Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank

Transcription

1 Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank Effective January 2002

2 Foreword Financial analysis of ADB projects has been conducted ever since ADB was founded in To improve the uniformity, approach, and coverage of financial analysis, ADB issued Guidelines for the Preparation and Presentation of Financial Analysis in ADB has undertaken a review of the Guidelines to ensure that they reflect current ADB policies, rules, and procedures, and developments in financial management and analysis practices. In October 1999, a Bank-wide taskforce was appointed under the chairmanship of Francis B. Narayan, Lead Financial Management Specialist. The taskforce was supported by a consultant. The review process, lasting over a year, was carried out in consultation with all divisions and departments. These revised Guidelines are the result of the review. They describe ADB s philosophy, policies, and approach to financial management of executing agencies and financial analysis of investment projects. They have been prepared for the benefit of ADB staff and consultants who evaluate financial management practices of executing agencies or undertake financial analysis of investment projects. The new title Guidelines for the Financial Governance and Management of Investment Projects Financed by ADB reflects changes in ADB policies and procedures since The Guidelines has been developed for the web. This hardcopy version is an abridged edition. ADB deals with countries and sectors that are at different stages of development and that have different resource and staff constraints. Recognizing these constraints, the Guidelines need to be applied in a realistic, practical, and flexible manner. ADB financial analysts and financial management specialists have the discretion to determine the extent to which the Guidelines will apply in particular circumstances. The advice, directions and recommendations in the Guidelines should not be regarded as a substitute for initiative. ADB staff should always exercise resourcefulness and imagination in reaching sound professional judgments. MYOUNG-HO SHIN Vice President (Region West) November 2001

3 iii Key Information on these Guidelines What are e these Guidelines? The Asian Development Bank (ADB) publishes the Guidelines for the Financial Governance and Management of Investment Projects Financed by the ADB (the Guidelines). The Guidelines set out ADB s requirements and procedures for the financial management of projects financed by ADB, for instance, financial reporting, and auditing requirements. They also provide guidance on how to apply these requirements. When are e the Guidelines Updated? The web-based Guidelines and the downloadable copy of the Guidelines are updated every six months. A list of six-monthly changes to the Guidelines can be accessed online. After reviewing these changes, users may decide to download an up-to-date copy of the Guidelines from website at What Recent Changes have been made to the Guidelines? ADB s 1989 Guidelines were reviewed and re-released in November The changes to the 2001 Guidelines reflected developments in financial management practices, changes in accounting and auditing standards, and harmonization efforts by the multilateral development banks including ADB. Who can I ask for help on the Guidelines? If your question is related to a project or program, please contact the responsible ADB project officer in the first instance. Otherwise, contact: Francis B. Narayan Lead Financial Management Specialist Asian Development Bank Manila, Philippines General Information: fmguidelines@adb.org Webmaster: fmgwebmaster@adb.org Telephone (632) Fax (632) Postal: 6 ADB Avenue P.O. Box 789, 0980, Manila, Philippines.

4 iv Acronyms The following acronyms are used throughout these Guidelines. A fuller list of common ADB acronyms is accessible at ADB AfDB APA BCBS BIS BTOR CAPA CFAA CFS COSO CPA DMC DSAA EA EBRD ED EIRR ENPV EU FARAH FASB FCDD FI FIL FIRR FNPV FOCC GAAP GDP IA IADB IAPC IAPS IAS IASB IASC Asian Development Bank African Development Bank Audited Project Accounts Basle Committee for Banking Supervision (BIS) Bank for International Settlements Back-to-Office Report Confederation of Asian and Pacific Accountants Country Financial Accountability Assessment (World Bank) Corporate Financial Statements Central Operations Service Office Certified Public Accountant Developing Member Country Country Diagnostic Study of Accounting and Auditing Executing Agency European Bank for Reconstruction and Development Exposure Draft Economic Internal Rate of Return Economic Net Present Value European Union Financial Accounting, Reporting & Auditing Handbook (World Bank) Financial Accounting Standards Board (United States) Financial Charges During Development Financial Institution Financial Institution Loan Financial Internal Rate of Return Financial Net Present Value Financial Opportunity Cost of Capital Generally Accepted Accounting Principles Gross Domestic Product Implementing Agency (also PIU) Inter-American Development Bank International Auditing Practices Committee (IFAC) International Auditing Practice Statement (issued by IAPC) International Accounting Standard (issued by IASB) International Accounting Standards Board (formerly IASC) International Accounting Standards Committee

