2011 Annual Report - BDO

Deferred tax is provided, using the liability method, on temporary differences at the end of thereporting period between the tax base of assets and liabilities and their carrying amounts forfinancial reporting purposes.Under the liability method, with certain exceptions, deferred tax liabilities are recognized forall taxable temporary differences and deferred tax assets are recognized for all deductibletemporary differences and the carryforward of unused tax losses and unused tax credits to theextent that it is probable that taxable profit will be available against which the deferred tax assetcan be utilized.The carrying amount of deferred tax assets is reviewed at the end of each reporting period andreduced to the extent that it is probable that sufficient taxable profit will be available to allowall or part of the deferred tax asset to be utilized.Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to theperiod when the asset is realized or the liability is settled, based on tax rates and tax laws thathave been enacted or substantively enacted at the end of each reporting period.Most changes in deferred tax assets or liabilities are recognized as a component of tax expensein the statement of income. Only changes in deferred tax assets or liabilities that relate toa change in value of assets or liabilities that is charged to other comprehensive income ordirectly to equity are charged to other comprehensive income or credited directly to equity.2.14 Trust OperationsThe Bank commonly acts as trustee and in other fiduciary capacities that result in the holdingor placing of assets on behalf of individuals, trusts, post-employment benefit plans andother institutions. These assets and income arising thereon are excluded from these financialstatements, as they are not assets of the Bank.2.15 Financial Risk Management2.15.01 Strategy in Using Financial InstrumentsBy their nature, the Bank’s activities are principally related to the use of financial instrumentsincluding derivatives. The Bank accepts deposits from customers at fixed and floating rates,and for various periods, and seeks to earn above-average interest margins by investing thesefunds in high-quality assets. The Bank seeks to increase these margins by consolidatingshort-term funds, lending and investing for longer periods at higher rates, while maintainingsufficient liquidity to meet all claims that might fall due.The Bank also trades in financial instruments where it takes positions in traded andover-the-counter instruments, including derivatives, to take advantage of short-term marketmovements in bonds and in currency and interest rate prices.www.bdo.com.ph 55