Accounting of Investment in Specific Securities SFAS No.

50

CONTENTS

Paragraph

Objective 01 - 02

Scope 03 - 05

Definitions 06

Accounting of Investment in Securities 07

Securities classified under the “Held to Maturity” category 08 - 12

Securities classified under the “Trading” and “Available for sale” categories 13
Reporting of the Change in the Fair value 14 - 15
Reduction in the value of a security 18

PRESENTATION 19 - 20

DISCLOSURES 21 - 24

EFFECTIVE DATE 25 - 26

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Accounting of Investment in Specific Securities SFAS No. 50

The paragraphs printed in bold letters and italics are standard paragraphs, which
must be read in the context of explanatory paragraphs and implementation
guidance printed in normal letters. There is no requirement to apply this statement
on items considered to be immaterial.

OBJECTIVE

01. Differences can still be found in the statements of Financial Accounting Standards
already published in the accounting treatment for the recognition and measurement
of the investment value of securities, especially debt securities. This statement is
intended to standardize the accounting treatment in reporting of investments in
debt securities and in equity securities.

02. This statement regulates the application of the accounting of the fair value of debt
and equity securities which are held by the owners to be traded, debt securities
held until maturity or securities held for neither purposes.

Scope

03. This statement must be applied for the accounting and reporting of investments in
equity securities which fair values are available and for all investments in debt
securities, except as indicated in paragraph 4.

a. The fair value of an equity security is considered available, if the selling price
or the supply and demand price have been set at the Jakarta Stock Exchange,
the Surabaya Stock Exchange and other Stock Exchanges in Indonesia. A
share with a restriction in sale does not meet this definition.

b. The fair value of an equity security, which is only traded in overseas stock
exchange is considered available, if the foreign country’s stock exchange has
a volume of trade and activities proportional or better than the domestic
market.

c. The fair value of an investment in a mutual/trust fund is considered available if

its net asset value is determined and published, and such value is the basis for
current transactions.

04. This statement does not regulate :

a. Investments in equity securities which are recorded using the equity method
and investments in subsidiaries.
b. Investments in securities of non-profit organizations.

05. This statement amends paragraphs 8, 9 and 10 of SFAS 31 applicable to the

banking industry. This statement is an expansion of :

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a. SFAS No. 13 Accounting of Investments

b. paragraph 38 of SFAS No. 28 Accounting of Loss Insurance (1996 revision)
c. paragraph 39 of SFAS No. 36 Accounting of Life Insurance, and
d. paragraph 62 of SFAS No. 42 Accounting of Securities companies.

Definitions

06. The followings are definitions of terms used in this statement :

Security is a valuable paper, namely a debt acknowledgment or promissory

note, commercial valuable papers, stocks, bonds, notes payable, participation
units in a collective investment contract, future contract and every derivative
of a security.

Debt security is a security indicating the debts relationship between the

creditor and the entity issuing the security.

Equity security is a security indicating the ownership right upon an equity or

the right to obtain (for example : warrant, purchase option) or right to sell
(for example sale option)such ownership right at a stipulated price or at a
price to be stipulated.

Fair value is the amount that can be obtained from the exchange of a
financial instrument between independent parties, not in compulsion or in
liquidation. If a market price is available for the instrument, the fair value to
be used in the application of this standard shall be calculated by multiplying
the number of shares traded with the market price per unit.

Holding gain or loss is the net change in the fair value of a security,
excluding: (a) recognized dividend or interest income not yet received
(accrual basis) and (b) every secutiy value depreciation by which is
permanent in nature.

ACCOUNTING OF INVESTMENT IN SECURITIES

07. At the time of acquisition, the company must classify the debt and equity
securities into one of the following categories :

a. held to maturity
b. trading
c. available for sale

On each date of reporting, the proper classifications of the securities must be

re-evaluated.

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Securities classified under the “Held to maturity” category.

08. If the company has the intention to hold a debt security until maturity, the
investment in the debt security must be classified under the “held to
maturity” category and presented on the balance sheet at the acquisition cost
after premium amortization or discount.

09. The company may change its intention to own a debt security until maturity
by selling or transferring the debt security. The sale or transfer of the debt
security is not considered as a change in the intention “held to maturity”, if
such change of intention is due to the following conditions :

a. there is an evidence of a significant reduction in the credit risk of the

company issuing the securities.
b. there is a change in tax regulations eliminating or increasing the final tax
applicable to interest from debt securities (excluding changes in tax
regulations revising the generally applicable tax rate on interest)
c. there is a business combination or a huge amount of sale (such as
segment sale) resulting in the necessity to sell or transfer securities
under the “held to maturity category” to maintain the credit risk of
the company and the interest rate position risk at the time.
d. there is a change in the requirements or regulations which significantly
amend the definition of allowable investments or the maximum level
of investments in certain types of securities, so that the company
must release securities under the “held to maturity” category.
e. there is a change in government regulations regarding the minimum
capital of certain industries, which cause the company to reduce its
business activities or its operating scale and sell the securities under
the “held to maturity” category.
f. there is a change in government regulations resulting in additional
burden of risk on investments in debt securities in the calculation of
certain ratios, for example in the calculation of the solvency of an
insurance company or the calculation of the capital adequacy ratio of the
capital of a bank.

