FINANCIAL STATEMENTS 2016

United Nations Educational, Scientific and Cultural Organization Bureau of Financial Management United Nations Educational, Scientific and Cultural Organization 7, place de Fontenoy, 75352 Paris 07 SP, France FINANCIAL REPORT & AUDITED CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS 2016

Published in 2017 by the United Nations Educational, Scientific and Cultural Organization 7, place de Fontenoy, 75352 Paris 07 SP, France UNESCO 2017 All rights reserved Photos Cover: NektonMission UNHCR/C. Tijerina Anucha Deewisate/Phuket/UNESCO Creative City of Gastronomy UNESCO Office in Bamako/María Muñoz Blanco UNESCO/Myriam Preckler Back cover : UNESCO/Football for All in Vietnam/Phan Cu p.3 Gettyimage/Bartosz Hadynyah p.17 UNESCO/Myriam Preckler p.23 UNESCO Office in Bamako/María Muñoz Blanco p.27 UNICEF Iraq/2016/Niles p.31 UNESCO/Marion Piccio Printed in France BFM-2017/WS/1

Contents FINANCIAL REPORT OF THE DIRECTOR-GENERAL...3 STATEMENT ON INTERNAL CONTROL...17 OPINION OF THE EXTERNAL AUDITOR...23 APPROVAL OF THE FINANCIAL STATEMENTS...27 CONSOLIDATED FINANCIAL STATEMENTS...31 I. STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016.... 33 II. STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 31 DECEMBER 2016... 34 III. STATEMENT OF CHANGES IN NET ASSETS/EQUITY FOR THE YEAR ENDED 31 DECEMBER 2016... 35 IV. CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016.... 36 V. STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE YEAR ENDED 31 DECEMBER 2016 GENERAL FUND... 37 VI. NOTES TO THE FINANCIAL STATEMENTS... 38 NOTE 1 REPORTING ENTITY... 38 NOTE 2 SIGNIFICANT ACCOUNTING POLICIES... 38 NOTE 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS... 43 NOTE 4 SEGMENT INFORMATION... 43 NOTE 5 SIGNIFICANT EVENTS... 46 NOTE 6 RESTATEMENT OF 2015.... 46 NOTE 7 CASH AND CASH EQUIVALENTS... 47 NOTE 8 INVESTMENTS... 47 NOTE 9 ACCOUNTS RECEIVABLE (NON EXCHANGE TRANSACTIONS)... 48 NOTE 10 ACCOUNTS RECEIVABLE (EXCHANGE TRANSACTIONS)... 49 NOTE 11 INVENTORIES... 49 NOTE 12 ADVANCE PAYMENTS... 49 NOTE 13 OTHER CURRENT ASSETS.... 49 NOTE 14 PROPERTY, PLANT AND EQUIPMENT (PP&E).... 50 NOTE 15 INTANGIBLE ASSETS... 51 NOTE 16 ACCOUNTS PAYABLE... 51 NOTE 17 EMPLOYEE BENEFITS... 51 NOTE 18 TRANSFERS PAYABLE.... 54 NOTE 19 CONDITIONS ON VOLUNTARY CONTRIBUTIONS.... 54 NOTE 20 ADVANCE RECEIPTS... 55 NOTE 21 BORROWINGS.... 55 NOTE 22 OTHER LIABILITIES.... 56 NOTE 23 NET ASSETS/EQUITY... 57 NOTE 24 REVENUE... 57 NOTE 25 EXPENSES... 59 NOTE 26 CONTINGENT LIABILITIES, COMMITMENTS AND CONTINGENT ASSETS... 61 NOTE 27 BUDGET... 61 NOTE 28 FINANCIAL RISK MANAGEMENT... 65 NOTE 29 EVENTS AFTER THE REPORTING DATE... 67 NOTE 30 RELATIONSHIPS OF SIGNIFICANT INFLUENCE... 67 NOTE 31 RELATED PARTY DISCLOSURES... 67

FINANCIAL REPORT OF THE DIRECTOR-GENERAL

INTRODUCTION In accordance with Article 11.1 of the Financial Regulations, I have the honour to submit the financial statements and financial report of the Organization for the year ended 31 December 2016. The External Auditor has expressed an unqualified (clean) opinion on the financial statements. His report is submitted to the Executive Board in accordance with Article 12 of the Financial Regulations. This section, the financial report, presents the Director-General s discussion and analysis of UNESCO s financial position and financial performance for the financial year ended 31 December 2016. OVERVIEW OF THE FINANCIAL STATEMENTS The financial statements have been prepared in accordance with International Public Sector Accounting Standards (IPSAS) as required under Article 11.1 of the Financial Regulations of the Organization. Consolidated financial statements are prepared for all UNESCO operations and entities including the nine category 1 institutes. The financial statements cover all four business segments, namely; The General Fund (GEF) This segment, financed from the assessed contributions of Member States, covers the main operations of the Organization. The programme appropriations for the financial period are voted by the General Conference of Member States. Other Proprietary Funds (OPF) Includes revenue-generating activities, programme support costs for special accounts and trust funds, the Staff Compensation Fund, the Terminal Payment Fund and Headquarters-related special accounts. Programme Fiduciary Fund (PFF) This segment relates to programmes and activities financed from funding provided by donors through agreements or other legal authority. The UNESCO category 1 institutes which are set up as separate entities are accounted for under this segment. Staff Fiduciary Funds (SFF) Activities/funds under this segment have been established for the benefit of UNESCO s staff members through the Medical Benefits Fund, the Commissary, the Restaurant Services and the Day Nursery and Children s Club. The financial statements consist of: A Statement of Financial Position This provides information about the accumulated surplus/deficit at the reporting year end date the difference between UNESCO s total assets and liabilities. It gives information about the extent to which resources are available to support future operations and the unfunded liabilities. A Statement of Financial Performance This measures the net surplus or deficit of the reporting year the difference between revenues and expenses. It provides information about the Organization s cost of programme delivery and the amounts and resources of revenue. A Statement of Changes in Net Assets/Equity Which highlights the sources of changes in the overall financial position. 5

