RONGELAP ATOLL LOCAL GOVERNMENT FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT YEAR ENDED SEPTEMBER 30, 2015

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1 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT YEAR ENDED SEPTEMBER 30, 2015

2 Table of Contents Year Ended September 30, 2015 I. Independent Auditors' Report 1 Page II. Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Position 4 Statement of Activities 5 Governmental Fund Financial Statements: Balance Sheet 6 Statement of Revenues, Expenditures, and Changes in Fund Balances 7 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities 8 Notes to the Basic Financial Statements 9 III. Required Supplementary Information - Other than Management s Discussion and Analysis: Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund 26 Notes to the Required Supplementary Information - Budgetary Reporting 27 IV. Independent Auditors Reports on Internal Control and on Compliance: Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 28 Independent Auditors Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by OMB Circular A Schedule of Expenditures of Federal Awards 33 Notes to Schedule of Expenditures of Federal Awards 35 Schedule of Findings and Questioned Costs 36 Unresolved Prior Year Findings and Questioned Costs 51

3 Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU USA Tel: +1 (671) Fax: +1 (671) INDEPENDENT AUDITORS REPORT Mayor James Matayoshi Rongelap Atoll Local Government Republic of the Marshall Islands: Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Rongelap Atoll Local Government (RALGOV), as of and for the year ended September 30, 2015, and the related notes to the financial statements, which collectively comprise RALGOV s basic financial statements as set forth in Section II of the foregoing table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions

4 Summary of Opinions Opinion Unit Governmental Activities General Fund Resettlement Trust Fund Local Distribution Authority Fund Resettlement Phase One Fund Claims Trust Fund Aggregate Remaining Fund Information Type of Opinion Qualified Unmodified Unmodified Qualified Qualified Unmodified Unmodified Basis for Qualified Opinions on the Governmental Activities, the Local Distribution Authority Fund, and the Resettlement Phase One Fund Because of inadequacies in RALGOV s accounting records, we were unable to form an opinion regarding an investment of $300,000 recorded by the governmental activities and the Local Distribution Authority Fund. In addition, as discussed in Note 3B to the financial statements, RALGOV reports its investment in Aquaculture Technologies of the Marshall Islands, Inc., a 51%- owned corporation, at cost. In our opinion, accounting principles generally accepted in the United States of America require that all majority-owned subsidiaries be accounted for as consolidated subsidiaries. Due to the lack of audited financial statements of the corporation, the effect of that departure from accounting principles generally accepted in the United States of America on the accompanying financial statements of the governmental activities and the Resettlement Phase One Fund are not reasonably determinable. Qualified Opinions In our opinion, except for the effects of the matters described in the "Basis for Qualified Opinions on the Governmental Activities, the Local Distribution Authority Fund, and the Resettlement Phase One Fund" paragraph, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the Local Distribution Authority Fund, and the Resettlement Phase One Fund of the Rongelap Atoll Local Government as of September 30, 2015, and the respective changes in financial position thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Unmodified Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the General Fund, the Resettlement Trust Fund, the Claims Trust Fund, and the aggregate remaining fund information of the Rongelap Atoll Local Government as of September 30, 2015, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America

5 Other Matters Required Supplementary Information Management has omitted the Management s Discussion and Analysis that accounting principles generally accepted in the United States of America requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board (GASB) who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. The Schedule of Revenues, Expenditures, and Changes in Fund Balance - Budget and Actual - General Fund and notes thereto, as set forth in Section III of the foregoing table of contents, is not a required part of the basic financial statements but is supplementary information required by the GASB. This supplementary information is the responsibility of the management of RALGOV. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit such information and we do not express an opinion on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated July 3, 2018, on our consideration of RALGOV s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. July 3,

