Insurance Contract continued FS Eng Bank Mandiri 31 Dec 2013 Final

PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2013 AND 2012 Expressed in millions of Rupiah, unless otherwise stated Appendix 541 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ae. Temporary Syirkah Funds continued Temporary syirkah funds cannot be classified as liability. This is due to the Subsidiary does not have any liability to return the fund to the owners, except for losses due to the Subsidiary’s management negligence or misrepresentation. On the other hand, temporary syirkah funds also cannot be classified as equity, because of the existence of maturity period and the depositors do not have the same rights as the shareholders, such as voting rights and the rights of realised gain from current asset and other non-investment accounts. Temporary syirkah funds represent one of the consolidated statement of financial position accounts which is in accordance with sharia principle that provide right to the Subsidiary to manage fund, including to mixing the funds with the other funds. The owner of temporary syirkah funds receive parts of profit in accordance with the agreement and receive loss based on the proportion to the total funds. The profit distribution of temporary syirkah funds might be based on profit sharing or revenue sharing concept. af. Interest and Sharia 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 comprehensive 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. ii Sharia income Included in interest income and expense are sharia income and expense. The Subsidiariess income as a fund manager mudharib consists of income from murabahah and istishna transactions, income from ijarah leasing, income from profit sharing of mudharabah and musyarakah financing and other main operating income. Murabahah income by deferred payment or by installment is recognised during the period of the contract based on effective method annuity. PT BANK MANDIRI PERSERO Tbk. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER 2013 AND 2012 Expressed in millions of Rupiah, unless otherwise stated Appendix 542 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued af. Interest and Sharia Income and Expense continued ii Sharia income continued Subsidiary determine risk policy based on the internal requirement. Subsidiary ceases the amortisation of deferred income when the financing were classified as non performing. Income from istishna is recognised using the percentage of completion or full completion method. Income from Ijarah is recognised proportionally during the contract period. Profit sharing for passive partner in musyarakah is recognised in the period when the right arise in accordance with the agreed sharing ratio. Profit sharing income from mudharabah is recognised in the period when the right arise in accordance with agreed sharing ratio and the recognition based on projection of income is not allowed. iii Third Parties’ Share on Return of Temporary Syirkah Funds Third parties’ share on the return of temporary syirkah funds represent fund owners’ share of the profit of Subsidiary derived from managing of such funds under mudharabah mutlaqah, mudharabah muqayyadah and mudharabah musytarakah principles. The profit sharing is determined on a cash basis. Distribution of profit sharing is based on profit sharing principle which calculated from the Subsidiary’s gross profit margin. Margin income and profit sharing on financing facilities and other earning assets are distributed to fund owners and the Subsidiary based on proportion of fund used in the financing and other earning assets. Margin income and profit sharing income allocated to the fund owners are then distributed to fund owners as shahibul maal and the Subsidiary as mudharib based on a predetermined ratio. Margin income and profit sharing from financing facilities and other earning assets using the Subsidiary’s funds, are entirely shared for the Subsidiary, including income from the Subsidiary’s fee-based transactions. ag. Premium Income and Claims Expenses Premium received from short duration insurance contracts is recognised as revenue over the period of risk coverage in proportion to the amounts of insurance protection provided. Premiums from long duration contracts are recognised as revenue when the policy is due. Premiums received before the due date of the respective policies are reported as policyholders’ deposits in the consolidated statement of financial position.