Basis of Preparation of the Consolidated Financial Statements

PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2016 and for the year then ended Expressed in millions of Rupiah, unless otherwise stated 36

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued c. Financial instruments continued

A. Financial assets continued

c Financial assets held-to-maturity continued Held-to-maturity financial assets are initially recognised at fair value including transaction costs and subsequently measured at amortised cost, using the effective interest method. Interest income on financial assets held-to-maturity is included in the consolidated statement of profit or loss and other comprehensive income and reported as “Interest income”. In the case of impairment, the impairment loss is reported as a deduction from the carrying value of the investment and recognised in the consolidated financial statements as “Allowance for impairment losses”. d Financial assets available-for-sale Financial assets available-for-sale are financial assets that are intended to be held for indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or that are not classified as loans and receivables, held-to- maturity or financial assets at fair value through profit or loss. Financial assets available-for-sale are initially recognised at fair value, plus transaction costs, and measured subsequently at fair value with gains or losses arising from the changes in fair value being other comprehensive income, except for impairment losses and foreign exchange gains or losses for debt instrument. For equity instrument, foreign exchange gains or losses is recognised in the consolidated statement of profit or loss and other comprehensive income, until the financial assets is derecognised. If a financial asset available-for-sale is determined to be impaired, the cumulative unrealised gain or loss arising from the changes in fair value previously recognised as other comprehensive income is recognised in the profit or loss. Interest income is calculated using the effective interest method. Recognition The Bank uses trade date accounting for regular way contracts when recording marketable securities and government bonds transactions. Financial assets that are transferred to a third party but not qualify for derecognition are presented in the consolidated statement of financial position as “receivables from assets pledged as collateral”, if the transferee has the right to sell or repledge them.

B. Financial liabilities

The Group classified its financial liabilities in the category of a financial liabilities at fair value through profit or loss and b financial liabilities measured at amortised cost. a Financial liabilities at fair value through profit or loss This category comprises two sub-categories: financial liabilities classified as held for trading, and financial liabilities designated by the Group as of fair value through profit or loss upon initial recognition. A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short term profit-taking. Derivatives are also categorised as held for trading unless they are designated and effective as hedging instruments. PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2016 and for the year then ended Expressed in millions of Rupiah, unless otherwise stated 37

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued c. Financial instruments continued