2011 Annual Report Financial Supplements - BDO

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Subsequent to initial recognition, HTM investments are measured at amortized costs usingeffective interest method, less impairment losses, if any. Impairment loss, which is thedifference between the carrying value and the present value of estimated cash flows of theinvestment, is recognized when there is objective evidence that the investment has beenimpaired. Any changes to the carrying amount of the investment due to impairment arerecognized in profit or loss.(d) AFS SecuritiesThis category includes non-derivative financial assets that are either designated to thiscategory or do not qualify for inclusion in any of the other categories of financial assets.Non-derivative financial asset classified as AFS may be reclassified to loans andreceivables category that would have met the definition of loans and receivables if there isan intention and ability to hold that financial asset for the foreseeable future or untilmaturity.All financial assets within this category are subsequently measured at fair value, unlessotherwise disclosed, with changes in value recognized in other comprehensive income, netof any effects arising from income taxes. Cumulative gains and losses arising fromsecurities classified as AFS are reclassified from other comprehensive income to profit orloss when these are sold or when the investment are impaired and presented as areclassification adjustment within other comprehensive income.In the case of impairment, any loss previously recognized in other comprehensive incomeis reclassified to profit or loss. Reversal of impairment losses are recognized in othercomprehensive income, except for financial assets that are debt securities which arerecognized in profit or loss only if the reversal can be objectively related to an eventoccurring after the impairment loss was recognized.The fair values of quoted investments in active markets are based on current closing prices.If the market for a financial asset is not active and for unlisted securities, BDO UnibankGroup establishes the fair value by using valuation techniques, which include the use ofrecent arm’s length transactions, discounted cash flow analysis, option pricing models andother valuation techniques commonly used by market participants.Gains and losses arising from changes in the fair value of the financial assets at FVTPLcategory are reported as part of Trading Gain under Other Operating Income account in thestatement of income in the period in which these arise. Gains and losses arising fromchanges in the fair value of AFS securities are recognized in other comprehensive incomeuntil the financial asset is derecognized or impaired, at which time the cumulative gain or losspreviously recognized in other comprehensive income shall be reclassified to profit or loss.However, interest calculated using the effective interest method is recognized in profit orloss.Non-compounding interest, dividend income and other cash flows resulting from holdingimpaired financial assets are recognized in profit or loss when received, regardless of how therelated carrying amount of financial assets is measured.Derecognition of financial assets occurs when the right to receive cash flows from thefinancial instruments expire or are transferred and substantially all of the risks and rewards ofownership have been transferred.www.bdo.com.ph 31
NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)2.07 Derivative Financial Instruments and Hedge AccountingBDO Unibank Group is a party to various foreign-currency forward and swap contracts andcross-currency and interest rate swaps. These contracts are entered into as a service tocustomers and as a means of reducing or managing BDO Unibank Group’s foreign exchangeand interest rate exposures, as well as for trading purposes.Derivatives are initially recognized at fair value on the date on which derivative contract isentered into and are subsequently measured at their fair value (except for the embeddedderivatives in CLNs linked to ROP bonds which BDO Unibank Group reclassified to loans).Fair values are obtained from quoted market prices in active markets, including recent markettransactions, and valuation techniques, including discounted cash flow models and optionpricing models, as appropriate. All derivatives are carried as assets when fair value is positiveand as liabilities when fair value is negative.The best evidence of the fair value of a derivative at initial recognition is the transaction price(the fair value of the consideration given or received) unless the fair value of the instrument isevidenced by comparison with other observable current market transactions in the sameinstrument or based on a valuation technique whose variables include only data fromobservable markets. When such evidence exists, BDO Unibank Group recognizes profit orloss at initial recognition.For more complex instruments, BDO Unibank Group uses proprietary models, which usuallyare developed from recognized valuation models. Some or all of the inputs into these modelsmay not be market observable, and are derived from market prices or rates or are estimatedbased on assumptions. When entering into a transaction, the financial instrument isrecognized initially at the transaction price, which is the best indicator of fair value, althoughthe value obtained from the valuation model may differ from the transaction price. Thisinitial difference in fair value indicated by valuation techniques is recognized as profit or lossdepending upon the individual facts and circumstances of each transaction and not later thanwhen the market data becomes observable.The value produced by a model or other valuation technique is adjusted to allow for a numberof factors as appropriate, because valuation techniques cannot appropriately reflect all factorsmarket participants take into account when entering into a transaction. Valuation adjustmentsare recorded to allow for model risks, bid-ask spreads, liquidity risks as well as other factors.Management believes that these valuation adjustments are necessary and appropriate to fairlystate financial instruments carried at fair value in the statement of financial position.Certain derivatives embedded in other financial instruments are considered as separatederivatives when their economic characteristics and risks are not closely related to those of thehost contract and the host contract is not carried at fair value through profit or loss. Theseembedded derivatives are bifurcated from the host contracts and are measured at fair valuewith changes in fair value recognized in profit or loss (except for the embedded derivatives inCLNs linked to ROP bonds which were not bifurcated from the host contracts and werereclassified to loans as permitted for prudential reporting).
Page 7 and 8: REPORT OFINDEPENDENT AUDITORSReport
Page 9 and 10: STATEMENTS OFINCOMEFOR THE YEARS EN
Page 12: BALANCE AT JANUARY 1, 2009 P 23,020
Page 16 and 17: FOR THE YEARS ENDED DECEMBER 31, 20
Page 18 and 19: 1.02 Approval of Financial Statemen
Page 22 and 23: (ii) Philippine Interpretation IFRI
Page 24 and 25: PFRS 7 (Amendment), Financial Instr
Page 26 and 27: (v)PFRS 9, Financial Instruments: C
Page 28 and 29: BDO Unibank Group accounts for its
Page 30 and 31: Regular purchases and sales of fina
Page 34: Certain derivatives may be designat
Page 37 and 38: NOTES TOFINANCIAL STATEMENTSDECEMBE
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NOTES TOFINANCIAL STATEMENTSDECEMBE
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COMPANY HEADQUARTERSBDO Unibank, In
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2011 Annual Report Financial Supplements - BDO

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