2011 Annual Report - BDO

3. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTSThe Bank’s financial statements prepared in accordance with FRSP for banks requiremanagement to make judgments and estimates that affect the amounts reported in the financialstatements and related notes. Judgments and estimates are continually evaluated and are basedon historical experience and other factors, including expectations of future events that arebelieved to be reasonable under the circumstances. Actual results may likely differ from theseestimates and the differences could be significant.3.01 Critical Management Judgments in Applying Accounting PoliciesIn the process of applying the Bank’s accounting policies, management has made the followingjudgments, apart from those involving estimation, which have the most significant effect onthe amounts recognized in the financial statements:(a) Held-to-maturity InvestmentsThe Bank follows the guidance of PAS 39, Financial Instruments: Recognition and Measurement,in classifying non-derivative financial assets with fixed or determinable payments andfixed maturity as held-to-maturity. This classification requires significant judgment. Inmaking this judgment, the Bank considers its intention and ability to hold such investmentsto maturity. If the Bank fails to keep these investments at maturity (other than for theallowed specific circumstances, for example, selling an insignificant amount close tomaturity), it will be required to reclassify the entire class to available-for-sale securities.The investments would therefore be measured at fair value and not at amortized cost.However, the tainting provision will not apply if the sales or reclassifications of held-tomaturityinvestments are so close to maturity or the financial asset’s call date that changesin the market rate of interest would not have a significant effect on the financial asset’s fairvalue; occur after the Bank has collected substantially all of the financial asset’s originalprincipal through scheduled payments or prepayments; or are attributable to an isolatedevent that is beyond the control of the Bank, is nonrecurring and could not have beenreasonably anticipated by the Bank. If the entire class of held-to-maturity investmentsis tainted, the fair value would have increased by P528.9 million in 2011 and would havedecreased by P502.42 million in 2010, with a corresponding entry in the Unrealized FairValue Gain (Losses) on Available-for-sale Securities account in the statement of changes inequity (see Note 7).(b) Impairment of Available-for-sale Financial AssetsThe Bank follows the guidance of PAS 39 in determining when an investment ispermanently impaired. This determination requires significant judgment. In makingthis judgment, the Bank evaluates, among other factors, the duration and extent to whichthe fair value of an investment is less than its cost; and the financial health of and neartermbusiness outlook for the investee, including factors such as industry and sectorperformance, changes in technology and operational and financing cash flow.www.bdo.com.ph 73