Accounting of Securities Companies SFAS No.

42

CONTENTS

Paragraph

PREFACE 01 - 11

Business Characteristics of Securities Company 01 - 06

Objective 07
Scope 08 - 10
Definitions 11

ELUCIDATION 12 - 49

Intermediary and Security Trader 12 - 13

Security transaction 14 - 19
Valuation of Securities 20 - 23
Securities Lending and Borrowing 24 - 26
Securities Sale transaction with repo/securities purchase transaction
with reverse repo 27 - 28
The underwriter 29 - 36
The Investment Manager 37 - 44
Presentation of Financial Statements 45 - 46
Profit and Loss statement 47 - 48
Disclosures 49

STATEMENT OF FINANCIAL ACCOUNTING

STANDARD No. 42
SECURITIES COMPANIES 50 - 69
Transition Period 68
Effective Date 69

PREFACE

Business characteristics of Securities Company

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01. A securities company is an institution which can perform activities of an

intermediary for securities trader, underwriter of securities issuance, investment
manager, investment advisor and other activities in line with the provisions
stipulated by the BAPEPAM (Capital Market Supervisory Agency).

02. Securities companies as institutions trusted by the people have a strategic role in
safeguarding the continuity of the capital market. Therefore, the capital market
authority, namely BAPEPAM has set out various operational regulations for
carrying out the activities of securities companies.

03. Securities companies are required to maintain adequate liquidity, so that they can
meet all of their obligations. For example, if a security company is doing a
purchasing transaction for its client and that client could not make the funds
available at the stipulated time, the security company is obligated to make payment
on the security transaction for its client.

04. The time cycle of a security transaction is very short. For example, the security
transaction in the Jakarta Stock Exchange is completed in five days.

05. In carrying out its business, the securities company’s transactions are related to the
Stock Exchange, Custodian, Clearing and Underwriting Institution and Deposit
and Settlement Institution.

06. Market prices of securities, particularly shares and participation unit of mutual
funds are generally available daily and the prices of these securities can fluctuate
significantly :

OBJECTIVE

07. This standard deals with the accounting for the activities of securities companies
covering :

a. Intermediary of securities trader (broker)

b. Underwriter
c. Investment manager

SCOPE

08. This standard deals with the accounting treatment of transactions which are
particularly related to securities companies. Matters of a general nature and

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matters not dealt with in this standard, shall be treated with reference to the
generally accepted accounting principles.

09. This standard is valid for every financial statements of securities companies
presented to external parties.

10. The government, as the party responsible for developing and supervising security
companies requires special financial information, particularly related to the
company’s ability to meet its obligations, for example securities companies are
obligated by BAPEPAM to submit Reports on Net Working Capital. This standard
is not an implementation of such government regulation.

11. Following are definitions of terms used in this standard :

Securities are valuable papers such as promissory notes, commercial papers,

bonds, debt acknowledgment certificate, and participation units in a collective
investment. Included in the meaning of securities are future contract and any other
derivatives of securities.

Security company is a company which has been granted a business license by

BAPEPAM to carry out one or more of the following activities, namely the
activities of an intermediary of a security trader, underwriter, investment manager,
investment advisor and other activities in line with the provisions stipulated by
BAPEPAM.

Offering is the offering of stocks carried out by an underwriter to sell stocks to

the public.

Deposit and Settlement Institution (LPP) is the party carrying out the activities
of central custodian for custodian banks, securities companies and other parties.

Clearing and Underwriting Institution is the party carrying out clearing and
guarantee settlement of stock exchange transactions.

ELUCIDATION

Intermediary and Security Trader

12. A security company carries out various security transactions on behalf of its
clients as an intermediary (broker) or on its own behalf as a security trader
(dealer).

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Security transactions involves two dates which are important for accounting
purposes namely the trade date and the settlement date.

13. On the trade date the purchaser bears the risk or takes the benefit of the change in
the value of security purchased. On the settlement date, the seller must deliver the
securities and the purchaser must pay the price of the securities.

Security transaction

14. A security purchase and sale transaction, either on behalf of the client or on
its own behalf shall be recognized in the financial statements of the security
company at the time the commitment on the security transaction arises.

15. Under a security transaction in the regular market, risks, benefits and economic
potentials emerge on the trade date. The trade date constitutes the beginning of
the validity of the purchase and sale contract where the transacting parties have
agreed to the terms of the contract. To reflect the economic effects of the security
purchase and sale transaction, the security company must account for the change
in value in respect of the transaction.

