Hundred and seventieth Session

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1 ex United Nations Educational, Scientific and Cultural Organization Executive Board Hundred and seventieth Session 170 EX/19 PARIS, 9August 2004 Original: English Item 7.1 of the provisional agenda REPORT BY THE DIRECTOR-GENERAL ON A STUDY ON FINANCIAL AND CASH MANAGEMENT RELATING TO PAYMENT OF CONTRIBUTIONS, UNSPENT BUDGET BALANCES, CARRY-FORWARD MECHANISM, WORKING CAPITAL FUND, UNLIQUIDATED OBLIGATIONS, MISCELLANEOUS INCOME AND OTHERS SUMMARY In accordance with 167 EX/Decision 7.4 and 32 C/Resolution 64, the Director-General presents herewith his study on financial and cash management as requested. Decision proposed: paragraph Further to its examination of the Financial Report and Interim Financial Statements of UNESCO for the first year of the biennium, the Executive Board adopted 167 EX/Decision 7.4, paragraphs 6 and 7 of which read: 6. Considering that links exist between financial and cash management issues such as payment of contributions, unspent budget balances, working capital fund, unliquidated obligations, miscellaneous income and others and that the United Nations has recently revised its Financial Regulations and Rules, 7. Requests the Director-General to undertake a study on all such issues, in the light of accounting standards, and to report thereon to it at its 170th session. 2. Also, further to its review of document 32 C/35 on the Modernization of UNESCO s approach to recording expenditure, the General Conference adopted 32 C/Resolution 64, paragraph 3 of which reads:

2 page 2 3. Requests the Director-General to undertake a study on the advantages and disadvantages of a carry-forward mechanism for UNESCO, including comparison with other international organizations, to make recommendations thereon and to report to the Executive Board at its 170th session and to the General Conference at its 33rd session. 3. Since the studies requested by the General Conference and the Executive Board are of great importance and cover a very wide range of topics, they are being presented under the following headings: A. Payment of contributions and working capital fund; B. Unspent budget balances, unliquidated obligations, miscellaneous income and carryforward mechanism; C. Accounting standards; D. Financial regulations and rules; E. Conclusions and recommendations of the Director-General. A. Payment of contributions and working capital fund 4. The Financial Regulations of UNESCO and the General Conference prescribe the rules and regulations governing the payment of contributions and the Working Capital Fund (WCF). 5. Financial Regulation 5.1 states that appropriations shall be financed by contributions from Member States, according to the scale of assessments determined by the General Conference, and that pending the receipt of such contributions the appropriations may be financed from the Working Capital Fund. Also, Financial Regulation 5.5 states that contributions and advances shall be considered as due and payable in full within thirty days of the receipt of the communications of the Director-General or as of the first day of the year to which they relate, whichever is the later. As of 1 January of the following year the unpaid balance of such contributions and advances shall be considered to be one year in arrears. 6. The WCF has been established in conformity with the provisions of Financial Regulations 6.2 to 6.5 in an amount and for purposes to be determined by the General Conference. The source of moneys of the Working Capital Fund shall be advances from Member States, and these advances made in accordance with the scale of assessments as determined by the General Conference for the apportionment of the expenses of UNESCO shall be carried to the credit of the Member States which have made such advances. 7. The principal objectives of the WCF as approved by the General Conference at its 32nd session for the current financial period are: (a) to provide finance for budgetary appropriations pending the receipt of contributions; (b) to provide finance within limits determined by the General Conference for selfliquidating expenditures, including those arising in connection with trust funds and special accounts. 8. By 32 C/Resolution 68, the General Conference fixed the level of the WCF at US $28 million and thus maintained the amount at 4.59% of UNESCO s budget, equivalent to 4.8 weeks of expenditure. The Director-General is submitting his report on the status of contributions of Member States and of payment plans in document 170 EX/20. This document shows that the arrears of contributions, including an amount of US $30.4 million deferred to future years, greatly exceed the level of the WCF but that satisfactory receipt of current year contributions has enabled the treasury situation to remain positive without recourse to borrowing; the Director-General will continue to