5 v IEG IES IFAC IFRS IMF INTOSAI IOSCO IPSAS ISA MDB MFI MIGA MOF MRM NGO OECD OIST OM PAI PAU PCR PIU PMU PPTA PSC REEA RETA ROE ROR ROSC RRP SAI SFR SI SME SOE SRC TA TOR UNCTAD WACC WTO International Education Guideline (issued by IFAC) International Education Standard (issued by IFAC) International Federation of Accountants International Financial Reporting Standard (issued by IASB) International Monetary Fund International Organization of Supreme Audit Institutions International Organization of Securities Commissions International Public Sector Accounting Standard (issued by IFAC) International Standard on Auditing (issued by IAPC) Multilateral Development Bank Microfinance Institution Multilateral Investment Guarantee Agency Ministry of Finance Management Review Meeting Nongovernment Organization Organization for Economic Cooperation and Development Office of Information Systems and Technology Operations Manual Project Administration Instructions Project Administration Unit Project Completion Report Project Implementing Unit (also IA) Project Management Unit Project Preparatory Technical Assistance Public Sector Committee (IFAC) Revenue Earning Executing Agency Regional Technical Assistance Return on Equity Rate of Return Report on the Observance of Standards and Codes (World Bank IMF) Report and Recommendation of the President (ADB) Supreme Audit Institution Self-Financing Ratio Sensitivity Indicator Small or Medium-scale Enterprise Statement of Expenditure Staff Review Committee Technical Assistance Terms of Reference United Nations Conference on Trade and Development Weighted Average Cost of Capital World Trade Organization

6 vi Contents 1. Introduction to the Guidelines 1.1. Introduction 1.2. Rationale 1.3. Objectives 1.4. Structure 1.5. Project File 1.6. Guideline Updates 2. User Instructions 2.1. Overview 2.2. ADB Lending and Technical Assistance 2.3. Applying these Guidelines 2.4. Project Types and General Treatments 2.5. An Overview of Project Processing Steps 2.6. Step 1: Identification and Early Preparation 2.7. Step 2: Loan Preparation 2.8. Step 3: Project Examination 2.9. Step 4: Loan Negotiations 2.10.Step 5: Project Implementation 2.11.Step 6: Project Completion 3. Preparing and Appraising Investment Projects 3.1. Investment Projects Overview 3.2. Possible Investment Projects Possible Revenue-Earning Projects Possible Non-Revenue-Earning Projects 3.3. Appraisal Checklists 3.4. Forecasting Introduction to Forecasting Using the COSTAB Model Preparing Project Cost Estimates Determining Contingencies Disbursement Profiles Preparing Financing Plans Computing Incremental Project Cash Flows 3.5. Preparing Financial Benefit-Cost Analyses Introduction Determining the Discount Rate (WACC) Calculating the Financial IRR and NPV Undertaking Sensitivity and Risk Analyses 3.6. Loan Covenants Introduction to Loan Covenants Operating Covenants Capital Structure Covenants Liquidity Covenants 3.7. ADB Reports Introduction to ADB Reports The Project Preparation Report Report and Recommendation of the President (RRP) Miscellaneous ADB Reports 4. Financial Management of Executing Agencies 4.1. Financial Management Overview 4.2. Institutions and Systems Introduction to Institutions and Systems Major Institutional Assessments Governance Financial Policies Country Diagnostic Studies of Accounting and Auditing Executing Agencies (EAs) Project Objectives Revenue-Earning Projects Non-Revenue-Earning Projects 4.3. Financial Analysis Introduction to Financial Analysis Financial Analysis Objectives Linkages with Cost Recovery and Tariffs Preparing Financial Tables Determining Fiscal Period Coverage Forecasting and Financial Projections Forecasting Assumptions 4.4. Measuring Performance Introduction to Measuring Performance Objectives of Measuring Performance Performance Indicators Using Benchmarking Indicators Selecting Indicators and Covenants Operating Indicators and Covenants Capital Structure Indicators Liquidity Indicators 5. Reporting and Auditing 5.1. Financial Reporting and Auditing Overview 5.2. Accounting Standards and Policies Introduction International Accounting Standards (IASs) ADB Accounting Policy Requirements