FINANCIAL REPORT OF THE DIRECTOR-GENERAL A Cash Flow Statement This provides information about UNESCO s liquidity and solvency including how the organization raised and used cash during the period and the repayment of borrowing. It measures the difference between the actual cash coming in and cash going out. A Comparison of Budget and Actual Amounts This highlights whether resources where used in accordance with the approved budget. It shows differences between the actual expenditure and the approved budget appropriation. Notes to the Financial Statements Which assist in understanding the financial statements. Notes comprise of a summary of significant accounting policies and other explanatory information. It provides additional information on the financial statements as required under IPSAS. ORGANIZATIONAL BACKGROUND, OBJECTIVES, STRATEGY AND PROGRAMMES UNESCO was created in 1945 with an aim at contributing 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, 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. Membership of the Organization comprises of 195 Member States and 10 Associate Members as at 31 December 2016. The current Medium-Term Strategy (37 C/4), approved by the General Conference in November 2013, sets out the strategic vision and programmatic framework for UNESCO s actions over the period 2014-2021 built around the following mission statement: As a specialized agency of the United Nations, UNESCO pursuant to its Constitution contributes to the building of peace, the eradication of poverty and sustainable development and intercultural dialogue through education, the sciences, culture, communication and information. The strategy defines two overarching objectives peace and equitable and sustainable development as well as two global priorities Africa and gender equality. The Strategy further defines nine strategic objectives. These strategic objectives are translated into programmatic priorities through main lines of action and expected results in the C/5 Programme and Budget document adopted by the General Conference. Programmes are defined for four years while the budget allocation is approved every two years. The following section provides a summary of key achievements of the implementation of UNESCO s Major Programmes: EDUCATION Through an unprecedented consultative process led by UNESCO spearheaded the formulation of the Education 2030 agenda, encapsulated in the stand-alone Sustainable Development Goal 4 (SDG 4) on education. Capitalizing on its convening power, UNESCO is bringing together global, regional and national stakeholders to guide the implementation of SDG 4 Education 2030 and functions as the focal point for education within the overall 2030 Agenda for Sustainable Development coordination structure. In supporting the countries to implement SDG 4, Major Programme I continued to focus its programme in four priority areas: sector-wide policy and planning; literacy, technical and vocational education and training (TVET), and teachers. The year 2016 marked the 50th anniversary of the International Literacy Day (ILD), and the Global Alliance for Literacy inaugurated on ILD 2016 is expected to play a key role in further advocating for and promoting literacy. UNESCO adopted a new Strategy for TVET (2016-2021) to support Member States to enhance the relevance of their TVET systems and foster youth employment and entrepreneurship. In the area of teachers, UNESCO continues to support Member States, paying particular attention to those in Africa, with large-scale capacity development programmes on teacher policy development and teacher training, including through usage of (ICTs). 6

FINANCIAL REPORT OF THE DIRECTOR-GENERAL UNESCO has also intensified efforts to provide an education response to the Syrian crisis, particularly through its Bridging Learning Gaps for Youth strategy. Implementation continued in Iraq, Jordan, Lebanon and Syria to facilitate access to secondary and higher education, improve its quality and build resilient education systems for affected youth between the ages of 15 to 30. Targeted interventions to support emergency education in Yemen in the ongoing crisis situation resumed in 2016. NATURAL SCIENCES Key achievements include: the International Year of Crystallography (IYCr) 2014; the extraordinary success of the International Year of Light and Light-based Technologies (IYL) 2015; three World Water Assessment Reports; the UNESCO Science Report: Towards 2030; the adoption of the MAB Strategy 2015-2025; the ratification of the new International Geoscience and Geoparks Programme and the label UNESCO Global Geopark ; adoption of the SIDS Action Plan that frames UNESCO s contributions to implementing the SAMOA Pathway; contributions to the 2030 Agenda, particularly in relation to the adopted SDGs on water, biodiversity and the cross-cutting nature of science, technology and innovation (STI); and events leading up to and at the UNFCCC COP 21 and the incorporation of water, gender equality, indigenous peoples and other MP II-related topics in the resulting Paris Agreement on Climate Change, as well as at COP 22 on the Agreement s operationalization. MP II ensured the secretariat of the United Nations Secretary-General s Scientific Advisory Board (SAB), organized all its meetings and coordinated the briefings and summary report. The capacities of more than 9,700 professionals, over 40% of whom were women, in water-related areas were strengthened during, while nearly 700 Ph.D. and postdoctoral fellows, of whom 30% were women, furthered their education in physics through ICTP and the World Academy of Sciences for the advancement of science in developing countries (TWAS). In accordance with its mandate, and as specifically referred to in the stand-alone SDG 1 for the Ocean, the Intergovernmental Oceanographic Commission (IOC) has been entrusted with the custodianship role for SDG targets 14.3 and 14.a and now leads on the development of science-based indicators for the Goal s targets. Over the last two years, the IOC placed much programmatic and outreach focus on mobilizing scientific and civil society institutions around ocean and climate science and awareness-building. With the Ocean s role in climate regulation acknowledged in the Paris Agreement, the IOC pursued its efforts and actively participated in the UNFCCC COP 22 in order to further highlight the key need for continuous support for ocean observations. IOC s regional tsunami warning systems in the Caribbean, Indian Ocean and the North-East Atlantic, Mediterranean and connected seas, and in the Pacific are now operational. The United Nations World Ocean Assessment was published in January 2016 and IOC contributed extensively throughout the process. The results of the two ocean assessments conducted under the GEF-funded Transboundary Water Assessment Programme have been widely disseminated to practitioners in Member States. A new set of IOC Guidelines for Marine Spatial Planning was published and more than 40 countries around the world are now using them as a tool to plan sustainable economic development and ecosystem resilience in their national waters. The IOC Assembly adopted the new IOC Capacity Development (CD) Strategy (2015-2021) which highlights the need for cooperation and coordination between regional and global programmes. IOC made considerable progress in advancing the work on its first Global Ocean Science Report (GOSR), to be launched in June 2017, as regards the global picture of existing scientific capacities at national and regional level, including the first detailed analysis of gender balance in the workforce related to ocean science. SOCIAL AND HUMAN SCIENCES Globally, the 2030 Agenda for Sustainable Development has enshrined sustainability in a set of ambitious and transformative goals anchored in human rights, targeting universality of application and committing to leaving no one behind, all of which are the values upheld and objectives pursued by MP III. Institutionally, the Social and Human Sciences Sector undertook a reassessment of its core programmes, reorganizing its work around a common thread: Mobilizing knowledge and values in dialogue with our stakeholders to equip societies to better understand the challenges they face and transform themselves in response. 7