3 page 3 make every effort to avoid such a need. Nevertheless, he considers that the authority given to him to negotiate and contract short-term loans as an exceptional measure when necessary to enable the Organization to meet its financial commitments to be essential for sound management unless the level of the WCF was increased substantially. B. Unspent budget balances, unliquidated obligations, miscellaneous income and carry-forward mechanism 9. The basic texts for the rules regarding unspent budget balances, unliquidated obligations and miscellaneous income are to be found in the Financial Regulations, but these have been suspended on several occasions by the General Conference for an experimental system to encourage prompt payment of contributions (renewed for a further six-year period to end 2007 by 31 C/Resolution 53 (III) see Annex I), to create a carry-forward mechanism (31 C/Resolution 50 and 32 C/Resolution 64 see Annex II) and, latterly, as an exceptional measure, to credit certain Member States relating to the scale of their contributions for To enable the Executive Board to consider this important and ever more complicated matter, the texts of the relevant Financial Regulations and their suspensions are given as follows: Financial Regulation 4.3 Appropriations shall remain available for twelve months following the end of the financial period to which they relate to the extent that they are required to discharge obligations in respect of goods supplied and services rendered in the financial period and to liquidate any other outstanding legal obligations of the financial period. The balance of the appropriations remaining unobligated at the close of a financial period, after deducting therefrom any contributions from Member States relating to that financial period which remain unpaid, shall be apportioned among Member States in proportion to their assessed contributions for that financial period. The amount so apportioned to a Member State shall be surrendered to such Member State if its contribution for that financial period has been paid in full. This regulation was firstly suspended for the incentive scheme to encourage prompt payment of contributions and latterly for the carry-forward mechanism. Financial Regulation 4.4 At the end of the twelve-month period provided for in Regulation 4.3, the then remaining unspent balance of appropriations retained after deducting therefrom any contributions from Member States relating to the financial period of the appropriation which remain unpaid, shall be apportioned among Member States in proportion to their assessed contributions for that financial period. The amount so apportioned to a Member State shall be surrendered to such Member State if its contribution for that financial period has been paid in full. This regulation was firstly suspended for the incentive scheme and latterly for the exceptional measure to credit certain Member States with regard to their contributions for Financial Regulation 5.2 In the assessment of the contributions of Member States adjustments shall be made to the amount of the appropriations approved by the General Conference for the following financial period in respect of:

4 page 4 (a) Supplementary appropriations for which contributions have not previously been assessed on the Member States; (b) (c) Miscellaneous income for which credits have not previously been taken into account, and any adjustments in estimated miscellaneous income previously taken into account; Contributions resulting from the assessment of new Member States under the provisions of Regulation 5.9. This regulation has been suspended with regard to paragraphs (b) and (c) for the incentive scheme and latterly for the exceptional measure to credit certain Member States with regard to their contributions for Financial Regulation 7.1 All other income except: (a) contributions to the budget; (b) direct refunds of expenditures made during the financial period; (c) advances or deposits to funds; and (d) interest on investments, excluding that on investments of the Working Capital Fund shall be classified as Miscellaneous Income, for credit to the General Fund. This regulation has been suspended for the positive incentive scheme and latterly for the exceptional measure to credit certain Member States with regard to their contributions for The Director-General considers that in view of all these suspensions of Financial Regulations, it is time to consider a change in them, albeit taking account of the fact that the experimental period for the incentive scheme has been extended until 31 December The carry-forward mechanism (see Annex II) 12. In response to a recommendation from its External Auditor, UNESCO adopted a carryforward mechanism for the biennium at the 31st session of its General Conference. This was renewed at the 32nd session for the biennium. This has enabled the Organization to fund priority and/or emergency activities authorized by the Executive Board with funds that would not otherwise have been available. 13. Further to the request of the General Conference and to assist the Executive Board in making its recommendations, the Director-General presents this study on the advantages and disadvantages of the carry-forward mechanism for UNESCO, including comparison with other international organizations as well as his recommendations. 14. As the External Auditor emphasized in their report on the biennium, UNESCO followed the practice of breaking even its regular budget, with total expenditures equalling total budget allocations for a biennium and stated that unliquidated obligations (ULOs) were quite helpful to arrive at this end. UNESCO has made particular efforts in reviewing ULOs to ensure to the extent possible that they were valid and supporting legal commitments of the Organization. UNESCO is therefore not following the practice of breaking even and consequently gives a more accurate budgetary situation of programme implementation, which is clearly an advantage. At the same time, the Organization noted that in its stricter application of its existing rules for ULOs, there was a negative impact on some programme activities relating to the financial period but for which, most frequently for timing reasons, the relevant obligations were considered invalid. Without the facility of the carry-forward, it could well be that UNESCO would have to pay a legal obligation for an activity authorized in one biennium with the funds for the next and for which there might not be

