FINANCIAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010, AND REPORT BY THE EXTERNAL AUDITOR OUTLINE

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1 36 C 36 C/33 31 August 2011 Original: English Item 10.3 of the provisional agenda FINANCIAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010, AND REPORT BY THE EXTERNAL AUDITOR Source: Financial Regulation OUTLINE Background: In accordance with this Financial Regulation the report of the External Auditor, the audited consolidated financial statements and the report of the Director-General on the accounts of UNESCO for the year ended 31 December 2010 are hereby transmitted to the General Conference. Purpose: To submit to the General Conference for examination the audited final accounts for the year 2010, the report of the External Auditor thereon and the report of the Director-General on the implementation of the recommendations of the External Auditor. Decision required: paragraph 3.

2 36 C/33 FINANCIAL STATEMENTS AND EXTERNAL AUDIT REPORT 1. This document incorporates document 187 EX/27 Part I and Part II (Annex) containing the report of the Director-General on the accounts of UNESCO for the year ended 31 December 2010, the audit opinion of the External Auditor, the audited consolidated financial statements and the report of the External Auditor together with the written comments of the Director-General thereon. 2. The document is also being submitted to the Executive Board at its 187th session for examination and the decision and observations, if any, of the Board will be reported to the General Conference as an addendum to this document. 3. The General Conference is invited to take note of this report and these financial statements. It may wish, therefore, to adopt a resolution along the following lines: The General Conference, 1. Having examined document 36 C/33 and Add., 2. Expresses its appreciation to the External Auditor for the high standard of his work; 3. Notes the opinion of the External Auditor that the financial statements presented fairly in all material respects, the financial position of UNESCO as at 31 December 2010 and the results of its operations and its cash flows for the financial year then ended, and that they were prepared in accordance with the stated accounting policies, which were applied on a consistent basis; 4. Notes that although he does not qualify his opinion, the External Auditor recommend that the Secretariat go on strengthening internal control for the financial governance of the Organization; 5. Notes the recommendations of the External Auditor and the Director-General s comments thereon; 6. Receives and accepts the report of the External Auditor and the audited financial statements on the accounts of UNESCO for the year ended 31 December 2010.

3 Executive Board Hundred and eighty-seventh session ANNEX 187 EX/27 Part I 36 C/33 Annex PARIS, 26 August 2011 Original: English Item 27 of the provisional agenda FINANCIAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010, AND REPORT BY THE EXTERNAL AUDITOR SUMMARY In accordance with Financial Regulation 12.10, the report by the External Auditor and the audited consolidated financial statements, together with the report by the Director-General on the accounts of UNESCO for the financial period ended 31 December 2010, are submitted to the Executive Board. The financial report and the audited consolidated financial statements, together with the formal opinion of the External Auditor, are contained in document BFM/127 (attached hereto) while the report by the External Auditor, together with the comments of the Director-General thereon, is presented in document 187 EX/27 Part II. Action expected of the Executive Board: proposed decision in paragraph In accordance with Financial Regulation 12.10, the Executive Board is required to examine the External Auditor s report together with the final audited accounts and to forward them to the General Conference with such comments as it deems appropriate. 2. The Executive Board may also wish to note in particular the opinion of the External Auditor on the financial statements which states: In our opinion, the financial statements present fairly, in all material respects, the financial position of the UNESCO as at 31 December 2010 and the results of its operations and its cash flows for the financial period then ended, in accordance with the International Public Sector Accounting Standards (IPSAS). The long-form report of the External Auditor and the Director-General s comments thereon are to be found in document 187 EX/27 Part II.

4 187 EX/27 Part I page 2 Action expected of the Executive Board 3. The Board may wish to adopt a decision along the following lines: The Executive Board, 1. Recalling Article of the Financial Regulations, 2. Having examined documents 187 EX/27 Parts I and II, 3. Expresses its appreciation to the External Auditor for the high standard of his work; 4. Notes the opinion of the External Auditor that the financial statements presented fairly, in all material respects, the financial position of UNESCO as at 31 December 2010 and the results of its operations and its cash flow for the financial period then ended; that they were prepared in accordance with the stated accounting policies, which were applied on a consistent basis; 5. Further notes, with appreciation, the preparation of the first set of financial statements under the International Public Sector Accounting Standards (IPSAS) by the Secretariat and the successful implementation of the IPSAS project; 6. Invites the Director-General to report on the implementation of the recommendations of the External Auditor to the General Conference at its 37th session and to submit this report to the Executive Board at its 189th and 191st sessions for prior review; 7. Decides to transmit to the General Conference at its 36th session the report by the External Auditor and the audited consolidated financial statements of UNESCO for the period ended 31 December 2010.

5 187 EX/27 Part I page 3 BFM/127 PARIS, 20 July 2011 Original: English UNITED NATIONS EDUCATIONAL, SCIENTIFIC AND CULTURAL ORGANIZATION (UNESCO) FINANCIAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

6 187 EX/27 Part I page 5 CONTENTS 1. REPORT OF THE DIRECTOR-GENERAL ON THE ACCOUNTS OF UNESCO FOR THE YEAR ENDED 31 DECEMBER OPINION OF THE EXTERNAL AUDITOR 3. APPROVAL OF THE FINANCIAL STATEMENTS 4. CONSOLIDATED FINANCIAL STATEMENTS I. Statement of Financial Position II. Statement of Financial Performance III. Statement of Changes in Net Assets/Equity IV. Cash Flow Statement V. Statement of Comparison of Budget and Actual Amounts VI. Notes to the Financial Statements 1. Reporting Entity 2. Significant Accounting Policies 3. First Implementation of IPSAS 4. Critical Accounting Estimates and Judgements 5. Segment Information 6. Cash and Cash Equivalents 7. Investments 8. Accounts Receivable (Non-Exchange Transactions) 9. Accounts Receivable (Exchange Transactions) 10. Inventories 11. Advance Payments 12. Other Current Assets 13. Property, Plant and Equipment (PP&E) 14. Intangible Assets 15. Accounts Payable 16. Employee Benefits 17. Transfers Payable 18. Conditions on Voluntary Contributions 19. Advance Receipts 20. Borrowings 21. Other Liabilities 22. Net Assets/Equity 23. Revenue 24. Expenses 25. Contingent Liabilities, Commitments and Contingent Assets 26. Budget 27. Financial Risk Management 28. Events After the Reporting Date 29. Relationships of Significant Influence 30. Related Party Disclosures 5. UNAUDITED ANNEXES I. Ex Gratia Payments II. Waivers Granted for Contracts Submitted to the Contracts Committee III. Statement on Internal Control

7 187 EX/27 Part I page 7 REPORT OF THE DIRECTOR-GENERAL ON THE ACCOUNTS OF UNESCO FOR THE YEAR ENDED 31 DECEMBER 2010 Introduction 1. In accordance with Article 11.1 of the Financial Regulations, I have the honour to submit the financial statements and report of the Organization for the year ending 31 December For the first time, the annual financial statements of UNESCO have been prepared in accordance with International Public Sector Accounting Standards (IPSAS). Until the last biennium , the financial statements were prepared in accordance with the United Nations System Accounting Standards (UNSAS), and were audited on a biennial basis. 3. The Report of the External Auditor, together with his opinion on the financial statements, is also submitted in accordance with Article 12 of the financial regulations. 4. UNESCO was created in London on 16 November 1945 by governments of the States Parties to contribute to peace and security by promoting collaboration among the nations through education, science and culture in order to further universal respect for justice, for the rule of law and for human rights and fundamental freedoms which are affirmed for the peoples of the world, without distinction of race, sex, language or religion, by the Charter of the United Nations Organization. 5. The Organization, for its Medium-Term Strategy ( ), focuses in particular on two global priorities: Africa; Gender equality. And on five overarching objectives: Attaining quality education for all and lifelong learning; Mobilizing science knowledge and policy for sustainable development; Addressing emerging social and ethical challenges; Fostering cultural diversity, intercultural dialogue and a culture of peace; Building inclusive knowledge societies through information and communication. 6. UNESCO carries out these priorities and objectives within a results-based framework ensuring aid effectiveness, accountability and transparency. This needs to be supported by quality financial reporting and management information, and as such the improved and more complete financial statements prepared under IPSAS are a key part of UNESCO delivering on its priorities and objectives. The move to IPSAS Improved financial reporting and management information 7. On 30 November 2005, the High-Level Committee of Management (HLCM) recommended that all United Nations system organizations adopt IPSAS as their accounting standard effective no later than This recommendation was driven by a clearly identified need within the United Nations system to move to improved, independent and universally accepted accounting standards, with the aim of increasing quality and credibility in financial reporting. 8. Following this, the General Conference at its 34th session approved the adoption of IPSAS as the accounting standard of UNESCO with effect from 1 January 2010 (34 C/Resolution 71). The

8 187 EX/27 Part I page 8 project to implement IPSAS at UNESCO has been complex and wide-ranging, with preparatory work already commencing in Although most United Nations organizations have now pushed back the original implementation deadline, UNESCO has always maintained its 2010 target. UNESCO is one of only nine United Nations organizations that have adopted IPSAS as originally planned by 1 January The adoption of IPSAS means the application of accounting standards which represent best management practices and keep up to date with the latest developments in financial matters. It will also lead to greater harmonization in the presentation of financial statements between United Nations system organizations and better comparability of financial statements with other international organizations and national governments. 10. Financial statements prepared in accordance with IPSAS provide much more insight into the actual assets, liabilities, revenues and expenses of the Organization. Increased transparency with respect to assets and liabilities results in greater internal control and enhanced management of resources. Comprehensive information about revenues and expenses better supports decision making and enhances strategic planning. Summary of changes to the financial statements 11. Applying IPSAS requires the introduction of the full accrual basis of accounting, a significant change from the modified cash basis of accounting applied under UNSAS. Accrual basis accounting means the recognition of transactions and events when they occur, recorded in the accounting records and reported in the financial statements of the financial periods to which they relate, and not only when cash or its equivalent is received or paid. 12. Under IPSAS, revenue for both assessed and voluntary contributions is recognized when UNESCO has a right to receive the contribution. Where contributions are due to UNESCO, a receivable balance is shown, but this is reduced to reflect an amount which is considered unlikely to be received. Voluntary contribution arrangements are analysed to see if UNESCO needs to meet performance conditions, and if these are present, revenue is only recognized when the conditions are fulfilled. Previously under UNSAS, revenue from voluntary contributions was simply recognized when cash was received. UNESCO now also assesses the value of non-monetary contributions, such as the free use of premises, and includes this in revenue. 13. Commitments against budgetary allocations which were previously recognized as expenses under UNSAS no longer meet the recognition criteria as expenses under IPSAS. Expenses are now recognized in the financial statements only when services or goods have been received and accepted by the Organization. 14. UNESCO now reports the value of its investment in both tangible and intangible fixed assets. Tangible fixed assets (referred to as property, plant and equipment) represent the land and buildings, non-expendable property and small attractive items (such as laptops and mobile phones) of the Organization. Intangible fixed assets represent property which does not have physical substance for UNESCO this is essentially computer software. Previously, most fixed assets were immediately recorded as an expense on acquisition. 15. The value of future employee benefits (for example, accumulated annual leave, repatriation grants, After-Service Health Insurance) that UNESCO staff have earned but not yet received are now recorded to capture the full cost of employing staff. In previous financial statements these types of benefits were shown as an expense only when paid, and the liabilities were only disclosed in the notes. 16. As prepared under UNSAS the principal financial statements were presented showing the split by fund on the face of the financial statement. Under IPSAS, only the total consolidated position is now shown on the face of the principal financial statements, with the split by fund

9 187 EX/27 Part I page 9 included in the notes. The consolidated financial statements include all entities which are deemed to be controlled by UNESCO according to the IPSAS definition. The UNESCO Staff Savings and Loan Services (USLS), which was consolidated under UNSAS, is no longer consolidated as it does not meet the IPSAS definition of a controlled entity. 17. The implementation of IPSAS does not currently impact the preparation of the Regular Programme and Budget, which is still presented on a modified cash basis. As this basis differs from the accrual basis applied to the financial statements, reconciliation between the budget and the principal financial statements is provided in accordance with the requirements of IPSAS. 18. IPSAS requires more detailed disclosures to be included in the notes to the financial statements in the interests of transparency. As such, UNESCO now provides information on the remuneration of key management personnel, which includes the Director-General, the Deputy Director-General, the Assistant Directors-General and the Directors of the Central Services. Key information is now also provided on the financial risk management of the Organization. Financial performance 19. The Organization s results showed a deficit for the year of $32.1m, with total revenue of $764.6m compared to total expenses of $796.7m. It is noted that as permitted in respect of financial statements to which accrual accounting is first applied in accordance with IPSAS, comparative information has not been provided in the Statement of Financial Performance. The financial statements provide detail of financial performance by fund within the segment information disclosures, and this is summarized below: Table 1. Summary Financial Performance by Fund GEF OPF PFF SFF Inter-fund transactions TOTAL UNESCO $m $m $m $m $m $m Total Revenue Total Expenses DEFICIT FOR THE YEAR All funds generated a deficit for the year, although for differing reasons. For the General Fund (GEF) the introduction of IPSAS has not significantly impacted revenue recognition, with all assessed contributions recognized as revenue at the start of the year to which they apply. However, the IPSAS requirement that the cost of post-employment benefits be recognized in the year in which they are earned by staff has led to significant employee benefit expenses in GEF during Notably the combined service cost and interest cost for the year relating to the After- Service Health Insurance (ASHI) defined benefit scheme totalled $54.2m. It should be noted again at this point that the introduction of IPSAS has not impacted the preparation of the Regular Programme and Budget, and a separate analysis of Budgetary Performance is detailed below. 21. The introduction of IPSAS has fundamentally changed the way revenue is recognized under voluntary contributions, and this has undoubtedly impacted the financial performance of the Programme Fiduciary Fund (PFF). Application of IPSAS does not lead to the matching of revenue to expenses, and UNESCO only recognizes revenue under voluntary contributions once a binding agreement is in place under which UNESCO controls the underlying asset and when any conditions in the agreement have been fulfilled by UNESCO. As such there can be notable timing differences between the recognition of revenue and expenses. However, as a result of this

10 187 EX/27 Part I page 10 accounting treatment the financial statements clearly present the financial position of the Organization with regard to these contributions. 22. The Medical Benefits Fund, reported under Staff Fiduciary Fund (SFF) recorded a deficit of $5.6m for the year. The contributions received under the fund are no longer enough to pay for medical benefit expenses. The fund now has more retirees than active members. Measures are being considered to address the deficit in the short-term. 23. The deficit under Other Proprietary Fund (OPF) reflects the nature of some of the programmes/activities under this fund. Revenue has been recognized in previous periods but the actual implementation spans over many years. The deficit for the period has been fully covered by the reserves. Revenue analysis 24. UNESCO s programme activities are financed mainly from two sources the regular budget (GEF) and extrabudgetary funding (PFF). Assessed contributions of $377.3m represent approximately 49% of the Organization s total revenue for It should be noted that under IPSAS, assessed contributions received in Euros are converted to United States dollars at the United Nations Operational Rate of Exchange (UNORE) as opposed to the Constant Dollar Rate. As a result the financial statements show a different total value for assessed contributions in GEF when compared to the Regular Programme and Budget. Figure 1. Revenue sources Other Revenue Producing Activities $23.7m 3% Other/Misc. Revenue $21.4m 3% Finance Revenue $19.4m 3% Voluntary Contributions $322.8m 42% Assessed Contributions $377.3m 49% 25. Revenue recognized from voluntary contributions totalled $322.8m for the year, representing 42% of total revenue. UNESCO also has balances of $33.6m relating to monetary voluntary contributions subject to conditions and $79.4m relating to advance receipt voluntary contributions. These balances are currently shown as liabilities, but should be recorded as revenue in future periods as conditions are fulfilled and binding agreements are established.

