SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that have been used in the preparation of these financial statements
are summarized below and the succeeding pages. These policies have been consistently applied to all
the years presented, unless otherwise stated.

2.1 Basis of Preparation of Financial Statements

(a) Statement of Compliance with Financial Reporting Standards in the Philippines The consolidated
financial statements of BDO Unibank Group and the separate financial statements of the Parent Bank
have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS are
adopted by the Financial Reporting Standards Council (FRSC), from the pronouncements issued by the
International Accounting Standards Board (IASB), and approved by the Philippine Board of
Accountancy.

The financial statements have been prepared using the measurement bases specified by PFRS for each
type of resources, liability, income and expense. The measurement bases are more fully described in
the accounting policies that follow.

(b) Presentation of Financial Statements

In 2019, the BDO Unibank Group and the Parent Bank adopted PFRS 16, Leases, which was applied
using the transitional relief allowed by the standard. This allows the BDO Unibank Group and the
Parent Bank not to restate its prior periods’ financial statements. The impact of the adoption of PFRS
16 resulted in the decrease of balances as of January 1, 2019 of Surplus Free amounting to P847 and
P856 for the BDO Unibank Group and Parent Bank, respectively.

2.2 Adoption of New and Amended PFRS

(a) Effective in 2020 that are Relevant to the BDO Unibank Group and the Parent Bank The BDO
Unibank Group and the Parent Bank adopted for the first time the following amendments to PAS or
PFRS, which are mandatorily effective for annual periods beginning on or after January 1, 2020:
(i) Revised Conceptual Framework for Financial Reporting. The revised conceptual framework will be
used in standard-setting decisions with immediate effect.

Key changes include:

(a) increasing the prominence of stewardship in the objective of financial reporting,

(b) reinstating prudence as a component of neutrality,

(c) defining a reporting entity, which may be a legal entity, or a portion of an entity,

(d) revising the definitions of an asset and a liability,

(e) removing the probability threshold for recognition and adding guidance on derecognition,

(f) adding guidance on different measurement basis, and,

(g) stating that profit or loss is the primary performance indicator and that, in principle, income and
expenses in other comprehensive income should be recycled where this enhances the relevance or
faithful representation of the financial statements.

(ii) PAS 1 (Amendments), Presentation of Financial Statements, and PAS 8 (Amendments), Accounting
Policies, Changes in Accounting Estimates and Errors Definition of Material.

The amendments provide a clearer definition of ‘material’ in PAS 1 by including the concept of
‘obscuring’ material information with immaterial information as part of the new definition, and
clarifying the assessment threshold (i.e., misstatement of information is material if it could reasonably
be expected to influence decisions made by primary users, which consider the characteristic of those
users as well as the entity’s own circumstances). The definition of material in PAS 8 has been
accordingly replaced by reference to the new definition in PAS 1. In addition, amendment has also been
made in other standards that contain definition of material or refer to the term ‘material’ to ensure
consistency. The application of these amendments had no significant impact on the BDO Unibank
Group and the Parent Bank’s financial statements.

(iii) PFRS 3 (Amendments), Business Combinations Definition of a Business.

The amended definition of a business requires an acquisition to include an input and a substantive
process that together significantly contribute to the ability to create outputs. The definition of the term
‘outputs’ is amended to focus on goods and services provided to customers, generating investment
income and other income, and it excludes returns in the form of lower costs and other economic
benefits. The application of these amendments had no significant impact on the BDO Unibank Group
and the Parent Bank’s financial statements.

(iv) PFRS 7 (Amendments), Financial Instruments: Disclosures, and PFRS 9 (Amendments), Financial
Instruments Interest Rate Benchmark Reform.

The amendments clarify that an entity would continue to apply certain hedge accounting requirements
assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the
hedging instrument are based will not be altered as a result of interest rate benchmark reform. The
application of these amendments had no significant impact on the BDO Unibank Group and the Parent
Bank’s financial statements.
 (v) The BDO Unibank Group and the Parent Bank elected to adopt early PFRS 16 (Amendments), Leases
COVID-19-Related Rent Concessions, which is effective for annual reporting periods beginning on or
after June 30, 2020.