FINANCIAL REPORT OF THE DIRECTOR-GENERAL Key achievements of MP III include: provision of upstream policy advice on youth in 37 countries, advancement of the research-policy nexus in social policies at regional level, in particular in Latin America and Africa, as well as at national level; wide mobilization of stakeholders in support of the Action Plan of the International Decade for the Rapprochement of Cultures; reactivation of the UNESCO International Coalition of Inclusive and Sustainable Cities (ICCAR) and its regional chapters providing a platform for local authorities to address discrimination and exclusion; capacity-building and institutional development in the area of bioethics, advancement of normative instruments such as the elaboration of a draft text of a non-binding declaration on ethical principles in relation to climate change and achieving near universal ratification of the International Convention against Doping in Sport. CULTURE The Culture Sector strove to ensure the implementation of the six conventions against a backdrop of significant financial and human resources constraints. Priority was given to fulfilling its legal obligations through the organization of the statutory meetings. Nevertheless, thanks to extra budgetary support, and notwithstanding its unpredictable nature, initiatives to build the capacity of Member States at the country level were undertaken under all the conventions, paying particular attention to Africa. Responses to conflicts, including through the implementation of the Strategy for the Reinforcement of UNESCO s Actions for the Protection of Culture and the Promotion of Cultural Pluralism in the Event of Armed Conflict continued to pose significant financial and operational challenges to the Culture Sector. Important efforts were made to mobilize partners and identify funding and provide technical support to countries affected by armed conflicts through field offices. The Culture Sector has taken concrete steps to start implementing the 2030 Agenda, and in particular SDG 11. Notably, it participated in the Habitat III Conference on Housing and Sustainable Urban Development in Quito, Ecuador, in October 2016, where it launched the UNESCO Global Report Culture: Urban Future, which provides policy recommendations on culture and urban development. COMMUNICATION AND INFORMATION The CI Sector made substantial progress in promoting freedom of expression, media development as well as the building of inclusive Knowledge Societies through ICTs. In addition, with the adoption of the 2030 Agenda for Sustainable Development in 2015, the CI Sector provided support to Member States in the achievement of the Sustainable Development Goals (SDGs). Programme implementation continued, however, to be limited by a significant lack of resources, both financial and in terms of staff. Taking into consideration this critical factor, Major Programme (MP V) has been successful in delivering on its expected results, through staff taking on additional work, and by building partnerships and mobilizing extra budgetary resources. The International Programme for the Development of Communication (IPDC), the Information for All Programme (IFAP) and the Memory of the World (MoW) Programme continued to be key drivers in supporting Member States in building peace and promoting fundamental rights and freedoms. World Press Freedom Day (3 May) and World Radio Day (13 February) remained main vehicles to promote the role of freedom of expression and the importance of media development and pluralism for sustainable development. The development impact of ICTs in increasingly connected knowledge societies was fostered inter alia through Open Educational Resources, YouthMobile and Open Access initiatives. CI also led international initiatives on the prevention of violent extremism, empowerment of people with disabilities and on enhancing education through ICTs. UNESCO played a key role in facilitating the United Nations General Assembly outcomes of the World Summit on the Information Society (WSIS+10) Review process, stressing the importance of protecting human rights, of policy, capacity and content development while harnessing ICTs for sustainable development. Intersectoral and transversal work was emphasized in implementing programmes related to youth and vulnerable groups, and in order to fulfill the commitments made under the small island developing States (SIDS) Action Plan. The CI Sector also continued to make steady progress in supporting the African Union Agenda 2063, as well promoting Gender Equality through specific gender programming and gender mainstreaming, in alignment with SDG 5. 8