6 Statement of Net Position September 30, 2015 Current assets: Cash and cash equivalents $ 242,365 Time certificate of deposit 6,681 Receivables, net of allowance for uncollectibles of $1,794, ,893 Prepaid items 29,206 Total current assets 614,145 Noncurrent assets: Investments 1,004,011 Restricted assets: Investments 27,704,959 Capital assets, net of accumulated depreciation 8,991,733 Total noncurrent assets 37,700,703 Total assets $ 38,314,848 Current liabilities: Current portion of notes payable $ 21,302 Accounts payable 208,069 Interest payable 3,288 Other liabilities and accruals 84,642 Total current liabilities 317,301 Noncurrent liabilities: Notes payable, net of current portion 839,660 Loan payable 5,326,000 Total liabilities 6,482,961 Commitments and contingencies ASSETS LIABILITIES NET POSITION Net investment in capital assets 8,991,733 Restricted for: Nonexpendable: Claims 16,153,700 Expendable: Resettlement 5,397,849 Claims 590,400 Other 100,000 Unrestricted 598,205 Total net position 31,831,887 Total liabilities and net position $ 38,314,848 See accompanying notes to basic financial statements

7 Statement of Activities Year Ended September 30, 2015 Program Revenues Net (Expenses) Operating Revenues and Grants and Changes in Expenses Contributions Net Position Functions/Programs Government activities: Council $ 38,566 $ - $ (38,566) Education 96,372 - (96,372) Finance 257,918 - (257,918) Health and sanitation 65,788 - (65,788) Office of the Mayor 454,672 - (454,672) Phase 1 - engineering 31,883 - (31,883) Public safety 96,227 - (96,227) Social services 235,823 57,453 (178,370) Transportation and communication 103,978 - (103,978) Resettlement program 1,527,355 65,924 (1,461,431) Fish farming 65,000 - (65,000) Nuclear claims related 1,662,381 - (1,662,381) Rongelap bungalows 63,957 - (63,957) Unallocated interest - long-term debt 155,035 - (155,035) $ 4,854,955 $ 123,377 (4,731,578) General revenues: Investment earnings 242,330 Other 72,767 Total general revenues 315,097 Contributions from permanent fund (3,612,535) Total general revenues and contributions (3,297,438) Change in net position (8,029,016) Net position at the beginning of the year 39,860,903 Net position at the end of the year $ 31,831,887 See accompanying notes to basic financial statements

8 Balance Sheet Governmental Funds September 30, 2015 Capital Projects Permanent Local Other Resettlement Distribution Resettlement Claims Governmental ASSETS General Trust Authority Phase One Trust Fund Total Cash and cash equivalents $ 62,940 $ - $ 80,782 $ 88,935 $ - $ 9,708 $ 242,365 Time certificate of deposit - - 6, ,681 Investments 55, , , ,004,011 Receivables, net 63,941 9,236 71, ,790 27,604 16, ,893 Prepaid items 22, ,479-4,800 29,206 Due from other funds 156, , ,905 Restricted assets: Investments - 6,249, ,455,384-27,704,959 LIABILITIES AND FUND BALANCES Special Revenue $ 361,448 $ 6,258,811 $ 818,325 $ 875,398 $ 21,482,988 $ 31,050 $ 29,828,020 Liabilities: Accounts payable $ 104,635 $ - $ 70,182 $ 23,090 $ - $ 10,162 $ 208,069 Other liabilities and accruals 46,359-1,170 37, ,642 Due to other funds , , ,905 Total liabilities 150, , ,535-10, ,616 Fund balances Nonspendable 55, , , ,004,011 Restricted - 6,258, ,650-21,482,988-28,021,449 Committed 100, ,000 Unassigned 55, (171,331) - 20,888 (95,056) Total fund balances 210,454 6,258, , ,863 21,482,988 20,888 29,030,404 Total liabilities and fund balances $ 361,448 $ 6,258,811 $ 818,325 $ 875,398 $ 21,482,988 $ 31,050 Amounts reported for governmental activities in the statement of net position are different because: Capital assets used in governmental activites are not financial resources and, therefore, are not reported in the funds 8,991,733 Long-term liabilities, including notes payable, are not due and payable in the current period and therefore are not reported in the funds. The liabilities include: Notes payable $ (860,962) Loan payable (5,326,000) Accrued interest payable (3,288) (6,190,250) Net position of governmental activities $ 31,831,887 See accompanying notes to basic financial statements

