised outside profit or loss, is also recognised outside profit or loss i.e. in other comprehensive income and accumulated in the available-for-sale revaluation reserves. 3 Critical Accounting Estimates The Group ’s accounting policies and use of estimates are integral to the reported results. Certain accounting estimates require exercise of management’s judgment in determining the appropriate methodology for valuation of assets and liabilities. In addition, procedures are in place to ensure that methodologies are reviewed and revised as appropriate. The Group believes its estimates for determining the valuation of its assets and liabilities are appropriate. The following is a brief description of the Group ’s critical accounting estimates involving management’s valuation judgment.

3.1 Impairment allowances

It is the Group ’s policy to establish, through charges against profit, specific and general allowances in respect of estimated and inherent credit losses in its portfolio as described in Note 2.10. A significant judgmental area is the calculation of general and other allowances assessed on a collective basis. Such allowances require judgment partly because it is not possible or practical to determine losses on individual loans due to the large number of individual loans and hence a portfolio assessment is required taking into account historical data and combined with professional judgment by management on the current economic and credit environment. In determining such allowances, management considers country and portfolio risks, as well as industry practices. Please refer to the Risk Management section for a further description of the risk management strategies applied. Year ended 31 December 2012 16

3.2 Fair value of financial instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction. The majority of the Group ’s financial instruments reported at fair value are based on quoted and observable market prices or on internally developed models that are based on independently sourced market parameters, such as interest rate yield curves, credit spreads, exchange prices, dividend yields, option volatilities and foreign exchange rates. Valuation reserves or pricing adjustments where applicable will be used to converge to fair value. The determination of fair value is subject to the Valuation Framework approved by the Board Risk Management Committee BRMC and the oversight of senior management committees. The Valuation Framework is implemented by the Group through policies and procedures approved by the committees. These policies and procedures facilitate the exercise of judgment in determining the risk characteristics of various financial instruments, discount rates, estimates of future cash flows and other factors used in the valuation process. Judgment may also be applied in adjusting prices for less readily observable external parameters such as through the use of valuation reserves. Other factors such as model assumptions and market dislocations leading to market anomalies can also materially affect these estimates. Please refer to Note 42 for details about the fair value hierarchy of the Group ’s financial instruments measured at fair value. The fair value of financial instruments without an observable market price in liquid market may be determined using valuations models. The choice of model requires significant judgment for complex products especially those in the “Treasury” segment and is governed by the above Valuation Framework and subject to approval by an independent control function. Note 42 provides details of financial instruments that are valued with observable and unobservable parameters Levels 1 to 3. Instruments designated as Levels 2 and 3 are frequently revalued using a valuation technique employing a relevant model. 3.3 Goodwill on consolidation The Group performs an impairment review to ensure that the carrying amount of the CGU, to which the goodwill is allocated, does not exceed the recoverable amount of the CGU. Note 25 provides details of goodwill as of the reporting date. The recoverable amount represents the present value of the estimated future cash flows expected to arise from continuing operations. Therefore, in arriving at the recoverable amount, management exercises judgment in estimating the future cash flows, growth rate and discount rate.

3.4 Income taxes