5 page 5 a similar authorization. It has consequently revised its internal rules on the validity of ULOs to reflect this reality. Also, there are situations, for example the emergency situation in Afghanistan at the end of 2001 that were not anticipated in the regular programme budget (C/5), since they were not known at the time the budget was being prepared and approved. The increased requirement for security due to the world situation subsequent to the 11 September 2001 terrorist attacks on the United States of America is another high profile example. Should UNESCO limit its action to possibilities from voluntary funding or have flexibility with its regular programme? The Director- General considers that the carry-forward mechanism contributes most usefully towards these late known requirements. 15. On the other hand, it must be recalled that the rational execution of the whole programme and budget as approved by the General Conference should be the first priority of the Director-General. 16. From Annex II, attached, the Executive Board will note that although a carry-forward mechanism is usual for voluntary funded organizations and accounts, it is comparatively new for programmes funded by assessed contributions. In fact, further to the recommendation from its External Auditor, UNESCO took the lead in this domain. The FAO, however, introduced a carryforward mechanism in 2003 for the first time. C. Accounting standards 17. Further to decision 46/445 of the United Nations General Assembly that requested the Secretary-General to propose a set of accounting standards for common application in the United Nations system, the Administrative Committee on Co-ordination (ACC, now CEB, composed of the executive heads of the United Nations, the Specialized Agencies and IAEA) agreed to draw up such accounting standards in consultation with the Panel of External Auditors of the United Nations system. The accounting standards thus developed were reported to the Executive Board, which took note of them at its 145th session (145 EX/Decision 7.1) and of the commitment of the Director- General to take them into account in the preparation of UNESCO s financial statements in the future. 18. Periodically, these United Nations System Accounting Standards (UNSAS) have been modified, in most cases as a result of changes in International Accounting Standards, and in consultation with the Panel of External Auditors. At the most recent meeting on Accounting Standards, the representatives of the Panel considered that UNSAS should be strengthened and made more prescriptive and that they encouraged International Public Sector Accounting Standards (IPSAS) over International Accounting Standards (IAS) since the United Nations Working Party set up to examine accounting standards had said that IAS had nothing to do with governments. Furthermore, no United Nations organization had reviewed all of IPSAS in their entirety. 19. One of the major differences between UNSAS and IAS relates to employee benefits. As stated in a note to its financial statements UNESCO does not normally recognize liabilities for accrued annual leave, termination and repatriation grant entitlements. Also, it makes no provision for the after-service medical care/health insurance (ASHI) for its staff estimated for an amount of US $323 million at 31 December 2003 (see Annex III). 20. In view of the material implications that the adoption of IPSAS or IAS would have on the presentation of the financial situations of most organizations, the United Nations Working Party on accounting standards recommended, and the High-Level Committee on Management endorsed on behalf of the CEB, that dedicated resources were required to take forward accounting standards within the United Nations system.