FINANCIAL REPORT OF THE DIRECTOR-GENERAL FINANCIAL STATEMENT HIGHLIGHTS The consolidated deficit for the year is $48.7 million compared to a deficit of $24.8 million in the previous year. The regular programme operations generated a deficit of $35.7 million, whereas the other combined operations generated a deficit of $13.0 million. Total revenue of $615.0 million reduced significantly by 11% ($80.0 million) compared to the previous period mainly attributable to the decrease in voluntary contributions. Expenditure, on the other hand, also decreased by $56.1 million (7.8%) to $663.7 million. Overall, the net assets position increased by $6.0 million to $255.4 million as at 31 December 2016. Total current assets of $746.0 million increased by $42.2 million (6.0%) compared to the previous year. Short-term investments and cash and cash equivalents of $ 666.7 million represent 89.4% of the total current assets. The reduction of $18.1 million (2.1%) in non-current liabilities is mainly attributable to the decrease of the After- Service Health Insurance (ASHI) liability. Gross outstanding assessed contribution from Member States has increased significantly over the last three years to $521.5 million due to the suspension of payments by a Member State in 2011. The cumulative allowance made due to non-payment of contributions amounted to $482.3 million (92.5% of the total due). FINANCIAL PERFORMANCE BUSINESS SEGMENT ANALYSIS As shown in Table 1, the regular programme segment (GEF) recorded a lower deficit of $35.5 million compared to $67.1 million in the previous financial period. This is explained by a higher reduction of expenses (by $56.1 million) compared to the revenue decrease. The Proprietary Fiduciary Fund (PFF) that showed a surplus of $21.7 million in 2015 recorded a deficit of $28.1 million in 2016. Voluntary contributions decreased by $59.6 million. TABLE 1. SUMMARY FINANCIAL PERFORMANCE BY FUND Expressed in million US dollars GEF OPF PFF SFF Inter-fund transactions TOTAL UNESCO Total Revenue 338.9 49.8 251.2 28.7 (53.6) 615.0 Total Expenses (374.4) (35.7) (279.3) (27.9) 53.6 (663.7) (Deficit)/Surplus 2016 (35.5) 14.1 (28.1) 0.8 (48.7) (Deficit)/Surplus 2015 (67.1) 16.9 21.7 3.7 (24.8) REVENUE ANALYSIS Gross assessed contributions amounting to $322.7 million represent 52.5% of the total revenue (2015: 49.1%) with voluntary contributions accounting for 40.1% (2015: 44%). 9

FINANCIAL REPORT OF THE DIRECTOR-GENERAL Other revenue producing activities M$18.6 3% Other revenue M$27.4 4% FIGURE 1 REVENUE BY SOURCE (AMOUNTS IN USD MILLIONS): TOTAL $615.0 MILLION Voluntary contributions M$246.3 40% Assessed contributions M$322.7 53% An allowance for the year of unpaid contributions of $71.5 million was made to reflect the decision of two Member States to suspend their regular contributions, thus bringing the net assessed contributions revenue to $251.2million. 400 2016 350 300 250 2015 2014 2013 2012 FIGURE 2 REVENUE SOURCES: 5-YEAR COMPARISON (IN USD MILLIONS) 200 150 100 50 0 Assessed contributions Voluntary contributions Other revenue producing acivities Other revenue As Figure 2 above depicts, assessed contributions over the past five years have remained relatively stable reflecting the zero nominal growth budget in place. Voluntary contributions on the other hand is on a declining trend since its peak in 2012. 10

FINANCIAL REPORT OF THE DIRECTOR-GENERAL EXPENSE ANALYSIS TABLE 2. CHANGE IN EXPENSES (Expressed in millions of USD) Nature of expenses 2016 2015 Net Change (USD) Net Change (%) Employee benefits expenses 312.5 345.9 (33.4) (9.7%) Consultants, external experts and mission costs 47.4 53.4 (6.0) (11.2%) External training, grants and other transfers 45.7 41.5 4.2 10.1% Supplies, consumables and other running costs 52.5 53.7 (1.2) (2.2%) Contracted services 109.3 125.0 (15.7) (12.6%) Allowance for unpaid Member States contributions 71.5 75.7 (4.2) (5.5%) Other expenses 24.8 24.6 0.2 0.8% Total expenses 663.7 719.8 (56.1) (7.8%) Employee benefits expenses decreased by $33.4 million to $312.5 million. This is mainly attributable to the reduction of ASHI cost (service, interests and benefit cost) by $30.1 million. Salaries of international and national staff based at Headquarters, in more than 50 field and liaison offices worldwide, and in the nine category 1 institutes amounting to $215.2 million, represent 68.9% of employee benefit. A further $33.1 million (10.6%) was spent on temporary personnel to support the delivery of programmes and activities. Medical benefit expenses and accrual of After-Service Health Insurance costs for current and retired staff amounted to $64.2 million. Consultants, external experts and mission costs decreased by $6.0 million (11.2%) to $47.4 million. Contracted services of $109.3 million have decreased by $15.7 million (12.6%). These represent expenses where a third party entity is engaged to perform work on behalf of the Organization. This could be a contract with a commercial organization, not-for-profit organizations and government ministries for the implementation of activities/programmes under UNESCO s mission and mandate. The allowance for assessed contribution of $71.5 million represents mainly the unpaid contributions of the current year from the two Member States who have suspended the payment of their contributions to the Organization. 11% 4% Employee benefit expenses Consultants, external experts and mission costs FIGURE 3 16% External training, grants and transfers COMPOSITION OF 2016 EXPENSES BY NATURE 47% Supplies, consumables and other running costs Contracted services 8% 7% 7% Allowance for unpaid Member States contributions Other expenses 11