9 Statement of Revenues, Expenditures and Changes in Fund Balances Governmental Funds Year Ended September 30, 2015 Special Revenue Capital Projects Permanent Revenues: Local Other Resettlement Distribution Resettlement Claims Governmental General Trust Authority Phase One Trust Funds Total Federal and other grants $ 57,453 $ - $ - $ 65,924 $ - $ - $ 123,377 Dividends and interest ,626 43,960 26, , ,041 Net change in the fair value of investments - 46, (3,966,531) - (3,919,922) Other 42, ,786 72,772 Total revenues 99, ,241 44,362 92,601 (3,437,801) 29,871 (2,930,732) Expenditures: Current: Council 38, ,566 Education 96, ,372 Finance 213, ,224-24, ,234 Health and sanitation 65, ,788 Office of the Mayor 471, ,013 Phase I - Engineering 24, ,463 Public safety 96, ,227 Social services 235, ,612 Transportation and communication 103, ,978 Resettlement program 84, , ,680 Fish farming 15, , ,000 Nuclear claims related - - 1,662, ,662,381 Investment management - 68, , ,329 Rongelap Bungalows ,957 63,957 Debt service , , ,035 Total expenditures 1,444,918 68,595 1,663, , ,892 88,932 4,540,635 Excess (deficiency) of revenues over (under) expenditures (1,344,924) 171,646 (1,618,676) (903,659) (3,716,693) (59,061) (7,471,367) Other financing sources (uses): Operating transfers in 1,549, ,499-79,949 2,534,111 Operating transfers out - (1,549,663) (958,547) (25,901) - - (2,534,111) Total other financing sources (uses), net 1,549,663 (1,549,663) (958,547) 878,598-79,949 - Net change in fund balances 204,739 (1,378,017) (2,577,223) (25,061) (3,716,693) 20,888 (7,471,367) Fund balances at beginning of year 5,715 7,636,828 3,167, ,924 25,199,681-36,501,771 Fund balances at end of year $ 210,454 $ 6,258,811 $ 590,400 $ 466,863 $ 21,482,988 $ 20,888 $ 29,030,404 See accompanying notes to basic financial statements

10 Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances of Governmental Funds to the Statement of Activities Year Ended September 30, 2015 Net change in fund balances - total governmental funds $ (7,471,367) Governmental funds report capital outlays as expenditures. However, in the statement of activities, the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. For the current year, these amounts consist of: Capital outlays, net of disposals $ 30,995 Depreciation expense (610,439) (579,444) The issuance of long-term debt (e.g. bonds, lease) provides current financial resources to governmental funds, while repayment of principal of long-term debt consumes the current financial resources of governmental funds. Neither transaction has any effect on net position. For the current year, these amounts consist of: Repayment of USDA loans 21,795 Change in net position of governmental activities $ (8,029,016) See accompanying notes to basic financial statements

11 Notes to Financial Statements September 30, 2015 (1) Organization The Rongelap Atoll Local Government (RALGOV) was established pursuant to Public Law , the Local Government Act of the Republic of the Marshall Islands (RepMar), and operates under the Constitution of the Rongelap Atoll Local Government. RALGOV is governed by an elected mayor and a thirteen-member council. (2) Summary of Significant Accounting Policies The accompanying financial statements of RALGOV have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), as applied to government units. The Governmental Accounting Standards Board (GASB) is the recognized standard-setting body for establishing governmental accounting and financial reporting principles. The more significant of RALGOV s accounting policies are described below. A. Government-Wide Financial Statements The Statement of Net Position and the Statement of Activities report financial information on all of the non-fiduciary activities of RALGOV. For the most part, the effect of interfund activity has been eliminated from these statements. RALGOV s activities are defined as governmental activities, which are supported by intergovernmental revenues and other non-exchange revenues. The Statement of Net Position presents all of RALGOV s non-fiduciary assets and liabilities, with the difference reported as net position. Net position is reported in three categories: Net investment in capital assets consists of capital assets, net of accumulated depreciation and reduced by outstanding balances for bonds, notes and other debt that are attributed to the acquisition, construction or improvement of those assets. Restricted net position - nonexpendable consists of permanent funds in which donors or other outside sources have stipulated that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expanded or added to the principal. Restricted net position - expendable consists of resources in which RALGOV is legally or contractually obligated to spend resources in accordance with restrictions either externally imposed by creditors, grantors, contributors, and the like, or imposed by law. Unrestricted net position consists of net position, which does not meet the definition of the two preceding categories. Unrestricted net position often is designated, (for example, internally restricted), to indicate that management does not consider them to be available for general operations. The Statement of Activities demonstrates the degree to which the direct expenses of given functions or segments are offset by program revenues. Direct expenses are those that are clearly identifiable within a specific function or segment. Program revenues include charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges that are restricted to meeting the operational or capital requirements of a particular function. Taxes and other items not meeting the definition of program revenues are, instead, reported as general revenue