16. In the event the security company purchases a security for its client, then such
transaction will result in a receivable from the client and a payable to the Clearing
and Underwriting Institution. On the settlement date, the security company will
receive payment from the client which will be used to pay and settle the liability to
the Clearing and Underwriting Institution. On the other hand, if the security
company sells securities for its client, the sale of the securities will result in a
receivable from the Clearing and Underwriting Institution and a liability to the
client. On the settlement date, the security company receives payment on the
receivable from the Clearing and Underwriting Institution which will subsequently
be used to settle and pay the liability to the client.

17. The purchase of securities on its own behalf shall be accounted for by recognizing
the portfolio of marketable securities and account payable. Sale of securities shall
be accounted for by recognizing account receivable and reducing the portfolio of
marketable securities and recognizing the profit or loss from the sale of the
securities.

18. If a security company cannot settle a security purchase transaction, such

transaction shall be recorded as fail to receive and presented on the balance
sheet as a liability. If a security company cannot settle a security sale
transaction, such transaction shall be recorded as fail to deliver and
presented on the balance sheet as an asset.

19. On the settlement date, the selling security company is obligated to deliver the
securities to the purchasing security company. If the seller cannot deliver the
securities, then the seller fails to deliver and the purchaser fails to receive.

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Valuation of securities

20. Portfolio of securities purchased on its own behalf shall be valued based on
market prices. Unrealized profit or loss as a result of an increase or decrease
of the market price shall be reported in the current period profit and loss
statement.

21. Securities traded in the stock exchange have a high level of liquidity and are
subject to pretty fast price fluctuations. Therefore, valuation based on market
prices more reflects the value which can be realized. The market price is available
at the Stock Exchange and is published on a daily basis. In case a security is listed
in more than one stock exchange, the market price to be used is the latest price at
the main stock exchange where the security is traded.

22. If a security traded in the stock exchange is not liquid or the available market
price is not reliable, then the security shall be valued based on the fair value
determined by the management. If the market price of a listed security is not
available, the security shall be valued based on the lower between the
acquisition cost and fair value.

23. Although a security is listed at the stock exchange, it could happen that the market
price of the security is not available or is not reliable. This could happen because
the security is not actively traded. In such case the management must determine
the fair value of the security.

Securities Lending and Borrowing

24. Securities lending and borrowing transaction is usually carried out to prevent
failure to deliver. This usually happens in short selling namely selling securities
which are not in possession yet. For this purpose, the security company enter into

a securities lending and borrowing contract with another security company or with
the Clearing and Underwriting Institution. Under such transaction, the security
company borrowing the securities usually makes a guarantee deposit or deliver
other securities as guarantee or issue a standby letter of credit.

25. Securities lending and borrowing transaction with a deposit shall be

accounted for as a financing transaction. The borrowing security company
shall recognize the receivable in the amount of deposit surrendered and the
lending security company shall recognize the payable in the amount of
deposit received.

26. The security company which borrows the securities obtains a benefit from the
securities lending and borrowing transaction, as it will be able to fulfill its
obligation to deliver the securities at the time of settlement, whilst the security

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company which lends the securities obtains a benefit from investing the deposit
received. In the event the securities are lent with other securities as guarantee or
through the issuance of a standby letter of credit, the security company will
receive a compensation (fee). The ownership of the securities lent and the
securities delivered as a guarantee does not change. Therefore, these securities
shall continue to be recognized as part of the portfolio of marketable securities by
the security company which lends the securities or by the security company which
delivers the securities as a guarantee.

Securities sale transaction with repo/securities purchase transaction with reverse

repo

27. A sale with repo transaction and a purchase with reverse repo transaction
constitute a financing transaction with securities as guarantee. The
accounting treatments of these transactions are as follows :

a. Securities sold with a repo shall be recognized as a liability and the

securities delivered shall continue to be recognized as part of the
portfolio of marketable securities. The difference between the sale price
and the purchase price shall be recognized as interest expense.

b. Securities purchased with a reverse repo shall be recognized as a

receivable and the securities received shall not be recognized as part of
the portfolio of marketable securities. The difference between the
purchase price and the resale price constitutes interest.

28. In a sale transaction with a repo, the security company sells the securities to
another party at a certain price and agrees to repurchase the securities within a
certain period of time at the same price plus a certain level of interest or at certain
higher price. On the other hand, in a security purchase transaction with a reverse

repo, the security company purchases securities at a certain price and agrees to
resell the securities at a certain price plus a certain level of interest, or at a certain
higher price. Under this transaction the securities ownership remains with the
seller and shall continue to be presented as part of the portfolio of marketable
securities.

THE UNDERWRITER

29. Income related to the underwriting shall be recognized at the time the
underwriting activity is substantively completed and total income can
already be determined.