11 187 EX/27 Part I page Voluntary contributions also include $13.0m of in-kind contributions, of which $11.1m concerns the free use of premises for field offices and institutes. These are recognized as an important element allowing UNESCO to carry out its activities throughout the world. In these cases the contribution value is based on the rental market rate, and a corresponding rental expense is also recognized. Expense analysis 27. Employee benefit expenses of $398.2m represent 50% of total expenses of $796.7m for the year As already highlighted, accrual accounting for post-employment and other long-term employee benefits requires the cost of the schemes to be recorded as the benefits are earned by staff, rather than on a pay-as-you-go basis. The total interest and service cost for the year relating to ASHI, accumulated annual leave and repatriation benefits is $57.9m. This methodology allows UNESCO to better account for the true cost of employing its staff on an annual basis. Figure 2. Expense analysis Other $56.3m 7% Contracted services $140.1m 18% Supplies, consumables, other running costs $81.6m 10% Employee benefit expenses $398.2m 50% Grants and other transfers $65.0m 8% Consultants, external experts and mission costs $55.4m, 7% 28. The category Other in the above chart includes depreciation and amortization of $20.0m and foreign exchange losses of $17.3m. Depreciation and amortization represents the cost of UNESCO s property, plant and equipment and intangible assets spread over their useful lives. Foreign exchange losses mainly relate to the losses recorded as a result of the late receipt of Member States euro contributions. The dollar has strengthened against the euro during the year as compared to the rate as at 1 January As such, substantial losses were recorded at the time of receipt of these euro contributions. 29. Analysing expenses on a fund basis shows that expenses under GEF represents 48% of total expenses (before inter-fund eliminations). With expenses under OPF representing 5% of total

12 187 EX/27 Part I page 12 expenses, the combined proprietary funds represent 53% of the total expenses of the Organization before inter-fund eliminations. Expenses under PFF represent 42% of the total. 30. UNESCO does not recognize expenses on certain types of contracts used for its programme delivery such as Financing Activity Contracts (FAC), Implementing Partnership Agreements (IPA) and the Participation Programme (PP) until performance conditions in the agreements are fulfilled. This is an important aspect of UNESCO monitoring and ensuring that its funds are used in accordance with the terms of agreements which correspond to the programmes and objectives of the Organization. Funds distributed by UNESCO under these arrangements which have not yet been recognized as expenses are shown as advance payment assets in the financial statements, and as at 31 December 2010 these totalled $56.3m (compared to an opening balance at 1 December 2010 of $51.7m). This balance concerns principally PP advance payments of $21.4m, with amounts dating back as far as the biennium. Budgetary performance 31. The Regular Budget of the Organization continues to be prepared on a modified cash basis, and is presented in the financial statements as statement V, Statement of Comparison of Budget and Actual Amounts. In order to facilitate a comparison between the budget and the financial statements prepared under IPSAS, reconciliations of the budget to the Statement of Financial Performance and the Cash Flow Statement are included in the notes to the financial statements. 32. The Regular Budget for the biennium was set at $653m. For the year ended 31 December 2010, the allotment including authorized transfers and additional appropriations was $352.2m. Of this total available, actual expenditure on a modified cash basis totals $304.6m, of which $15.8m (5%) is unliquidated obligations. This represents an implementation rate of 47% which, when compared to the theoretical rate of 50% expected at the first year of the biennium, shows significant implementation of programme activities. Financial position 33. UNESCO has net assets/equity of $428.1m as at 31 December Following the introduction of IPSAS, opening adjustments to the statement of financial position resulted in a reduction in net assets/equity of $267.6m. The financial position of the Organization by fund as included in segment information can be summarized as follows: Table 2. Summary financial position by Fund GEF OPF PFF SFF Inter-fund balances TOTAL UNESCO $m $m $m $m $m $m Total Assets ,518.1 Total Liabilities ,090.0 NET ASSETS/EQUITY The net working capital (current assets less current liabilities) of the Organization is $634.6m as at 31 December 2010 ($641.4m as at 1 January 2010). All funds have working capital levels which indicate a positive picture of short-term liquidity, although as highlighted below, GEF does experience issues around unpaid contributions, and overall cash and cash equivalents levels fell across the Organization.

13 187 EX/27 Part I page When looking at the net assets/equity position however, it is important to note the negative balance of $125.0m in GEF. This is a result of unfunded post-employment and long-term employee benefit liabilities, mainly the ASHI scheme with a balance of $735.6m as at 31 December Methods of funding these longer term liabilities will need to be identified as a priority. Cash, cash equivalents and contributions 36. Cash and cash equivalents balances fell from $139.2m at the start of the year to $106.7m at 31 December Receipts of assessed contributions for the current year Regular Programme amounted to $313.9m representing 84% of the total assessment of $373.8m for the year. Receipts of contributions from previous years and instalments due were $23.9m against the total due of $33.1m. Total gross assessed contributions receivable at 31 December 2010 were $71.5m, of which $59.9m relates to 2010 contributions. UNESCO has calculated an allowance of $7.1m against all assessed contributions receivable. During 2010, arrears of $3.7m attributable to the Former Federal Republic of Yugoslavia were written off in accordance with the decision of the General Conference (35 C/Resolution 89.III). The total amount of contributions deferred to future years dropped to $6.1m in 2010 from $18.3m in This was mainly due to two Member States with large payment plans that paid their instalments in advance. 38. Unpaid contributions still remain a cause for concern with 16% of the assessment for the year outstanding. Prompt payments of contributions are vital for the Organization to achieve its stated objectives. In January 2010 and during the last quarter of year 2010, the General Fund showed negative cash balances but they could be covered by the Working Capital Fund of $30.0m. As of 31 December 2010, the total cash position of the General Fund including the Working Capital Fund was $30.5m. 39. The contributions received for extrabudgetary projects in 2010 totalled $282.9m compared to $293.5m in 2009.The cash position of the Programme Fiduciary funds amounted to $34.6m. Most of the funds received for extrabudgetary projects are placed in short-term investments as explained below. Investments 40. As at the end of 2010, the investment portfolio of UNESCO amounted to $619.0m consisting mainly of extrabudgetary funds. Since the adoption of IPSAS, the investments of UNESCO Staff Loans and Savings Service are no longer included in the consolidated financial statements. The year 2010 was characterized by historically low USD and EUR interest rates. This had a negative impact on the investment returns that were, however, in line with the benchmarks established by the conservative investment policy of the Organization. Property, plant and equipment (PP&E) 41. Under IPSAS UNESCO now has a detailed inventory of all PP&E, with a total net value of $633.3m as at 31 December This is principally land and buildings with a combined net value of $621.7m. In order to obtain correct IPSAS opening balances for land and buildings, independent experts provided market values. UNESCO recognizes the land at its headquarters sites at Place de Fontenoy and Rue Miollis as part of its PP&E. This land is leased for a nominal rent from the Government of France, but given the terms of the lease it is considered appropriate to recognize the land as an asset in the UNESCO financial statements. 42. The remainder of UNESCO s PP&E is non-expendable property and small attractive items with a net value of $11.6m. Detailed inventories have been performed to establish a complete register of these items. This work has enabled UNESCO to improve the control and management of these important resources.

14 187 EX/27 Part I page 14 Figure 3. Detail of Property, Plant & Equipment Land $254.7m Buildings $367.0m $11.6m Furniture & Fixtures $0.7m Vehicles $2.1m Other Equiment $4.0m Comms & IT Equipment $4.8m Employee benefit liabilities 43. UNESCO has significant liabilities relating to post-employment and other long-term employee benefits. For the liabilities relating to After-Service Health Insurance, repatriation benefits and accumulated annual leave, actuarial valuations have been used. 44. The funding of these long-term contractual obligations with employees, both current and past, remains an issue for the Organization. The main liability, relating to After-Service Health Insurance, amounts to $735.6m as at 31 December This shows an increase of $86.6m from the balance calculated at 31 December 2009, which is largely due to a change in the discount rate applied to the actuarial calculation. 45. As highlighted previously, it is the belief of the Secretariat that this liability should be funded gradually over a reasonable period of time. Internal control and risk management 46. For the first time I have submitted a Statement of Internal Control (SIC) with the annual financial statements (see Annex III). This follows the recent implementation of measures within the Organization to strengthen internal control with the aim of adapting UNESCO s internal control framework to fit an evolving Organization and to meet stakeholders expectations. During the period, UNESCO s financial rules were amended to reflect changes brought about by the adoption of IPSAS. These amendments as approved by the Board in its 185th session detail further the amendments made to the financial regulations as approved by the General Conference at its 35th session. 47. Internal Control at UNESCO is a process carried by the Director-General, senior management and other staff under the direction and oversight provided by our Governing Bodies. The amended rules clearly reflect the responsibility of the Deputy Director-General for the overall supervision and implementation and application of the financial rules, as well as assigning specific financial responsibilities within the Organization. 48. In order to reinforce Internal Control, individual accountability has been promoted through an annual attestation from each member of the managerial team. This process has been supported by

15 187 EX/27 Part I page 15 a self-assessment questionnaire which has enabled each manager to identify key areas for improvement in order to mitigate operational risks. These individual attestations support the SIC from the Director-General. 49. The financial statements prepared under IPSAS provide details of how UNESCO manages its financial risk, including credit risk, market risk (foreign currency exchange and interest rate) and liquidity risk. The primary objective of the Investment Policy of UNESCO is the preservation of the value of resources of the Organization.

16 OPINION OF THE EXTERNAL AUDITOR 187 EX/27 Part I - page 17

17 187 EX/27 Part I - page 18

18 187 EX/27 Part I page 19 I. UNESCO STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Note ASSETS Current Assets Cash and cash equivalents 6 106, ,178 Short-term investments 7 617, ,202 Accounts receivable (non-exchange transactions) 8 73,255 39,337 Accounts receivable (exchange transactions) 9 2,799 5,742 Inventories 10 4,454 4,399 Advance payments 11 60,361 57,820 Other current assets 12 5,125 9,127 Total current assets 869, ,805 Non-current assets Accounts receivable (non-exchange transactions) 8 10,806 15,869 Long-term investments 7 1,849 1,924 Property, plant and equipment , ,823 Intangible assets 14 2,222 2,745 Total non-current assets 648, ,361 TOTAL ASSETS 1,518,050 1,545,166 LIABILITIES Current Liabilities Accounts payable 15 23,233 40,901 Employee benefits 16 8,190 9,261 Transfers payable 17 70,077 54,723 Conditions on voluntary contributions 18 35,550 29,035 Advance receipts 19 80,280 81,180 Current portion of borrowings 20 7,857 8,638 Other current liabilities 21 10,003 12,642 Total current liabilities 235, ,380 Non-current Liabilities Employee benefits , ,493 Conditions on voluntary contributions 18 8,114 8,690 Long-term loans 20 55,876 70,337 Other non-current liabilities 21 6,577 7,162 Total non-current liabilities 854, ,682 TOTAL LIABILITIES 1,089,978 1,022,062 NET ASSETS 428, ,104 NET ASSETS/EQUITY Reserves and fund balances , ,594 IPSAS opening balance reserve , ,490 NET ASSETS/EQUITY 428, ,104 The accompanying notes form an integral part of these consolidated financial statements.

19 187 EX/27 Part I page 20 II. UNESCO STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 31 DECEMBER 2010 Expressed in 000s US dollars 31/12/2010 Note REVENUE Assessed contributions 377,290 Voluntary contributions 322,778 Other revenue producing activities 23,761 Other/miscellaneous revenue 21,389 Finance revenue 19,385 Total revenue ,603 EXPENSES Employee benefit expenses 398,209 Consultants, external experts and mission costs 55,377 Grants and other transfers 65,045 Supplies, consumables and other running costs 81,603 Contracted services 140,143 Depreciation and amortization 19,969 Other expenses 7,909 Foreign exchange losses 17,343 Finance costs 11,123 Total expenses ,721 DEFICIT FOR THE YEAR -32,118 The accompanying notes form an integral part of these consolidated financial statements. Comparative information is not provided in the Statement of Financial Performance for which accrual accounting is first adopted in accordance with IPSAS.

20 187 EX/27 Part I page 21 III. UNESCO STATEMENT OF CHANGES IN NET ASSETS/EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010 Expressed in 000s US dollars 31/12/2010 Note Net Assets/Equity as at 31/12/ ,695 IPSAS Opening Balance Adjustments Reversal capital funds relating to land & buildings ,342 Reversal currency exchange reserve 22 17,813 Adjustments to operating reserves: 22 Removal of USLS from consolidation -27,702 ICTP end of service reserve -8,651 Reclassification of budgetary surplus 22-7,219 Recognition of property, plant and equipment ,288 Recognition of After-Service Health Insurance ,018 De-recognition of unliquidated obligations ,560 Other IPSAS opening balance adjustments ,320 Restated Net Assets/Equity as at 01/01/ ,104 Movements in Net Assets/Equity during 2010 Exchange differences on certain foreign currency transactions 22 1,439 Increase in Working Capital Fund 22 1,000 Actuarial loss 22-45,733 Incentive Scheme distribution to Member States 22-19,616 Other adjustments 22-4 Total of item recognized directly in Net Assets/Equity -62,914 Deficit for the year 22-32,118 Total recognized revenue and expense for the period -95,032 Total Net Assets/Equity as at 31/12/ ,072 The accompanying notes form an integral part of these consolidated financial statements.