12 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued B. Fund Financial Statements The fund financial statements present a balance sheet and a statement of revenues, expenditures, and changes in fund balances for RALGOV s major funds. Major individual governmental funds are reported as separate columns in the fund financial statements pursuant to GASB reporting standards. RALGOV reports its financial position and results of operations in funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures/expenses. Transactions between funds within a fund type, if any, have not been eliminated. C. Measurement Focus and Basis of Accounting Government-Wide Financial Statements: The government-wide financial statements are reported using the economic resources management focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Amounts reported as program revenue include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. General revenue is derived from taxation, investment income and other fees that are not allocated to specific programs. Governmental Fund Financial Statements: Governmental fund financial statements account for the general governmental activities of RALGOV and are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as they become susceptible to accrual; generally when they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, RALGOV considers revenues to be available if they are collected within 90 days of the end of the current fiscal period. Miscellaneous revenues from other financing sources are recognized when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Investments and related investment earnings are recorded at fair value. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Expenditures generally are recorded in the period in which the related fund liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due

13 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued C. Measurement Focus and Basis of Accounting, Continued Governmental Fund Financial Statements, Continued: GASB Statement No. 34, Basic Financial Statements - and Management s Discussion and Analysis - For State and Local Governments, as amended by GASB Statement No. 37, Basic Financial Statements - and Management s Discussion and Analysis - For State and Local Governments: Omnibus, sets forth minimum criteria (percentage of the assets, liabilities, revenues or expenditures/expenses for either fund category or the governmental and enterprise funds combined) for the determination of major funds. Major individual governmental funds are reported as separate columns in the fund financial statements. RALGOV reports the following major funds: General Fund - This fund is the primary operating fund of RALGOV. It is used to account for all governmental transactions, except those required to be accounted for in another fund. Resettlement Trust Fund - a special revenue fund that accounts for United States Congress appropriations under United States Public Law and , and which were paid and distributed in accordance with an agreement between the Government of the United States, the Government of the Republic of the Marshall Islands and RALGOV to assist in the resettlement of Rongelap Atoll by the people of Rongelap. Local Distribution Authority Fund - a special revenue fund that accounts for funds received under the Rongelap Claims Trust Fund and which are distributed by RALGOV to the people of Rongelap based on an approved distribution scheme. Resettlement Phase One Fund - a capital projects fund that accounts for funds received from the Resettlement Trust Fund under the agreement between the United States Department of the Interior and RALGOV regarding Phase I activities for the resettlement in Rongelap Atoll. Claims Trust Fund - a permanent fund that accounts for funds received under Article II, Section 4, of the agreement between the Government of the United States and the Government of the Republic of the Marshall Islands for the implementation of Section 177 of the Compact of Free Association (the Compact). In accordance with Article II, Section 8, of the Compact, RALGOV executed the Rongelap Claims Trust Agreement. Under the agreement, the Claims Trust Fund received a total of $37,500,000 over a period of 15 years as compensation for loss or damage to property and person of the people of Rongelap. The final payment was received on October Pursuant to Section 7.2(2) of the Agreement, after the final payment is received, the Claims Trust Fund is required to distribute annually to the people of Rongelap, through the Local Distribution Authority, between 15% and 70% of its net income. The remaining 30% to 85% shall be retained and added to the corpus of the Claims Trust Fund. In addition, pursuant to Section 8.1 of the trust agreement, RALGOV may also invade up to 3% of the corpus of the Claims Trust Fund. Such invasion may occur in the event of an unforeseen natural disaster or other similar circumstance, as determined by the sole discretion of RALGOV, in order to prevent hardship to the people of Rongelap. An invasion of the corpus shall not occur more frequently than once every three years. On June 9, 2009, RALGOV executed an amended trust agreement whereby the annual distribution payment to the people of Rongelap shall be $2,663,000. In the event that the value of the corpus of the Claims Trust Fund falls below $20,000,000, the annual distribution payment shall be reduced to $1,331,500. All other terms and conditions of the initial trust agreement remain