6 page 6 D. Financial regulations and rules 21. UNESCO s Financial Regulations and any amendments thereto are effective as of the date of their approval by the General Conference; suspension of an article of the Financial Regulations requires a two-thirds majority (Article 14 of the Regulations). Under Article 15.2 of the same Regulations, it is stipulated that rules made by the Director-General to carry out their provisions shall be communicated to the Executive Board for approval. 22. The Director-General considers that it is premature to submit proposals for any changes in the Financial Regulations at this session of the Executive Board, but would consider submitting such proposals via the Board at its 172nd session to the 33rd session of the General Conference, should the Board so wish in the light of its discussions on the items covered in this document. At the same time, the Director-General would submit for the approval of the Executive Board the revised Financial Rules of the Organization. E. Conclusions and recommendations of the Director-General 23. The Director-General has tried to make his study on this wide-ranging subject as brief and comprehensive as possible, and considers that in many ways it should be seen as an ongoing study that the Executive Board will no doubt wish to return to at later sessions. 24. The carry-forward mechanism has now been applied for two biennia and has proved its value in enabling UNESCO to contribute positively and proactively to situations that were not known at the time the budget was prepared and approved. Consequently, the Director-General recommends that it be institutionalized and that Financial Regulation 4.3 be modified accordingly. 25. Accounting standards are becoming more and more prescriptive and international, with many countries replacing their own national accounting standards with international ones. The United Nations system is addressing this issue, which, notably for after-service health insurance, will have major implications for financing and presentation of financial information. The Director-General also notes that IAS would require the need for a reserve to cover accumulated leave and termination payments and thus change from a pay as you go system for most staff members to a fully funded one. With regard to after-service health insurance, the Executive Board will note the very large amounts of unfunded liability involved and that several organizations, notably FAO and WHO, are making the necessary provisions whereas others, notably the United Nations and ILO, are not. In view of the existing budgetary situation at UNESCO, the Director-General proposes to await the report of the United Nations study on the implications of international accounting standards before making his formal recommendation to the Executive Board and the General Conference. 26. The Executive Board may wish to adopt a decision along the following lines: The Executive Board, 1. Recalling 167 EX/Decision 7.4 and 32 C/Resolution 64, 2. Having examined document 170 EX/19, 3. Requests the Director-General to revise Article 4.3 of the Financial Regulations of UNESCO with regard to a carry-forward mechanism and to submit it to the General Conference at its 33rd session as well as to the Executive Board at its 172nd session for prior review;

7 page 7 4. Requests the Director-General to revise the Financial Rules of UNESCO and to present them to it for approval at its 172nd session, together with an update of the issues raised in this document; 5. Further requests the Director-General to monitor the situation on unfunded liabilities, including those related to After-Service Health Insurance, and report back to the Executive Board as and when the United Nations study on the subject becomes available along with his recommendations as well as a progress report to its 172nd session.

8 Annex I ANNEX I INCENTIVE SCHEME TO ENCOURAGE PROMPT PAYMENT OF CONTRIBUTIONS On the basis of a recommendation made by the Executive Board at its 146th session (146 EX/Decision 8.2), the General Conference decided in 1995 (28 C/Resolution 24.32) that: the existing positive incentive scheme to encourage prompt payment of contributions should be continued in a modified form for an experimental six-year period effective 1 January 1996, as follows: (a) the resources to be distributed to eligible Member States shall consist of: (i) (ii) all other income classified as miscellaneous income within the definition of Article 7.1 of the Financial Regulations except UNDP support costs, net of exchange adjustments and interest costs on borrowing, and taking into account the balance of the currency fluctuation account of the split-level assessment system; interest on investments of the Working Capital Fund; (iii) contributions resulting from the assessment on new Member States under the provisions of Article 5.9 of the Financial Regulations, exclusive of contributions that may be assessed on any of the three States that withdrew from the Organization in should they rejoin; (iv) any unobligated or unspent balances of appropriations available for apportionment to Member States as defined in Articles 4.3 and 4.4 of the Financial Regulations, after deducting therefrom any contributions relating to the appropriation of each financial period that remain unpaid; (v) for , subject to the decision to be taken on financing the increase in the level of the Working Capital Fund, the other income, Part VIII and budget surpluses for and previous financial periods that have not already been distributed, together with miscellaneous income for the financial period; in this connection, no deduction shall be made from the appropriation voted for , in respect of estimated miscellaneous income of the biennium, for the purpose of determining the assessments on Member States; (b) (c) the incentive points of eligible Member States shall be calculated by reference to the weighted scale shown in Annex VI of document 126 EX/35, taking into account dates and amounts of contributions paid, rounded to the nearest thousand United States dollars; the funds available from the sources defined above at the end of the financial period shall be prorated to Member States that have paid in full their assessed contributions by the end of each year of the financial period concerned; if a Member State that has not paid in full for the first year pays the amount assessed for both years of the financial period before the end of the second year, that Member State will qualify for incentive points in the second year on the basis of contributions paid in respect of the amount assessed for that second year;

9 Annex I page 2 (d) the share of resources to be distributed to each Member State shall be calculated according to the proportion of the incentive points accumulated by the Member State to the total pool of incentive points for the entire financial period; (e) the appropriate share of each eligible Member State shall be deducted from the contribution assessed on it for the second year of the subsequent financial period;. The General Conference further resolved that the relevant provisions of Articles 4.3, 4.4, 5.2 and 7.1 of the Financial Regulations shall be suspended over the six-year experimental period commencing 1 January 1996 in order to facilitate implementation of the modified incentive scheme. The General Conference decided in 2001 (31 C/Resolution 53 (III) that the existing positive incentive scheme to encourage prompt payment of contributions should be continued for a further six-year period and that the relevant provisions of Articles 4.3, 4.4, 5.2 and 7.1 of the Financial Regulations shall be suspended for this period.