21 187 EX/27 Part I page 22 IV. UNESCO CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010 Expressed in 000s US dollars 31/12/2010 Note Cash flows from operating activities Deficit for the period -32,118 Depreciation and amortization 19,969 (Increase) in accounts receivable -27,403 (Increase) in inventories -153 (Increase) in advance payments -3,601 Decrease in other current assets 14,247 (Decrease) in accounts payable -17,426 Increase in employee benefits 39,372 (Decrease) in transfers payable -6,133 (Decrease) in borrowings due to revaluations -7,894 Increase in conditions on voluntary contributions 6,512 Increase in advance receipts 1,958 (Decrease) in other liabilities -12,613 Loss on disposal of property, plant and equipment 148 Net cash flows from operating activities -25,135 Cash flows from investing activities Purchase of property, plant and equipment -5,743 Purchase of intangible assets -805 Sale of property, plant and equipment 73 Decrease in short-term investments 10,972 Decrease in long term investment 75 Net cash flows from investing activities 4,572 Cash flows from financing activities Repayment of loans -7,844 Increase in working capital contributions 1,000 Net cash flows from financing activities -6,844 Net (decrease) in cash and cash equivalents -27,407 Cash and cash equivalents, beginning of period 6 139,178 Exchange rate effects -5,081 Cash and cash equivalents, end of period 6 106,690 The accompanying notes form an integral part of these consolidated financial statements. Comparative information is not provided in the Cash Flow Statement for which accrual accounting is first adopted in accordance with IPSAS.

22 187 EX/27 Part I page 23 V. UNESCO STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE YEAR ENDED 31 DECEMBER 2010 GENERAL FUND Expressed in 000s US dollars Original Budget Main Appropriation Line 2010 Allotment PART I General Policy and Direction A. Governing Bodies Authorized Transfers Additional Appropriation Final Budget 2010 Allotment as Adjusted Actual Expenditure Difference: Final Budget and Actual Expenditure Unobligated balance 1. General Conference , Executive Board 3, ,239 3, Total Part I.A 4, ,239 4, B. Direction 10, ,856 9,574 1,282 C. Participation in the joint machinery of the UN 5, ,052 4,348 1,704 TOTAL PART I 20,520 1,627-22,147 18,748 3,399 PART II Programmes and Programme Related Services A. Programmes Major Programme I Education 61, ,289 51,467 10,822 Major Programme II Natural Sciences 30, ,880 28,692 3,188 Major Programme III Soc. and Human Sciences 15, ,993 13,498 2,495 Major Programme IV Culture 27, ,732 26,705 3,027 Major Programme V Communication and Inf. 17, ,010 15,308 2,702 UNESCO Institute for Statistics 4, ,564 4,564 - Field Management of decentralized progs. 28, ,714 28, Total Part II.A 185,133 2,776 3, , ,844 22,338 B. Programme Related Services 1. Coordination of action to benefit Africa 2, ,349 2, Public information 6, ,211 6, Strategic planning and programming monitoring 3, ,702 4, Budget planning and management 2, ,421 2, Total Part II.B 15,485 1, ,683 15, C. Participation Programme and fellowships 1. Participation programme 10,495 2,304-12,799 10,603 2, Fellowships programme 1, ,204 1, Total Part II.C 11,699 2,304-14,003 11,692 2,311 TOTAL PART II 212,317 6,141 3, , ,431 25,437 PART III Support for Programme Execution and Administration A. External relations and cooperation 9, ,984 8, B. Field management and coordination 12, ,132 11,651 1,481 C. Human resources management 16, ,426 17,115 1,311 D. Accounting, treasury managem't and fin. control 5, ,290 4, E. Administration 48, ,695 47,266 2,429 TOTAL PART III 91,846 3, ,527 89,404 6,123 TOTAL PARTS I - III 324,683 10,846 4, , ,583 34,959 Reserve for reclassifications 2, ,000-2,000 PART IV ANTICIPATED COST INCREASES 10, ,650-10,650 TOTAL 337,333 10,846 4, , ,583 47,609 Note: The accounting basis and the budget basis are different. This Statement of Comparison of Budget and Actual Amounts is prepared on the modified cash basis. See Note 26 Budget.

23 187 EX/27 Part I page 24 VI. NOTES TO THE FINANCIAL STATEMENTS NOTE 1: REPORTING ENTITY The United Nations Educational, Scientific and Cultural Organization (UNESCO) was created in London on 16 November 1945 by governments of the States Parties to contribute to peace and security by promoting collaboration among the nations through education, science and culture in order to further universal respect for justice, for the rule of law and for human rights and fundamental freedoms which are affirmed for the peoples of the world, without distinction of race, sex, language or religion, by the Charter of the United Nations Organization. As one of the specialized agencies referred to in Article 57 of the Charter of the United Nations Organization, the provisions of Articles 104 and 105 of that Charter concerning the legal status of that Organization, its privileges and immunities, apply in the same way to UNESCO. UNESCO is governed by a General Conference, consisting of the representatives of its Member States, which determines the policies and main lines of work of the Organization. The Executive Board, which consists of 58 Member States elected by the General Conference, takes, in accordance with the decisions of the General Conference, all necessary measures to ensure the effective and rational execution of the programme of work by the Director-General. The Organization has its Headquarters located in Paris, France. It is also composed of 50 field offices located around the world, three liaison offices in Geneva, New York and Brussels, and nine category 1 institutes and two centres spread worldwide which specialize in the fields of competency of UNESCO. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION The financial statements have been prepared on an accrual and going concern basis and comply with the requirements of International Public Sector Accounting Standards (IPSAS). Where IPSAS is silent concerning any specific standard, the appropriate International Financial Reporting Standards (IFRS) are applied. UNESCO applies IPSAS standards 25, 28, 29, 30 and 31 prior to their required implementation dates. This is the first set of UNESCO financial statements prepared in compliance with IPSAS. The adoption of IPSAS has required changes to be made to the accounting policies followed by UNESCO. This includes the preparation of the financial statements on an annual basis, compared to the previous biennial basis. The adoption of the new accounting policies has resulted in changes to the assets and liabilities recognized in the Statement of Financial Position. Accordingly, the last audited Statement of Financial Position, dated 31 December 2009, has been restated and the resulting changes are reported in the Statement of Changes in Net Assets/Equity and Note 3 First Implementation of IPSAS. The revised 31 December 2009 Statement of Financial Position is described in these financial statements as the 01/01/2010 Opening Balance (Restated). As permitted in respect of financial statements to which accrual accounting is first adopted in accordance with IPSAS, comparative information has not been provided in the Statement of Financial Performance and the Cash Flow Statement. The preparation of financial statements in conformity with IPSAS requires the use of certain critical accounting estimates. It also requires UNESCO management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4 Critical Accounting Estimates and Judgements.

24 187 EX/27 Part I page 25 The accounting policies set out below have been applied consistently in the preparation and presentation of these financial statements and in preparing opening balances of the Statement of Financial Position. 2.2 CONSOLIDATION Included within the scope of consolidation for the preparation of the UNESCO financial statements are UNESCO Headquarters, field offices, liaison offices, centres and category 1 institutes. Where institutes or operations are considered to constitute standalone entities, they are consolidated in the UNESCO financial statements only if they are deemed to be controlled by UNESCO according to the definition of control contained within the IPSAS standards. Under IPSAS, control is the power to govern the financial and operating policies of another entity so as to benefit from its activities. The consolidated category 1 institutes are considered to constitute controlled entities. They are listed in the following table along with their locations and functional currencies: Institute UNESCO International Institute for Educational Planning (IIEP) Location Paris (France) and Buenos Aires (Argentina) Functional Currency USD UNESCO International Bureau of Education (IBE) Geneva (Switzerland) USD UNESCO Institute for Lifelong Learning (UIL) Hamburg (Germany) EUR UNESCO Institute for Information Technologies in Education (IITE) UNESCO International Institute for Capacity-Building in Africa (IICBA) UNESCO International Institute for Higher Education in Latin America and the Caribbean (IESALC) Moscow (Russian Federation) Addis Ababa (Ethiopia) Caracas (Venezuela) USD USD USD UNESCO-IHE Institute for Water Education (IHE) Delft (Netherlands) EUR International Centre for Theoretical Physics (ICTP) Trieste (Italy) EUR UNESCO Institute for Statistics (UIS) Montreal (Canada) USD All consolidated entities prepare their accounting information on an accrual and going concern basis and comply with the requirements of IPSAS. The financial performance and financial position of entities whose functional currency is different to the presentation currency of UNESCO consolidated financial statements are translated into the presentation currency of UNESCO (see Note 2.3). 2.3 FOREIGN CURRENCY TRANSACTIONS The consolidated financial statements are presented in United States (US) dollars, which is the functional currency of UNESCO. Non-monetary items that are measured in terms of historical cost or fair value in a foreign currency are translated using the United Nations Operational Rate of Exchange (UNORE) prevailing at the

25 187 EX/27 Part I page 26 date of the transaction or when the fair value was determined. Monetary assets and liabilities that are denominated in foreign currencies are translated into United States dollars at the exchange rate prevailing on the date of the statement of financial position. Foreign currency transactions are translated into United States dollars using the UNORE prevailing at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Statement of Financial Performance. Some entities which are included in the consolidated financial statements of UNESCO have different functional currencies to the United States dollar, which must be translated for consolidation purposes as follows: Assets and liabilities for each statement of financial position presented are translated at the exchange rate prevailing on the date of the Statement of Financial Position; Revenues and expenses for each statement of financial performance are translated at exchange rates prevailing at the dates of transactions (UNORE); All resulting exchange differences are recognized as a separate component of net assets/equity. 2.4 SEGMENT REPORTING A segment is a distinguishable activity or group of activities for which it is appropriate to separately report financial information. At UNESCO, segment information is based on the principal activities and sources of financing of the Organization. As such, UNESCO reports separate financial information for four segments: the General Fund (GEF), Other Proprietary Funds (OPF), Programme Fiduciary Funds (PFF) and Staff Fiduciary Funds (SFF). 2.5 CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash in hand, deposits held at call with banks and other shortterm highly liquid investments that are readily convertible to cash and subject to an insignificant risk of changes in value. Cash and cash equivalents held in a fiduciary capacity (Programme Fiduciary Funds and Staff Fiduciary Funds) that can only be used for a specific purpose are considered as restricted. 2.6 INVESTMENTS UNESCO classifies its investments into the following two categories: loans and receivables and financial assets at fair value through surplus or deficit: (a) Loans and receivables: these are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, including term deposits. They are included in current assets, except for maturities greater than 12 months after the reporting date which are classified as non-current assets. UNESCO s loans and receivables are classified in investments in the Statement of Financial Position (see Note 7 Investments). (b) Financial assets at fair value through surplus or deficit: a financial asset is classified in this category if so designated by management. Assets in this category are classified as current assets if they are expected to be realized within 12 months of the reporting date. After initial recognition they are measured at their fair values. Gains or losses on re-measurement are recognized in the Statement of Financial Performance. Financial

26 187 EX/27 Part I page 27 assets in this category are classified in investments in the Statement of Financial Position (see Note 7 Investments). At each reporting date UNESCO assesses whether there is any objective evidence that an investment or group of investments is impaired. Any impairment losses are recognized in the Statement of Financial Performance. 2.7 CONTRIBUTIONS AND OTHER RECEIVABLES Receivables are measured at fair value less any allowance for estimated irrecoverable amounts. An allowance is established when there is objective evidence, based on a review of outstanding amounts at the reporting date, that UNESCO will not be able to collect all amounts due according to the original terms of the receivables. In establishing the allowance for assessed contributions, the fair value of receivables is calculated as the estimated discounted cash flows arising from receivables to be collected in the future. This discounting approach is not applied to voluntary contributions. Assessed contributions received prior to the commencement of the relevant specified budget period are recorded as an asset and a corresponding advance receipt liability is recognized. 2.8 INVENTORIES Inventories held for sale are valued at the lower of cost and net realizable value. Inventories held for distribution at no or nominal charge or consumption in the production of goods or the provision of services at no or nominal charge are valued at the lower of cost and current replacement cost. Write downs from cost to current replacement cost or net realizable value are recognized in the Statement of Financial Performance. The cost of inventories is assigned in line with the weighted average cost formula. 2.9 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (PP&E) is carried at cost less accumulated depreciation and impairment. Heritage assets are not recognized in the financial statements, but appropriate disclosure is made in the notes to the accounts. For the first-time recognition for IPSAS opening balance purposes, existing PP&E is recognized at either cost or fair value depending on the class of PP&E to which it belongs. Additions The cost of an item of PP&E is recognized as an asset if it is probable that future economic benefits or service potential associated with the item will flow to UNESCO and the cost of the item can be measured reliably. In most instances, an item of PP&E is recognized at its cost. When an asset is donated, it is recognized at fair value as at the date of acquisition. UNESCO applies thresholds when considering whether to capitalize PP&E additions. PP&E is recognized as an asset if it has a cost or fair value of $1,000 or more per unit, unless it is considered to be a Small Attractive Item (such as PCs, laptops, cameras, printers, personal digital assistants) for which a threshold of $300 or more per unit is applied. Disposals Gains and losses on disposal are determined by comparing the proceeds with the carrying amount of the asset, and are included in the Statement of Financial Performance. Subsequent costs Costs incurred subsequent to initial acquisition are capitalized only when it is probable that future economic benefits or service potential associated with the item will flow to UNESCO and the cost of the item can be measured reliably.

