Impairment allowances Fair value of financial instruments

NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2011 financial information about unconsolidated structured entities that the reporting entity had sponsored. FRS 113 Fair Value Measurement effective 1 January 2013 FRS 113 defines fair value, establishes a framework for measuring fair value and sets out the disclosure requirements for fair value measurements. It explains how to measure the fair value when it is required by other FRSs. It does not introduce new fair value measurements, neither does it eliminate the practicability exceptions to fair value measurements that currently exist in certain standards. FRS 113 defines fair value as a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date i.e. an exit price. Amendments to FRS 1 Financial Statement Presentation effective 1 July 2012 The amendments require entities to group items presented in other comprehensive income on the basis of whether they are potentially recycled to the income statement reclassification adjustments. Where an entity presents its comprehensive income in two separate statements, the amendments specifically require these statements to be presented consecutively. Amendments to FRS 12 Income Taxes effective 1 January 2012 The amendments introduce an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value, where the presumption that the carrying amount of the investment property will be recovered entirely by sale can be rebutted only if the investment property is depreciable and held within a business model whose objective is to consume substantially all of the asset’s economic benefits over the life of the asset. The amendments also incorporate into FRS 12 the remaining guidance previously contained in INT FRS 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets, which is withdrawn. Amendments to FRS 107 Financial Instruments: Disclosures effective 1 July 2011 The amendments require additional disclosures for all transferred financial assets that are not derecognised in their entirety, and those that are derecognised in their entirety but for which the transferor retains continuing involvement existing at the reporting date, irrespective of when the related transfer transaction occurred. The amendments also clarify the conditions under which an entity is deemed to transfer a financial asset. 4 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 judgement 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 judgement.

4.1 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. In determining specific allowances, management considers objective evidence of impairment and exercises judgement in estimating cash flows and collateral value. When a loan is impaired, a specific allowance is assessed by using the discounted cash flow method, measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. The amount of specific allowance also takes into account the collateral value, which may be discounted to reflect the impact of a forced sale or untimely liquidation. In determining general allowances, management considers country and portfolio risks, as well as industry practices. General allowances of at least 1 of credit exposures on and off- balance sheet against which specific allowances have not been made are maintained and adjusted for collaterals held. This is in accordance with the transitional arrangements under Notice to Banks No. 612, “Credit Files, Grading and Provisioning” issued by the Monetary Authority of Singapore.

4.2 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. 92 The determination of fair value is subject to the Valuation Framework approved by the Board Risk Management Committee 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 judgement in determining the risk characteristics of various financial instruments, discount rates, estimates of future cash flows and other factors used in the valuation process. Judgement 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. Refer to Note 43 for more details about the fair value hierarchy of the Group’s financial instruments measured at fair value.

4.3 Goodwill on consolidation