The amendments permit lessees, as a practical expedient, not to assess whether particular rent
concessions occurring as a direct consequence of the COVID-19 pandemic are lease modifications and
instead to account for those rent concessions as if they are not lease modifications. The BDO Unibank
Group and Parent Bank applied this practical expedient to all its leases where it received rent
concessions to leases involving its land and bank premises. As a result, both the BDO Unibank Group
and Parent Bank recognized P445 to reflect changes in lease payments that arose from rent
concessions, which is presented as part of Occupancy under Other Operating Expenses in the
statements of income for the year ended December 31, 2020 (see Note 24).

Effective Subsequent to 2020 but not Adopted Early

There are new PFRS and amendments to existing standards effective for annual periods subsequent to
2020, which are adopted by the FRSC. Management will adopt the following relevant pronouncements
in accordance with their transitional provisions; and, unless otherwise stated, none of these are
expected to have significant impact on the BDO Unibank Group and the Parent Bank’s financial
statements.

(i) PFRS 3 (Amendments), Business Combination Reference to the Conceptual Framework (effective
from January 1, 2022). The amendments update an outdated reference to the Conceptual Framework in
PFRS 3 without significantly changing the requirements in the standard.

(ii) PAS 16 (Amendments), Property, Plant and Equipment Proceeds Before Intended Use (effective
from January 1, 2022). The amendments prohibit deducting from the cost of an item of property, plant
and equipment any proceeds from selling items produced while bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by management. Instead,
an entity recognizes the proceeds from selling such items, and the cost of producing those items, in
profit or loss.

(iii) PAS 37 (Amendments), Provisions, Contingent Liabilities and Contingent Assets – Onerous Contracts
– Cost of Fulfilling a Contract (effective January 1, 2022). The amendments specify that the ‘cost of
fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to
a contract can either be incremental costs of fulfilling that contract (examples would be direct labor,
materials) or an allocation of other costs that relate directly to fulfilling contracts (an example would be
the allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling
the contract).

(iv) Annual Improvements to PFRS 2018-2020 Cycle. Among the improvements, the following
amendments, which are effective from January 1, 2022, are relevant to the BDO Unibank Group:

 PFRS 9 (Amendments), Financial Instruments Fees in the ’10 per cent’ Test for Derecognition of
Liabilities. The improvements clarify the fees that an entity includes when assessing whether
the terms of a new or modified financial liability are substantially different from the terms of
the original financial liability.
  Illustrative Examples Accompanying PFRS 16, Leases Lease Incentives. The improvement merely
removes from the example the illustration of the reimbursement of leasehold improvements by
lessor in order to resolve any potential confusion regarding the treatment of lease incentives.

(v) PAS 1 (Amendments), Presentation of Financial Statements Classification of Liabilities as Current or

Non-current (effective January 1, 2023).

The amendments aim to promote consistency in applying the requirements by helping entities
determine whether, in the statement of financial position, debt and other liabilities with an uncertain
settlement date should be classified as current (due or potentially due to be settled within one year) or
non-current.

(vi) PFRS 10 (Amendments), Consolidated Financial Statements, and PAS 28 (Amendments),

Investments in Associates and Joint Ventures Sale or Contribution of Assets Between an Investor and its
Associates or Joint Venture (effective date deferred indefinitely).

The amendments to PFRS 10 require full recognition in the investor’s financial statements of gains or
losses arising on the sale or contribution of assets that constitute a business as defined in PFRS 3
between an investor and its associate or joint venture. Accordingly, the partial recognition of gains or
losses (i.e., to the extent of the unrelated investor’s interests in an associate or joint venture) only
applies to those sale or contribution of assets that do not constitute a business. Corresponding
amendments have been made to PAS 28 to reflect these changes.