10 Annex II ANNEX II CARRY-FORWARD MECHANISM 1. In his report on the Accounts of UNESCO for the biennium that was submitted to the Executive Board under cover of document 160 EX/25 Add., the External Auditor commented on unliquidated obligations in paragraphs 190 to 202 and made a recommendation in paragraph 203 that UNESCO should undertake a study with the object of modernizing UNESCO s approach to recording expenditures including the need for and the mechanisms required for setting up obligations. 2. This recommendation stemmed from the comments of the External Auditor made on unliquidated obligations (ULOs) in general but in particular from paragraphs 198, 199 and 202 that read as follows: 198. Rules dictate behaviour. According to the Financial Regulations, the balance of the appropriations remaining unobligated or uncommitted at the close of a financial period shall be surrendered to Member States. This rule has influenced management and everyone involved in UNESCO in administering budgets to ensure that available funds are indeed obligated and charged against current appropriation or the funds are lost. There is therefore a natural tendency not to permit appropriated funds to go unused. The obligation system is designed to avoid spending more than the amount appropriated; in practice, it also discourages spending less than the amount appropriated UNESCO follows the practice of breaking even its regular budget, total expenditures equalling total budget allocations for a biennium. ULOs are quite helpful to arrive at this end The Secretariat needs to study the feasibility of how obligations of one biennium that are legitimate commitments can be charged or carried forward against appropriations of future financial periods subject to approval by the Executive Board. Such provisions exist in the Financial Regulations and Rules of the United Nations. Moreover, many governments of Member States encourage managers not to spend their budgets at yearend only to use up funds available. They allow them to carry forward a small percentage of unspent appropriations with the approval of oversight bodies. 3. In paragraph 198, reproduced above, the External Auditor is referring to Financial Regulation 4.3, and that UNESCO has followed the practice of breaking even on its regular budget (i.e. little to no balance of appropriations remaining unobligated) and that UNESCO should study the feasibility of allowing it to carry forward a small percentage of unspent appropriations with the approval of oversight bodies. 4. The Director-General welcomed the comments of the External Auditor and, after a study on this most important topic, considered that a facility whereby UNESCO modernized its rules to allow the carry-forward of a small percentage of unspent appropriations with the approval of oversight bodies to be an improvement. Management would be able to focus on programme without taking the same account of balancing a budget and the self-inflicted penalty of losing funds. 5. In 162 EX/Decision 7.4, the Executive Board welcomed the Director-General s study with the object of modernizing UNESCO s approach to recording expenditures and further to its recommendation, the General Conference resolved in 31 C/Resolution 50:

11 Annex II page Welcomes the Director-General s study with the object of modernizing UNESCO s approach to recording expenditures and requests him to review the modernization process and report thereon to the Executive Board at its 166th session as well as to the General Conference at its 32nd session, if so decided by the Executive Board; 12. Suspends Financial Regulation 4.3 and authorizes that an amount not to exceed 2% of the original appropriation of document 30 C/5 can be carried forward to the biennium and that the Executive Board decide at its 164th session, taking account of priorities presented by the Director-General based on the debates held at the 31st session of the General Conference, how such funds are to be used, some or all of which could be returned to Member States; 13. Requests the Director-General to present to the Executive Board for approval his budget proposals for the use of such funds, if available, which, if the Board agrees to earmark them for future activities, are to be treated as an additional appropriation to document 31 C/5;. 6. As a result of the above General Conference resolution, the Executive Board approved the carry-over of the unspent balance of funds from to the biennium (164 EX/Decision 6.2) for a total amount of $8,005,346 ($7,705,748 for priority programme activities and reform process and $299,598 for specific activities funded by donors). Also, at its 166th session, the Executive Board took note of the report of the Director-General on the process of modernizing methods for recording expenditures and requested him to present a further report to it at its 167th session, to be forwarded, if the Board so decides, to the General Conference at its 32nd session. 7. The General Conference subsequently resolved in 32 C/Resolution 64: 2. Emphasizes that rational execution of the whole programme and budget as approved by the General Conference should be the first priority of the Director-General; 3. Requests the Director-General to undertake a study on the advantages and disadvantages of a carry-forward mechanism for UNESCO, including comparison with other international organizations, to make recommendations thereon and to report to the Executive Board at its 170th session and to the General Conference at its 33rd session; 4. Considers, pending the results of such a study, that allowing a carry forward from one biennium to the next for a modest value of unobligated funds may help to ensure more efficient use of such funds for high-priority programmes; 5. Decides that the relevant provisions of Article 4.3 of the Financial Regulations be exceptionally suspended for the current biennium and authorizes an amount not exceeding 2% of the original appropriation of document 31 C/5 to be carried forward to the biennium; 6. Requests the Director-General to present to the Executive Board at its 169th session a report identifying the sources of any unobligated funds from the biennium along with budget proposals for the use of such funds; and further requests that this report should include a quantitative analysis, reviewed by the External Auditor, of the causes of the unspent balances from each source, indicating to what extent these reflect efficient management;

