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p. 93 of 95 BACK | NEXT Message from the Chairman of the Board of Directors Members, Capital Stock and Voting Power The Record Abbreviations 2004 in Review: Board of Directors' Report Special Theme: The Changing Face of the Microfinance Industry: Building Financial Systems for the Poor Part 1: Institutional Effectiveness Part 2: Poverty Reduction Part 3: Financial Statements: Management's Discussion and Analysis Overview Ordinary Capital Resource Critical Accounting Policies and Estimates Special Funds Trust Funds Managed by ADB

Annual Report 2004 : Part 3: Financial Statements: Management's Discussion and Analysis

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Critical Accounting Policies and Estimates

Significant accounting policies are contained in Note B of OCR's financial statements. In the financial statements, Management makes estimates in determining the fair value of financial instruments. Estimates by their nature are based on judgment and available information; therefore, actual results could differ and could have a material impact on the financial statements.

Fair Valuation of Financial Instruments. Under statutory reporting, ADB carries its investments and derivatives, as defined by FAS 133, on a fair value basis. These derivatives, including embedded derivatives in the structured borrowings, are separately valued and accounted for in the balance sheet. Fair values for exchange-traded securities and derivatives are based on quoted market prices. Fair valuations where market prices are not readily available are determined using marketbased pricing models incorporating readily observable market data and require judgment and estimates.

All pricing models used for determining fair values of ADB's derivatives are based on discounted expected cash flows using observable market data. ADB reviews pricing models to assess the appropriateness of assumptions to reasonably reflect the valuation of transactions. In addition, valuations derived from the models are subject to ongoing internal and external verification and review. The models use market-sourced inputs such as interest rates, exchange rates, and option volatilities. Selection of these inputs may involve some judgment and may impact net income. Nevertheless, ADB believes that the estimates of fair values are reasonable given existing controls and processes.

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