(4) Self-Assessment, Asset Write-Offs and Provisions,  and Disclosure of Problem Assets (a) Self-Assessment SMBC conducts rigorous self-assessment of asset quality using  criteria based on the  Financial Inspection Manual  of the Financial  Services Agency and the  Practical Guideline  published by the  Japanese Institute of Certified Public Accountants. Self-assessment  is the latter stage of the obligor grading process for determining the  borrower’s ability to fulfill debt obligations, and the obligor grade  criteria are consistent with the categories used in self-assessment. At the same time, self-assessment is a preparatory task for  ensuring SMBC’s asset quality and calculating the appropriate level  of write-offs and provisions. Each asset is assessed individually  for its security and collectibility. Depending on the borrower’s cur- rent situation, the borrower is assigned to one of five categories:  Normal Borrowers, Borrowers Requiring Caution, Potentially  Bankrupt Borrowers, Effectively Bankrupt Borrowers, and Bankrupt  Borrowers. Based on the borrower’s category, claims on the bor- rower are classified into Classification I, II, III, and IV assets accord- ing to their default and impairment risk levels, taking into account  such factors as collateral and guarantees. As part of our efforts to  bolster risk management throughout the Group, our consolidated  subsidiaries carry out self-assessment in substantially the same  manner. In cases where claims have been determined to be uncollectible,  or deemed to be uncollectible, write-offs signify the recognition of  losses on the account books with respect to such claims. Write- offs can be made either in the form of loss recognition by offsetting  uncollectible amounts against corresponding balance sheet items,  referred to as a direct write-off, or else by recognition of a loan loss  provision on a contra-asset account in the amount deemed uncol- lectible, referred to as an indirect write-off. Recognition of indirect  SMBC uses the discounted cash flow (DCF) method to calculate  the provision amounts for large claims on Substandard Borrowers  and Potentially Bankrupt Borrowers when the cash flow from  repayment of principal and interest received can be estimated  reasonably accurately. SMBC then makes provisions equivalent  to the excess of the book value of the claims over the said cash  inflow discounted by the initial contractual interest rate or the  effective interest rate at the time of origination. One of the major  advantages of the DCF method over conventional methods of  calculating the provision amount is that it enables effective evalua- tion of each individual borrower. However, as the provision amount  depends on the future cash flow estimated on the basis of the  borrower’s business reconstruction plan and the DCF formula  input values, such as the discount rate and the probability of the  borrower going into bankruptcy, SMBC makes every effort to uti- lize up-to-date and correct data to realize the most accurate esti- mates possible. SMBC’s write-off and provision criteria for each self- assessment borrower category are shown in the table below.  As part of our overall measures to strengthen risk management  throughout the Group, all consolidated subsidiaries use substantially  the same standards as SMBC for write-offs and provisions. write-offs is generally known as provision for the reserve for possible  loan losses. Self-Assessment  Borrower Categories Standards for Write-Offs and  Provisions Normal Borrowers The expected loss amount for the next 12 months is  calculated for each grade based on the grade’s historical  bankruptcy rate, and the total amount is recorded as “provi- sion for the general reserve for possible loan losses.” Borrowers Requiring Caution These assets are divided into groups according to the level  of default risk. Amounts are recorded as provisions for the  general reserve in proportion to the expected losses based  on the historical bankruptcy rate of each group. The groups  are “claims on Substandard Borrowers” and “claims on other  Borrowers Requiring Caution.” The latter group is further  subdivided according to the borrower’s financial position,  credit situation, and other factors. Further, when cash flows  can be estimated reasonably accurately, the discounted  cash flow (DCF) method is applied mainly to large claims for  calculating the provision amount. Potentially Bankrupt Borrowers A provision for the specific reserve for possible loan losses  is made for the portion of Classification III assets (calculated  for each borrower) not secured by collateral, guarantee, or  other means. Further, when cash flows can be estimated  reasonably accurately, the DCF method is applied mainly to  large claims for calculating the provision amount. Effectively Bankrupt/ Bankrupt  Borrowers Classification III asset and Classification IV asset amounts  for each borrower are calculated, and the full amount of  Classification IV assets (deemed to be uncollectible or of no  value) is written off in principle and provision for the specific  reserve is made for the full amount of Classification III assets. Notes General reserve  Provisions made in accordance with general inherent default  risk of loans, unrelated to specific individual loans or other  claims Specific reserve Provisions made for claims that have been found uncollect- ible in part or in total (individually evaluated claims) Borrower Categories, Defined Normal Borrowers Borrowers with good earnings performances and no  significant financial problems Borrowers Requiring Caution Borrowers identified for close monitoring Potentially Bankrupt Borrowers Borrowers perceived to have a high risk of falling into  bankruptcy Effectively Bankrupt Borrowers Borrowers that may not have legally or formally declared  bankruptcy but are essentially bankrupt Bankrupt Borrowers Borrowers that have been legally or formally declared bankrupt Asset Classifications, Defined Classification I Assets not classified under Classifications II, III, or IV Classification II Assets perceived to have an above-average risk of  uncollectibility Classification III Assets for which final collection or asset value is very doubt- ful and which pose a high risk of incurring a loss Classification IV Assets assessed as uncollectible or worthless Discounted Cash Flow Method (b) Asset Write-Offs and Provisions SMFG  2011 38