14 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued D. Cash and Cash Equivalents and Time Certificates of Deposit Cash and cash equivalents include cash held in demand accounts as well as short-term investments with a maturity date within three months of the date acquired by RALGOV. Deposits maintained in time certificates of deposit with original maturity dates greater than three months are separately classified on the statement of net position/balance sheet. E. Investments Investments and related investment earnings are recorded at fair value. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. An investment of 20% or more of the voting stock of an investee is presumed to give the investor significant influence. Under the equity method, the investor records, as earnings or loss, its proportionate share of the investee s earnings or loss. F. Receivables Receivables consist of amounts advanced to individuals, on an unsecured basis, substantially all of whom are situated in the Republic of the Marshall Islands. Receivables are stated net of estimated allowances for uncollectible accounts, which is determined based upon past collection experience and aging of the accounts. Reimbursements due to RALGOV for expenditures on federally funded reimbursement and grant programs are included as receivables on the governmental fund balance sheet. Receivables as of September 30, 2015, for the primary government s individual major governmental funds, including applicable allowance for uncollectible accounts, are as follows: Local Other Resettlement Distribution Resettlement Claims Governmental General Trust Authority Phase One Trust Funds Total Receivables: Employee $ 104,816 $ - $ 11,670 $ 15,713 $ - $ 2,896 $ 135,095 Loans 15, , ,825 50, ,279,825 Federal agencies , ,516 Interest 72 9,236 43,960 2,243 24,166-79,677 Other 93,690-59, ,230 3,438 42, , , , , ,702 27,604 45,542 2,130,691 Allowance for uncollectible accounts (149,637) (350,000) (908,249) (357,912) - (29,000)(1,794,798) G. Prepaid Items $ 63,941 $ 9,236 $ 71,780 $ 146,790 $ 27,604 $ 16,542 $ 335,893 Certain payments made to vendors or persons for services reflect costs applicable to future accounting periods and are recorded as prepaid items in both the governmentwide and governmental fund financial statements

15 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued H. Interfund Receivables/Payables During the course of its operations, RALGOV records transactions between individual funds for goods provided or services rendered. Receivables and payables resulting from transactions between funds are classified as due from other funds or due to other funds on the combined balance sheet. Interfund receivables/payables have been eliminated from the statement of net position. I. Restricted Assets Certain assets of RALGOV are classified as restricted assets because their use is completely restricted by trust agreements, loan agreements, or enabling legislation. Investments recorded in the Resettlement Trust Fund and the Claims Trust Fund of $6,249,575 and $21,455,384, respectively, are restricted by trust agreements in that they are not available to be used in current operations. J. Capital Assets Capital assets, which include property, plant and equipment and infrastructure assets (e.g. roads, docks, airports, water catchments, and other similar items), whether purchased or constructed, are recorded at historical cost. Asset acquisitions of $5,000 and above are capitalized. Depreciation is provided over the estimated useful lives of the assets through use of the straight-line method. The estimated useful lives of these assets are as follows: Airport and dock Roads Buildings/facility and improvements Other equipment Motor vehicles Office equipment Furniture and fixtures years 30 years 5-10 years 3 years 3 years 3 years 1-3 years K. Deferred Outflows of Resources In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (deduction of net position) until then. RALGOV has no items that qualify for reporting in this category. L. Interfund/Intrafund Transactions As a general rule, the effect of interfund activity has been eliminated in the governmentwide statements. Exceptions to this rule are: 1) activities between funds reported as governmental activities and funds reported as business-type activities and 2) activities between funds that are reported in different functional categories in either the governmental or business-type activities column. Elimination of these activities would distort the direct costs and program revenues for the functions concerned