12 Annex II page 3 7. Authorizes the Executive Board to decide as from its 169th session on the use of such funds, taking into account UNESCO priority programmes and groups as well as the need to strengthen security for UNESCO s premises worldwide and emergency situations which could arise, bearing in mind that unspent balances could be deducted proportionally from the future contributions of Member States; 8. Requests the Director-General to treat any funds approved by the Executive Board for activities as an additional appropriation to the budget for the biennium. 8. The Executive Board approved in 169 EX/Decision 6.3 the carry-forward, subject to final audit, to the budget of the unspent budget balance from the budget. Other United Nations organizations 9. As a general rule, a carry-forward mechanism is authorized for those United Nations agencies that are funded from voluntary contributions; this is in fact the same as applied to all UNESCO funds, except the regular programme, as is evidenced by a standard clause approved by the Executive Board in special financial regulations that the Director-General might prepare for Trust Funds, Reserve and Special Accounts, which reads Any unused balance at the end of a financial period shall be carried forward to the following financial period. 10. The following paragraphs provide an overview of the results of the Director-General s study on this matter with regard to other international organizations, as requested by the General Conference and the Executive Board: United Nations (UN) The United Nations has no carry-forward mechanism for its regular budget, for which appropriations are available for obligation during the financial period and for 12 months following the end of the financial period to the extent that they are required to discharge obligations relating to the financial period, with any remaining balance being surrendered. Food and Agricultural Organization (FAO) The FAO introduced in 2003 for the first time a carry-forward mechanism in the form of a Capital Expenditure Facility. This Facility consists of a separate budgetary chapter and a Capital Expenditures Account, which will be used for the purpose of managing activities that involve capital expenditure. The sources of the fund shall include the balance [relating to capital expenditure] of the budget at the end of each financial period shall be transferred to the Capital Expenditures Account for use in a subsequent period. International Labour Organization (ILO) The ILO has no carry-forward mechanism for its regular programme, as such. However, obligations which could not be charged to the appropriations of the preceding financial period may, if the Director-General shall so decide, be charged to the appropriations of the current financial period. Nevertheless, there shall be included in the budget for each financial period an item entitled Unpaid liabilities to which may be charged any payments of a similar character which it would not be appropriate to pay from any other item of the budget. World Health Organization (WHO) The WHO has no carry-forward mechanism for its regular programme.