30. Expenses incurred which are related to the underwriting process shall be
accumulated and charged at the time the income from the underwriting activity
is recognized. In the event the underwriting activity is not completed and the

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issuance of the securities is cancelled, the underwriting expenses shall be charged

to the current period.

31. As an underwriter, a securities company carries out various activities to help a

potential issuer in the issuance and offering of the securities to the public. In
respect of the underwriting activities, the security company obtains income in
accordance with what has been agreed to in the underwriting contract in the form
of underwriting fees, selling fees and management fees.

32. A security company carries out the underwriting activities after receiving the
authority from the prospective issuer. On the allotment date, the securities are
allocated to the subscribers in accordance with the provisions on allotment
contained in the prospectus. At that time, the underwriting organizer, the
underwriter and the sale agent would know what their participations are in the
issuance of the securities. Expenses incurred related to the underwriting process
shall be accumulated and charged at the time the income from the underwriting is
recognized. In the event the underwriting activity is not completed and the
issuance of the securities is cancelled, the underwriting expenses shall be charged
to the current period.

33. Before receiving the authority as an underwriter, the security company shall
conduct a verification of the prospective issuer. This activity is often followed by
the rendering of consulting services to prepare the prospective issuer to become a
public company. Expenses incurred related to these activities shall be charged at
the time of occurrence and shall be presented by types of expenses for example
research expenses, business travel, representation expenses etc. If in carrying out
these activities the security company obtains a compensation such compensation,
shall be recognized as income at the time earned.

34. Funds received from the subscription of securities shall be recognized and
presented separately as an asset and liability.

35. In accordance with the provision in the prospectus, funds for the subscription of
the securities must be deposited by the subscribers to the account of the
underwriting organizer with a bank. These funds shall be paid by the underwriter
organizer to the issuer after the allotment of the securities is completed.

36. In an underwriting with full commitment, the underwriting organizer and the
underwriter must purchase any under-subscribed securities. These securities shall
be recognized as part of the portfolio of marketable securities. On the other hand,
if the number of securities subscribed exceeds the number offered (over-
subscribed), the underwriting organizer and the underwriter must return the excess
of funds for the securities subscription. Any securities subscription which has not
been refunded shall be presented as a liability.

Investment manager

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37. The activities of a security company as an investment manager cover the

management of the client’s investments (including mutual funds), the management
of own investments and investment advisor.

38. Any income from the client’s investment management services and
investment advisory services shall be recognized at the time the services are
rendered in accordance with the provisions in the contract. Expenses
incurred related to the investment management and investment advisory
activities shall be charged at the time incurred.

39. The income from investment management services originates from the activities of
mutual funds management and the client’s investments (non-mutual funds). As a
manager of mutual funds, the investment manager obtains an income, the amount
of which is determined in the contract based on a certain percentage of the daily
Net Asset Value (NAV) of the related mutual funds. In addition, the investment
manager receives an income in the form of selling fee or front-end fee and
redemption fee or back-end fee, which shall be recognized at the time of the
transaction.

40. Funds received within the framework of activities of an investment manager

as a manager of the client’s investments (non-mutual funds) shall be
recognized as a liability.

41. At the time of acquisition, securities purchased as own investments shall be

recorded as a portfolio of marketable securities based on acquisition costs,
and shall be classified in accordance with the purposes of acquisition, as
follows:

a. Trading securities
Debt securities and equity to be traded (Trading securities). Trading in
this case shall reflect active and high frequency of purchasing and
selling with the objective of obtaining profits from short term
differences.

b. Hold to maturity securities

Debt securities hold to maturity. Securities classified under this
category are limited to debt securities held with the objective of
obtaining interest income and the debt securities will only be cashed
(defrozen) on maturity. Debt securities should not be classified under
this category if the purpose of ownership is only for an unspecified
period of time, and if the debt securities are available for sale to cope
with :

1. changes in the level of market interest rate and changes related to

the same risk

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2. liquidity needs
3. changes in availability and alternative investment income
4. changes in foreign exchange risk

c. Available for sale securities

Debt securities and equity available for sale. Debt securities falling
under this category are securities owned for an unspecified period of
time because for example, are intended for sale at a certain time to meet
the needs for liquidity or constitutes part of the company’s risk
management program.

