The World Bank Annual Report 2004 Volume 2 THE WORLD BANK Financial Statements The World Bank Annual Report 2004 Volume 2 Financial Statements THE WORLD BANK Washington, D.C. Copyright © 2004 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington D.C. 20433, U.S.A. Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or any endorsement or acceptance of such boundaries. Rights and Permissions All queries on rights, licenses, and permissions should be addressed to World Bank, Office of the Publisher, 1818 H Street N.W., Washington D.C. 20433; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISSN 0252-2942 ISBN 0-8213-5971-1 Contents Letter of Transmittal v Management's Discussion and Analysis 1 International Bank for Reconstruction and Development Financial Statements and Internal Control Reports 39 Special Purpose Financial Statements and Internal Control Reports of the International Development Association 89 Letter of Transmittal This Annual Report, which covers the period from July 1, 2003, to June 30, 2004, has been prepared by the Executive Directors of both the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) in accordance with the respective bylaws of the two institutions. James D. Wolfensohn, President of the IBRD and IDA and Chairman of the Board of Executive Directors, has submitted this report, together with the accompanying administrative budgets and audited financial statements, to the Board of Governors. Annual reports for the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID) are published separately. Executive Directors Alternates Carole Brookins Robert B. Holland, III (vacant) Toshio Oya Eckhard Deutscher Walter Hermann Tom Scholar (vacant) Pierre Duquesne Anthony Requin Kurt Bayer Gino Alzetta Per Kurowski Maria Jesus Fernandez Ad Melkert Tamara Solyanyk Marcel Masse Gobind Ganga Otaviano Canuto Gil S. Beltran Biagio Bossone Nuno Mota Pinto John Austin Terry O'Brien Louis K. Kasekende J. Mills Jones Chander Mohan Vasudev Akbar Ali Khan Tanwir Ali Agha Sid Ahmed Dib Thorsteinn Ingolfsson Inkeri Hirvensalo Pietro Veglio Jakub Karnowski Zhu Guangyao Wu Jinkang Yahya Abdulla M. Alyahya Abdulrahman M. Almofadhi Alexey G. Kvasov Eugene Miagkov Mahdy Ismail Aljazzaf Mohamed Kamel Amr Rapee Asumpinpong Hadiyanto Alieto Guadagni C. Veronica Querejazu Vidovic Paulo F. Gomes Louis Philippe Ong Seng As of June 30, 2004 I NTERNATIONAL B ANK FOR R ECONSTRUCTION AND D EVELOPMENT M ANAGEMENT'S D ISCUSSION AND A NALYSIS J UNE 3 0 , 2 0 0 4 Section 1: Overview 3 Section 2: Basis of Reporting 5 Section 3: Development Activities 8 Loans 8 Guarantees 13 Other Activities 15 Section 4: Liquidity Management 15 Section 5: Funding Resources 17 Equity 17 Borrowings 20 Section 6: Financial Risk Management 21 Governance Structure 21 Managing Risk-Bearing Capacity 22 Credit Risk 23 Market Risk 27 Liquidity Risk 30 Operational Risk 30 Section 7: Critical Accounting Policies 31 Section 8: Results of Operations 31 Section 9: Governance 34 Section 10: Reconciliation of Prior Year Current Value Financial Statements to Reported Basis 36 Glossary of Terms 38 IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 1 Throughout Management's Discussion and Analysis, terms in boldface type are defined in the Glossary of Terms on page 38. The Management Discussion and Analysis contains forward looking statements which may be identified by such terms as "anticipates", "believes", "expects", "intends" or words of similar meaning. Such state- ments involve a number of assumptions and estimates that are based on current expectations, which are subject to risks and uncertainties beyond IBRD's control. Consequently, actual future results could differ materially from those currently anticipated. 2 THE WORLD BANK ANNUAL REPORT 2004 1. OVERVIEW reporting do not significantly impact IBRD's risk- bearing capacity. The International Bank for Reconstruction and Development (IBRD) is an international Lending commitments in FY 2004 were $11.0 billion, organization established in 1945 and is owned by its which was slightly lower than the FY 2003 level of member countries. IBRD's main goals are promoting $11.2 billion. sustainable economic development and reducing FY 2004 operating income was $1,696 million, poverty. It pursues these goals primarily by $1,325 million lower than that for FY 2003, thereby providing loans, guarantees and related technical decreasing IBRD's return on equity and net return assistance for projects and programs in its on average earning assets before the effects of FAS developing member countries. IBRD's ability to 133a. intermediate funds from international capital markets for lending to its developing member During FY 2004, provisioning requirements were countries is an important element in achieving its reduced by $665 million due primarily to a net development goals. IBRD's financial objective is not improvement in borrowers' risk ratings, and to a to maximize profit, but to earn adequate net income lesser extent, changes in the size and distribution of to ensure its financial strength and to sustain its the portfolio including negative