In addition to the changes described above, other events which are non-
repetitive and are extra ordinary in nature and cannot be anticipated, may
cause the company to sell or transfer certain securities in the “held to
maturity” category, disregarding the original intention to own the securities
under the “held to maturity” category and considering other securities
within the same category. All sales and transfers of securities under the “held
to maturity” category must be disclosed in accordance with the requirements
in paragraphs 23.

10. The company shall not classify a debt security under the “held to maturity”
category, if the company has the intention to own the security for an indefinite

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period of time. Therefore, a debt security cannot be classified under this category,
if the company intends to sell the security, for example, to cope with :

a. changes in the market interest rate and changes related to the similar risk
b. liquidity needs;
c. changes in the availability and the level of return on alternative investments
d. changes in the source of company financing and the requirements
e. changes in the foreign exchange risks.

11. In managing the assets and liabilities of an entity, the management may decide that
the equilibrium of the company financial management risk could be achieved
without the need to provide all of its investments in securities which can be sold
when needed. In this case, the company can determine that a certain debt security
is classified under the “held to maturity” category and will not be sold for financial
risk management purposes. Based on the purpose of the debt security ownership,
the company can recognize the debt security using the acquisition cost method
(including discount amortization or premium).

12. The sale of a debt security which satisfies one of the following two conditions can
be regarded as having met the due date for purposes of security classification as
described in paragraphs 8 and 13 and for disclosure purposes as described in
paragraph 23.

a. the sale of the security takes place on a date fairly close to the due date, so that
the interest rate factor is no longer a determinant factor of the selling
price. The date of the sale is so close to the due date, so that a change in
the market interest rate no longer has a significant effect on the fair value
of the security.
b. the sale of the security takes place after the company receives a major part (at
least 85 percent) of the carrying value of the investment in the debt
security. The payment takes place as advance payment of the debt
security or as payment for the debt security in accordance with the
schedule of installment payments for the debt security (consisting of
principal and interests). For a security with variable interest rates, the
amounts of the installment payments will not be equal in amount,
depending on the interest rate in effect.

Securities classified under the “trading” and “available for sale” categories

13. Investments in debt securities which are not classified under the “held to
maturity” category and equity securities for which the fair values are
available, must be classified under one of the following categories and
measured at their fair values on the balance sheet :

a. “Trading”. Securities purchased and owned for resale in near future shall
be classified under the “trading” category. Securities in the
“trading” category usually show a very high frequency of purchases

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and sales. These securities are owned with the objective of obtaining
profit from short term price differences.
b. “Available for sale”. Securities which are not classified under the
“trading” and “held to maturity” categories must be classified under the
“available for sale” category.

Reporting of the change in the fair value

14. Unrealized gains or loss on securities under the “trading” category must be
recognized as income. Unrealized profit on loss on securities under the
“available for sale” category (including securities classified as current assets)
must be included as the component of equity and presented separately, and
shall not be recognized as income until the profit or loss is realized.

15. For the three categories of securities, dividends and interest income, including
premium amortization and discount arising at the time of acquisition, shall always
be recognized as income. This statement has no effect on the method used to
recognized and measure the amounts of dividends and interest income. Realized
profit or loss on securities classified under the “available for sale” or “held to
maturity” category must also be reported as income.

Changes in the investment category

16. Transfers of securities between categories shall be recorded at their fair

values. On the date of a change in category, unrealized profit or loss must be
recorded as follows :

a. for securities transferred from the “trading” category, unrealized gains or

losses on the date of transfer has already been recorded as income
and therefore no further recording is required.
b. for securities transferred to the “trading” category, unrealized gains or
losses on the date of transfer shall be recognized as income at that
time.
c. for debt securities which are transferred to the “available for sale”
category from the “held to maturity” category, unrealized gains or
losses shall be recognized in the equity category separately on the
date of the category transfer.
d. for debt securities which are transferred to the “available for sale”
category from the “held to maturity” category, unrealized gains or losses
on the date of transfer shall continue to be reported in the equity
component separately, but must be amortized over the useful life of the
security in a manner consistent with the premium amortization or
discount. The amortization of the unrealized profit or loss shall match the
effect of the premium amortization or discount on the interest income
from securities under the “held to maturity” category.