27 187 EX/27 Part I page 28 Depreciation Depreciation is provided on a straight-line basis on all PP&E other than land, at rates that will write off the cost of the assets over their useful lives. The useful lives of major classes of assets have been estimated as follows: Class of Property, Plant and Equipment Communications and IT equipment Vehicles Furniture and fixtures Other equipment Buildings Land Depreciation Period 4 years 5 years 5 years 5 years years N/A Buildings are analysed by components and different depreciation periods are applied as follows: foundations and walls 50 years; other structural components 30 years; fittings 15 years; technical installations 25 years. The residual values and useful lives of assets are reviewed and adjusted, if applicable, at each financial year-end INTANGIBLE ASSETS Intangible assets are carried at cost less accumulated amortization and impairment. Intangible assets are capitalized in the financial statements if they have a cost exceeding $50,000. Software acquisition and development Acquired computer software licenses are capitalized based on costs incurred to acquire and bring to use the specific software. Costs that are directly associated with the development of software for use by UNESCO are capitalized as an intangible asset. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Amortization Amortization is provided on a straight-line basis on all intangible assets of finite life, at rates that will write off the cost or value of the assets over their useful lives. The useful lives of major classes of intangible assets have been estimated as follows: Class of Intangible Asset Software acquired separately Software internally developed Licenses and rights Amortization Period 5 years 5 years 2-6 years (or period of license or right if shorter) 2.11 EMPLOYEE BENEFITS UNESCO employee benefits are composed of the following: Short-term employee benefits Short-term employee benefits are expected to be settled within 12 months of the reporting date and are measured at their nominal values based on accrued entitlements at current rates of pay. Short-term employee benefits comprise first-time employment benefits (assignment grants), regular monthly benefits (wages, salaries, allowances) compensated absences (annual leave, sick leave, maternity/paternity/adoption leave) and other short-term benefits (education grant, reimbursement of taxes) and the current portion of long-term benefits provided to current employees. These are treated as current liabilities. Some elements of normally short-term benefits

28 187 EX/27 Part I page 29 may not be expected to be settled within 12 months of the reporting date. This may be the case with some annual leave entitlements. These elements which are expected to be settled more than 12 months after the end of the reporting date are treated as non-current liabilities and are measured at the present value of the estimated future cash flows if the payments and the impact of discounting are considered to be material. Post-employment benefits Post-employment benefits include pension plans, post-employment medical care, repatriation grants and other lump sums payable after the completion of employment. Post-employment benefit plans are classified as either defined contribution or defined benefit plans. For defined contribution post-employment plans, the obligation for each period is determined by the amounts to be contributed for that period, and no actuarial assumptions are required to measure the obligation or the expense. Post-employment benefits under defined benefit plans are measured at the present value of the defined benefit obligation adjusted for unrecognized actuarial gains and losses and unrecognized past service cost. UNJSPF: UNESCO is a member organization participating in the United Nations Joint Staff Pension Fund (UNJSPF), which was established by the United Nations General Assembly to provide retirement, death, disability and related benefits. The Pension Fund is a funded, multiemployer defined benefit plan. Actuarial valuations are prepared every two years for the UNJSPF using the Open Group Aggregate Method. The plan exposes participating organizations to actuarial risks associated with the current and former employees of other organizations, with the result that there is no consistent and reliable basis for allocating the obligation, plan assets, and costs to individual organizations participating in the plan. UNESCO, as well as other participating organizations, is not in a position to identify its share of the underlying financial position and performance of the plan on an IPSAS 25 basis with sufficient reliability for accounting purposes, and hence has recorded this plan as if it were a defined contribution plan. The Organization s contribution to the UNJSPF consists of its mandated contribution, at the rate established by the General Assembly, together with its share of any actuarial deficiency payments under Article 26 of the Regulations of the Pension Fund. Such deficiency payments are payable only if and when the General Assembly has invoked the provision of Article 26, following determination that there is a requirement for deficiency payments based on an assessment of an actuarial sufficiency of the Pension Fund as at the valuation date. As at the date of the current financial statements, the General Assembly has not invoked this provision. ASHI: The After-Service Health Insurance (ASHI) programme extends subsidized health insurance coverage to retirees and their dependants under the same health insurance schemes as for active staff based on certain eligibility requirements. The ASHI programme at UNESCO is a defined benefit plan. Accordingly a liability is recognized to reflect the present value of the defined benefit obligation adjusted for unrecognized actuarial gains and losses and unrecognized past service cost. The latest actuarial valuations for the UNESCO ASHI programme were carried out as at 31 December 2010 using the Projected Unit Credit Service Prorate. Other long-term employee benefits Other long-term employee benefits are benefits which are expected to be settled more than 12 months after the end of the reporting period. These are treated as non-current liabilities and are measured at the present value of the estimated future cash flows if the payments and the impact of discounting are considered to be material. Termination benefits Termination benefits generally include indemnities for voluntary redundancy, and are expected to be settled within 12 months of the reporting date.

29 187 EX/27 Part I page BORROWINGS Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are currently stated at amortized cost; any difference between the proceeds and the redemption value is recognized in the Statement of Financial Performance over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless UNESCO has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Where UNESCO holds interest-free loans or does not pay interest on loans, the benefit to UNESCO of the arrangement is treated as an in-kind contribution PROVISIONS Provisions are recognized for future expenditure of uncertain amount or timing when there is a present obligation (either legal or constructive) as a result of a past event, it is probable that expenditure will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are not made for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. The increase in the provision due to the passage of time is recognized as interest expense TAX UNESCO enjoys privileged tax-exemption; as such the Organization s assets, income and other property are exempt from all direct taxation REVENUE RECOGNITION Accrual accounting under IPSAS does not require the matching of revenue to related expenses. The cash-flows arising from revenue and related expenses can take place in current and future accounting periods. Non-exchange revenue Revenue from non-exchange transactions is measured based on the increase in net assets recognized. Where the full criteria for recognition of an asset under a non-exchange agreement are not fulfilled, a contingent asset may be disclosed. Assessed contributions are assessed and approved for a two-year budget period. The amount of these contributions is then apportioned between the two years for invoicing and payment. Assessed contributions are recognized as revenue at the beginning of the apportioned year in the relevant two-year budget period. Voluntary contributions and other transfers which are supported by enforceable agreements are recognized as revenue at the time the agreement becomes binding and when control over the underlying asset is obtained, unless the agreement establishes a condition on transferred assets that requires recognition of a liability. In such cases, revenue is recognized as the condition liability is discharged. Voluntary contributions such as pledges and other promised donations which are not supported by binding agreements are recognized as revenue when received. In-kind contributions of goods that directly support approved operations and activities and can be reliably measured, are recognized and valued at fair value. These contributions include the use of premises and utilities. In-kind contributions of services, such as the services of volunteers, are not currently recognized.

30 187 EX/27 Part I page 31 Exchange revenue Other sources of revenue from exchange transactions are measured at the fair value of the consideration received or receivable and are recognized as goods and services are delivered EXPENSES Under accrual accounting, expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decreases in net assets/equity. Expenses are recognized when the transaction or event causing the expense occurs, and the recognition of the expense is therefore not linked to when cash or its equivalent is received or paid. Non-exchange transactions Expenses from non-exchange funding agreements are recognized when the funding is legally in force, except where the agreement establishes a condition on transferred assets. In such cases, expenses are recognized as services are performed and the condition on transferred assets fulfilled consistent with the terms of the agreement. Where revenue is recognized from in-kind contributions, a corresponding expense is also recognized in the financial statements. NOTE 3: FIRST IMPLEMENTATION OF IPSAS This is the first set of UNESCO financial statements prepared on a full accrual basis and which comply with the requirements of International Public Sector Accounting Standards (IPSAS). Previous UNESCO financial statements were prepared to conform to the United Nations System Accounting Standards (UNSAS), and were presented on a modified cash basis. The table below summarizes the adjustments made to the audited 2009 Statement of Assets, Liabilities and Reserves and Fund Balances to incorporate the changes in accounting policy in order to produce an IPSAS compliant opening Statement of Financial Position as at 1 January 2010:

31 187 EX/27 Part I page 32 Expressed in 000s US dollars 31/12/2009 (Audited) IPSAS OPENING BALANCE ADJUSTMENTS Effect of transition to IPSAS 01/01/2010 Opening Balance (Restated) ASSETS Current Assets Cash and cash equivalents 152,333-13, ,178 Short-term investments 1,135, , ,202 Accounts receivable (non-exchange transactions) 34,308 5,029 39,337 Accounts receivable (exchange transactions) 5, ,742 Inventories 1,595 2,804 4,399 Advance payments 15,800 42,020 57,820 Other current assets 9,127-9,127 Total current assets 1,354, , ,805 Non-current assets Accounts receivable (non-exchange transactions) 18,787-2,918 15,869 Long-term investments 143, ,934 1,924 Property, plant and equipment 191, , ,823 Intangible assets - 2,745 2,745 Total non-current assets 354, , ,361 TOTAL ASSETS 1,709, ,955 1,545,166 LIABILITIES Current Liabilities Accounts payable 29,973 10,928 40,901 Employee benefits 8, ,261 Transfers payable 2,258 52,465 54,723 Conditions on voluntary contributions - 29,035 29,035 Advance receipts 31,289 49,891 81,180 Current portion of borrowings 8, ,638 Other current liabilities 748, ,972 12,642 Total current liabilities 829, , ,380 Non-current Liabilities Employee benefits , ,493 Conditions on voluntary contributions - 8,690 8,690 Long-term loans 80,756-10,419 70,337 Other non-current liabilities 7, ,162 Total non-current liabilities 88, , ,682 TOTAL LIABILITIES 918, ,636 1,022,062 NET ASSETS 790, , ,104 NET ASSETS/EQUITY Reserves and fund balances 790, , ,594 IPSAS opening balance reserve , ,490 NET ASSETS/EQUITY 790, , ,104

32 187 EX/27 Part I page 33 The adjustments made to generate the 1 January 2010 opening Statement of Financial Position have resulted in a K$267,591 reduction in total net assets/equity. The adjustments can be analysed as follows: Recognition of property, plant and equipment (PP&E) All PP&E held by UNESCO as at 1 January 2010 has been recognized in the financial statements. Buildings previously included at cost are now shown at fair value for opening balance purposes. The figures below do not include the impact of reversing the existing capital funds relating to land and buildings: Expressed in 000s US dollars 01/01/2010 Removal of buildings at cost -187,207 Recognition of land and buildings at fair value 633,744 Recognition of other plant and equipment at cost 8,409 Net effect on Net Assets/Equity 454,946 Recognition of After-Service Health Insurance Liabilities relating to post-employment employee benefits are recognized in the financial statements based on their valuation as at 1 January The most significant adjustment relating to this is a liability of K$649,018 in respect of After-Service Health Insurance, with a corresponding decrease in net assets/equity. De-recognition of Unliquidated Obligations Liabilities relating to unliquidated obligations are no longer recognized in the financial statements under IPSAS, as they do not correspond to the recognition of expenses in accordance with accrual accounting. This adjustment has resulted in a reduction in liabilities of K$109,560, with a corresponding increase in net assets/equity. Removal of USLS from Consolidation UNESCO Staff Savings and Loans Services (USLS) is not included in the consolidated financial statements prepared under IPSAS, as it is not considered to be a controlled entity. It is disclosed however as a relationship of significant influence (see Note 29). The removal of USLS from the consolidated financial statements for opening balance purposes has resulted in a decrease of K$27,702 in net assets/equity through existing reserves and fund balances: Expressed in 000s US dollars 01/01/2010 Cash and cash equivalents -13,155 Short-term investments -513,759 Long-term investments (including loans to members) -141,975 Accounts payable (including distribution to members) 13,849 Employee benefits current 145 Other current liabilities (Members deposits) 627,043 Employee liabilities non current 150 Net effect on Net Assets/Equity -27,702 Other opening balance adjustments resulted in a reduction of K$155,377 in net assets/equity. The nature of these adjustments is detailed below:

33 187 EX/27 Part I page 34 Expressed in 000s US dollars 01/01/2010 ASSETS Current Assets Short term investments 253 Accounts receivable 13,064 Allowance for doubtful contributions -7,094 Reclassification to non-current -941 Accounts receivable (non-exchange transactions) 5,029 Allowance for doubtful debts -1,007 Other 1,021 Accounts receivable (exchange transactions) 14 Inventories 2,804 Advance payment participation programme 25,522 Advance payment activity financing 8,231 Other 8,267 Advance payments 42,020 Non-Current Assets Allowance for doubtful contributions -3,859 Reclassification from current 941 Accounts receivable (non-exchange transactions) -2,918 Long-term investments (fair value) 41 Intangible assets 2,745 LIABILITIES Current Liabilities Accruals for goods/services received not invoiced -24,375 Suppliers payable -402 Accounts payable -24,777 Employee benefits -712 Interest payable to donors -45,246 Governments payable (budgetary surplus) -7,219 Transfers payable -52,465 Conditions on monetary voluntary contributions -27,172 Conditions on in-kind voluntary contributions -1,863 Conditions on voluntary contributions -29,035 Advance receipts on framework agreements -49,201 Other voluntary contributions received in advance -690 Advance receipts -49,891 Current portion of borrowing (amortized cost) 134 Other current liabilities 885 Non-current Liabilities Accumulated annual leave -20,790 Repatriation benefits -19,161 Italian end of service benefit -10,524 Employee benefits -50,475 Conditions on voluntary contributions (in-kind) -8,690 Long-term loans (amortized cost) 10,419 Other non-current liabilities -758 Net effect on net assets/equity -155,377

34 187 EX/27 Part I page 35 NOTE 4: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements in accordance with IPSAS necessarily includes the use of accounting estimates and management assumptions and judgement. The areas where estimates, assumptions or judgement are significant to UNESCO s financial statements include, but are not limited to: post-employment benefit obligations, provisions for litigation, financial risk on inventories and accounts receivable, accrued charges, contingent assets and liabilities, and degree of impairment of fixed assets. Actual results could differ from those estimates. Changes in estimates are reflected in the period in which they become known. UNESCO Staff Savings and Loan Services (USLS) is excluded from the UNESCO consolidated financial statements. USLS is not considered to be a controlled entity, as UNESCO does not govern the financial and operating policies of USLS, and does not benefit from its activities. However, as UNESCO is deemed to hold a relationship of significant influence with USLS, appropriate disclosures are made in the Notes to the UNESCO financial statements see Note 29 Relationships of Significant Influence. UNESCO leases the land for its headquarters sites at Place de Fontenoy and Rue Miollis from the host government. Under the lease agreements, the lease terms are for 99 years, and can be renewed for unlimited subsequent periods of 99 years. UNESCO pays a nominal amount in rent for the use of the land. Given that the agreements effectively grant UNESCO the right to use the land at the two sites in perpetuity for a nominal rent, it is considered appropriate to recognize the land as an asset in the UNESCO financial statements see Note 13 Property, Plant & Equipment. NOTE 5: SEGMENT INFORMATION Segment information is based on the principal activities and sources of financing of the Organization. These segments are as follows: General Fund (GEF) includes both the General and Working Capital Funds set up in accordance with Financial Regulations 6.1 and 6.2. This segment has been established for the purpose of accounting for the expenditure of the regular programme appropriation voted by the General Conference of UNESCO for a given financial period. Other Proprietary Funds (OPF) include revenue-generating activities, programme support costs for special accounts and trust funds, the Staff Compensation Fund, the Terminal Payments Fund, and Headquarters-related special accounts. This segment carries out the programmes, or groups other authorized expenditure, of UNESCO. The funds have been established in accordance with Financial Regulation 6.5 and normally have individual special financial regulations. Programme Fiduciary Funds (PFF) includes institutes, special accounts and trust funds set up in accordance with Financial Regulation 6.5. This segment carries out extrabudgetary programme activities in accordance with the respective agreements signed between UNESCO and donors or other legal authority. The resources of each fund in this segment can only be used for the purposes for which the respective fund has been established. Staff Fiduciary Funds (SFF) is the segment that has been established for the benefit of UNESCO s staff members, namely through the Medical Benefits Fund (MBF), the UNESCO Commissary Fund (UCF), the UNESCO Restaurant Service (URS) and the UNESCO Day Nursery and Children s Club (UNC). The resources of each fund in this segment can only be used for the purposes for which the respective fund has been established.