16 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued M. Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates. N. Compensated Absences RALGOV recognizes expenditures for annual leave and sick leave when leave is actually taken. Accordingly, unused annual leave and sick leave are not included as an obligation within the governmental funds balance sheet. The estimated accumulated amount of unused sick leave at September 30, 2015 is presently not determinable. O. Deferred Inflows of Resources In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (additions to net position) until then. RALGOV has no items that qualify for reporting in this category. P. Fund Balances Fund balance classifications are based on the extent to which RALGOV is bound to honor constraints on the specific purposes for which amounts in those funds can be spent. Amounts are reported under the following fund balance classifications: Non-spendable - includes fund balance amounts that cannot be spent either because it is not in spendable form or because of legal or contractual constraints. Restricted - includes fund balance amounts that are constrained for specific purposes which are externally imposed by providers, such as creditors or amounts constrained due to constitutional provisions or enabling legislation. Committed - includes fund balance amounts that are constrained for specific purposes that are internally imposed by the government through formal action of the highest level of decision making authority and does not lapse at year-end. Assigned - includes fund balance amounts that are intended to be used for specific purposes that are neither considered restricted or committed. Unassigned - includes negative fund balances in other governmental funds. RALGOV has a general policy to first use restricted resources for expenditures incurred for which both restricted and unrestricted (committed, assigned, and unassigned) resources are available. When expenditures are incurred for which only unrestricted resources are available, the general policy of RALGOV is to use committed resources first, followed by assigned, and then unassigned. The use of restricted/committed resources may be deferred based on a review of the specific transaction. A formal minimum fund balance policy has not been adopted

17 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued Q. New Accounting Standards During fiscal year 2015, RALGOV implemented the following pronouncements: GASB Statement No. 68, Accounting and Financial Reporting for Pensions and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68, which revise and establish new financial reporting requirements for most governments that provide their employees with pension benefits. The implementation of these pronouncements did not have a material effect on the accompanying financial statements. GASB Statement No. 69, Government Combinations and Disposals of Government Operations, which improves accounting and financial reporting for state and local governments' combinations and disposals of government operations. Government combinations include mergers, acquisitions, and transfers of operations. A disposal of government operations can occur through a transfer to another government or a sale. The implementation of this pronouncement did not have a material effect on the accompanying financial statements. In February 2015, GASB issued Statement No. 72, Fair Value Measurement and Application, which addresses accounting and financial reporting issues related to fair value measurements and requires entities to expand their fair value disclosures by determining major categories of debt and equity securities within the fair value hierarchy on the basis of the nature and risk of the investment. The provisions in Statement 72 are effective for fiscal years beginning after June 15, Management believes that the implementation of this statement only requires additional disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques and will not have a material effect on the financial statements of RALGOV. In June 2015, GASB issued Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, which aligns the reporting requirements for pensions and pension plans not covered in GASB Statements 67 and 68 with the reporting requirements in Statement 68. The provisions in Statement No. 73 are effective for fiscal years beginning after June 15, 2015, with the exception of the provisions that address employers and governmental nonemployer contributing entities for pensions that are not within the scope of Statement 68, which are effective for fiscal years beginning after June 15, Management does not believe that the implementation of this statement will have a material effect on the financial statements of RALGOV. In June 2015, GASB issued Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, which replaces Statements No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and addresses financial reporting requirements for governments whose employees are provided with postemployment benefits other than pensions (other postemployment benefits or OPEB). The provisions in Statement No. 74 are effective for fiscal years beginning after June 15, Management does not believe that the implementation of this statement will have a material effect on the financial statements of RALGOV

18 Notes to Financial Statements September 30, 2015 (2) Summary of Significant Accounting Policies, Continued Q. New Accounting Standards, Continued In June 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, and provides guidance on reporting by governments that provide OPEB to their employees and for governments that finance OPEB for employees of other governments. The provisions in Statement No. 75 are effective for fiscal years beginning after June 15, Management does not believe that the implementation of this statement will have a material effect on the financial statements of RALGOV. In June 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, which eliminates two of the four categories of authoritative GAAP that exist under the existing hierarchy prescribed by Statement 55. The two categories that will remain under the new standard are (1) GASB Statements and (2) GASB technical bulletins and implementation guides in addition to AICPA guidance that the GASB clears. The provisions in Statement No. 76 are effective for fiscal years beginning after June 15, Management does not believe that the implementation of this statement will have a material effect on the financial statements of RALGOV. In August 2015, GASB issued Statement No. 77, Tax Abatement Disclosures, which requires governments that enter into tax abatement agreements to disclose certain information about the agreements. The provisions in Statement No. 77 are effective for fiscal years beginning after December 15, Management does not believe that the implementation of this statement will have a material effect on the financial statements of RALGOV. (3) Deposits and Investments GASB Statement No. 40 addresses common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk and foreign currency risk. As an element of interest rate risk, disclosure is required of investments that have fair values that are highly sensitive to changes in interest rates. GASB Statement No. 40 also requires disclosure of formal policies related to deposit and investment risks. RALGOV does not have formal deposit and investment policies. Investments in Resettlement Trust Fund and Claims Trust Fund are governed by their respective trust agreements. A. Deposits Custodial credit risk is the risk that in the event of a bank failure, RALGOV s deposits may not be returned to it. Such deposits are not covered by depository insurance and are either uncollateralized, or collateralized with securities held by the pledging financial institution or held by the pledging financial institution but not in the depositorgovernment s name. RALGOV does not have a deposit policy for custodial credit risk

