Part II. Financial Management and Financial Statements. African Development Bank. African Development Fund. Nigeria Trust Fund

Transcription

1 Part II Financial Management and Financial Statements African Development Bank African Development Fund Nigeria Trust Fund

2 Chapter 005 African Development Bank 66

3 African Development Bank Chapter chapter five Adb, Adf, and Ntf Financial Management and Financial Statements Management s Report Regarding Effectiveness of Internal Controls Over External Financial Reporting External Auditors Report Regarding Effectiveness of Internal Controls Over External Financial Reporting African Development Bank Financial Management Financial Results Financial Statements and Report of the Independent Auditors Administrative Budget for Financial Year 2008 African Development Fund Financial Management Financial Results Special Purpose Financial Statements and Report of the Independent Auditors Administrative Budget for Financial Year 2008 Nigeria Trust Fund Financial Management Financial Results Financial Statements and Report of the Independent Auditors 67

4 Chapter 005 African Development Bank Group AFRICAN DEVELOPMENT BANK GROUP AFRICAN DEVELOPMENT FUND BANQUE AFRICAINE DE DÉVELOPPEMENT FONDS AFRICAIN DE DÉVELOPPEMENT Management s Report Regarding the Effectiveness of Internal Controls Over External Financial Reporting Date: April 2, 2008 The Management of the African Development Bank Group ( The Bank Group ) is responsible for the preparation, fair presentation and overall integrity of its published financial statements. The financial statements for the African Development Bank and the Nigeria Trust Fund have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board, while those of the African Development Fund were prepared on a special purpose basis. The financial statements have been audited by the independent accounting firm of KPMG, who were given unrestricted access to all financial records and related data, including minutes of all meetings of the Boards of Directors and committees of the Board. Management believes that all representations made to the external auditors during their audit were valid and appropriate. The external auditors report accompanies the audited financial statements. Management is responsible for establishing and maintaining effective internal controls over external financial reporting in conformity with the basis of accounting. The system of internal control contains monitoring mechanisms and actions that are taken to correct deficiencies identified. Internal controls for external financial reporting are subject to ongoing scrutiny and testing by management and internal audit and are revised as considered necessary. Management believes that such controls support the integrity and reliability of the financial statements. There are inherent limitations to the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, an effective internal control system can provide only reasonable, as opposed to absolute, assurance with respect to financial statements. Furthermore, the effectiveness of an internal control system can change with circumstances. The Boards of Directors of the Bank Group have established an Audit and Finance Committee (AUFI) to assist the Boards, among other things, in their oversight responsibility for the soundness of the Bank Group s accounting policies and practices and the effectiveness of internal controls. AUFI, which is comprised entirely of selected members of the Board of Directors, oversees the process for the selection of external auditors and makes a recommendation for such selection to the Board of Directors, which in turn makes a recommendation for the approval of the Board of Governors. AUFI meets periodically with management to review and monitor matters of financial, accounting or auditing significance. The external auditors and the internal auditors regularly meet with AUFI to discuss the adequacy of internal controls over financial reporting and any other matter that may require AUFI s attention. The Bank s assessment of the effectiveness of internal controls was based on the framework provided by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). On the basis of the work performed, Management asserts that the Bank Group maintained effective internal controls over its financial reporting as contained in the Financial Statements for Management is not aware of any material control weakness that could affect the reliability of the 2007 financial statements. In addition to providing an audit opinion on the fairness of the financial statements for 2007, the external auditors of the Bank Group conducted an independent assessment of the Bank Group s internal control framework and their opinion thereon is presented separately in this annual report. Thierry de Longuemar VICE PRESIDENT, FINANCE Donald Kaberuka PRESIDENT Charles Boamah CONTROLLER 68 15, Avenue du Ghana, Angle des Rues Pierre de Courbertin et Hédi Nouira BP Tunis Belvédère Tunisia Tel: (216) Fax: (216) afdb@afdb.com Internet:

5 African Development Bank Group Chapter 005 KPMG Audit 1, cours Valmy Paris La Défense Cedex France Téléphone: +33 (0) Télécopie: +33 (0) Site internet: African Development Bank Group Temporary Relocation Agency 15, Avenue du Ghana 1002 Tunis Belvédère Tunisie Independent Auditors Report to the Board of Governors of the African Development Bank Group regarding the effectiveness of internal control over external financial reporting Year ended 31 December 2007 Scope We have examined the African Development Bank Group s internal controls over external financial reporting for the year ended 31 December 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management s responsibilities The management of the African Development Bank Group ( The Bank Group ) is responsible for implementing and maintaining effective internal controls over financial reporting and for assessment of the effectiveness of such controls. Management has asserted the effectiveness of the internal controls over financial reporting for Independent Auditors responsibilities Our responsibility is to express an opinion on the Bank Group s internal control over financial reporting based on our procedures. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000, issued by the International Auditing and Assurance Standards Board. That standard requires that we plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, effective internal controls are maintained over financial reporting. An assurance engagement includes obtaining an understanding of internal controls over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controls, based on the assessed risk. It also includes performing such other procedures as considered necessary in the circumstances. We believe that the evidence we have obtained is sufficient and appropriate to provide a reasonable basis for our opinion. Inherent limitation A company s system of internal controls over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. A company s system of internal controls over financial reporting includes those policies and procedures that (1) KPMG S.A. cabinet français membre de KPMG International. une coopérative de droit suisse. Société anonyme d expertise comptable commissariat aux comptes à directoire et conseil de surveillance. Inscrite au Tableau de l ordre à Paris sous le n o et à la Compagnie des Commissaires aux Comptes de Versailles. Siège social : KPMG S.A. Immeuble le Palatin 3, cours du Triangle Paris La Défense Cedex Capital : Code APE 741 C R.C.S. Nanterre TVA Union Européenne FR

