Deposits from Customers SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2010, 2009 AND 2008 Expressed in millions of Rupiah, unless otherwise stated Appendix 542 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ac. Interest Income and Expense i Conventional Interest income and expense for all interest-bearing financial instruments are recognised within “interest income” and “interest expense” in the consolidated statement of income using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees, commissions and other fees received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised on the non-impaired portion of the impaired financial assets using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Prior to 1 January 2010 Interest income and expense are recognised on an accrual basis. Interest income on loans or other earning assets that are classified as non-performing is recognised only to the extend that the interest is received in cash. When a financial asset is classified as non-performing, any interest income previously recognised but not yet collected is reversed against interest income. The reversed interest income is recognised as a contingent receivable. Cash receipts from loans that are classified as doubtful or loss are first applied to the loan principal. The excess of cash receipts over loan principal is recognised as interest income in the statements of income. Interest income from restructured loan is recognised only to the extent that interest is received in cash, before the loan’s quality become current as determined by Bank Indonesia Regulation No. 72PBI2005 dated 20 January 2005 regarding Asset Quality Rating for Commercial Banks, as amended by Bank Indonesia Regulation No. 112PBI2009 dated 29 January 2009. Interest receivable on non-performing assets of Bank Mandiri and its Subsidiaries is recorded as contingent receivables in the Commitment and Contingency statement in the notes to the consolidated financial statements. Subsidiaries’ consumer financing income is presented net of with consumer financing income for other banks in relation with channeling transactions, joint financing cooperations, factoring, and the appointment as manager of accounts receivable. ii Sharia Included in interest income and expense are sharia income and expense. The Bank’s income as a fund manager mudharib consist of income from sale and purchase on murabahah transaction, income from istishna, rent income ijarah and income from profit sharing from mudharabah and musyarakah financing as well as other main operating income. PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2010, 2009 AND 2008 Expressed in millions of Rupiah, unless otherwise stated Appendix 543 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ac. Interest Income and Expense continued ii Sharia continued Income from murabahah transaction, which payment is made on installment or deferred, is recognised proportionally, in accordance with generally accepted banking practice Bank Indonesia Letter No. 101260DPbS dated 15 October 2008 and Bank Indonesia Letter No. 9634DPbS dated 20 April 2007. Considering the risk on murabahah receivables, the Subsidiary adopts the following policy in recognising income from murabahah: 1. Murabahah with a deferred payment term of one year or above one year where the risk of cash collection on receivables andor management fee are relatively low risk, the income is recognised using effective method annuity over the contract period. 2. Murabahah with a deffered payment term above than one year, where the risk of cash collection receivables andor management fee and the collection receivable are relatively high risk, the income is recognised using proportionally method over the contract period. Subsidiary determine level of the risk based on internal requirement. Subsidiary will stop the amortisation of deferred income during the financing period when the loan is categorised as non performing. Istishna income is recognised using percentage of completion method or at the end of contract. Ijarah income is recognised proportionally over the contract period. Musyarakah profit sharing income for passive partner is recognised based on an agreed portion in accordance with the financing contract. Mudharabah profit sharing income is recognised in a period where the right of revenue sharing is due based on agreed portion. It is not allowable to recognise the income based on projection. ad. Premium income recognition, Claims and benefits expenses and Unearned premium income Subsidiary’s premium received from short duration insurance contracts is recognised as income over the period of risk coverage in proportion to the amounts of insurance protection provided. Subsidiary’s premiums from long duration contracts are recognised as income when the policy is due. Premiums received before the due date of the respective policies are reported as other liabilities in the consolidated balance sheet. Subsidiary’s claims and benefits consist of settled claims, claims that are still in process of completion and estimated of claims incurred but not yet reported IBNR. Claims and benefits are recognised as expenses when the liabilities to cover claims are incurred. Claim recoveries from reinsurance companies are recognised and recorded as deduction from claims expenses consistent in the same period with the claim expenses recognition. Total claims in process, including claims incurred but not yet reported, are stated at estimated amounts determined based on the actuarial technical insurance calculations. Changes in estimated claims liabilities as a result of further evaluation and the difference between estimated claims and paid claims are recognised as addition to or deduction from expenses in the period the changes occurred.