35 187 EX/27 Part I page 36 STATEMENT OF FINANCIAL POSITION BY SEGMENT AS AT 31 DECEMBER 2010 Expressed in 000s US dollars GEF OPF PFF SFF Interfund balances TOTAL UNESCO ASSETS Current Assets Cash and cash equivalents 30,550 36,305 34,633 5, ,690 Short-term investments 294 5, ,716 24, ,143 Accounts receivable (non-exchange transactions) 60, , ,255 Accounts receivable (exchange transactions) , ,799 Inventories - 2, ,081-4,454 Advance payments 27, , ,361 Other current assets ,747 3, ,108 5,125 Total current assets 119,427 58, ,556 32,038-13, ,827 Non-current assets Accounts receivable (non-exchange transactions) 3,836-6, ,806 Long-term investments - - 1, ,849 Property, plant and equipment 624,500 1,629 6, ,346 Intangible assets 2, ,222 Total non-current assets 630,558 1,629 15, ,223 TOTAL ASSETS 749,985 59, ,350 32,280-13,472 1,518,050 LIABILITIES Current Liabilities Accounts payable 5,698 1,108 13,747 2, ,233 Employee benefits 3, , ,190 Transfers payable 21, , ,077 Conditions on voluntary contributions 1,943-33, ,550 Advance receipts 1, , ,280 Current portion of borrowings 7, ,857 Other current liabilities 3, ,590 5,136-13,108 10,003 Total current liabilities 44,567 2, ,459 9,161-13, ,190 Non-current Liabilities Employee benefits 766,413 2,951 14, ,221 Conditions on voluntary contributions 8, ,114 Long-term loans 55, ,876 Other non-current liabilities - 6, ,577 Total non-current liabilities 830,403 9,423 14, ,788 TOTAL LIABILITIES 874,970 11, ,316 9,266-13,472 1,089,978 NET ASSETS -124,985 48, ,034 23, ,072 NET ASSETS/EQUITY Reserves and fund balances -27,703 46, ,755 24, ,562 IPSAS opening balance reserve -97,282 1,711-26,721-1, ,490 NET ASSETS/EQUITY -124,985 48, ,034 23, ,072

36 187 EX/27 Part I page 37 STATEMENT OF FINANCIAL PERFORMANCE BY SEGMENT FOR THE YEAR ENDED 31 DECEMBER 2010 Expressed in 000s US dollars GEF OPF PFF SFF Inter-fund transactions TOTAL UNESCO REVENUE Assessed contributions 373,780-3, ,290 Voluntary contributions 12, , ,778 Other revenue producing activities - 11,278 7,776 8,428-3,721 23,761 Other / miscellaneous revenue 9,547 1, ,382-10,422 21,389 Finance revenue 299 6,484 12, ,385 Inter-segment transfers 41 17,744 14, ,989 - Total revenue 395,916 37, ,123 29,011-46, ,603 EXPENSES Employee benefit expenses 261,602 25,742 93,311 27,995-10, ,209 Consultants, external experts & mission costs 22,500 2,582 31, ,087 55,377 Grants and other transfers 38, , ,204 65,045 Supplies, consumables and other running costs 32,222 7,571 39,277 4,240-1,707 81,603 Contracted services 21,957 5, , , ,143 Depreciation and amortization 17, , ,969 Other expenses , ,909 Foreign exchange losses 11, ,779 2,052-17,343 Finance costs 1, , ,123 Inter-segment transfers , ,410 - Total expenses 407,886 43, ,837 34,646-46, ,721 DEFICIT FOR THE YEAR -11,970-5,799-8,714-5, ,118 Note that some internal activities lead to accounting transactions that create inter-segment assets, liabilities, revenue and expenses. Inter-segment transactions are reflected in the Statement of Financial Position by Segment and Statement of Financial Performance by Segment to accurately present these financial statements.

37 187 EX/27 Part I page 38 NOTE 6: CASH AND CASH EQUIVALENTS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Cash with banks 106, ,089 Cash in hand Total cash and cash equivalents 106, ,178 Cash is principally held in UNESCO Headquarters interest bearing Euro and United States dollar bank accounts. A limited amount of cash balances are also held on the Headquarters interestbearing convertible currency accounts and field offices and institutes United States dollar and local currency accounts. Cash and cash equivalents include K$66,855 available under proprietary funds. The remaining balance of K$39,835 is held by UNESCO in a fiduciary capacity, including K$5,202 in Staff Fiduciary Funds (see Note 5 Segment Information). NOTE 7: INVESTMENTS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Current portion Loans and receivables Term deposits (maturing within 12 months) 449, ,405 Accrued interest 870 1,035 Fair value through surplus or deficit Brazilian Government Treasury Bills (up to 184 days) 166, ,762 Total current portion 617, ,202 Non-current portion Fair value through surplus or deficit Other 1,849 1,924 Total non-current portion 1,849 1,924 Total investments 618, ,126 The term deposits are held with international banks which are assigned deposit ceilings in accordance with the Investment Policy of UNESCO. Term deposits and accrued interest as at 31 December 2010 include K$5,294 held by UNESCO in proprietary funds. K$445,512 is held in a fiduciary capacity, including K$24,133 in Staff Fiduciary Funds (see Note 5 Segment Information). The average interest rate on term deposits for the year ended 31 December 2010 was 0.875% for Euro deposits and 0.580% for United States dollar deposits. The UNESCO Brasilia Office (UBO) invests in Brazilian Government Treasury Bills, in accordance with the Investment Policy of UNESCO. As at 31 December 2010 the balance of these investments is K$166,337. These are floating-yield bills issued by the Brazilian Treasury ( Letra Financeiro do Tesouro ). The average interest rate on Brazilian Government Treasury Bill investments was 9.509% for the year ended 31 December 2010.

38 187 EX/27 Part I page 39 The non-current investment represents the investment portfolio of the Nessim Habif Trust Fund, which includes bonds and equity funds. In accordance with the Financial Regulation concerning the Nessim Habif Fund (61 EX/38), the capital of the fund is invested in industrial securities either in Switzerland or in the United States of America. The maturity analysis of investments is as follows: 31/12/2010 Term deposits Brazilian Government Treasury Bills Nessim Habif trust fund Expressed in 000s US dollars Term deposits (with maturities 12 months or less) 449, Other investments maturing within 1 year - 166,337 - Investments maturing after 1 year but less than five years More than five years - - 1,849 Total 449, ,337 1,849 NOTE 8: ACCOUNTS RECEIVABLE (NON-EXCHANGE TRANSACTIONS) Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Assessed contributions (current) 64,665 29,919 Assessed contributions (non-current) 7,251 19,728 Gross assessed contributions 71,916 49,647 Allowance for assessed contributions (current) -3,664-7,094 Allowance for assessed contributions (non-current) -3,415-3,859 Net assessed contributions 64,837 38,694 Voluntary contributions (current) 12,254 16,512 Voluntary contributions (non-current) 6,970 - Total accounts receivable (non-exchange transactions) 84,061 55,206 Assessed contributions receivable represent uncollected revenues committed to UNESCO by Member States and Associated Members for completion of the programme of work. Non-current assessed contributions are those contributions which are expected to be received more than 12 months after the reporting date. The allowance for assessed contributions is calculated by providing against the entire balance of arrears from the biennium and before which are not under payment plans. Outstanding assessed contributions from the previous biennium and amounts under payment plans are discounted to their present value based on the year in which they are expected to be received:

39 187 EX/27 Part I page 40 Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Arrears not under payment plans: ,103 6, ,180 6,897 Other current assessed contributions 61,485 23,022 Gross assessed contributions (current) 64,665 29,919 Allowance for arrears -3,179-6,897 Discount other current assessed contributions Net assessed contributions (current) 61,001 22,825 Gross assessed contributions (non-current) 7,251 19,728 Discount for non-current assessed contributions -3,415-3,859 Net assessed contributions (non-current) 3,836 15,869 Total net assessed contributions 64,837 38,694 During the year ended 31 December 2010, UNESCO wrote off arrears of K$3,662. These arrears were attributable to the Former Federal Republic of Yugoslavia, incurred after 27 April NOTE 9: ACCOUNTS RECEIVABLE (EXCHANGE TRANSACTIONS) Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Amounts receivable for goods and services 3,951 6,811 Allowance for doubtful accounts -1,152-1,069 Net receivables from exchange transactions 2,799 5,742 The allowance for receivables from exchange transactions is an estimated irrecoverable amount based on an aged analysis of outstanding amounts at the reporting date. NOTE 10: INVENTORIES Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Publications 3,300 3,154 Supplies 1,154 1,256 Gross inventories 4,454 4,410 Provision for depreciation of inventories Net inventories 4,454 4,399 Publications include publications held for sale. Full details of publications held to be distributed at no or nominal charge are not currently available, and therefore costs related to these publications are recognized as expenses as they are incurred. Publications for free distribution generally have

40 187 EX/27 Part I page 41 short useful lives, and therefore the value of any remaining stock at year end would be significantly depreciated. Supplies include principally restaurant supplies and commissary supplies. The provision for depreciation of inventories represents the write down of inventories of publications and supplies to net realizable value. NOTE 11: ADVANCE PAYMENTS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Advances to staff 2,558 3,420 Activity financing advance payments 13,677 8,421 Implementing partner advances 7,870 7,209 IHE advances to project partners 13,374 10,515 Participation Programme advance payments 21,374 25,522 Other advance payments 1,508 2,733 Total advance payments 60,361 57,820 Advance payments on non-exchange contracts (Financing Activity Contracts, Implementation Partnership Agreements, Participation Programme and IHE projects) relate to transfers made to third parties where the conditions on the transferred assets are yet to be accepted by UNESCO as fulfilled as at 31 December Under the Participation Programme, transfers of funds are considered to be advance payments until a financial report confirming use of the funds in accordance with the agreement is received and accepted by UNESCO. Advance payments under the Participation Programme can be allocated to biennia as follows: Biennium Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) ,382 1, ,871 7, ,762 16, ,359 - Participation Programme advance payments 21,374 25,522 NOTE 12: OTHER CURRENT ASSETS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) VAT receivables 2,422 7,565 Other 2,703 1,562 Total other current assets 5,125 9,127 Other current assets are principally VAT amounts recoverable from fiscal authorities.

41 187 EX/27 Part I page 42 NOTE 13: PROPERTY, PLANT AND EQUIPMENT (PP&E) Expressed in 000s US dollars Land Buildings Comms & IT Equipm't Vehicles Furniture and Fixtures Other Equipm't Total 01/01/2010 Cost 254, ,423 25,488 5,794 2,529 10, ,375 Accumulated depreciation ,183-3,542-1,781-6,850-32,552 Carrying amount 254, ,227 5,305 2, , ,823 Movements year to 31/12/2010 Additions , ,593 5,743 Disposals ,306 Disposals depreciation ,085 Impairment Depreciation - -13,651-2, ,003-18,641 Exchange adjustments depn ,051 Exchange adjustments cost ,409 Total movements year to 31/12/ , ,477 31/12/2010 Cost 254, ,808 26,600 6,155 2,686 11, ,403 Accumulated depreciation - -13,830-21,793-4,047-1,941-7,446-49,057 Carrying amount 254, ,978 4,807 2, , ,346 In accordance with IPSAS, in adopting accrual accounting for the first time, property, plant and equipment (PP&E) is initially recognized at cost or fair value as at 1 January Additions to PP&E after 1 January 2010 are measured at cost. As at 31 December 2010, UNESCO holds fully depreciated PP&E which is still in use for a gross value of K$20,214. Headquarters land, which is leased by UNESCO from the Government of France, is included within PP&E at its fair value (see Note 4 Critical Accounting Estimates and Judgements). The carrying value of UNESCO buildings is detailed in the following table, based on fair value less accumulated depreciation. Description Expressed in 000s US dollars Opening Fair Value Depreciation Additions Exchange adjustment Carry Value 01/01/ /12/ Place Fontenoy 208,907-7, ,317 1 Rue Miollis 154,169-5, ,566 Apartment, place Vauban 5, ,709 IBE building, Geneva 8, ,359 Ocampo Villa, Buenos Aires 1, ,470 IHE building renovation, Delft 1, ,557 Total 380,227-13, ,978 Heritage assets UNESCO also has a significant number of Works of Art (also referred to as heritage assets), including paintings, statues and various other objects, which have been mainly donated by governments, artists and other partners. An internal fund has been set-up to cover accidental

42 187 EX/27 Part I page 43 damage to these works, which have a considerable intrinsic value. The value of these works is not recognized in the financial statements of UNESCO in compliance with IPSAS 17. NOTE 14: INTANGIBLE ASSETS Expressed in 000s US dollars Software Internally Developed Software Acquired Total 01/01/2010 Cost 19, ,855 Accumulated amortization -16, ,110 Carrying amount 2, ,745 Movements year to 31 December 2010 Additions Disposals Disposals amortization Impairment Amortization -1, ,328 Total movements year to 31 December , /12/2010 Cost 19,532 1,128 20,660 Accumulated depreciation -18, ,438 Carrying amount 1, ,222 UNESCO currently only recognizes software as intangible assets, as it is not considered probable that significant future economic benefits from copyrights and intellectual property will flow to UNESCO. NOTE 15: ACCOUNTS PAYABLE Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Suppliers payable 9,535 14,365 Accruals for goods and services 12,858 26,536 Other payables Total accounts payable 23,233 40,901 Suppliers payable relate to amounts due for goods and services for which invoices have been received. Accruals are liabilities for goods and services that have been received or provided to UNESCO during the period and which have not been invoiced or formally agreed with the suppliers.

