Basis of Consolidated Financial Statements Preparation and Measurement

PT SINAR MAS MULTIARTHA Tbk AND ITS SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2014 and 2013 Figures are Presented in Millions of Rupiah,unless Otherwise Stated 4. AFS Financial Assets AFS financial assets are those which are designated as such or not classified in any of the other categories. They are purchased and held indefinitely and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS financial assets are measured at fair value with unrealized gains or losses recognized as other comprehensive income, until the investment is sold, or determined to be impaired, at which time the cumulative gain or loss is reclassified to the profit and loss and removed from comprehensive income. As of December 31, 2014 and 2013, this category includes short-term invesments – securities bonds, Republic of Indonesia – ROI Loans, shares that are traded in Indonesia Stock Exchange, placement with Bank Indonesia, and investment in shares of stock. In the absence of a reliable basis for determining the fair value, the Group’s investments in shares of stock enumerated in Note 17 are carried at cost, net of any impairment. Financial Liabilities 1. Financial Liabilities at FVPL Financial liabilities are classified in this category if these result from trading activities or derivative transactions that are not accounted for as accounting hedges, or when the Group elects to designate a financial liability under this category. Changes in fair value are recognized directly in the consolidated statement of comprehensive income. As of December 31, 2014 and 2013, this category includes segregated funds contract liabilities – unit linked policies and other liabilities – derivative liabilities. 2. Other Financial Liabilities This category pertains to financial liabilities that are not held for trading or not designated at FVPL upon the inception of the liability. Issued financial instruments or their components, which are not classified as financial liabilities at FVPL are classified as other financial liabilities, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. Other financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization or accretion for any related premium, discount, and any directly attributable transaction costs. As of December 31, 2014 and 2013, this category includes deposits and deposits from other banks, payables to brokers, accrued expenses, securities issued, loans received, and other liabilities. - 25 - PT SINAR MAS MULTIARTHA Tbk AND ITS SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2014 and 2013 Figures are Presented in Millions of Rupiah,unless Otherwise Stated Derivative Financial Instruments and Hedging Activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: 1. Hedges of the fair value of recognized assets or liabilities or a firm commitment fair value hedges; or 2. Hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction cash flow hedge. At the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. In doing the business, the Group enters into transactions involving derivative financial instruments such as foreign currency spot and forward contracts and foreign currency swaps. Derivative financial instruments are valued and recorded on statement of financial position at their fair value using market rates. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains or losses as a result of fair value changes are recognized as current year profitloss. 1. Fair Value Hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group only applies fair value hedge accounting for hedging fixed interest risk on borrowings. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognized in the profit or loss within “Interest and other financial charges”, together with changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognized in the profit or loss within “Other Income Expense – Net”. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item, for which the effective interest method is used, is amortized to profit or loss over the period to maturity. 2. Cash Flow Hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as a cash flow hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the profit or loss within “Other Income Expense – Net”. - 26 -