6 Chapter 005 African Development Bank Group African Development Bank Group Independent Auditors Report to the Board of Governors of the African Development Bank Group regarding the effectiveness of internal control over external financial reporting pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal controls over financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinion In our opinion, the Bank Group, in all material respects, maintained effective internal controls over financial reporting during the year ended 31 December 2007, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited the financial statements of the African Development Bank, the African Development Fund and the Nigeria Trust Fund for 2007, in accordance with the International Standards on Auditing, and we have expressed unqualified opinions. Paris La Défense, 2 nd April 2008 KPMG Audit A division of KPMG S.A. Pascal Brouard Partner 70

7 Chapter 005 African Development Bank African Development Bank Chapter 005 This chapter discusses the management of the financial resources of the Bank Group s windows the African Development Bank (ADB), the African Development Fund (ADF), and the Nigeria Trust Fund (NTF) during the year. It also presents the Audited Financial Statements for 2007 for the three windows, as well as the ADB and ADF Administrative Budgets for the financial year THE AFRICAN DEVELOPMENT BANK Financial Management Capital Subscription The authorized capital stock of the Bank stood at UA billion as of December 31, 2007, and has been allocated to regional and nonregional members in such proportion so that, when fully subscribed, the regional group holds 60 percent of the total capital stock and the nonregional group 40 percent. At December 31, 2007, members subscriptions reached UA billion, that is percent of the capital stock. The capital stock is composed of paidup and callable capital. The paidup capital is the amount of capital payable over a period determined by the Board of Governors resolution for the relevant General Capital Increase (10 years for the fourth General Capital Increase and 8 years for the fifth General Capital Increase). The paidin capital, which represents the portion of paidup capital that has been actually paid, reached UA 2.34 billion. As of December 31, 2007, the Bank s callable capital was UA billion of which UA 6.66 billion was from countries rated doublea and higher. The callable capital is subject to payment as and when required by the Bank to meet its incurred obligations, (a) by making or participating in direct loans out of funds borrowed or otherwise acquired by the Bank for inclusion in its ordinary capital resources or in special resources; or (b) by guaranteeing in whole or in part, loans made by other entities. It is a protection of the Bank s creditors and holders of Bank s guarantees in the event that it is not able to meet its financial obligations. There has never been a call on the callable capital of the Bank. In accordance with the Shares Transfer Rules, shares for which payment have become due and remain outstanding are forfeited after a prescribed period and offered for subscription to member countries. A member country s payment of the first GCIV installment triggers the subscription to the entire callable capital portion of shares allocated to it, however, shares representing the paidup portion of subscriptions are issued only as and when the Bank receives actual payments for such shares. The position of capital subscriptions at December 31, 2007 is shown in the Statement of Subscriptions to the Capital Stock and Voting Power, which forms part of the Financial Statements in this Report. Bank Rating The rating agencies Standard & Poor s, Moody s, Fitch Ratings, and the Japan Credit Rating Agency reaffirmed their AAA and AA+ rating of the African Development Bank s senior and subordinated debt respectively, with a stable outlook. Their rating reflects the Bank s strong membership support, its preferred creditor status, sound capital adequacy and prudent financial management and policies. Borrowings The Bank strives to raise funds from the capital markets at the lowest possible cost to support its lending activities. The topnotch credit ratings enjoyed by the Bank enable it to issue securities at low interest rates. Its borrowing activities are guided by client and cashflow requirements, assets and liability management goals, and risk management policies. As at December 31, 2007, the borrowing portfolio of the Bank stood at UA 6.20 billion. The Bank is well within its debt policy limits. The key debt ratios are as follows: Total debt/total callable capital (max 80 percent): percent Senior debt/nonborrowing members callable capital (max 80 percent): percent In December 2006, the ADB Board of Directors approved for the year 2007, a borrowing program of up to UA 1,015 million including a UA 140 million component for the Enhanced Private Sector Assistance for Africa Initiative (EPSA). In 2007, the Bank raised UA 724 million from the capital markets at a weighted average cost of 6month US Dollar LIBOR minus 32 basis points. In addition, the Bank raised UA 55 million under the EPSA initiative. The highlight of the year was the Bank s first transaction in the domestic bond market of any African country with the raising of ZAR 1.2 billion for a fiveyear maturity in the domestic bond market of South Africa. The transaction is also the first by any supranational in that market and is listed on the Bond Exchange of South Africa. The listing enables the Bank to offer its bond issues to the domestic South African investors. This is based on the specific 71