43 187 EX/27 Part I page 44 NOTE 16: EMPLOYEE BENEFITS Expressed in 000s US dollars Actuarial valuation 31/12/2010 UNESCO valuation Total 01/01/2010 Opening Balance (Restated) Payroll and reimbursements - 8,190 8,190 9,261 Employee benefits (current) - 8,190 8,190 9,261 After-Service Health Insurance 735, , ,018 Accumulated annual leave 18,536 1,767 20,303 20,790 Repatriation benefits 18, ,884 19,161 Italian end-of-service benefit - 9,403 9,403 10,524 Employee benefits (non-current) 772,485 11, , ,493 Total employee benefits 772,485 19, , ,754 Employee benefit liabilities are determined by professional actuaries or calculated by UNESCO based on personnel data and past payment experience. Employee benefits current Current or short-term employee benefits include payroll and allowances, death grant, education grant and home leave. Employee benefits non-current Non-current employee benefits relate to post-employment and other long-term employee benefits. These include After-Service Health Insurance, accumulated annual leave, repatriation benefits and the Italian end of service benefit. After-Service Health Insurance (ASHI) UNESCO operates the ASHI scheme which is a defined employee benefit plan. Under the scheme, staff retiring from UNESCO, who have reached their fifty-fifth birthday and who have completed at least 10 years of participation in the Medical Benefits Fund as at the date of their separation, may opt to remain (indefinitely) in that Fund as an associate participant with UNESCO continuing to participate in the funding of their contributions. UNESCO performs annually both a long-term projection and an actuarial valuation of the ASHI scheme to measure its employee benefits obligation. Accumulated annual leave (AAL) UNESCO staff can accumulate unused annual leave up to a maximum of 60 working days. On separation from UNESCO, staff members are entitled to receive a sum of money equivalent to their pay for the period of AAL that they hold at the date of separation. Repatriation benefits A staff member who has completed one year of continuous service outside the country of his/her recognized home is entitled upon separation from UNESCO to a repatriation grant payable on the basis of completed years and months of qualifying service outside the country of his/her recognized home. Staff members are also entitled to travel and removal costs for repatriation on separation from UNESCO. Italian end-of-service benefit The Italian end-of-service benefit (known as liquidazione ) is a separation lump sum payable to local General Service staff working for UNESCO in Italy. The amount of the payment is based on the number of completed years of service at the time of separation from UNESCO.

44 187 EX/27 Part I page 45 Actuarial valuations Liabilities arising from ASHI, accrued annual leave and repatriation benefits are determined by consulting actuaries. Actuarial assumptions are required to be disclosed in the financial statements in accordance with IPSAS 25. The following assumptions and methods have been used to determine the value of post-employment and other separation-related employee liabilities for UNESCO as at 31 December 2010: Discount rate - ASHI 4.70% - the rate used is the rate of return of the Euro Corporate AA bonds with a maturity of 10 years and more (iboxx Index) at the valuation date. Discount rate Repatriation benefits and Accumulated annual leave 4.50% - the rate used is the rate of return of the Euro Corporate AA bonds with a maturity of 7-10 years (iboxx Index) at the valuation dates. Salary scale (including inflation) 2.00% Pension increase rate (including inflation) 2.00% Medical cost trend rate (including inflation) Initial 5.00% Medical cost trend rate (including inflation) Ultimate 5.00% Inflation rate ASHI Plan duration (for discount rate justification purposes) ASHI Repatriation benefits Accumulated annual leave 2.00% years It was assumed that 100% of staff eligible to benefit from the ASHI after service actually claim their entitlement. It was assumed that 75% of staff eligible for repatriation benefits on leaving actually claim their entitlement. As the accumulation of annual leave by employee historically remains stable year on year, it is assumed that the total accumulated balance is a long-term employee benefit taken by staff members on separation from UNESCO. The following tables and text provide additional information and analysis on employee benefit liabilities calculated by actuaries: Expressed in 000s US dollars ASHI AAL Repatriation benefits Total Restated defined benefit obligation at 01/01/ ,018 18,844 18, ,453 Movement for year ended 31/12/2010 Service cost 22,146 1, ,222 Interest cost 32, ,687 (Actual gross benefits payments) -16,989-2,496-1,750-21,235 Participant contributions 3, ,625 Actuarial (gain)/loss 45, ,733 Defined benefit obligation 31/12/ ,631 18,536 18, ,485 The actuarial valuation of the defined benefits obligation is determined by discounting the probable future payment required to settle the obligation resulting from employee service rendered in the current and prior periods. The discount rate used is based on market yields, at the reporting date,

45 187 EX/27 Part I page 46 on iboxx Corporate AA bonds, that have terms to maturity approximating to the terms of the related post-employment liability. Actuarial gains or losses arise when the actuarial assessment differs from the long-term expectation on the obligations: they result from experience adjustments (differences between the previous actuarial assumptions and what has actually occurred) and the effects of change in actuarial assumptions. Actuarial gains or losses for AAL and repatriation benefits obligations are recognized in the Statement of Financial Performance. Actuarial gains or losses relating to the ASHI obligation are accounted for using the reserve recognition approach, and are recognized through net assets/equity in the Statement of Financial Position and in the Statement of Changes in Net Assets/Equity in the year in which they occur. ASHI actuarial losses recognized directly in net assets/equity are K$45,733 for the year ended 31 December The annual expense amounts recognized in the Statement of Financial Performance are as follows: Expressed in 000s US dollars ASHI AAL Repatriation benefits Total Service cost 22,146 1, ,222 Interest cost 32, ,687 Other expenses Total expenses recognized for year ended 31/12/ ,244 2,188 1,477 57,909 Current service cost is the increase in the present value of the defined obligation resulting from employee service in the current period. Interest cost is the increase during the period in the present value of the defined benefit obligation which arises because the benefits are one period closer to settlement. Assumed healthcare cost trends have a significant effect on the amounts calculated for the ASHI liability and expenses. A one percentage point change in assumed healthcare cost trend rates would have the following effects: After-Service Health Insurance - healthcare cost trends Expressed in 000s US dollars Medical cost trend rate 4% Medical cost trend rate 5% Medical cost trend rate 6% Defined benefit obligation as at 31/12/ , , ,508 % Variation -19.8% 26.4% Service and interest cost for the year to 31/12/ ,505 54,244 71,891 % Variation -23.5% 32.5% The expected contribution of UNESCO in 2011 to the ASHI plan is K$19,455 which represents expected gross benefit payments for the year. Expected contributions from participants in 2011 are K$3,915. The expected contribution of UNESCO in 2011 to the accumulated annual leave and repatriation defined benefit plans is K$1,856 and K$1,474 respectively, which represents expected benefit payments for the year.

46 187 EX/27 Part I page 47 United Nations Joint Staff Pension Fund (UNJSPF) The latest actuarial valuation for the UNJSPF was prepared as of 31 December This valuation revealed an actuarial deficit, amounting to -0.38% of pensionable remuneration. Despite the actuarial deficit from the 2009 valuation, it was assessed that the UNJSPF is adequately funded. Therefore the United Nations General Assembly did not invoke provision of Article 26 requiring additional payments. UNESCO makes contributions on behalf of its staff (currently payable by the participant and UNESCO at 7.9% and 15.8% respectively of the staff member s pensionable remuneration) and would be liable for its share of the unfunded liability, if any. Total retirement plan contributions made for staff in the year to 31 December 2010 amounted to K$39,694 (2009: K$39,762). NOTE 17: TRANSFERS PAYABLE Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Interest payable to donors 48,817 45,246 Distribution payable to Member States 19,617 7,219 Other transfers payable 1,643 2,258 Total transfers payable 70,077 54,723 UNESCO recognizes as a liability transfers which are payable to donors and Member States. This includes accrued interest payable to donors, and the other payables to Member States arising from distributions of surplus. Other transfers payable relates to various amounts due under nonexchange arrangements. NOTE 18: CONDITIONS ON VOLUNTARY CONTRIBUTIONS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Conditions on monetary contributions (current) 33,607 27,172 Conditions on in-kind voluntary contributions (current) 1,943 1,863 Conditions on voluntary contributions (current) 35,550 29,035 Conditions on in-kind voluntary contributions (non -current) 8,114 8,690 Conditions on voluntary contributions (non-current) 8,114 8,690 Total conditions on voluntary contributions 43,664 37,725 UNESCO recognizes as a liability conditions attached to monetary voluntary contributions. Conditions are imposed by donors on the use of contributions, and include both a performance obligation to use the donation in a specified manner, and an enforceable return obligation to return the donation if it is not used in the specified manner. The amount recognized as a liability is the best estimate of the amount that would be required to settle the obligation at the reporting date. As UNESCO satisfies the conditions on voluntary contributions through performance in the specified manner, the carrying amount of the liability is reduced and an amount of revenue equal to that reduction is recognized. Conditions on in-kind voluntary contributions relate to the two loans on which UNESCO does not pay interest (see Note 20 Borrowings). The amount recognized as a liability is the total present value of the interest which would normally be payable on a similar loan. As interest free

47 187 EX/27 Part I page 48 repayments are made by UNESCO over the loan period, the carrying amount of the liability is reduced and an amount of in-kind revenue equal to that reduction is recognized. This liability is allocated between current and non-current based on the period in which the in-kind revenue is expected to be recognized. NOTE 19: ADVANCE RECEIPTS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Framework agreements 49,335 49,200 IHE voluntary contributions received in advance 24,720 26,582 Other voluntary contributions received in advance 5,358 2,300 Assessed contributions received in advance 599 2,251 Other advance receipts Total advance receipts 80,280 81,180 UNESCO recognizes as a liability amounts received under non-exchange contracts where a binding agreement is not considered to be in place. This is especially relevant to Framework Agreements, where amounts can be received before agreement is reached on the allocation of the contribution. NOTE 20: BORROWINGS Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) IBE building loan Phase II Belmont plan loan 7,717 8,513 Current portion of borrowings 7,857 8,638 IBE building loan 1,174 1,178 Phase II Belmont plan loan 54,702 69,159 Long-term portion of borrowings 55,876 70,337 Total borrowings 63,733 78,975 Borrowings are recognized in the financial statements at amortized cost with values based on cash flows discounted using a discount rate of 3.20% (Phase II Belmont plan loan) and 3.00% (IBE building loan). The maturity analysis of the loans is as follows: 31/12/2010 IBE building loan Phase II Belmont plan loan Expressed in 000s US dollars Within three months - 1,952 Later than three months and not later than one year 140 5,765 Later than one year and not later than five years ,547 Later than five years ,155 Total borrowings 1,314 62,419 IBE Building UNESCO received loans from the Property Foundation for International Organizations (FIPOI) of Switzerland for the balance of KCHF (thousands of Swiss francs) 4,437 to partly finance the

48 187 EX/27 Part I page 49 purchase of buildings for the UNESCO International Bureau of Education (IBE). Following a renegotiation of the payment schedule in December 1997 it was agreed to fix the amount of the loan outstanding as of 1 January 1998 at KCHF 3,223 (K$2,270) repayable in equal annual instalments of KCHF 133 from 1998 until 2021, with a final payment of KCHF 19 in The renegotiated loan is interest-free, and for the presentation of the financial statements, in-kind revenue is recognized for the benefit to UNESCO of not paying interest. The non-amortized balance of the loan as at 31 December 2010 is KCHF 1,488 (KCHF 1,622 at 1 January 2010). Phase II Belmont Plan By 32 C/Resolution 74, the General Conference had authorized the Director-General to contract an interest-free loan of K 79,875 with a lender chosen by him in cooperation with the Government of France and to take into account the necessity of making provision in future budgets for the funds required for reimbursement of the sums borrowed. An agreement was signed on 23 March 2004 between UNESCO, the Caisse des Dépôts et Consignations (CDC) and the Government of France for the interest-free loan which would be drawn in five yearly instalments from 2004 to 2008 and repaid over eight biennia starting in The loan repayments are fully guaranteed by the Government of France. Under the arrangement, interest costs are paid by the Government of France and in 2010 these payments totalled K 1,494 (K$1,928). For the presentation of the financial statements, in-kind revenue is recognized for the benefit to UNESCO of not paying interest. As at 31 December 2010, the non-amortized balance of the loan is K 54,963 (K 60,952 at 1 January 2010). NOTE 21: OTHER LIABILITIES Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Unredeemed coupons Other current liabilities 9,220 11,884 Other current liabilities 10,003 12,642 Unredeemed coupons 6,472 7,010 Provisions Other non-current liabilities 6,577 7,162 Total other liabilities 16,580 19,804 Other liabilities are mainly represented by unredeemed coupons which have been issued by UNESCO. The UNESCO coupons programme provides private individuals, institutions or Member States with the possibility of buying, with their local non-convertible currencies, coupons denominated in US dollars and guaranteed by UNESCO. Coupons are used for the purchase of books, publications and material for educational, scientific or cultural purposes, and for paying subscriptions to institutions and university registration fees. UNESCO undertakes to reimburse suppliers accepting these coupons in payment of their invoices. If the recipient of the coupons does not use them, they can send them back for a cash reimbursement or for exchange with coupons bearing a new validity date. The current coupon validity period is four years; however if expired unused coupons are sent to UNESCO, replacement coupons will be issued. Unredeemed coupons are classified between current and non-current based on amounts expected to be redeemed within the next 12 months.

