SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ad. Income tax continued

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 70 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ag. Premium income and claims expenses continued Claims and benefits consist of settled claims, claims that are still in process of completion and estimates 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. ah. Fees and commissions income Fees and commissions income and transaction cost that are directly attributable to lending and consumer financing activities, are recognised as a partdeduction of outstanding loan and consumer financing receivables and will be recognised as interest income by amortising the carrying value of loan and consumer financing receivables using effective interest rate method. The directly attributable unamortised fees and commissions balances relating to loans and consumer financing receivables and investment in lease financing which settled prior to maturity are recognised upon settlement date, of such loans, consumer financing and investment in lease financing. Other fees and commissions income which are not directly related to lending activities or a specific periods are recognised as revenue on the transaction date. ai. Employee benefits Pension liability Bank Mandiri established a defined contribution pension plan covering substantially all of its eligible employees from August 1, 1999 and also defined benefit pension plans, which were derived from each of the Merged Banks’ pension plan. This program is funded through payment to pension fund’s management as defined in the regular actuarial calculation. Bank Mandiri and Subsidiaries’ pension liability has been calculated by comparing the benefit that will be received by an employee at normal pension age from the Pension Plans with the benefit as stipulated under the Labor Law No. 132003 after deducting accumulated employee contributions and the results of its investments. If the pension benefit from the Pension Plans is less than the benefit as required by the Labor Law No. 132003, the Bank and Subsidiaries will have to pay such shortage. The pension plan based on the labor law is a defined benefit plan because the labor law requires a certain formula to calculate the minimum pension benefit. A defined contribution plan is a pension plan that defines an amount of pension contribution based on pension Fund Regulation and all contribution including investment return are recorded in its account’s member as pension benefit as stated in Pension Fund Law No. 11 year 1992 dated April 20, 1992 regarding Pension Fund. 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 71

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ai. Employee benefits continued

Pension liability continued The liability recognised in the consolidated statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the consolidated statement of financial position date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service cost. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method on a regular basis for periods not exceed one year. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefit will be paid, and that have terms to maturity approximating the terms of the related pension liability. Effective on January 1, 2015, the Bank and subsidiaries applied SFAS No. 24 Revised 2013, “Employee Benefits”. The revised SFAS, among others, removes the corridor mechanism and contingent liability disclosures to simplify classification and disclosures. The accumulated unrecognised actuarial gains or losses incurred are recognised as “Other Comprehensive Income” and is presented in the equity section. Past service cost directly charge to profit or loss. Since the impact of the revised SFAS is not significant to the consolidated financial statements, then the implementation of the revised SFAS is applied prospectively. The post-employment benefits expense recognised during the current year consists of service cost in profit and loss, net interest on the net defined benefit liability in profit and loss and re- measurement of the net defined benefit liabilities in other comprehensive income. Net interest on the net defined benefit liabilities is the interest income component of plan assets, interest expense of defined benefit liabilities and interest on the effect of asset ceiling. Remeasurements of the net defined benefit liability consists of: - Actuarial gains and losses; - Return on plan assets, excluding amount included in net interest on the net defined benefit liability; and - Any change in effect of the asset ceiling, excluding amount including in net interest on the net defined benefit liability. Actuarial gains and losses may arise from the adjustments made based on the experience and changes in actuarial assumption. Other long-term employment benefit obligations The entitlement of these benefits is provided to the employees until reaching the retirement age and the completion of a minimum service period. The costs estimation for these benefits are accrued over the period of employment calculated, using similar methodology used for defined benefit pension plans but simplified. These obligations are calculated annually by independent qualified actuaries.