FINANCIAL REPORT OF THE DIRECTOR-GENERAL BUDGETARY PERFORMANCE The Organization continues to be faced with the suspension of contributions from two Member States amounting to 22.4% of the approved budget of $653 million. The General Conference accordingly approved an expenditure plan of $518 million for the 2016-2017 budgetary period in order to ensure that Organization operates within the expected cash flow. The budget expenditure for the first year amounted to $253.6 million. As figure 4 shows, the expenditure on Programmes was $154.6 million representing 61.0% of the total budget expenditure. Reserve for After Service health Insurance 3.4 Part IV: Loan Repayment 7.0 FIGURE 4 Part III: Corporate Services 42.0 2016 BUDGETARY EXPENDITURE BY APPROPRIATION LINE (IN USD MILLIONS) Part II.C: PP and Fellowships Part II.B: Programme Related Services Part II.A: Programmes 9.2 17.9 154.6 Part I: General Policy and Direction 19.5 0 40 80 120 160 FINANCIAL POSITION The net assets/equity of the main segment, GEF, is still negative. However, it improved from a negative balance of $203.7 million in 2015 to $187.5 million as at 31 December 2016. The PFF overall position remained strong with net assets of $330.7 million. TABLE 3. SUMMARY FINANCIAL POSITION BY FUND Expressed in million USD GEF OPF PFF SFF Inter-fund transactions TOTAL UNESCO Total Assets 664.3 99.6 506.9 36.9 (7.9) 1 299.8 Total Liabilities (851.9) (16.6) (176.1) (7.7) 7.9 (1 044.4) Net assets/equity 2016 (187.6) 83.0 330.8 29.2 255.4 Net assets/equity 2015 (203.7) 68.5 356.1 28.4 249.3 The net working capital (current assets less current liabilities) amounted to $541.4 million (2015: $537.9 million). This high level of working capital is attributable to the significant amount of cash and short term investments held for the execution of extra-budgetary projects. The regular programme segment (GEF) working capital of $63.7 million (2015: $52.1 million) represents only 11.8 % of the overall situation (2015: 9.6%). 12

FINANCIAL REPORT OF THE DIRECTOR-GENERAL CONTRIBUTIONS The collection rate as at 30 June 2016 decreased sharply due to delayed payments from some of the top contributors. Overall, the rate of collection of assessed contributions in the year of assessment remained stable since 2012. 100 90 85 94 83 As of 31 December As of 30 June FIGURE 5 ASSESSED CONTRIBUTIONS COLLECTION RATE (IN % IN THE YEAR OF ASSESSMENT) 80 70 60 64 62 59 76 73 74 73 72 66 64 61 59 70 50 52 46 40 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gross outstanding assessed contributions amounted to $521.5 million, an increase of 17% over the previous year s level. Outstanding contributions are due from 68 Member States and 4 Associate Members. One Member State owes 89% ($467.8 million) of the outstanding balance. The gross assessed contributions are due and payable to the Organization in accordance with the Constitution and Financial Regulations of the Organization and none of the balance is written-off. However, as required under IPSAS, an allowance is made for the non-payment of contributions and the cumulative amount is $482.3 million thus bringing the net assessed contributions in the statement of financial position to $39.2 million. 521 500 482 Allowance FIGURE 6 450 400 350 353 335 447 411 Gross GROSS OUTSTANDING CONTRIBUTIONS VS. ALLOWANCE (IN USD MILLIONS) 300 250 200 188 166 265 249 150 100 50 0 2012 2013 2014 2015 2016 13

FINANCIAL REPORT OF THE DIRECTOR-GENERAL AFTER-SERVICE HEALTH INSURANCE (ASHI) LIABILITY The total liability as at 31 December 2016 remained relatively similar to the 2015 level, amounting to $767 million compared to $780 million in 2015, a decrease of $13 million. 1400 1200 1265.1 FIGURE 7 ASHI LIABILITY (IN USD MILLIONS) 1000 800 600 777.2 838.7 780 767 400 200 0 2012 2013 2014 2015 2016 INVESTMENT PORTFOLIO The investment portfolio of UNESCO amounted to $629.6 million as at 31 December 2016. The portfolio is mainly composed of investments in saving accounts, money market term deposits and other short-term investments with major banking institutions with strong credit ratings. The credit risk profile of investments has not changed significantly with 61% placed with banks rated AA or above. The functional currency of UNESCO Brasilia (UBO) is the Brazilian Real (BRL) and consequently its investments were made in short-term Brazilian Government Treasury Bills in BRL that were rated BB. YEAR END 2016 FIGURE 8 RATING BREAKDOWN OF UNESCO S INVESTMENT PORTFOLIO (IN USD MILLION) 400 350 300 250 200 150 100 50 0 Other investments 329.6 Cash equivalents 333.9 92.1 10 38 101.8 78 68 AAA AA A BB - UBO 14

FINANCIAL REPORT OF THE DIRECTOR-GENERAL The primary objective of UNESCO s Investment Policy is the preservation of the value of resources of the Organization. Within this general objective, the principal considerations for investment management are, in order of priority, security of principal, liquidity, and rate of return. UNESCO s investments outperformed their benchmarks both in US dollar and euro in 2016. The performance of the BRL investment portfolio was in line with that of its respective benchmark. Irina Bokova Director-General 15