19 Notes to Financial Statements September 30, 2015 (3) Deposits and Investments, Continued A. Deposits, Continued As of September 30, 2015, the carrying amount of the RALGOV s total cash and cash equivalents and time certificates of deposit were $249,046 and the corresponding bank balances were $329,814. Of the bank balance amounts, $239,839 is maintained in financial institutions subject to Federal Deposit Insurance Corporation (FDIC) insurance. As of September 30, 2015, bank deposits in the amount of $239,839 were FDIC insured. Bank deposits of $89,975 are maintained in financial institutions not subject to depository insurance. RALGOV does not require collateralization of its cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk. B. Investments As of September 30, 2015, investments at fair value are as follows: Resettlement Trust Fund: Fixed income $ 1,976,519 Cash management 120,064 Domestic equities 3,439,630 Foreign equities 481,976 Alternatives 231,386 6,249,575 Claims Trust Fund: Fixed income 4,874,087 Cash management 422,367 Domestic equities 11,180,919 Foreign equities 1,486,313 Alternatives 695,187 Mutual funds 2,796,511 21,455,384 $ 27,704,959 Custodial credit risk for investments is the risk that in the event of the failure of the counterparty to the transaction, RALGOV will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. RALGOV s investments are held and administered by trustees in accordance with various trustee agreements. Based on negotiated trust and custody contracts, all of these investments were held in RALGOV s name by RALGOV s custodial financial institutions at September 30, Credit risk for investments is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of debt instruments. RALGOV does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates

20 Notes to Financial Statements September 30, 2015 (3) Deposits and Investments, Continued B. Investments, Continued Concentration of credit risk for investments is the risk of loss attributed to the magnitude of an entity s investment in a single issuer. GASB Statement No. 40 requires disclosure by issuer and amount of investments in any one issuer that represents five percent (5%) or more of total investments for RALGOV. As of September 30, 2015, there were no investments in any one issuer that exceeded 5% of total investments. As of September 30, 2015, the Resettlement Trust Funds investment in debt securities was as follows: Moodys Investment Maturities (In years) Credit Less Greater Rating than 1 1 to 5 6 to 10 than 10 Fair Value US Treasury Obligations AAA $ 318,259 $ 290,432 $ 53,554 $ 93,650 $ 755,895 Corporate notes AA1-160, , ,054 Corporate notes AA ,105-68,105 Corporate notes AA3-68, ,414 Corporate notes A2-67, , ,407 Corporate notes A3-132,400 76, ,664 Corporate notes BAA1-309, ,979 $ 318,259 $ 1,028,910 $ 535,700 $ 93,650 $ 1,976,519 As of September 30, 2015, the Claims Trust Funds investment in debt securities was as follows: Moodys Investment Maturities (In years) Credit Less Greater Rating than 1 1 to 5 6 to 10 than 10 Fair Value US Treasury Obligations AAA $ 512,407 $ 669,067 $ 363,309 $ - $ 1,544,783 Corporate notes AAA , ,607 Corporate notes AA , ,563 Corporate notes AA2-101, ,361 Corporate notes A1-154, ,113 Corporate notes A2-204, , ,675 Corporate notes A3-412, ,291 Corporate notes BAA1-716, , ,366 Corporate notes BAA2-205, ,272 Corporate notes BAA , ,121 Foreign bonds AA1-204, ,493 Foreign bonds AA2-102, ,442 General Fund: $ 512,407 $ 2,769,554 $ 1,592,136 $ - $ 4,874,087 RALGOV holds an investment in a life insurance contract, which is recorded at fair value. As of September 30, 2015, the cash surrender value of this life insurance contract is $55,067. In addition, RALGOV holds a 49.1% ownership equity in Rongelap Tourism Company, Inc. (RTCI), which engages in tourism activities in the Republic of the Marshalls Islands. As of September 30, 2015, the investment is accounted for on the equity method. RTCI ceased operations in February 2006 following significant losses from prior years. At September 30, 2015, RALGOV s investment in RTCI amounted to $