42. On balance sheet date, the portfolio of securities shall be valued in

accordance with the classification of the related security, as follows :

a. Debt securities and equity to be traded shall be presented based on the

market values. Unrealized profit (or loss) as a result of increases
(decreases) of market prices shall be reported in the current period
profit and loss statement.

b. Debt securities held to maturity shall be presented based on acquisition

costs after deducting (adding) premium amortization (discount).

c. Debt securities and equity available for sale shall be presented based on
market prices. Unrealized profit (loss) as a result of increases
(decreases) of market prices shall not be recognized in the profit and
loss statement for the current period, rather shall be presented
separately as a component of equity. Unrealized profit (loss) shall be
reported in the profit and loss statement at the time of realization.

43. Securities portfolio of participation units in mutual funds acquired at the

time of the establishment of the mutual funds shall be presented at
acquisition cost. If the net asset value of the participation units in mutual
funds decreases significantly and permanently , adjustment must be made on
the acquisition cost. Securities portfolio of participation units in mutual
funds for own investment shall be valued in accordance with the acquisition
objectives as described under paragraphs 41 and 42.

44. As a founder and management of mutual funds the ownership of participation units
in a mutual funds is intended to maintain the confidence of public investors and to
maintain the liquidity and stability of the mutual funds. The management of mutual
funds is obligated to hold its participation units in a mutual funds for a certain
period of time. Accordingly, participation units in a mutual funds shall be
presented based on the acquisition cost until the end of the specified period.

Presented of Financial Statements

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Balance Sheet

45. The Balance Sheet shall be presented using the unclassified method, so that
assets and liabilities are not grouped into the current and non-current
components. The group of asset accounts shall be presented based on the
order of liquidity, while the group of liability accounts shall be presented
based on the order of maturity.

46. A security company can carry out various business activities all at one covering
intermediary of a security trader (broker), underwriter and investment manager.
Each activity has different characteristics and transaction cycles. The transaction
cycle of a security underwriter and investment manager are longer. Under such
business condition, the classification of current and non-current on the balance
sheet represents a less relevant information.

Profit and Loss Statement

47. It is difficult to identify expenses incurred in carrying out various activities of

a security company with the types of income earned. If it is not practical
and economical to present the profit and loss statement in a multiple step
form, the profit and loss statement may be presented in a single step form.

48. If the Profit and Loss Statement is presented in a single step form, revenues
shall be grouped in such a manner so as to reflect revenues from each
business activity of the security company, and charges shall be presented by
types of expenses.

Disclosures

49. The following must be disclosed in the notes to the Financial Statements :

a. Accounting treatment of :
1. securities broker and trader transactions
2. sale transactions with repo and purchase transactions with reverse
repo
3. securities lending and borrowing transactions
4. recognition of income and expenses related to the activities of the
security company.

b. Commitments and conditional obligations resulting from transactions as

broker, underwriter and investment manager.

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STATEMENT OF FINANCIAL ACCOUNTING STANDARD No. 42 REGARDING

ACCOUNTING OF SECURITIES COMPANIES

This statement of Financial Accounting Standard No. 42 consists of paragraphs 50

to 69. This statement must be read in the context of paragraphs 01 to 49.

Security transaction

50. A security purchase and sale transaction, either on behalf of the client or on
its own behalf shall be recognized in the financial statements of the security
company at the time the commitment on the security transaction arises.

51. If a security company cannot settle a security purchase transaction, such

transaction shall be recorded as fail to receive and presented on the balance
sheet as a liability. If a security company cannot settle a security sale
transaction, such transaction shall be recorded as fail to deliver and
presented on the balance sheet as an asset.

Valuation of securities

52. Portfolio of securities purchased on its own behalf shall be valued based on
market prices. Unrealized profit or loss as a result of an increase or decrease
of the market price shall be reported in the current period profit and loss
statement.

53. If a security traded in the stock exchange is not liquid or the available market
price is not reliable, then the security shall be valued based on the fair value
determined by the management. If the market price of a listed security is not
available, the security shall be valued based on the lower between the
acquisition cost and fair value.

Securities Lending and Borrowing Transaction

54. Securities lending and borrowing transaction with a deposit shall be

accounted for as a financing transaction. The borrowing security company
shall recognize the receivable in the amount of deposit surrendered and the
lending security company shall recognize the payable in the amount of
deposit received.

55. Securities sale transaction with repo/securities purchase transaction with

reverse repo. A sale with repo transaction and a purchase with reverse repo
transaction constitute a financing transaction with securities as guarantee.
The accounting treatments of these transactions are as follows :

a. Securities sold with a repo shall be recognized as a liability and the

securities delivered shall continue to be recognized as part of the

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portfolio of marketable securities. The difference between the sale price

and the purchase price shall be recognized as interest expense.

b. Securities purchased with a reverse repo shall be recognized as a

receivable and the securities received shall not be recognized as part of
the portfolio of marketable securities. The difference between the
purchase price and the resale price constitutes interest.

