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, 2015 and for the year then ended Expressed in millions of Rupiah, unless otherwise stated 35

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

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. Financial liabilities are derecognised from the consolidated statement of financial position when redeemed or otherwise extinguished. 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. Gains and losses arising from changes in fair value of financial liabilities classified held for trading are included in the consolidated statement of profit or loss and other comprehensive income and are reported as “Unrealised gainslosses from increasedecrease in fair value of financial instruments”. Interest expenses on financial liabilities held for trading are included in “Interest expenses”. If the Group designated certain debt securities upon initial recognition as of fair value through profit or loss fair value option, then this designation cannot be changed subsequently. According to SFAS 55, the fair value option is applied on the debt securities consists of debt host and embedded derivatives that must otherwise be separated. Fair value changes relating to financial liabilities designated at fair value through profit or loss are recognised in “Gainslosses from changes in fair value of financial instruments”. b Financial liabilities at amortised cost Financial liabilities at amortised cost are initially recognised at fair value less transaction costs. After initial recognition, Group measures all financial liabilities at amortised cost using effective interest rates method. Effective interest rate amortisation is recognised as “Interest expense”.

C. Derecognition

Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred that is, if substantially all the risks and rewards have not been transferred, the Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.