8 Chapter 005 African Development Bank documentation framework that has now been created by the Bank which is in line with local financial regulations in South Africa. During 2007, the Bank also raised funds through transactions in the public market, the private placement market, the Uridashi market and through African currencylinked bonds. The Bank maintained its presence in the public market through a highly successful fiveyear maturity inaugural transaction for an amount of Canadian Dollar 400 million in the Canadian domestic bond market in July The Bank continues to focus its efforts on the possibility of issuance in African currencies. Following the successes of the earlier years, the Bank concluded offshore transactions linked to Nigerian Naira, Kenyan Shilling, Tanzanian Shilling and Ghanaian Cedi in 2007 in addition to the domestic South African Rand transaction. Investments The Bank s cash and treasury investments (net of repurchase agreements) as of December 31, 2007 totaled UA 5.40 billion, compared to UA 5.34 billion at the end of Investment income for 2007 amounted to UA million, or a return of 4.59 percent on an average liquidity of UA 5.20 billion, compared to UA million in 2006, or a return of 4.22 percent, on an average liquidity of UA 5.06 billion. Effective January 1, 2001, the ADB s liquid assets were tranched into 3 portfolios, namely operational portfolio, prudential portfolio, and equitybacked portfolio, each with a different benchmark that reflects the cashflow and risk profile of its assets and funding sources. These benchmarks are onemonth LIBID for the operational portfolio, and 6month markedtomarket LIBOR, resetting on February 1 and August 1 for the prudential portfolio. The equitybacked portfolio is managed against a repricing profile benchmark with 10 percent of the Bank s net assets repricing uniformly over a period of 10 years. Loan Portfolio Loans signed, net of cancellations, as at December 31, 2007 amounted to UA billion. Total outstanding loans, as at December 31, 2007, was UA 5.54 billion, UA 249 million higher than the UA 5.29 billion outstanding as at the end of This increase was in spite of prepayments during the year amounting to UA million. Undisbursed balances at December 31, 2007 totaled UA 1.62 billion, a decrease of UA million from December 31, The number of active signed loans stood at 276 for a total amount of UA 5.54 billion. Also, at December 31, 2007, 547 loans amounting to UA 8.27 billion had been fully repaid. A breakdown of the loan portfolio by product type is presented below. Loans Outstanding, December 31, 2007 (percentages) Single Currency Variable Rate 9.34% Single Currency Floating Rate 31.85% MultiCurrency Fixed Rate 5.94% MultiCurrency Variable Rate 6.66% Single Currency Fixed Rate 46.21% Disbursements Disbursements on Bank loans increased from UA million in 2006 to UA million, representing an increase of 61.3 percent. At December 31, 2007, cumulative disbursements (including nonsovereign loans) amounted to UA billion. Fully disbursed loans at December 31, 2007 were 747 for a total amount of UA billion, representing percent of cumulative disbursements. Undisbursed Balances, December 31, 2007 (percentages) Single Currency Variable Rate 0.75% Single Currency Floating Rate 35.25% MultiCurrency Fixed Rate 0.11% MultiCurrency Variable Rate 0.00% Single Currency Fixed Rate 63.89% Financial Products Loans. The Bank offers 3 loan products: variable, floating, and fixed interest rate loans with a selection of loan currencies, currently, US Dollars, Euro, Japanese Yen, and South Africa Rand. To suit the longterm financing needs of borrowers, loans have a maximum maturity of 20 years, including a grace period on the repayment of the principal amount, generally not exceeding 5 years. For the single currency variable interest rate loan, the base rate is determined twice a year, on January 1 and July 1, and is based on the Bank s average cost of a designated pool of borrowings funding the loans in the specific currency. The base rate for the floating interest rate loan is derived from the 6month market reference rate in the specific currency, for example, LIBOR, EURIBOR or JIBAR. The base rate is reset on February 1 and August 1 each year and applies to the 6month period following the reset date. For the fixed interest rate loan, the lending rate in 72