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17. Consistent with paragraphs 8 to 10, a transfer from the “held to maturity” category
rarely takes place, except for a transfer due to a change in condition as described
under paragraph 9. Because of its nature, a transfer to or from securities under the
“trading” category is also rare.

Reduction in the value of a security

18. For an individual security under the “available for sale” category or “held to
maturity” category, the company shall determine whether a reduction in the
fair value below the acquisition cost (including premium amortization and
discount) represents a permanent reduction or not. If there is a probability
that the investor would not recover the entire amount of the acquisition cost
which should have been received in accordance with the terms of agreement
of the debt security, a permanent reduction shall be deemed to have
occurred. If the reduction in the fair value is regarded as a permanent
reduction, the acquisition cost of the security must be reduced to its fair
value, and the amount of the reduction must be recognized in the profit and
loss statement as a realized loss. A new acquisition cost shall not be revised.
Subsequent increases in the fair value of securities under the “available for
sale” category shall be included in the equity component separately, as
indicated in paragraph 14. Subsequent reductions in the fair value, unless
temporary in nature, must also be included in the equity component
separately.

PRESENTATION

19. A company with a balance sheet, in which assets are categoryed into current
assets, fixed assets and other assets and liabilities are categoryed into short
term and long term (classified balance sheet) must report all securities under
the “trading” category as current assets. Securities under the “held to
maturity” category and the “available for sale” category shall be presented as
either current or non-current assets based on management’s decision.
Specifically, debt securities under the “held to maturity” and “available for
sale” categories maturing the following year must be categoryed as current
assets.

20. The cash flow used for or originating from the purchase, sale and maturity of
securities under the “available for sale” and “held to maturity” categories
must be classified as cash flow from investment activities in the cash flow
report and reported at the gross value for each category of securities. Cash
flow for or originating from the purchase, sale and maturity of securities
under the “trading” category shall be classified as cash flow from operating
activities.

DISCLOSURES

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21. For securities under the “available for sale” and “held to maturity”
categories, the following information must be disclosed in the notes to the
financial statements for each main category of securities :

a. the aggregate fair value

b. unrealized gains from the ownership of the securities
c. unrealized losses from the ownership of the securities
d. acquisition costs including the amounts of unamortized premium and
discount.

Financial institution companies (banks, credit cooperatives, financing

institution, and insurance) must disclose each type of the main securities
owned, as follows :

a. equity securities;
b. debt securities issued by the government,
c. companies’ debt securities
d. debt securities secured by a mortgage, and
e. other debt securities

22. For debt securities under the “available for sale” and “held to majority” categories,
information on the maturity dates of the debt securities must be disclosed in the
notes to the financial statements presented for the latest year. The information on
the maturity dates can be classified based on the period to maturity after the
balance sheet date. Financial institutions must disclose the fair value and the
acquisition cost of debt securities, including unamortized discount and premium,
based on at least 4 categories of maturity dates as follows :

a. mature within less than 1 year

b. mature between 1 to 5 years
c. mature between 5 to 10 years
d. mature after more than 10 years.

Securities which do not mature on a specific date, such as securities, the payments
of which are secured by a mortgage, can be disclosed separately (not allocated to
several categories of maturity dates above). If the classification of maturity dates
is allocated, the basis of the allocation must be disclosed.

23. For each accounting period, the company must disclose :

a. receipts from the sales of securities under the “available for sale” category and
the realized profit and loss from the sale.
b. the basis for the determination of acquisition cost in calculating realized profit
or loss (for example, specific identification, average or other method)
c. a change in the unrealized profit or loss from ownership for securities under
the “available for sale” category which has been included in the equity
component separately during the related period.

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d. a change in the unrealized profit or loss from ownership for securities under
the “available for sale” category which has been included in the equity
component separately during the related period.
e. a change in the unrealized profit or loss from security ownership from
securities under the “trading” category which has been recognized as income
during the period of reporting.

24. The following must be disclosed for each sale or transfer of securities under the
“held to maturity” category.

a. the total of accumulated amortization of discount or premium for securities

sold or transferred to other category.
b. realized or unrealized profit or loss from the sale of securities
c. conditions leading to the decision to sell or transfer the category of securities.

EFFECTIVE DATE

25. This statement becomes effective for the preparation and presentation of
financial statements covering the period beginning with or after 1 January,
1999. Early implementation is encouraged.

26. The application of this statement for the first time will affect Retained Earnings.
The effect shall be reported as the effect of change in accounting principles
described in paragraphs 42 SFAS No. 25 Net Profit or loss for the Current Period,
Basic Mistakes and Changes in Accounting Policy. The effect on retained earnings
can take the form of a recovery of income in the amount of unrealized loss of
ownership of a security in the “available for sale” category. The unrealized
ownership profit or loss for the security under the “available for sale” category on
the date this statement is implemented for the first time, shall be included
separately in the equity component.

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