THE UNDERWRITER

56. Income related to the underwriting shall be recognized at the time the
underwriting activity is completed and total income can already be
determined.

57. Expenses incurred which are related to the underwriting process shall be
accumulated and charged at the time the income from the underwriting is
recognized. In the event the underwriting activity is not completed and the
issuance of the securities is cancelled, the underwriting expenses shall be
charged to the current period.

58. Funds received from the subscription of securities shall be recognized and
presented separately as an asset and liability.

Investment Manager

59. Any income from the client’s investment management services and
investment advisory services shall be recognized at the time the services are
rendered in accordance with the provisions in the contract. Expenses
incurred related to the investment management and investment advisory
activities shall be charged at the time incurred.

60. Funds received within the framework of activities of an investment manager

as a manager of the client’s investments (non-mutual funds) shall be
recognized as a liability.

61. At the time of acquisition, securities purchased as own investments shall be

recorded as a portfolio of marketable securities based on acquisition costs
and shall be classified in accordance with the purpose of acquisition, as
follows :

a. Trading securities

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Debt securities and equity to be traded (trading securities). Trading in

this case shall reflect active and high frequency of purchasing and
selling with the objective of obtaining profits from short term
differences.

b. Hold to maturity securities

Debt securities hold to maturity. Securities classified under this
category are limited to debt securities held with the objective of
obtaining interest income and the debt securities will only be cashed
(defrozen) on maturity. Debt securities should not be classified under
this category, if the purpose of ownership is only for an unspecified
period of time and if the debt securities are available for sale to cope
with :

1. Changes in the level of market interest rate and changes related to

the same risk
2. liquidity needs
3. changes in availability and alternative investment income
4. changes in foreign exchange risk

c. Available for sale securities

Debt securities and equity available for sale. Debt securities falling
under this category are securities owned for an unspecified period of
time because, for example, are intended for sale at a certain time to
meet the needs for liquidity or constitutes part of the company’s risk
management program.

62. On balance sheet date, the portfolio of securities shall be valued in

accordance with the classification of the related security, as follows :

a. Debt securities and equity to be traded shall be presented based on the

market values. Unrealized profit (or loss) as a result of increases
(decreases) of market prices shall be reported in the current period
profit and loss statement.

b. Debt securities held to maturity shall be presented based on acquisition

costs after deducting (adding) premium amortization (discount).

c. Debt securities and equity available for sale shall be presented based on
market prices. Unrealized profit (loss) as a result of increases
(decreases) of market prices shall not be recognized in the profit and
loss statement for the current period, rather shall be presented
separately as a component of equity. Unrealized profit (loss) shall be
reported in the profit and loss statement at the time of realization.

63. Securities portfolio of participation units in mutual funds acquired at the

time of the establishment of the mutual funds shall be presented at

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acquisition cost. If the Net Asset Value of the participation units mutual
funds decreases significantly and permanently adjustment must be made on
the acquisition cost. Securities portfolio of participation units in mutual
funds for own investment shall be valued in accordance with the acquisition
objectives as described under paragraphs 61 and 62.

Presentation of Financial Statements

Balance Sheet

64. The Balance Sheet shall be presented using the unclassified method, so that
assets and liabilities are not grouped into the current and non-current
components. The group of asset accounts shall be presented based on the
order of liquidity, while the group of liability accounts shall be presented
based on the order of maturity.

Profit and Loss Statement

65. It is difficult to identify expenses incurred in carrying various activities of a

security company with the types of income earned. If it is not practical and
economical to present the profit and loss statement in a multiple step form,
the profit and loss statement may be presented in a single step form.

66. If the Profit and Loss statement is presented in a single step form, revenues
shall be grouped in such a manner so as to reflect revenues from each
business activity of the security company and charges shall be presented by
types of expenses.

Disclosures

67. In addition to matters which must be disclosed in the notes to the financial
statements as described in the generally applicable Financial Accounting
Standards, securities companies must disclose the following :

a. Accounting treatment of :

1. securities broker and trader transactions

2. sale transactions with repo and purchase transactions with reverse
repo
3. securities lending and borrowing transactions
4. recognition of income and expenses related to the activities of the
security company.

b. Commitments and conditional obligations resulting from transactions as

broker, underwriter and investment manager

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Transition period

68. If the application of this standard results in a change of the accounting

policy, then such change shall be reported prospectively.

Effective Date

69. This standard becomes effective for the preparation and presentation of financial
statements covering the period beginning with or after 1 January, 1998. Early
implementation is encouraged.

55.

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