2 STATEMENT ON INTERNAL CONTROL

Statement on Internal Control Statement on Internal Control for 2016 30 March 2017 Scope of responsibility As Director-General of the United Nations Educational, Scientific and Cultural Organization (UNESCO), in accordance with the responsibility assigned to me and, in particular, Article 10 of the Financial Regulations, I am accountable for maintaining a sound system of internal control to ensure the accomplishment of established objectives and goals for operations; the economical use of resources; the reliability and integrity of information; compliance with policies, plans, procedures, rules and regulations; and the safeguarding of assets. Purpose of the system of internal control Internal control is designed to reduce and manage rather than eliminate the risk of failure to achieve the Organization s aims and objectives and related policies. Therefore, it can only provide a reasonable and not absolute assurance of effectiveness. It is based on an ongoing process designed to identify the principal risks, evaluate the nature and extent of those risks and manage them efficiently, effectively and economically. Internal control is a process, effected by the Governing Bodies, the Director-General, senior management and other personnel, and designed to provide reasonable assurance on the achievement of the following internal control objectives: Effectiveness and efficiency of operations and safeguarding of assets, Reliability of financial reporting and Compliance with applicable rules and regulations. Thus, on an operational level, UNESCO s internal control system is not solely a policy or procedure that is performed at certain points in time, but rather continually operated at all levels within the Organization through internal control processes to ensure the above objectives. My current statement on UNESCO s internal control processes, as described above, applies for the year ended 31 December 2016, and up to the date of the approval of the Organization s 2016 financial statements. Risk management and control framework Since 2008, the Organization has initiated a risk management programme which included: The identification of risks classified according to relevance, impact and probability of occurrence, The establishment of a risk management committee whose mandate is to develop action plans to address major risks, to build up an integrated risk management framework, to strengthen risk management capacities and a risk management culture, and to regularly re-evaluate risks and the Organization s tolerance levels in light of the evolving environment, and The Risk Management handbook setting out the basic concepts and mechanisms underlying risk management and enabling UNESCO staff to set up risk profile as well as a risk management plan as applicable to their Sections, Divisions or Offices. 19

Statement on Internal Control In addition to the above initial programme, the Organization is committed to further enhance risk management by accelerating the implementation of a full Entreprise Risk Management (ERM). In addition, a comprehensive Internal Control System Framework has been designed and recently reviewed to ensure that the Organization s objectives are achieved efficiently through the establishment of a policy framework for internal control, comprising policies, procedures and processes underpinned by appropriate ethical values. These include, but are not limited to, current and comprehensive manuals for the management and control of administrative processes such as financial management, contracting, travel and human resources. Furthermore, my senior team and I are committed to a continuous improvement programme to strengthen the system of internal control across the Organization. Review of effectiveness My review of the effectiveness of the system of internal controls is mainly informed by: My senior managers, in particular Assistant Directors-General, Directors of Bureaux and Offices, Directors and Heads of Established Offices and Category 1 Institutes away from Headquarters who play important roles and are accountable for expected results, performance, controlling their Sector/Bureaux/Office/Institute s activities and the resources entrusted to them. The information channels mainly rely on periodic meetings held by the Senior Management Team and the Programme Management Committee. For the year ended 31 December 2016, control issues, together with a remedial action plan, have been identified through a self-assessment process, as confirmed by my senior managers personal written attestation. The self-assessment questionnaires are regularly updated to take account of areas of risk as identified internally and arising from audit recommendations. This year, my senior managers were asked to further assess their operational risk management, records management and responsiveness to audit recommendations; The Internal Oversight Service, on whose reports of internal audits, evaluations and advisory services I rely. These reports, which are also provided to the Oversight Advisory Committee and summarized in the Internal Oversight Service s annual report, include independent and objective information on the adequacy and effectiveness of the Organization s system of internal controls and programme effectiveness together with recommendations for improvement; The Oversight Advisory Committee whose purpose is to advise me on risk management, financial and internal controls and the related functions of oversight; The Ethics Advisor who provides confidential advice and counsel to the Organization and its staff on ethics and standards of conduct and promotes ethical awareness and responsible behavior in handling referrals concerning allegations of unethical behavior including conflict of interest; The Risk Management Committee; The Joint Inspection Unit of the United Nations system which undertakes independent inspections aimed at improving management and economy and achieving greater coordination between the UN organizations; The external auditor, whose comments are submitted to the Executive Board and the General Conference; and The Governing Bodies observations. Significant matter(s) arising during the year Financial Situation Since the admission of Palestine in 2011 and the suspension of funding to UNESCO by two Member States, the Organization has made significant efforts to contain costs and reorganize to operate within a reduced expenditure plan. Delayed payments of contributions represent an additional financial pressure, which, if repeated and despite the cash flow management measures in place, could negatively affect the ability of the Organization to meet its programmatic objectives. The Secretariat regularly informs Member States of the cash flow situation and their support in this area is even more key as resources are stretched. The Secretariat will report on the cash flow situation to the Executive Board and General Conference in 2017. 20

Statement on Internal Control Enterprise Risk Management Further to the revitalization of the Risk Committee at the end of 2015 and under the oversight of the Deputy Director General, an action plan to accelerate Entreprise Risk Management has been designed for implementation during 2017 by a designated project team. The action plan includes inter-alia: (i) A UNESCO full-fledged Risk Management Policy (ii) The formulation of a comprehensive risk register (iii) The establishment of a ERM manual and procedures and (iv) A comprehensive training and communication plan In addition, a committee for the review of high-risk projects has been initiated. At an operational level, Senior Managers have reported in their 2016 control self-assessment exercise, the need to be provided with additional guidance on operational risk management. The ERM project will respond to this need. Accountability and Internal Control Framework Policy During 2016, the update of the internal control framework policy was initiated to be based on the COSO2 1 model and incorporate the three lines of defense model. It will be finalized along with the UNESCO Risk Management Policy. Models for the letters of accountability for achieving UNESCO s objectives and delivering value for money were also updated for roll out in 2017. These letters aim at informing newly appointed budget holders of their accountability for achieving the objectives which have been set for them and the functions of UNESCO under their control; using resources economically, efficiently and effectively; maintaining reliable financial and performance information; complying with policies, plans, financial regulations procedures, rules and regulations; safeguarding UNESCO s assets; and maintaining an effective system of internal control and identifying, reporting and addressing control weaknesses. Follow up on Audit Recommendations Audits, both internal and external, investigations and evaluations contribute to improving the management and effectiveness of programme delivery and internal operations. The importance of effective and timely follow up of audit is regularly reminded to Senior Managers who are at the forefront for their implementation. In order to further improve the Secretariat s responsiveness to audits, several actions were taken during the year: Senior Managers were instructed to provide detailed explanation for those recommendations open for four years or more with a view to accelerating their closure. The 2016 internal follow up exercise as at 30 June 2016 resulted in an improved implementation rate. An internal information meeting was organized with the Director of External Audit and Headquarters and Field Offices focal points for external audits to explain the various steps of an audit assignment and what is expected from them in each of these steps from audit notification to the follow up of audit recommendations and A central coordination / follow up mechanism was introduced to ensure coherent organizational responses to internal and external oversight reports and their recommendations 1 Committee of Sponsoring Organizations of the Treadway Commission (COSO) 21

