Via ODiSy March 22, 2012 PHILIPPINE STOCK EXCHANGE ... - BDO

- 17 -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 accountin the statement of income in the period in which these arise. Gains and losses arisingfrom changes in the fair value of AFS securities are recognized in other comprehensiveincome until the financial asset is derecognized or impaired, at which time thecumulative gain or loss previously recognized in other comprehensive income shall bereclassified to profit or loss. However, interest calculated using the effective interestmethod is recognized in profit or loss.Non-compounding interest, dividend income and other cash flows resulting fromholding impaired financial assets are recognized in profit or loss when received,regardless of how the related 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 andrewards of ownership have been transferred.2.07 Derivative Financial Instruments and Hedge AccountingBDO Unibank Group is a party to various foreign-currency forward and swap contractsand cross-currency and interest rate swaps. These contracts are entered into as a serviceto customers and as a means of reducing or managing BDO Unibank Group’s foreignexchange and 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 toloans). Fair values are obtained from quoted market prices in active markets, includingrecent market transactions, and valuation techniques, including discounted cash flowmodels and option pricing models, as appropriate. All derivatives are carried as assetswhen fair value is positive and as liabilities when fair value is negative.The best evidence of the fair value of a derivative at initial recognition is the transactionprice (the fair value of the consideration given or received) unless the fair value of theinstrument is evidenced by comparison with other observable current markettransactions in the same instrument or based on a valuation technique whose variablesinclude only data from observable markets. When such evidence exists, BDO UnibankGroup recognizes profit or loss at initial recognition.For more complex instruments, BDO Unibank Group uses proprietary models, whichusually are developed from recognized valuation models. Some or all of the inputs intothese models may not be market observable, and are derived from market prices orrates or are estimated based on assumptions. When entering into a transaction, thefinancial instrument is recognized initially at the transaction price, which is the bestindicator of fair value, although the value obtained from the valuation model may differfrom the transaction price. This initial difference in fair value indicated by valuationtechniques is recognized as profit or loss depending upon the individual facts andcircumstances of each transaction and not later than when the market data becomesobservable.