7 vii 5.3. Financial Reporting Introduction Content and Timing of Financial Reporting Accounting Statements and Financial Reports Interim Financial Statements and the Project Management Report (PMR) Audited Project Financial Statements Annual Financial Statements for a Non-Revenue-Earning Project Annual Financial Statements for Revenue-Earning Projects and EAs Supplementary Financial Statements Designing Financial Reports for Revenue-Earning Projects Designing Financial Reports for Non-Revenue-Earning Projects Examples of Model Financial Statements 5.4. Auditing Standards and Auditor Engagement Introduction ADB Requirements Auditing Procedures Auditor Selection and Appointment Issues in Auditor Selection Selecting Auditors Terms of Reference for an Auditor Contract or Engagement Letter of Auditor International Standards on Auditing (ISAs) Government Auditors 5.5. Reviewing Financial Reports Introduction The Review Process: Late or Unacceptable Financial Reports Compliance With Financial Performance Covenants Communication with Government Auditors 5.6. Reviewing Auditors Reports Introduction Auditors Reports and Opinions Model Audit Opinions Compliance with Loan Covenants Compliance with ADB s Requirements Types of Auditors Opinion Materiality Use of Technical Experts Statements of Expenditure (SOE) and Imprest Accounts Reviewing Audit Management Letters Audit Report Questionnaire 6. Financial Institutions (FIs) 6.1. FI Introduction and Overview 6.2. Reviewing FI Financial Management General Operational Issues Policy Framework for FIs and FI Loans Treatment of Interest Rate Distortions Treatment of Directed-Credit Programs ADB Policy on Subsidies Eligibility Criteria for FIs 6.3. FI Investments Introduction Investing in FIs Selecting Participating Institutions Appraising an FI Investment 6.4. Assessing FI Performance Introduction Assessing Microfinance Institutions (MFIs) Applying the CAMEL Framework Assessing FI Risks Determining FI Credit Ratings Specialized FI Internal Controls 6.5. Appraisal Checklist 6.6. FI Reporting and Auditing Issues Introduction FI Financial Reporting FI Auditing MFI Financial Reporting and Auditing 7. Knowledge Management 7.1. Useful Websites 7.2. Operations Manual (OM) 7.3. Project Administration Instructions (PAIs) 7.4. International Accounting Standards (IASs) 7.5. International Standards on Auditing (ISAs) 7.6. Financial Review Checklist for RRPs Lessons from Past Projects Project Cost Estimates Financing Plan (FP) Executing Agencies and Implementing Agencies Financial Projections Financial Analysis Project Justifications Accounting and Auditing

8 viii Procurements and Disbursement Arrangements Finance-Related Risks Assurances 7.7. Appraisal Checklist: Non-Revenue- Earning Project 7.8. Appraisal Checklist: Revenue-Earning Project 7.9. Appraisal Checklist: Private Sector Project 7.10.Appraisal Checklist: Financial Institution 7.11.Undertaking Sensitivity and Risk Analyses Step 1: Identify the Key Variables Steps 2 and 3: Calculate Effects of Changing Variables Step 4: Analyze Key Variable Changes Undertaking Risk Analysis 7.12.Model Operating Covenants Rate of Return (see ) Self-Financing Ratio (see ) General Price Level (see ) Operating Ratio (see ) Breakeven Covenant (see ) 7.13.Model Capital Structure Covenants Debt Service Coverage (Version A: Historical orientation) (see ) Debt Service Coverage (Version B: Forecast orientation) (see ) Debt-Equity Ratio (see ) Capital Adequacy Ratio (see ) 7.14.Model Liquidity Covenants Current Ratio (see ) Quick Ratio Covenant (see ) Dividend Limitation (see ) 7.15.Commonly Used Ratios Operating Indicators Capital Adequacy Indicators Liquidity Indicators 7.16.Model Financial Statements: Service Organization 7.17.Model Financial Statements: Manufacturing Organization 7.18.Model Terms of Reference for an Auditor 7.19.Audit Report Questionnaire Using the Audit Report Questionnaire Authenticity, Form, and Timeliness Audit Opinion Matters Addressed Auditor s Opinion and Report Conclusion and Further Action (if any) Index