Statement on Internal Control - 4 - Corporate Oversight Officer I have also created a position of Senior Corporate Oversight Officer within my Office who is tasked, inter alia to coordinate and ensure coherent organizational responses to internal and external oversight reports and their recommendations; trace and report on timely implementation of all oversight recommendations; prepare regular reports on oversight implementation rates for the attention of my senior managers; identify cross-cutting issues and trends that require strategic input and decisions at the senior management level and flag organizational performance and risk issues as appropriate Training During the year, training on UNESCO s main expenditure processes and associated roles/responsibilities and accountabilities to strengthen the internal control framework has continued. 247 Programme specialists and 65 Administrative officers from field offices have participated in regional training workshops, which focused on project and financial management. Conclusion Effective internal control, no matter how well designed, has inherent limitations including the possibility of circumvention and therefore can provide only reasonable assurance. Furthermore, because of changes of conditions, the effectiveness of internal control may vary over time. I am committed to addressing any weaknesses in internal controls noted during the year brought to my attention. Based on the above, I conclude that, to the best of my knowledge and information, there are no material weaknesses which would prevent the external auditor from providing an unqualified opinion on the Organization s financial statements nor are there other significant matters arising which would need to be raised in the present document for the year ended 31 December 2016 and up to the date of approval of the financial statements. Irina Bokova Director-General 22

3 OPINION OF THE EXTERNAL AUDITOR

OPINION OF THE EXTERNAL AUDITOR 25

OPINION OF THE EXTERNAL AUDITOR 26

4 APPROVAL OF THE FINANCIAL STATEMENTS

APPROVAL OF THE FINANCIAL STATEMENTS 29

5 CONSOLIDATED FINANCIAL STATEMENTS

I. STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 Expressed in 000 US dollars Note 31/12/2016 31/12/2015 restated ASSETS Current Assets Cash and cash equivalents 7 154 508 149 968 Short-term investments 8 512 246 473 318 Accounts receivable (non-exchange transactions) 9 39 245 34 952 Receivables from exchange transactions 10 1 667 2 105 Inventories 11 357 635 Advance payments 12 31 424 37 717 Other current assets 13 6 569 5 100 Total current assets 746 016 703 795 Non-current assets Accounts receivable (non-exchange transactions) 9 2 207 2 610 Long-term investments 8 1 612 2 797 Property, plant and equipment 14 549 884 563 715 Intangible assets 15 63 129 Total non-current assets 553 766 569 251 TOTAL ASSETS 1 299 782 1 273 046 LIABILITIES Current Liabilities Accounts payable (exchange transactions) 16 17 791 24 730 Employee benefits 17 6 927 8 352 Transfers payable 18 15 043 15 796 Conditions on voluntary contributions 19 57 661 52 167 Advance receipts 20 88 478 47 626 Borrowings current portion 21 6 316 6 605 Other current liabilities 22 12 432 10 578 Total current liabilities 204 648 165 854 Non-current Liabilities Employee benefits 17 820 890 831 840 Conditions on voluntary contributions 19 390 771 Borrowings long-term portion 21 13 521 20 338 Other non-current liabilities 22 4 974 4 932 Total non-current liabilities 839 775 857 881 TOTAL LIABILITIES 1 044 423 1 023 735 NET ASSETS 255 359 249 311 NET ASSETS/EQUITY Reserves and fund balances 23 255 359 249 311 NET ASSETS/EQUITY 255 359 249 311 The accompanying notes form an integral part of these consolidated financial statements. 33

II. STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 31 DECEMBER 2016 Expressed in 000 US dollars Note 31/12/2016 31/12/2015 restated REVENUE Assessed contributions 322 727 341 374 Voluntary contributions 246 329 305 932 Other revenue-producing activities 18 611 21 414 Other/miscellaneous revenue 14 410 14 089 Finance revenue 12 948 12 197 Total revenue 24 615 025 695 006 EXPENSES Employee benefit expenses 312 527 345 855 Consultants, external experts and mission costs 47 411 53 372 External training, grants and other transfers 45 727 41 494 Supplies, consumables and other running costs 52 505 53 682 Contracted services 109 354 124 998 Depreciation and amortization 17 416 17 093 Allowance for assessed contributions 71 542 75 699 Other expenses 928 523 Foreign exchange losses 1 778 2 452 Finance costs 4 499 4 636 Total expenses 25 663 687 719 804 DEFICIT FOR THE PERIOD (48 662) (24 798) The accompanying notes form an integral part of these consolidated financial statements. 34

III. STATEMENT OF CHANGES IN NET ASSETS/EQUITY FOR THE YEAR ENDED 31 DECEMBER 2016 Expressed in 000 US dollars Note 31/12/2016 31/12/2015 Restated Net Assets/Equity at the beginning of the period 249 311 (244 643) Exchange differences on certain foreign currency transactions 23 9 845 (25 075) Actuarial gain/(loss) 23 47 763 549 537 Other adjustments 23 191 900 Return of funds to donors 23 (3 089) (6 610) Total of item recognized directly in Net Assets/Equity 54 710 518 752 Deficit for the period 23 (48 662) (24 798) Total recognized revenue and expense for the period 6 048 493 954 Net Assets/Equity at the end of the period 255 359 249 311 The accompanying notes form an integral part of these consolidated financial statements. 35