9 African Development Bank Chapter 005 each currency is the fixed amortizing swap rate derived from the 6month market reference rates. Borrowers may select from a number of ratefixing alternatives, including fixing at each disbursement or after all disbursements have been completed. Prior to rate fixing, the currencyspecific floating interest rate applies. The pricing formula applicable to all 3 loan products is the same. The applicable rate of interest is the sum of the chosen base rate plus a lending spread. Loans to sovereign and sovereignguaranteed borrowers enjoy a lending spread of 40 basis points above the 6month market reference rate. For nonsovereign guaranteed borrowers in both the private and public sector, the lending spread is computed based on the Bank s riskbased pricing framework. Agency Lines. Loans to private sector enterprises can be extended directly or through a private financial institution (PFI). In an agency line (AL), the credit risk of the borrower is borne by the Bank. In addition, the PFI acts as an agent for the Bank, to carry out a variety of activities, including, but not limited to, identifying projects within certain parameters; appraising such projects on behalf of the Bank; when approved, undertaking all of the administrative steps related to disbursement (billing, collection of Bank s funds, filing of security); supervising projects, monitoring the performance of the borrower, submitting reports thereon; and transmitting amounts related to the repayment of the loan to the Bank. Guarantees. Through the guarantee product, the Bank seeks to leverage its preferred creditor status to assist eligible borrowers to obtain financing from third party lenders, including capital markets. Guarantees will also enable borrowers to obtain financing in their own local currency where the Bank is not able to provide such financing directly from its own resources. Risk Management Products are offered to enable borrowers to manage the market risks associated with their loans from the Bank, including interest rate, currency, and commodity price risks. These products assist borrowers to manage their balance sheets and their changing needs more efficiently over time. Risk management products such as interest rate swaps, currency swaps, interest rate caps and collars are available to borrowers at any time during the life of the loan. Equity Participation or Quasi Equity Products. The Bank s ability to provide risk capital through equity investments is a key element of its resource mobilization role. Even though the Bank cannot be a majority shareholder in a company, it can participate in a project by acquiring ordinary stocks, redeemable preferred stocks, or debentures. Other Financial Services. In addition to the products described above, the Bank may offer loan syndication and underwriting services through its private sector window. Risk Management Policies and Processes As a development finance institution, the African Development Bank seeks to reduce its exposure to risks that are not essential to its core business of providing development finance and related assistance. To this end, the Bank has adapted its risk management policies, guidelines and processes to reduce exposure to interest rate, currency, liquidity, counterparty, legal and other operational risks, while maximizing its capacity to assume credit risks to public and private sector clients, within approved risk limits. Note D of the Financial Statements provides the details regarding the Risk Management policies and processes applied by the Bank to manage these risks. Financial Results Since 2006, the Bank has accounted for distributions to organizations, funds or institutions for purposes complementary with the Bank s mission as grant expenses in the period such distributions are approved by the Board of Governors. Prior to 2006, such distributions were presented as direct reductions of equity. Due to current expense treatment of distributions approved by the Board of Governors, Income before transfer of income approved by the Board of Governors is separately disclosed on the income statement, to highlight income from normal or ordinary operations of the Bank. The highlights of the Bank s financial performance in 2007 include the following: Income before transfers approved by the Board of Governors increased by percent from UA million in 2006 to UA million in The increase is mainly attributable to the following factors: a) net writeback of provision for impairment on loans and related charges receivable of UA million in 2007 compared to a net charge for provision of UA million in 2006, b) an increase of UA million in 2007 in the unrealized gains on derivatives and borrowings for which fair value option was elected, and c) a reduction of UA million in the amount of impairment for equity investments and other receivables. Loan income increased by UA million, or 3.93 percent, in The increase in loan income was mainly due to a higher average loan balance during Investment income also increased in 2007 by UA million, or percent, as a result of higher average investment balances and higher yields, but the increase was more than offset by a UA million increase in borrowingrelated charges. In 2007, 73

10 Chapter 005 African Development Bank the Bank earned income of UA 4.97 million on investments in debt instruments issued by entities in its regional member countries. As a result of the arrears clearance mechanism approved by the Board of Directors during 2007, the number of sovereign borrowers in arrears for six months or more decreased from 6 at December 31, 2006 to 4 at December 31, Consequently, there was a writeback of impairment for losses on loans and related charges receivable in 2007 compared to a charge for impairment in At December 31, 2007 total accumulated provision for losses on principal and charges was UA million, which was 6.10 percent of gross principal and charges receivable at that date, compared to UA million, or 7.60 percent of gross principal and charges receivable at December 31, percentage of gross loans, reserves plus loss provisions on loan principal increased from 47.7 percent at December 31, 2006 to percent at December 31, Against the background of the strong riskbearing capacity of the Bank, the Board of Governors in 2007 approved transfers of UA million to various development initiatives in Africa. These transfers included UA million to the special fund for postconflict assistance to the Democratic Republic of Congo, UA million to the ADF, UA million to the Heavily Indebted Poor Countries (HIPC) initiative, UA 10 million to the Middle Income Countries Technical Assistance Fund, and UA 9.49 million to the Investment Climate Facility for Africa. Total Bank Group administrative expenses increased from UA million in 2006 to UA million in The Bank s share of the Bank Group administrative expenses amounted to UA million for 2007, compared to UA million for Bank Group administrative expenses are allocated between the Bank, the ADF and the NTF based on a predetermined costsharing formula driven primarily by the relative levels of certain operational volume indicators. For the past several years, the Bank has earned levels of net income sufficient to enable not only the further strengthening of the Bank s reserves position, but also contributions on behalf of its shareholders to other development initiatives for Africa. Total reserves plus accumulated loss provisions on outstanding loan principal and charges at December 31, 2007 were UA 2.90 billion, up from UA 2.74 billion at December 31, As a 74