In addition, PAS 28 has been amended to clarify that when determining whether assets that are sold or
contributed constitute a business, an entity shall consider whether the sale or contribution of those
assets is part of multiple arrangements that should be accounted for as a single transaction.

(vii) PFRS 17, Insurance Contracts (effective January 1, 2023).

The new standard will eventually replace PFRS 4, Insurance Contracts. The Insurance Commission (IC),
through its Circular Letter 2018-69, has deferred the implementation of PFRS 17 for life insurance and
non-life insurance industry. PFRS 17 will set out the principles for the recognition, measurement,
presentation and disclosure of insurance contracts within its scope. This new standard requires a
current measurement model where estimates are remeasured in each reporting period.

Moreover, contracts are measured using the building blocks of:

 · discounted probability-weighted cash flows;

 · an explicit risk adjustment; and,
 · a contractual service margin (CSM) representing the unearned profit of the contract which
is recognized as revenue over the coverage period.

PFRS 17 further allows a choice between recognizing changes in discount rates either in the
statement of income or directly in other comprehensive income. The choice is likely to reflect how
insurers account for financial assets under PFRS 9.

In addition, the standard provides an optional, simplified premium allocation approach for the
liability for the remaining coverage for short duration contracts, which are often written by non-life
insurers.
A modification of the general measurement model called the variable fee approach is also
introduced by PFRS 17 for certain contracts written by life insurers where policyholders share in the
returns from underlying items. When applying the variable fee approach, the entity’s share of the
fair value changes of the underlying items is included in the CSM. The results of insurers using this
model are therefore likely to be less volatile than under the general model.

2.18 Other Income and Expense Recognition

Revenue is recognized only when (or as) the BDO Unibank Group satisfies a performance obligation
by transferring control of the promised services to the customer. A contract with a customer that
results in a recognized financial instrument in the BDO Unibank Group’s financial statements may
be partially within the scope of PFRS 9 and partially within the scope of PFRS 15.

In such case, the BDO Unibank Group first applies PFRS 9 to separate and measure the part of the
contract that is in-scope of PFRS 9, and then applies PFRS 15 to the residual part of the contract.
Expenses and costs, if any, are recognized in profit or loss upon utilization of the assets or services
or at the date these are incurred. All finance costs are reported in profit or loss on accrual basis,
except to the extent that they are capitalized.

Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended
use or sale) are capitalized as part of cost of such asset.

The capitalization of borrowing costs commences when expenditures for the asset and borrowing
costs are being incurred and activities that are necessary to prepare the asset for its intended use or
sale are in progress. Capitalization ceases when substantially all such activities are complete.

Investment income earned on the temporary investment of specific borrowings pending their
expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

The BDO Unibank Group also earns service fees and commissions in various banking services, and
gains on sale of properties, which are supported by contracts approved by the parties involved.
These revenues are accounted for by the BDO Unibank Group in accordance with PFRS 15.

For revenues arising from these various banking services which are to be accounted for under PFRS
15, the following provides information about the nature and timing of satisfaction of performance
obligations in contracts with customers, including significant payment terms, and the related
revenue recognition policies:

(a) Service charges, fees and commissions Service charges, fees and commissions are generally
recognized over time as the service is being provided and is based on the various criteria of
recognition for each specific income source.
(b) These include the following accounts:

(i) Commission and fees arising from loans, deposits, and other banking transactions are taken up
as income based on agreed terms and conditions.
(ii) Loan syndication fees are recognized as revenue when the syndication has been completed and
that BDO Unibank Group retained no part of the loan package for itself or retained a part at the
same effective interest rate for the other participants.

(iii) Arranger fees arising from negotiating or participating in the negotiation of a transaction for a
third party such as arrangement of the acquisition of shares or other securities or the purchase or
sale of businesses are recognized at the completion of the underlying assumptions.

(iv) Portfolio and other management advisory and service fees are recognized based on the
applicable service contracts, usually on a time-proportionate basis.