Principles of Consolidation Summary of Significant Accounting and Financial Reporting Policies

PT SINAR MAS MULTIARTHA Tbk AND ITS SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2014 and 2013 Figures are Presented in Millions of Rupiah,unless Otherwise Stated Derivative Financial Instruments and Hedging Activities Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair values. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: 1. Hedges of the fair value of recognized assets or liabilities or a firm commitment fair value hedges; or 2. Hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction cash flow hedge. At the inception of the transaction, the Group documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. In doing the business, the Group enters into transactions involving derivative financial instruments such as foreign currency spot and forward contracts and foreign currency swaps. Derivative financial instruments are valued and recorded on statement of financial position at their fair value using market rates. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Gains or losses as a result of fair value changes are recognized as current year profitloss. 1. Fair Value Hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the profit and loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Group only applies fair value hedge accounting for hedging fixed interest risk on borrowings. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognized in the profit or loss within “Interest and other financial charges”, together with changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognized in the profit or loss within “Other Income Expense – Net”. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of the hedged item, for which the effective interest method is used, is amortized to profit or loss over the period to maturity. 2. Cash Flow Hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as a cash flow hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the profit or loss within “Other Income Expense – Net”. - 26 - PT SINAR MAS MULTIARTHA Tbk AND ITS SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2014 and 2013 Figures are Presented in Millions of Rupiah,unless Otherwise Stated Amounts accumulated in equity are recycled to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging floating rate borrowings is recognized in profit or loss within “Other Income Expense – Net”. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset. The deferred amount will eventually be recognized as Depreciation if these assets are property and equipment. Offsetting of Financial Instruments Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable right to offset the recognized amounts and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Impairment of Financial Assets The Group’s management assesses at each consolidated statement of financial position date whether a financial asset or group of financial assets is impaired. 1. Assets Carried at Amortized Cost The Company assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset a “loss event” and that loss event or events has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan with the terms that the Company would not otherwise consider if the borrower has no financial difficulties, indications that a borrower or issuer will enter into bankruptcy, disappearance of an active market for a security due to financial difficulties, observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio. The management first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the management determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss, is or continues to be recognized are not included in a collective assessment of impairment. - 27 -