11 African Development Bank Financial Statements and Report of the Independent Auditors Years ended December 31, 2007 and 2006 Page Balance Sheet 76 Income Statement 78 Statement of Recognized Income and Expense 79 Statement of Cash Flows 80 Notes to the Financial Statements 81 Report of the Independent Auditors 144

12 Chapter 005 African Development Bank BALANCE SHEET AS AT DECEMBER 31, 2007 AND 2006 (UA thousands Note B) ASSETS CASH 95, ,329 DEMAND OBLIGATIONS 3,801 3,801 TREASURY INVESTMENTS (Note F) 5,303,540 6,093,361 DERIVATIVE ASSETS (Note G) 425, ,310 NONNEGOTIABLE INSTRUMENTS ON ACCOUNT OF CAPITAL (Note H) 15,385 20,383 ACCOUNTS RECEIVABLE Accrued income and charges receivable on loans (Note I) 267, ,935 Other accounts receivable 328, , , ,972 DEVELOPMENT FINANCING ACTIVITIES Loans, net (Notes D & I) 5,344,073 5,076,771 Equity participations (Note J) 189, ,119 Other debt securities (Note K) 94,622 5,627,943 5,195,890 OTHER ASSETS Property, equipment and intangible assets (Note L) 14,362 14,241 Miscellaneous ,029 14,954 TOTAL ASSETS 12,082,439 12,332,000 The accompanying notes to the financial statements form part of this statement _ADB_part a_uk.indd 76 11/04/08 13:40:41

13 African Development Bank Chapter 005 LIABILITIES & EQUITY ACCOUNTS PAYABLE Accrued financial charges 418, ,751 Other accounts payable 165, , , ,960 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND PAYABLE FOR CASH COLLATERAL RECEIVED (Note F) 877,833 DERIVATIVE LIABILITIES (Note G) 591, ,937 BORROWINGS (Note M) Borrowings at fair value 5,226,279 4,823,648 Borrowings at amortized cost 972,594 1,046,821 6,198,873 5,870,469 EQUITY (Note N) Capital Subscriptions paid 2,336,457 2,303,062 Cumulative Exchange Adjustment on Subscriptions (CEAS) (160,075) (155,742) Subscriptions paid (net of CEAS) 2,176,382 2,147,320 Reserves Retained earnings 2,498,288 2,305,345 Fair value gains on availableforsale investments 33, Total reserves 2,531,798 2,305,481 Total equity 4,708,180 4,452,801 TOTAL LIABILITIES & EQUITY 12,082,439 12,332, _ADB_part a_uk.indd 77 11/04/08 13:40:42

14 Chapter 005 African Development Bank INCOME STATEMENT FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (UA thousands Note B) OPERATIONAL INCOME & EXPENSES Income from: Loans (Note O) 341, ,027 Investments and related derivatives (Note O) 238, ,824 Other debt securities 4,966 Total income from loans and investments 585, ,851 Borrowing expenses (Note P) Interest and amortized issuance costs (268,023) (245,413) Net interest on borrowingrelated derivatives (62,706) (35,137) Unrealized gain on fairvalued borrowings and related derivatives 21,239 10,672 Unrealized gain on derivatives on non fairvalued borrowings and others 34,774 21,067 Provision for impairment (Note I) Loan principal 17,453 (22,566) Loan charges 52,503 (29,120) Provision for impairment on equity investments and other receivables (7,222) (34,745) Translation (losses)/gains (8,895) 4,101 Other income 7,323 23,736 Net operational income 371, ,446 OTHER EXPENSES Administrative expenses (Note Q) (42,218) (36,859) Depreciation Property, equipment and intangible assets (Note L) (5,375) (6,233) Sundry (expenses)/gains (493) 1,678 Total other expenses (48,086) (41,414) Income before transfers approved by the Board of Governors 323, ,032 Transfers of income approved by the Board of Governors (Note N) (119,902) (139,200) NET INCOME 203,766 54,832 The accompanying notes to the financial statements form part of this statement _ADB_part a_uk.indd 78 11/04/08 13:40:42

15 African Development Bank Chapter 005 STATEMENT OF RECOGNIZED INCOME AND EXPENSE FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (UA thousands Note B) Gain/(loss) on availableforsale investments taken to equity 33,374 (8,574) Actuarial losses on defined benefit plans (10,823) (7,165) Net income/(loss) recognized directly in equity 22,551 (15,739) Net income for the year 203,766 54,832 TOTAL RECOGNIZED INCOME FOR THE YEAR 226,317 39,093 The accompanying notes to the financial statements form part of this statement _ADB_part a_uk.indd 79 11/04/08 13:40:42