IV. CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 Expressed in 000 US dollars Note 31/12/2016 31/12/2015 Restated Cash flows from operating activities (Deficit) for the period (48 662) (24 798) Depreciation and amortization 17 416 17 093 (Increase) in accounts receivable (3 486) (17 605) Decrease in inventories 279 269 Decrease/(Increase) in advance payments 6 656 (4 657) (Increase)/Decrease in other current assets (3 981) 7 313 (Decrease)/Increase in accounts payable (6 973) 9 253 Increase in employee benefits 36 245 65 476 (Decrease)/Increase in transfers payable (1 515) 590 (Decrease) in borrowings due to revaluations (883) (3 639) Increase in Conditions on voluntary contributions 5 682 6 861 Increase/(Decrease) in advance receipts 40 640 (58 500) Increase/(Decrease) in other liabilities 1 104 (22 128) Loss on disposal of property, plant and equipment 98 248 Net cash flows from operating activities 42 620 (24 224) Cash flows from investing activities Purchase of property, plant and equipment (3 081) (5 848) (Increase)/Decrease in short-term investments (29 126) 26 260 Decrease/(Increase) in long term investments 1 185 (285) Net cash flows from investing activities (31 022) 20 127 Cash flows from financing activities Repayment of loans (6 707) (6 719) Net cash flows from financing activities (6 707) (6 719) Net increase/(decrease) in cash and cash equivalents 4 891 (10 816) Cash and cash equivalents, beginning of period 7 149 968 164 175 Exchange rate effects (351) (3 391) Cash and cash equivalents, end of period 7 154 508 149 968 The accompanying notes form an integral part of these consolidated financial statements. 36

V. STATEMENT OF COMPARISON OF BUDGET AND ACTUAL AMOUNTS FOR THE YEAR ENDED 31 DECEMBER 2016 GENERAL FUND Main Appropriation line 2016 Original Expressed in 000 US dollars Allotment Authorized Transfers 1,2 Additional Appropriations 3 2016 Allotment as Adjusted Actual expenditure Final Budget less Actual Expenditture PART I GENERAL POLICY AND DIRECTION A. Governing bodies (Including General Conference and Executive Board) 3 841 205 4 046 3 714 332 B. Direction 9 143 208 9 351 8 280 1 071 C. Participation in the joint machinery of the United Nations system 9 471 (7) 9 464 7 460 2 004 TOTAL PART I 22 455 406 22 861 19 454 3 407 PART II PROGRAMMES AND PROGRAMME-RELATED SERVICES A. Programmes Major Programme I Education 42 443 268 5 409 48 120 44 571 3 549 Major Programme II Natural sciences 24 358 322 1 299 25 979 23 170 2 809 Major Programme III Social and human sciences 12 919 (52) 826 13 693 11 992 1 701 Major Programme IV Culture 22 215 308 1 438 23 961 21 309 2 652 Major Programme V Communication and information 12 032 429 516 12 977 11 807 1 170 UNESCO Institute for Statistics 3 847 3 847 3 847 Management of Field Offices 40 878 148 820 41 846 37 908 3 938 Total Part II.A 158 692 1 423 10 308 170 423 154 604 15 819 B. Programme Related Services 1. Coordination and monitoring of action to benefit Africa 2 102 10 114 2 226 1 887 339 2. Coordination and monitoring of action to benefit Gender 810 (37) 6 779 741 38 Equality 3. UNESCO s response to post-conflict and post-disaster 507 (402) 105 303 (198) situation 4. Strategic planning, programme monitoring and budget 2 633 (196) 2 437 2 280 157 preparation 5. Organization-wide knowledge management 2 359 (251) 2 108 2 345 (237) 6. External relations and public information 9 885 351 115 10 351 9 759 592 7. Field Support and Coordination 562 417 979 624 355 Total Part II.B 18 858 (108) 235 18 985 17 939 1 046 C. Participation Programme and Fellowships 6 775 3 039 9 814 9 200 614 Total Part II.C 6 775 3 039 9 814 9 200 614 TOTAL PART II 184 325 4 354 10 543 199 222 181 743 17 479 PART III CORPORATE SERVICES A. Human resources management 14 582 1 294 15 876 13 008 2 868 B. Financial Management 6 171 (98) 6 073 6 050 23 C. Management of support services 18 524 604 19 128 18 123 1 005 D. Management of information systems and communications 4 827 4 827 4 833 (6) TOTAL PART III 44 104 1 800 45 904 42 014 3 890 TOTAL PARTS I-III 250 884 6 560 10 543 267 987 243 211 24 776 Reserve for After Service Health Insurance long term liability (ASHI) PART IV LOAN REPAYMENTS FOR THE RENOVATION OF THE HEADQUARTERS PREMISES & THE IBE BUILDING 3 406 3 406 3 406 7 041 7 041 7 029 12 PART V ANTICIPATED COST INCREASES 2 410 (1 521) 889 889 TOTAL APPROPRIATION 263 741 5 039 10 543 279 323 253 646 25 677 Note: the budget and accounting basis is different. This Statement of Comparison of Budget and Actual amounts is prepared on the budget basis. 1. Information concerning between lines can be found in documents 200 EX/Decision and 201 EX/4 Part II. 2. Between year transfers do not require approval from the Governing Bodies as they do not modify the biennial appropriation lines. 3. Information concerning additional appropriations presented to the Executive Board can be found in documents 200 EX/4, 201 EX/4 Part II and INF (Annex II). 37