13 Annex III ANNEX III AFTER-SERVICE MEDICAL CARE/HEALTH INSURANCE (ASHI) 1. International Accounting Standards (IAS) require that companies accrue during the service of their staff any costs for which they would be liable after the staff member leaves their employ. This could be through change of employment, dismissal, retirement, etc. Most frequently these costs relate to pensions and medical insurance. The organizations in the United Nations system contribute on a monthly basis towards the United Nations Joint Pension Fund, and subject to any actuarial shortfall that might require them to make additional contributions, have no further liability for pensions. The treatment for after-service health insurance, on the other hand, is inconsistently applied, with most organizations falling short of the requirements of IAS. 2. United Nations System Accounting Standards recognize these differences by allowing options, as stated in paragraph 57: Liabilities for annual leave, end-of-service benefits and post-retirement benefits, including after-service medical benefits, should be provided for in the financial statements to the extent required by the financial policies of the organization. In so far as such liabilities are not fully provided for, appropriate disclosure should be made in the notes to the financial statements and estimated liabilities quantified where possible, showing the basis of valuation. As far as after-service medical benefits are concerned, such liability should normally be determined by actuarial evaluation. 3. UNESCO consequently made the following note disclosure to its financial statements for the biennium ended 31 December 2003: (a) Annual leave, termination and repatriation grants As stated in note 2(c) on expenditure, UNESCO does not normally recognize in its financial statements liabilities for accrued annual leave, termination and repatriation grant entitlements except for entitlements for staff financed from certain non-general Fund accounts. Where not provided, charges are recorded in the financial period in which they are paid. At 31 December 2003, UNESCO s total liability for these costs is estimated to be approximately K$37,000 (2001 K$35,000) of which an amount of K$5,215 (2001 K$4,314) has been provided in the Financial Statements. (b) After-service medical care 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. As at 31 December 2003 the net present value of UNESCO s liability which is not provided for in these financial statements, amounts to K$323,000 (2001 K$252,000). This figure has been determined by actuarial valuation.

14 Annex III page 2 4. The policies of other Organizations for ASHI may be summarized as follows: United Nations (UN) The United Nations is in the process of preparing a report to the General Assembly on ASHI liabilities and plans to establish a funding mechanism based on the decision of the General Assembly. United Nations Children s Fund (UNICEF) An actuarial valuation estimated the accrued liability (net of offset of retiree contributions) at 31 December 2001 at $196.4 million. UNICEF has not specifically provided for these accrued liabilities. Benefits for current retiree premiums are charged as expenditures against the budget appropriations of the periods when actual payments are made. United Nations Development Programme (UNDP) An actuarial study determined UNDP s net accrued liability for after-service health benefits at 31 December 2001 to be $188.9 million. UNDP has made an accounting accrual of $54.0 million for the biennium ended 31 December UNDP is also accounting for future costs of coverage for current employees by accruing current service cost on an annual basis. Food and Agricultural Organization (FAO) FAO started to accrue the ASHI liability in respect of the past services of staff members (amounting at that time to $201 million) as from 1 January 1998 over an amortization period of 30 years. In addition, all of the current service costs of staff members are being accounted for and funded from the regular budget. Although a thirty-year period was originally chosen for recording this liability in the accounts, FAO s governing bodies decided to transfer excess of income over the requirements of other staff related funds, which has shortened the amortization period. This decision resulted in the recording of 48% of the liability in the first two biennia. International Fund for Agricultural Development (IFAD) An actuarial study of March 2001 estimated a total accrued liability of $19.7 million, made up of $11.5 million for retired staff and $8.2 million for active staff. As at year-end 2001, IFAD had funded $13.8 million of the accrued liability and plans to fund the full liability by end In addition IFAD is providing for current service costs of around $0.5 million each year. World Food Programme (WFP) An actuarial study estimated a total accrued liability of $70.4 million. Since the initial study, WFP has funded a total of $47 million, consisting of the amount identified as its accrued liability at end 1997, plus interest income on the invested funds less actual payments made from the fund during the biennium. In light of the major increase in the estimate of liability compared with the earlier study, WFP has commissioned a further study and in the interim does not plan to fund, or to recognize the higher amount in its financial statements. WFP intends to disclose this information in a note to the financial statements.

15 Annex III page 3 International Labour Organization (ILO) ILO s accrued liability at 31 December 2001 was estimated at $214.4 million. ILO expenses payments of benefits to retired staff on a pay-as-you-go basis, charging its contributions to the Staff Health Insurance Fund in the biennium that they are paid, and makes no provision for current service costs. There are no plans to fund the accrued liability at this time. World Health Organization (WHO) WHO was the first organization to recognize the need to make provisions for post-retirement benefits and in this context funded part of the actuarial deficit by special annual contributions starting in As of 31 December 2001, the balance of the reserve was $224 million of which $196 million related to future costs for retired staff. International Atomic Energy Agency (IAEA) In view of the relatively few IAEA staff with 10 or more years of service, IAEA does not consider it necessary to undertake any actuarial evaluation nor to provide an estimate of any after-service medical benefit liability in its financial statements.