16 Chapter 005 African Development Bank STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006 (UA thousands Note B) Cash flows from: Operating activities: Net income 203,766 54,832 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,375 6,233 Provision for impairment on loan principal and charges (69,956) 51,686 Unrealized gains on investments and related derivatives (5,997) (2,638) Amortization of discount or premium on heldtomaturity investments (5,645) 2,814 Provision for impairment on equity investments and receivables 7,222 34,745 Amortization of borrowing issuance costs 3,333 2,936 Unrealized gain on fair value borrowings and derivatives (56,013) (48,799) Translation losses/(gains) 8,895 (4,101) Share of profits in associate (479) (379) Net movements in derivatives (51,659) 130,972 Changes in accrued income on loans 15,640 (4,877) Changes in accrued financial charges 90,409 79,132 Changes in other receivables and payables (123,330) 19,412 Net cash provided by operating activities 21, ,968 Investing, lending and development activities: Disbursements on loans (884,747) (548,440) Repayments of loans 704, ,408 Investments maturing after 3 months of acquisition: Heldtomaturity portfolio (79,764) (410,735) Trading portfolio 359,145 (85,443) Other debt securities (92,801) Changes in other assets (5,451) (4,209) Equity participations movement (40,150) 2,919 Net cash used in investing, lending and development activities (39,723) (339,500) Financing activities: New issues on borrowings 779, ,741 Repayments on borrowings (402,541) (621,486) Net cash from capital subscriptions 33,363 40,302 Net cash provided by financing activities 410, ,557 Effect of exchange rate changes on cash and cash equivalents (12,363) (18,150) Increase in cash and cash equivalents 379, ,875 Cash and cash equivalents at the beginning of the year 705, ,015 Cash and cash equivalents at the end of the year 1,085, ,890 Composed of: Investments maturing within 3 months of acquisition: Heldtomaturity portfolio 24,114 80,075 Trading portfolio 966,194 1,374,319 Securities sold under agreements to repurchase and payable for cash collateral received (877,833) Cash 95, ,329 Cash and cash equivalents at the end of the year 1,085, ,890 Supplementary disclosure: Movement resulting from exchange rate fluctuations: Loans (70,008) 32,776 Borrowings (77,088) (251,558) Currency swaps 89, ,523 The accompanying notes to the financial statements form part of this statement _ADB_part a_uk.indd 80 11/04/08 13:40:43

17 African Development Bank Chapter 005 NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2007 and 2006 NOTE A OPERATIONS AND AFFILIATED ORGANIZATIONS The African Development Bank (ADB or the Bank) is a multilateral development finance institution dedicated to the economic and social progress of its regional member states. The Bank finances development projects and programs in its regional member states, typically in cooperation with other national or international development institutions. In furtherance of this objective, the Bank participates in the selection, study and preparation of projects contributing to such development and, where necessary, provides technical assistance. The Bank also promotes investments of public and private capital in projects and programs designed to contribute to the economic and social progress of the regional member states. The activities of the Bank are complemented by those of the African Development Fund (ADF or the Fund), which was established by the Bank and certain countries; and the Nigeria Trust Fund (NTF), which is a special fund administered by the Bank. Notably, the ADB, ADF, and NTF each have separate and distinct assets and liabilities. There is no recourse to the ADB for obligations in respect of any of the ADF or NTF liabilities. The ADF was established to assist the Bank in contributing to the economic and social development of the Bank s regional members, to promote cooperation and increased international trade particularly among the Bank s members, and to provide financing on concessional terms for such purposes. NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Bank s financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) promulgated by the International Accounting Standards Board. The financial statements have been prepared under the historical cost convention except for certain financial assets and financial liabilities that are carried at fair value. The significant accounting policies employed by the Bank are summarized below. Revenue Recognition Interest income is accrued and recognized based on the effective interest rate for the time such instrument is outstanding and held by the Bank. The effective interest rate is the rate that discounts the estimated future cash flows through the expected life of the financial asset to the asset s net carrying amount. Income from investments includes realized and unrealized gains and losses on trading financial instruments. Dividends relating to investments in equity are recognized when the Bank s right to receive payment is established. Functional and Presentation Currencies The Bank conducts its operations in the currencies of its member countries. As a result of the application of IAS 21 revised, The Effects of Changes in Foreign Exchange Rates, the Bank prospectively changed its functional currency from the currencies of all its member countries to the Unit of Account (UA) effective January 1, The UA is also the currency in which the financial statements are presented. The value of the Unit of Account is defined in Article 5.1 (b) of the Agreement Establishing the Bank (the Agreement) as equivalent to one Special Drawing Right (SDR) of the International Monetary Fund (IMF) or any unit adopted for the same purpose by the IMF. Currency Translation Income and expenses are translated to UA at the rates prevailing on the date of the transaction. Monetary assets and liabilities are translated into UA at rates prevailing at the balance sheet date. The rates used for translating currencies into UA at December 31, 2007 and 2006 are reported in Note V1. Nonmonetary assets and liabilities are translated into UA at historical rates. Translation differences are included in the determination of net income. Capital subscriptions are recorded in UA at the rates prevailing at the time of receipt. The translation difference relating to payments of capital subscriptions is reported in the financial statements as the Cumulative Exchange Adjustment on Subscriptions (CEAS). This is composed of the difference between the UA amount at the predetermined rate and the UA amount using the rate at the time of receipt. When currencies are converted into other currencies, the resulting gains or losses are included in the determination of net income _ADB_part a_uk.indd 81 11/04/08 13:40:44