49 187 EX/27 Part I page 50 NOTE 22: NET ASSETS/EQUITY 22.1 OPENING BALANCE ADJUSTMENTS AND RESERVE TRANSFERS Expressed in 000s US dollars 31/12/2009 UNSAS Audited IPSAS Adjustments IPSAS Reserve transfers 01/01/2010 Opening Balance (Restated) Working capital fund 29, ,000 Capital funds relating to land & building 118, ,342 - Currency exchange reserve -17,813-17,813 - Other surpluses 172, ,402 Balances - projects funded by donors 433, ,963 Actuarial gains/losses through reserves Operating reserves 47,582-27,702-8,651 11,229 Budgetary surpluses 7,219-7, Reserves and fund balances 790,695-34, , ,594 PPE recognition - 454, , ,288 ASHI recognition , ,018 ULO derecognition - 109, ,560 Other IPSAS opening balance reserve ,158-9, ,320 IPSAS opening balance reserve , , ,490 Total net assets/equity 790, , , MOVEMENTS IN THE YEAR TO 31/12/2010 Expressed in 000s US dollars 01/01/2010 Opening Balance (Restated) Deficit for the period Other adjustments to reserves 31/12/2010 Working capital fund 29,000-1,000 30,000 Capital funds relating to land & building Currency exchange reserve - - 1,439 1,439 Other surpluses 172,402-24,005-20, ,346 Balances projects funded by donors 433,963-8, ,850 Actuarial gains/losses through reserves ,733-45,733 Operating reserves 11, ,660 Budgetary surpluses Reserves and fund balances 646,594-32,118-62, ,562 PPE recognition 573, ,288 ASHI recognition -649, ,018 ULO derecognition 109, ,560 Other IPSAS opening balance reserve -157, ,320 IPSAS opening balance reserve -123, ,490 Total net assets/equity 523,104-32,118-62, ,072

50 187 EX/27 Part I page DETAIL OF RESERVES AND FUND BALANCES The Working Capital Fund has been established in an amount and for purposes to be determined from time to time by the General Conference. It is financed by advances from Member States made in accordance with the scale of assessments as determined by the General Conference. By 34 C/Resolution 78, the authorized level of the fund was increased to K$30,000 for the biennium. Other surpluses consists of General Fund surpluses, surpluses on other proprietary funds and surpluses on fiduciary funds. These surpluses can be carried forward from one financial period to the next. Other surpluses are summarized as follows: Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) Regular programme -11,970 19,616 Other Proprietary Funds 44,220 50,029 Proprietary funds 32,250 69,645 Fiduciary funds 96, ,757 Total other surpluses 128, ,402 Balances relating to projects funded by donors represent amounts received through voluntary contributions to the Programme Fiduciary Funds. These balances are held for use on specific identified projects, and as such are considered to be restricted. Operating Reserves have been created within the legislative authority of certain funds as is deemed to be required for the purpose of sound administration or legal obligation and are summarized as follows: Expressed in 000s US dollars 31/12/ /01/2010 Opening Balance (Restated) (i) Public Information Liaison and Relations Fund 1,351 1,351 (ii) International Centre for Theoretical Physics (ICTP) 1,321 1,333 (iii) UNESCO International Institute for Educational Planning (IIEP) 6,894 6,669 (iv) UNESCO Institute of Statistics (UIS) 1,793 1,585 Administrative reserves 11,359 10,938 Public Information Liaison and Relations Fund (PILRF) Currency fluctuation reserves Reserve for Accidental Damage to Works of Art at HQ Other reserves Total operating reserves 11,660 11,229 Administrative reserves have been established in accordance with the rules pertaining to each fund to cover mainly staff-related costs (separation, after-service entitlements, etc.) and other outlays that may arise in the future; The currency fluctuation reserve is established to cover the foreign currency risk element arising from the operation of the coupons programme.

51 187 EX/27 Part I page 52 NOTE 23: REVENUE Expressed in 000s US dollars 31/12/2010 Total assessed contributions 377,290 Voluntary contributions Monetary voluntary contributions 263,914 Inter-organization funds 45,858 In-kind voluntary contributions 13,006 Total voluntary contributions 322,778 Other revenue-producing activities Revenue-producing activities 14,242 Income from services rendered 9,519 Total other revenue-producing activities 23,761 Other/miscellaneous revenue Other operating gains 10,885 Contributions to MBF 10,504 Total other/miscellaneous revenue 21,389 Total finance revenue 19,385 Total revenue 764,603 Assessed contributions are recognized as revenue at the beginning of the year to which they are apportioned in the relevant two year budget period. Assessed contributions received in euros are converted at the UNORE as opposed to the Constant Dollar Rate. As a result of this the financial statements show a different total value for assessed contributions when compared to the Regular Programme and Budget (see Note 26 Budget). Voluntary contributions are analysed between monetary voluntary contributions, inter-organization funds and in-kind voluntary contributions. Where an in-kind contribution is recognized as revenue, a corresponding expense is also recognized. In-kind contributions include the use of field office and institute premises for no or nominal rent, and free utilities, maintenance and communications. In the case of the use of premises, the contribution value is based on the commercial rate for renting the building. In-kind contributions for premises are estimated to be K$11,111. In-kind voluntary contributions also include K$1,672 which corresponds to the calculated value to UNESCO of not paying loan interest on the Phase II Belmont plan loan and the IBE building loan. Revenue producing activities for K$14,242 include principally sales income from the UNESCO Restaurant Service and the UNESCO Commissary Fund. This figure also includes income from sales related to International Computer Driving Licence (ICDL) activities at the UNESCO Cairo field office. Income from services rendered relates principally to income from rent (offices and conference rooms) and related services. Other operating gains include the recognition of K$7,219 as revenue during the year which was previously included in opening balances as a budgetary surplus within Transfers Payable (see Note 17). This liability was removed and a corresponding amount recognized as revenue on an exceptional basis.

52 187 EX/27 Part I page 53 NOTE 24: EXPENSES Expressed in 000s US dollars 31/12/2010 Employee benefit expenses International & National staff 272,929 Temporary staff 48,348 Other personnel costs 76,932 Total employee benefit expenses 398,209 Consultants, external experts and mission costs Consultants 28,760 Staff mission costs 19,239 Delegates & external individuals missions 4,774 Other contracts 2,604 Total consultants, external experts and mission costs 55,377 Grants and other transfers Financial contributions 16,502 Grants and fellowships 23,753 External training and seminars 24,790 Total grants and other transfers 65,045 Supplies, consumables and other running costs Communications 5,534 Equipment 19,683 Leases 18,927 Utilities 7,333 Maintenance and repairs 13,455 Other supplies 16,671 Total supplies, consumables and other running costs 81,603 Contracted services Contracted research 21,027 Contracted seminars and meetings 17,111 Contracted document production 3,346 Other contracted services 98,659 Total contracted services 140,143 Depreciation and amortization Depreciation 18,641 Amortization 1,328 Total depreciation and amortization 19,969 Total other expenses 7,909 Total foreign exchange losses 17,343 Total finance costs 11,123 Total expenses 796,721

53 187 EX/27 Part I page EMPLOYEE BENEFIT EXPENSES International and national staff expenses include salaries, post adjustments, entitlements and pensions and health plan contributions for Professional and General Service category staff. This line also includes movements in the actuarial liability for Accumulated Annual Leave and Repatriation Benefits. Temporary staff expenses include all costs relating to the employment of temporaries and supernumeraries. Other personnel costs include reimbursement of MBF medical claims and the movement in the ASHI actuarial liability where this is recognized in the Statement of Financial Performance. This line also includes staff travel expenses which are not related to mission costs (home leave, family visit, education grant, interview, separation) CONSULTANTS, EXTERNAL EXPERTS AND MISSION COSTS Consultants expenses represent the cost of contracting consultants, including insurance and travel expenses. Staff mission costs are the mission and training costs for UNESCO staff, temporaries and supernumeraries. These concern principally travel and per diem expenses. Delegates and external individuals missions are expenses for travel and per diem of representatives, delegates, individuals and others (i.e. non-staff). Other contracts concern principally interpreter fees GRANTS AND OTHER TRANSFERS Financial contributions include contributions made to United Nations joint activities, publications, conferences and programme activities. Grants and fellowships include study grants, fellowships, subventions, sponsorships and grant-in-aid. This area of expense especially relates to the institutes ICTP and IHE. Expenses for external training and seminars are mainly travel and per diem costs for participants SUPPLIES, CONSUMABLES AND OTHER RUNNING COSTS Communications expenses concern mainly telephone and postal/freight costs. Equipment expenses represent equipment purchases and costs during the year which do not meet the criteria for capitalization as PP&E or Intangible Assets. Leases represents primarily premises rental cost. This line includes the expense which corresponds to the in-kind voluntary contribution for premises provided to UNESCO at no or nominal cost. Maintenance and repairs expenses are mainly those incurred in relation to UNESCO premises. Other supplies include office supplies, and also notably supplies for the UNESCO Restaurant Service and the UNESCO Commissary Fund CONTRACTED SERVICES Contracted services represent expenses where UNESCO has engaged a third party to perform work on behalf of UNESCO. Major categories of these types of arrangements include research, seminars and meetings and document production. Significant amounts fall within the category other contracted services. It should be noted that under certain arrangements, especially nonexchange contracts with not-for-profit organizations and government ministries for the implementation of activities under UNESCO s mission and mandate, contracts are established which cover several types of services and work which cannot be easily allocated to a single category of contracted services DEPRECIATION AND AMORTIZATION Depreciation is the expense resulting from the systematic allocation of the depreciable amounts of property, plant and equipment (PP&E) over their useful lives (see Note 13). This relates principally to UNESCO buildings. Amortization is the expense resulting from the systematic allocation of the amortizable amount of intangible assets over their useful lives (see Note 14).

54 187 EX/27 Part I page OTHER EXPENSES, FOREIGN EXCHANGE AND FINANCE COSTS Other expenses are largely composed of the return of funds to donors. Foreign exchange losses have resulted from the treatment of transactions in currencies other than the United States dollar in accordance with UNESCO accounting policy (see Note 2.3). Finance costs include investment interest payable to donors, and also the calculated interest cost of K$1,672 which corresponds to the in-kind revenue recognized for the value to UNESCO of not paying loan interest on the Phase II Belmont plan loan and the IBE building loan (see Note 23 Revenue). NOTE 25: CONTINGENT LIABILITIES, COMMITMENTS AND CONTINGENT ASSETS 25.1 LEGAL OR CONTINGENT LIABILITIES (a) (b) A civil action suit alleging acts of administrative impropriety was filed in January 2005 against high-ranking former officials of the National Social Security Institute of Brazil in which UNESCO and its former representative in the country were also cited as co-defendants, with respect to technical assistance agreements concluded between the aforementioned Institute and the UNESCO Brazil Office. The Federal Prosecutors are claiming damages of approximately US $28 million. At the outset, UNESCO invoked its immunity from jurisdiction and that of its former representative. In 2008, the Federal Court issued a decision declaring that civil action could continue against UNESCO and the former representative. In 2009 UNESCO filed a recourse against this decision, and in April 2010 the Federal Courts confirmed the immunity from jurisdiction of UNESCO and the former representative. However, in November 2010 the Federal Prosecutors appealed this decision before the Supreme Court. In January 2011, UNESCO filed its response to the Federal Prosecutors appeal. At this stage it is not possible to give an estimate as to the outcome of either the case or the amount of loss associated with the outcome. A number of legal cases are pending before labour courts in which former employees have lodged claims for compensation alleging violation of employment contracts. It is not possible at this time to determine whether any of these cases will result in a material outflow of resources. Staff members have also lodged complaints which are pending before the UNESCO Appeal Board or the International Labour Organization Administrative Tribunal OPERATING LEASE COMMITMENTS UNESCO enters into operating lease arrangements for the use of field office and institute premises, and for the use of photocopying and printing equipment. Future minimum lease rental payments for the following periods are: Expressed in 000s US dollars 31/12/2010 Within one year 4,287 Later than one year and not later than five years 6,281 Later than five years 2,281 Total operating lease commitments 12,849 Operating lease arrangements for field office premises can generally be cancelled by providing notice of up to 90 days. Individual operating lease agreements for photocopiers at Headquarters are generally made under the auspices of the overall long-term supply agreements with termination dates of 31 December 2013.

55 187 EX/27 Part I page 56 The operating lease for the UNESCO-IHE Institute for Water Education (IHE) Westvest 7 premises runs for an initial period up to 2013 with an option to renew or buy the premises. Part of the annual lease payments are calculated with reference to the one-year Euro Interbank Offered Rate (Euribor) plus 0.8% credit margin. To cover the interest rate risk of this arrangement, an Interest Rate Swap (IRP) agreement has been contracted for the same term as the lease. Under this agreement, IHE receives the one-year Euribor and pays 6.47% fixed interest. The notional principal amount of the IRP at 31 December 2010 is K 8,468 (31 December 2009: K 9,163) CONTINGENT ASSETS Under a number of existing voluntary contribution agreements, UNESCO will gain control of the voluntary contribution asset (contributions receivable) if certain stipulations set out in the agreement are met by UNESCO. Until the stipulations are met, these assets are not recognized in the Statement of Financial Position. As at 31 December 2010, there are voluntary contributions with an approximate value of K$109,310 (1 January 2010: K$90,017) under existing agreements where it is considered probable that UNESCO will meet the stipulations set out in the agreement. NOTE 26: BUDGET The General Fund is established for the purpose of accounting for the expenditure of the regular programme appropriation voted by the General Conference of UNESCO for a biennium of two consecutive calendar years beginning with an even-numbered year. It is financed from assessed contributions from Member States. Appropriations are available for obligation during the financial period to which they relate and for a further twelve months. The General Conference set $653 million as the level for assessed contributions from the 191 Member States for the biennium. For the year ended 31 December 2010, the allotment including authorized transfers and additional appropriations is $352 million. The General Fund budget is approved on a modified cash basis, whereby receipts are budgeted when it is planned that cash will be received and expenditures are budgeted when it is planned that payments will be made. The expenditures are classified between General Policy and Direction (Part I), Programmes and Programme Related Services (Part II), and Support for Programme Execution and Administration (Part III). The approved budget covers the financial period from 1 January 2010 to 31 December 2011 and includes regular and participation programme operations. In order to present the biennial budget on an annual basis, in the first year of the biennium the budget represents allotments issued based on work plans. For the second year, the budget represents the remaining un-allotted amounts of the biennium plus the unused funds of the first year. The original budget of $337 million for the year is adjusted for authorized transfers and additional appropriations to arrive at the final budget of $352 million. The authorized transfers of $11 million represent the transfer between appropriation lines and the transfer of funds from year two of the budget to the current year. The additional appropriations of $4 million are voluntary contributions received to support directly the programmes and activities of the regular programme. The budget situation as at 31 December 2010, which concerns only allotments for the year 2010, showed an unspent balance of K$47,609. The total expenditure figure at this date of K$304,583 contains unliquidated obligations amounting to K$15,806. UNESCO reports bi-annually to the Executive Board on the status of the budget implementation through the Management Chart. The budget and the accounting bases differ. The financial statements include all controlled entities for the financial period from 1 January 2010 to 31 December 2010 and a classification based on the nature of expenses is used in the Statement of Financial Performance. The financial statements differ from the budget, which deals with receipts and expenditures relating to General Fund assessments only and classifies expenses by programmes. The budget is prepared on the modified cash basis and the financial statements on the accrual basis. Under the budget assessed

