FirstCaribbean International Bank (Bahamas) Limited

Notes to Consolidated Financial StatementsFor the year ended October 31, 2009(Expressed in thousands of Bahamian dollars)2. Accounting Policies (Continued)2.2 Significant accounting judgments and estimatesThe preparation of consolidated financial statements in conformity with IFRS requires management to make certainsignificant estimates and judgments that affect amounts reported in the consolidated financial statements andaccompanying notes. Actual results could differ from these estimates.Estimates and judgements are continually evaluated and are based on historical experience and other factors,including expectations of future events that are believed to be reasonable under the circumstances. The estimates andjudgements that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilitieswithin the next financial year are discussed below.Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded on the consolidated balance sheet cannotbe derived from active markets, they are determined using a variety of valuation techniques that include the use ofmathematical models. The inputs to these models are derived from observable market data where possible, but whereobservable market data are not available, judgement is required to establish fair values.Certain financial instruments are recorded at fair value using valuation techniques in which current market transactionsor observable market data are not available. Their fair value is determined using a valuation model that has been testedagainst prices or inputs to actual market transactions and using the Bank’s best estimates of the most appropriatemodel assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close outpositions, counterparty credit and liquidity spread and limitations in the model.Impairment losses on loans and advancesThe Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether animpairment loss should be recorded in the consolidated statement of income, the Bank makes judgments as towhether there is any objective evidence indicating that there is a measurable decrease in the estimated future cashflows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. Thisevidence may include observable data indicating that there has been an adverse change in the payment status ofborrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group.Management uses estimates based on historical loss experience for assets with credit risk characteristics and objectiveevidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology andassumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce anydifferences between loss estimates and actual loss experience.Retirement benefit obligationsAccounting for some retirement benefit obligations requires the use of actuarial techniques to make a reliable estimateof the amount of benefit that employees have earned in return for their service in the current and prior periods. Theseactuarial assumptions are based on management’s best estimates of the variables that will determine the ultimate costof providing post-employment benefits and comprise both demographic and financial assumptions. Variations inthe financial assumptions can cause material adjustments in the next financial year if it is determined that the actualexperience differed from the estimate.22