18 Chapter 005 African Development Bank Member Countries Subscriptions Although the Agreement establishing the ADB allows for a member country to withdraw from the Bank, no member has ever withdrawn its membership voluntarily, nor has any indicated to the Bank that it intends to do so. The stability in the membership reflects the fact that the members are independent African and nonafrican countries, and that the purpose of the Bank is to contribute to the sustainable economic development and social progress of its regional member countries individually and jointly. Accordingly, as of December 31, 2007, the Bank did not expect to distribute any portion of its net assets due to member country withdrawals. In the unlikely event of a withdrawal by a member, the Bank shall arrange for the repurchase of the former member s shares. The repurchase price of the shares is the value shown by the books of the Bank on the date the country ceases to be a member, hereafter referred to as the termination date. The Bank may partially or fully offset amounts due for shares purchased against the member s liabilities on loans and guarantees due to the Bank. The former member would remain liable for direct obligations and contingent liabilities to the Bank for so long as any parts of the loans or guarantees contracted before the termination date are outstanding. If at a date subsequent to the termination date, it becomes evident that losses may not have been sufficiently taken into account when the repurchase price was determined, the former member may be required to pay, on demand, the amount by which the repurchase price of the shares would have been reduced had the losses been taken into account when the repurchase price was determined. In addition, the former member remains liable on any call, subsequent to the termination date, for unpaid subscriptions, to the extent that it would have been required to respond if the impairment of capital had occurred and the call had been made at the time the repurchase price of its shares was determined. Were a member to withdraw, the Bank may set the dates in respect of payments for shares repurchased. If, for example, paying a former member would have adverse consequences for the Bank s financial position, the Bank could defer payment until the risk had passed, and indefinitely if appropriate. Furthermore, shares that become unsubscribed for any reason may be offered by the Bank for purchase by eligible member countries, based on the share transfer rules approved by the Board of Governors. In any event, no payments shall be made until six months after the termination date. If the Bank were to terminate its operations, all liabilities of the Bank would first be settled out of the assets of the Bank and then, if necessary, out of members callable capital, before any distribution could be made to any member country. Such distribution is subject to the prior decision of the Board of Governors of the Bank and would be based on the prorata share of each member country. Employee Benefits 1) Pension Obligations The Bank operates a contributory defined benefit pension plan for its employees. The Staff Retirement Plan (SRP) provides benefit payments to participants upon retirement. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. An actuarial valuation of the cost of providing benefits for the SRP is determined using the Projected Unit Credit Method. Upon reaching retirement age, pension is calculated based on the average remuneration for the final three years of pensionable service and the pension is subject to annual inflationary adjustments. Actuarial gains and losses are recognized immediately in retained earnings in the year they occur. Past service cost is recognized immediately to the extent that benefits are already vested, otherwise, amortized on a straightline basis over the average period until the benefits become vested. The pension liability is recognized as part of other accounts payable in the balance sheet. The liability represents the present value of the Bank s defined benefit obligations, net of the fair value of plan assets and unrecognized actuarial gains and losses. 2) PostEmployment Medical Benefits The Bank operates a contributory defined Medical Benefit Plan (MBP), which provides postemployment healthcare benefits to eligible former staff, including retirees. Membership of the MBP includes both staff and retirees of the Bank. The entitlement to the postretirement healthcare benefit is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits derive from contributions from plan members as well as the Bank and are accrued over the period of employment and during retirement. Contributions by the Bank to the MBP are charged to expenses and included in the statement of income and expenses. The MBP Board, an independent body created by the Bank, determines the adequacy of the contributions and is authorized to recommend changes to the contribution rates of both the Bank and plan members _ADB_part a_uk.indd 82 11/04/08 13:40:44