21 Notes to Financial Statements September 30, 2015 (3) Deposits and Investments, Continued B. Investments, Continued Local Distribution Authority Fund: RALGOV holds a 25% equity ownership in Atoll Marine Aquaculture (AMA), which engages in the export of live aquaria in the Republic of the Marshall Islands to international markets and which is considered a related party as the Mayor is a member of the Board of Directors. As of September 30, 2015, the investment in AMA of $300,000 is accounted for on the equity method. In addition, RALGOV owns 1,000 shares of common stock of Marshall Islands Service Corporation, which provides all aspects of service activities in the Marshall Islands. As of September 30, 2015, the investment is accounted for at cost in the amount of $10,000 since the fair market value is not readily available. Finally, RALGOV holds an equity ownership in AcionMobile, Inc., a Nevada corporation, which engages in communications activities. As of September 30, 2015, the investment is accounted at cost in the amount of $750 since the fair market value is not readily available. Resettlement Phase One Fund: RALGOV holds 40% of outstanding preferred stock and 13.27% of outstanding common stock in Ajejdrikdrik Inc., which engages in consumer loan services in the Republic of the Marshall Islands and which is considered a related party as the Mayor is a member of the Board of Directors. As of September 30, 2015, the investment is accounted for at cost in the amount of $587,090 since the fair market value is not readily available. Dividends of $24,325 were received from the investee during the year ended September 30, In addition, RALGOV holds 51% equity ownership in Aquaculture Technologies of the Marshall Islands, which specializes in raising and sale of fish delicacies for both the domestic and Hawaiian markets. As of September 30, 2015, the investment is accounted for at cost in the amount of $51,104 since the fair market value is not readily available. (4) Loans Receivable Loans receivable of the primary government are summarized as follows: General Fund: Loan receivable from Aquaculture Technologies of the Marshall Islands, Inc. (ATMI), dated September 8, 2015 in the amount of $15,000, due September 7, 2016, interest at 8% per annum, interest and principal due at maturity, uncollateralized. This note has been fully provided for in the allowance for uncollectible accounts. $ 15,000 Resettlement Trust Fund: Loan receivable advanced to ATMI in 2013, no formal terms and conditions of repayment, uncollateralized. The advance has been fully provided for in the allowance for uncollectible accounts. $ 350,

22 Notes to Financial Statements September 30, 2015 (4) Loans Receivable, Continued Local Distribution Authority Fund: AcionMobile, Inc.: Note receivable dated January 8, 2010 in the amount of $400,000, due January 8, 2012, interest at 12% per annum payable annually, with principal due at maturity, uncollateralized. This note has been fully provided for in the allowance for uncollectible accounts. $ 400,000 Aquaculture Technologies of the Marshall Islands, Inc. (ATMI): Loan receivable advanced to ATMI in 2014, no formal terms and conditions of repayment, uncollateralized. The advance has been fully provided for in the allowance for uncollectible accounts. 214,825 Rongelap Multi-Purpose Cooperative, Inc. (RMPC): Execution Interest Maturity Date Rate Date Amount January 14, % January 13, 2015 $ 50,000 February 14, % February 13, ,000 April 2, % April 1, ,000 July 31, % July 30, , ,000 $ 864,825 RMPC is considered a related party as certain RALGOV employees are members of the Board of Directors. Principal and interest on the abovementioned notes receivable are due and payable at maturity and are uncollateralized. These notes have been fully provided for in the allowance for uncollectible accounts. Resettlement Phase One: Aquaculture Technologies of the Marshall Islands, Inc. (ATMI): Execution Interest Maturity Date Rate Date Amount January 30, % January 29, 2016 $ 15,000 March 20, % March 19, ,000 March 30, % March 29, ,000 $ 50,000 Principal and interest on the abovementioned notes receivable are due and payable at maturity and are uncollateralized. These notes have been fully provided for in the allowance for uncollectible accounts