56 187 EX/27 Part I page 57 contributions to be received in euros and the corresponding expenditure are translated into United States dollars at the Constant Dollar Rate (CDR). In the financial statements assessed contributions received in Euros and their corresponding expenditure are translated into United States dollars using the United Nations Operational Rate of Exchange (UNORE) prevailing at the date of the transaction. A Statement of Comparison of Budget and Actual Amounts for the General Fund is provided in these financial statements (see Statement V). Reconciliations between the actual amounts on a comparable basis as presented in the Statement of Comparison of Budget and Actual Amounts and the actual amounts in the financial statements for the year ended 31 December 2010 are presented in this Note BUDGET RECONCILIATION In order to reconcile the budget actual amounts to the financial statements (Cash Flow Statement and Statement of Financial Performance), differences between the budget scope and financial statements scope, and budget reporting and financial statements presentation have to be taken into account. (a) Reporting scope (entity) differences The budget concerns receipts and expenditures relating to General Fund assessments only. The Financial Statements include all UNESCO controlled entities, and as such include results for all Funds and the non-budgetary result for the General Fund. Details of the results of the Other Proprietary Funds, Programme Fiduciary Funds and Staff Fiduciary Funds are shown in Note 5 Segment Information. (b) Basis adjustments The budget is prepared on the modified cash basis. The financial statements are prepared on a full accrual basis in compliance with IPSAS requirements. In order to reconcile the budgetary result to the Cash Flow Statement, the non-cash elements such as unliquidated obligations and nonreceived assessed contributions are removed as basis differences. The principal adjustments impacting the reconciliation between the budget and the Statement of Financial Performance are as follows: Capital expenditures capitalized and depreciated over useful life under accrual accounting (generally recorded as current year expenses in the budget); Under IPSAS, the UNORE is applied as opposed to the CDR; Under accrual accounting, employee benefit liabilities are reported in the Statement of Financial Position, and movements in liabilities impact the Statement of Financial Performance; Unliquidated obligations are included in budget reporting but are not recognized under accrual accounting. (c) Timing differences The budget and the financial statements both represent the year to 31 December As such there are no timing differences in the reconciliation. (d) Presentation differences Presentation differences concern differences in the format and classification schemes in the Statement of Cash Flow and the Statement of Comparison of Budget and Actual Amounts.

57 187 EX/27 Part I page RECONCILIATION: BUDGETARY RESULT WITH NET DEFICIT 31/12/2010 Expressed in 000s US dollars Deficit per Statement of Financial Performance -32,118 (a) Scope differences OPF deficit 5,799 PFF deficit 8,714 SFF deficit 5,635 GEF deficit -11,970 (b) Accounting basis adjustments Revenue Constant Dollar adjustment -47,267 Budgetary allotment adjustment 21,679 In-kind contributions -8,236 Other non-budgetary income -9,899-43,723 Expenses Employee benefits 40,276 Constant Dollar adjustment 29,375 Prior budgetary period expenses 19,205 Depreciation and Amortization 17,188 Fixed assets addition -2,742 Foreign Exchange losses 11,547 Renovation loan expenses 2,065 Renovation loan repayment -7,025 In-kind contribution expenses 8,236 Accruals and advances -2,681 Other non-budgetary expenses & adjustments 3, ,108 c) Budget basis adjustment Unliquidated obligations -15,806 Total adjustments 59,579 Budget result on modified cash basis 47,609

58 187 EX/27 Part I page RECONCILIATION: BUDGETARY RESULT WITH NET CASH FLOW 31/12/2010 Expressed in 000s US dollars Operating activities Investing activities Financing activities Actual net surplus as per the Statement of Comparison of Budget and Actual Amounts 47, ,609 Unliquidated obligations 15, ,806 Basis differences Unreceived contributions for year -55, ,366 Other basis differences -10, ,163 Budgetary result cash basis -2, ,114 Timing differences Presentation differences -4,960 11,804-6,844 - Entity differences -18,061-7, ,293 Actual amount in the Cash Flow Statement -25,135 4,572-6,844-27,407 Total 26.4 UNLIQUIDATED OBLIGATIONS Expressed in 000s US dollars 31/12/ /01/2010 General Fund Commitment portion 10,464 12,405 Accrual portion 6,100 12,289 GEF unliquidated obligations 16,564 24,694 Other Proprietary Funds Commitment portion 2,606 1,586 Accrual portion OPF unliquidated obligations 3,151 2,202 Programme Fiduciary Funds Commitment portion 75,939 71,194 Accrual portion 7,719 11,470 PFF unliquidated obligations 83,658 82,664 Total unliquidated obligations 103, ,560 For budgetary purposes UNESCO records unliquidated obligations. Unliquidated obligations include both budget commitments which have not yet given rise to the delivery of a service at the reporting date, and real accruals for goods and services received but not yet invoiced and for travel which has taken place during the year. Budget commitments are not recorded in the financial statements whereas real accruals are recognized in accordance with IPSAS. GEF unliquidated obligations, except those related to renovation costs, are included in the actual amounts of the General Fund budget expenditure as at 31 December The table above provides the split of unliquidated obligations between commitments and accruals for goods and services received not yet invoiced and travel costs. At the close of the biennium, a provision of K$24,694 was set up to cover the unliquidated obligations of the Regular and Participation Programmes. Those obligations remained available for twelve months to 31 December 2010 to the extent that they were required to discharge obligations against goods and services rendered in the financial period and to liquidate any other outstanding legal obligations of that period. At the end of the current financial period ended 31 December 2010 an amount of K$3,606 remains unspent.

59 187 EX/27 Part I page 60 NOTE 27: FINANCIAL RISK MANAGEMENT UNESCO has developed risk management policies in accordance with its Financial Rules and Regulations. The Organization is exposed to a variety of financial risks, including credit risk, market risk (foreign currency exchange and interest rate), and liquidity risk. The primary objective of the Investment Policy of UNESCO is the preservation of the value of resources of the Organization, in United States dollar terms. Within this general objective the principal considerations for investment management are, in order of priority: 1. Security of principal; 2. Liquidity; 3. Rate of return CREDIT RISK In accordance with Investment Policy of UNESCO, the Treasury Section of the Bureau of Financial Management applies deposit ceilings determined using the following criteria: minimum equity $2.5 billion and minimum Fitch ratings: sovereign AA-, individual B/C, support 1, implied rating minimum AA-. The UNESCO Brasilia Office (UBO) is authorized to invest in Brazilian Government Treasury Bills. The credit risk associated with these investments is the sovereign risk of Brazil. The long term Fitch rating of the Government of Brazil is BBB- as at 31 December UNESCO does not have significant credit risk in relation to accounts receivable since contributors are principally Member States. However, an allowance is established when there is objective evidence, based on a review of outstanding amounts at the reporting date, that UNESCO will not be able to collect all amounts due according to the original terms of the receivables MARKET RISK The Organization is exposed to foreign currency exchange risk arising from fluctuations of currency exchange rates. The Split-Level System, whereby the Organization receives 57% of regular programme assessed contributions in euros in order to cover expenses which are denominated in that currency, is a means of ensuring that much of the exposure to exchange fluctuations between euros and United States dollars is removed. The Organization has field offices, centres and institutes worldwide. UNESCO maintains a minimum level of assets in local currencies, and whenever possible holds accounts in United States dollars. Extrabudgetary foreign currency exchange risk is managed through individual project budget planning for foreign currency expenditure. UBO s functional currency is the Brazilian Real. As revenue and expense for UBO are in the same currency, there is limited exposure to foreign currency exchange risk. The Organization is exposed to interest rate risk on its financial interest bearing assets. For cash and cash equivalents, term deposits and other investments, the Investment Committee regularly follows up that the rate of return is in line with the benchmarks set up in the Investment Policy. Interest rate risk is limited by the nature of investments which are held until maturity. A sensitivity analysis of the market risks related to these investments would not disclose significant variations in value given the nature of the counterparty risk and maturity period of the investments.

60 187 EX/27 Part I page LIQUIDITY RISK Investments are made with due consideration to the Organization s cash requirements for operating purposes. Investments in Brazilian Government Treasury Bills are floating-yield investments with a maximum of 184 days maturity and can be liquidated by UNESCO at any point during this period. As an exceptional measure in order to meet financial commitments the Organization may, within the terms and conditions prescribed by the General Conference, negotiate and contract external short-term loans. NOTE 28: EVENTS AFTER THE REPORTING DATE UNESCO s reporting date is 31 December The financial statements were authorized for issue on 31 March 2011, the date at which they were submitted to the External Auditor by the Director-General. On the date of signing these accounts, there have been no material events, favourable or unfavourable, incurred between the reporting date and the date when the financial statements were authorized for issue that would have impacted these statements. NOTE 29: RELATIONSHIPS OF SIGNIFICANT INFLUENCE The UNESCO Staff Savings and Loan Service (USLS) was created in 1954 as the UNESCO credit union. The object of USLS is to provide the possibility to its members on a mutualist basis of investing their savings and of borrowing money for suitable purposes. The UNESCO Staff Savings and Loan Service Fund, is established under Financial Regulation 6.5 and is reported to the Executive Board of UNESCO. USLS is operated for the benefit of its members. The net profit remaining after providing for the reserve is allotted to the payment of interest to the depositors. A statutory reserve is established for the purpose of compensating for any loss sustained in the operations of USLS. UNESCO is considered to exercise significant influence in relation to USLS, notably through its representation on the Board of Management, and its right of veto over decisions of the Board of Management. UNESCO does not control USLS, and therefore USLS is not included in the UNESCO consolidated financial statements. No interest in USLS is recorded in the UNESCO consolidated financial statements. Summary aggregate financial information of USLS is provided below: Expressed in 000s Euros 31/12/ /01/2010 (Restated) Revenue 6,634 10,971 Expenses -1, Interest apportionment on deposit accounts -5,820-10,425 Deficit (apportioned to reserves) Assets 483, ,547 Liabilities -463, ,335 Net assets/equity 19,718 19,212 Note that USLS financial statements are prepared in euro. Prior year numbers have been restated following the adoption of IPSAS by USLS.

61 187 EX/27 Part I page 62 NOTE 30: RELATED PARTY DISCLOSURES 30.1 GOVERNING BODIES UNESCO is governed by a General Conference, consisting of the representatives of the Member States of the Organization. They do not receive any remuneration from the Organization. The General Conference elects the 58 Member States which form the Executive Board. The Executive Board assures the overall management of UNESCO and meets twice a year. The Organization pays for travel costs, subsistence allowance and office expenses to cover costs incurred by the representatives of the Member States in the execution of their duties as Members. The Chairman of the Executive Board receives a representation allowance during his term of office as Chairman. Representatives of Member States are appointed separately by the Government of each Member State, and are not considered as key management personnel of UNESCO as defined under IPSAS KEY MANAGEMENT PERSONNEL Key management personnel of UNESCO are the Director-General, the Deputy Director-General, the Assistant Directors-General and the Directors of the Central Services as they have the authority and responsibility for planning, directing and controlling the activities of UNESCO. The aggregate remuneration paid to key management personnel includes: net salaries, post adjustment, entitlements such as allowances, grants and subsidies, and employer pension and health insurance contributions. 31/12/2010 Pension and health plans Number of individuals Compensation and post adjustment Entitlements Total remuneration 2010 Outstanding advances against entitlements Outstanding loans Key Management Personnel Expressed in 000s US dollars 19 3, , The Director-General is also provided with rent-free accommodation in the UNESCO-owned apartment at Place Vauban. Total remuneration of K$9 was provided to close family members of key management personnel who were employed by UNESCO during the year. Note that a number of the key management personnel were appointed during 2010 and therefore did not receive a full year of remuneration. Advances are those made against entitlements in accordance with staff rules and regulations. Loans granted to key management personnel are those granted under staff rules and regulations. Advances against entitlements and loans are widely available to all UNESCO staff.

62 187 EX/27 Part I Annex I ANNEX I UNESCO EX GRATIA PAYMENTS Financial Regulation 10.3 states that ex gratia payments shall be notified to the General Conference with the final accounts. No ex gratia payments were recorded during the financial year ended 31 December 2010.

63 187 EX/27 Part I Annex II ANNEX II WAIVERS GRANTED FOR CONTRACTS SUBMITTED TO THE CONTRACTS COMMITTEE In accordance with 176 EX/Decision 39.7 (c), information on waivers granted after review by the Contracts Committee during 2010 is as follows: Total Contracts Approved Total Waivers Approved Regular programme Contracts Submitted Extrabudgetary $ Contracts Submitted TOTAL $ Contracts Submitted $

64 ANNEX III 187 EX/27 Part I Annex III

65

66 Executive Board Hundred and eighty-seventh session 187 EX/27 Part II PARIS, 26 August 2011 Original: French/English Item 27 of the provisional agenda FINANCIAL REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 AND REPORT BY THE EXTERNAL AUDITOR Part II REPORT BY THE EXTERNAL AUDITOR SUMMARY This document contains the long-form External Auditor s report on UNESCO s accounts for 2010 and written comments by the Director- General thereon.

67 187 EX/27 Part II Office of the External Auditor of the United Nations Educational, Scientific and Cultural Organization REPORT ON THE FINANCIAL STATEMENTS OF THE UNITED NATIONS EDUCATIONAL, SCIENTIFIC AND CULTURAL ORGANIZATION FINANCIAL PERIOD ENDED 31 DECEMBER 2010