19 African Development Bank Chapter 005 Financial Instruments Financial assets and financial liabilities are recognized on the Bank s balance sheet when the Bank assumes related contractual rights or obligations. 1) Financial Assets The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; heldtomaturity investments; and availableforsale financial assets. Management determines the classification of its investments at initial recognition. i) Financial Assets at Fair Value through Profit or Loss All trading assets are carried at fair value through the income statement and gains and losses are reported in the income statement in the period in which they arise. The investments in the trading portfolio are acquired principally for the purpose of selling in the short term. Derivatives are also categorized as heldfortrading. ii) Loans and Receivables The Bank has classified demand obligations, accrued income and receivables from loans and investments and other sundry amounts as receivables. Loans and receivables are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans and receivables are carried at amortized cost using the effective interest method. iii) HeldtoMaturity Investments The Bank has classified its investments in certain debt securities as heldtomaturity. Heldtomaturity investments are nonderivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Heldtomaturity investments are subsequently measured at amortized cost. Heldtomaturity investments are carried at amortized cost using the effective interest method. iv) AvailableforSale Financial Assets The Bank has classified equity investments over which it does not have control or significant influence as availableforsale. Availableforsale investments are those intended to be held for an indefinite period of time, and may or may not be sold in the future. Gains and losses arising from changes in the fair value of availableforsale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in equity is recognized in profit or loss. Purchases and sales of financial assets at fair value through profit or loss, heldtomaturity and availableforsale investments are recognized on a tradedate basis, which is the date on which the Bank commits to purchase or sell the asset. Loans are recognized when cash is advanced to the borrowers. Financial assets not carried at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Securities purchased under resale agreements and securities sold under repurchase agreements are reported at market rates. The Bank receives securities purchased under resale agreements, monitors the fair value of the securities and if necessary may require additional collateral. Cash and cash equivalents comprise cash on hand, demand deposits and other shortterm, highly liquid investments that are readily convertible to a known amount of cash, are subject to insignificant risk of changes in value and have a time to maturity upon acquisition of three months or less _ADB_part a_uk.indd 83 11/04/08 13:40:45

20 Chapter 005 African Development Bank 2) Financial Liabilities i) Borrowings In the ordinary course of its business, the Bank borrows funds in the major capital markets for lending and liquidity purposes. The Bank issues debt instruments denominated in various currencies, with differing maturities at fixed or variable interest rates. The Bank s borrowing strategy is driven by three major factors, namely: timeliness in meeting cash flow requirements, optimizing asset and liability management with the objective of mitigating exposure to financial risks, and providing costeffective funding. In addition to long and mediumterm borrowings, the Bank also undertakes shortterm borrowing for cash and liquidity management purposes only. Borrowings not designated at fair value through profit or loss are carried on the balance sheet at amortized cost with interest expense determined using the effective interest method. Borrowing expenses are recognized in profit or loss and include the amortization of issuance costs, discounts and premiums, which is determined using the effective interest method. Certain of the Bank s borrowings have been obtained from the governments of some member countries of the Bank and are interest/free. In accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, the benefit of borrowing at subsidized rates from member countries governments has not been recognized through the imputation of interest expense in the financial statements. ii) Financial Liabilities at Fair Value through Profit or Loss This category has two subcategories: financial liabilities held for trading, and those designated at fair value through profit or loss at inception. Derivatives are categorized as heldfortrading. The Bank primarily applies fair value designation to borrowings which have been swapped into floatingrate debt using derivative contracts. In these cases, the designation of the borrowing at fair value through profit or loss is made in order to significantly reduce an accounting mismatch which would otherwise have arisen if the borrowings were carried on the balance sheet at amortized cost while the related swaps are carried on the balance sheet at fair value. iii) Other Liabilities All financial liabilities that are not derivatives or designated at fair value through profit or loss are recorded at amortized cost. The amounts include accrued finance charges on borrowings and other accounts payable. Financial liabilities are derecognized when they are discharged or cancelled or when they expire. Derivatives The Bank uses derivative instruments in its portfolios for asset/liability management, cost reduction, risk management and hedging purposes. These instruments include crosscurrency swaps and interest rate swaps. The derivatives on borrowings are used to modify the interest rate or currency characteristics or both of the debt the Bank issues. This economic relationship is established on the date the debt is issued, and maintained throughout the terms of the contracts. The interest component of these derivatives is reported as part of borrowing expenses. Although IAS 39 allows hedge accounting for certain qualifying hedging relationships, the Bank has elected not to apply hedge accounting to any qualifying hedging relationship, but rather classifies all derivatives as heldfortrading at fair value, with all changes in fair value recognized in the income statement. When the criteria for the application of the fair value option are met, then the related debt is also carried at fair value with changes in fair value recognized in the income statement. Derivatives embedded in other financial instruments or other nonfinancial host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealized gains or losses reported in profit or loss. Such derivatives are stripped from the host contract and measured at fair value with unrealized gains and losses reported in profit or loss. Impairment of Financial Assets 1) Assets Carried at Amortized Cost The Bank first assesses whether objective evidence of impairment exists individually for financial assets. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, that asset is included in a group of financial assets with similar credit characteristics and collectively assessed for impairment. Assets that are individually assessed for impairment and for 84 06_ADB_part a_uk.indd 84 11/04/08 13:40:45