net disbursements development activities. Box 1 presents selected (of which $4,614 million were prepayments). financial data for the last five fiscal years. In the context of assessing changes in IBRD's The financial strength of IBRD is based on the operating environment, it is management's practice support it receives from its shareholders and on its to recommend each year the allocation of net income array of financial policies and practices. Shareholder to augment reserves, waivers of loan charges to support for IBRD is reflected in the capital backing it benefit eligible borrowers, and allocation of net has received from its members and in the record of income to support developmental activities. its borrowing members in meeting their debt-service On August 3, 2004, the Executive Directors approved obligations to it. IBRD's financial policies and the allocation of $[680] million of FY 2004 net practices have led it to build reserves, to diversify its income to the General Reserve and recommended to funding sources, to hold a large portfolio of liquid IBRD's Board of Governors the following transfers investments, and to limit a variety of risks, including from unallocated net income: $[405] million to credit, market and liquidity risks. Surplus and $[590] million to other development IBRD's principal assets are its loans to member purposes. In addition, the Executive Directors countries. The majority of IBRD's outstanding loans approved a 50 basis point waiver of the front end fee are priced on a cost pass-through basis, in which the on all loans (other than special structural adjustment cost of funding the loans, plus a lending spread, is loans) presented to the Board in FY 2005. This waiver passed through to the borrower. also applies retroactively for FY 2004 to loans presented on or after March 1, 2004. The Executive To raise funds, IBRD issues debt securities in a Directors also approved that (i) interest charge variety of currencies to both institutional and retail waivers will be maintained at 5 basis points for old investors. These borrowings, together with IBRD's loans and 25 basis points for new loans respectively, equity, are used to fund its lending and investment to eligible borrowers for payment periods activities, as well as general operations. commencing during FY 2005; and (ii) waivers of 50 IBRD holds its assets and liabilities primarily in U.S. basis points on commitment charges for FY 2005 will dollars, euro and Japanese yen. IBRD mitigates its be maintained for all loans. exposure to exchange rate risks by matching the currencies of its liabilities and equity with those of its assets. However, the reported levels of its assets, liabilities, income and expense in the financial statements are affected by exchange rate movements a. For the purpose of this document, FAS 133 refers collectively to of major currencies compared to IBRD's reporting the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", currency, the U.S. dollar. Since IBRD matches the along with its amendments, as well as the derivative accounting currencies of its equity with those of its loans, the requirements of International Accounting Standard (IAS) 39 fluctuations captured in the cumulative translation (Revised), "Financial Instruments: Recognition and Measure- adjustment for purposes of financial statement ment". IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 3 Box 1: Selected Financial Data As of or for the Year Ended June 30 In millions of U.S. dollars, except ratio and return data in percentages Lendinga 2004 2003 2002 2001 2000 Commitments 11,045 11,231 11,452 10,487 10,919 Gross Disbursements 10,109 11,921 11,256 11,784 13,332 Net Disbursements (8,408) (7,996) (812) 2,091 2,860 Reported Basis 2004 2003 2002 2001 2000 Loan Income 4,403 5,742 6,861 8,143 8,153 Provision for Losses on Loans and Guarantees decrease (increase) 665 1,300 15 (676) 166 Investment Income 304 418 738 1,540 1,589 Borrowing Expenses (2,789) (3,594) (4,907) (7,152) (7,128) Net Noninterest Expense (887) (845) (783) (711) (789) Operating Income 1,696 3,021 1,924 1,144 1,991 Effects of applying FAS 133 (4,100) 2,323 854 345 Net (Loss) Income (2,404) 5,344 2,778 1,489 1,991 Net Return on Average Earning Assets b, c 1.18 2.06 1.29 0.78 1.34 after the effects of FAS 133 (1.67) 3.64 1.87 0.87d Gross Return on: Average Earning Assetsc 3.26 4.19 5.11 6.61 6.53 Average Outstanding Loansc 3.83 4.73 5.57 6.67 6.71 Average Cash and Investments 1.04 1.64 2.87 6.28 5.74 Cost of Average Borrowings (including swaps)b 2.61 3.23 4.23 6.18 5.92 after the effects of FAS 133 6.56 1.18 3.53 6.12d Interest Coverage b 1.61 1.84 1.39 1.16 1.28 after the effects of FAS 133 0.65 2.49 1.57 1.18d Return on Equity b 5.21 10.32 7.09 4.33 7.73 after the effects of FAS 133 (7.00) 16.18 9.75 4.63d Equity-to-Loans Ratioe 29.35 26.59 22.90 21.51 21.31 Total Assets 229,213 230,352 227,794 222,873 228,539 Cash and Liquid Investmentsf 31,126 26,620 25,056 24,407 24,331 Loans Outstanding 109,610 116,240 121,589 118,866 120,104 Accumulated Provision for Loan Lossesg (3,505) (4,045) (5,053) (4,074) (3,554) Borrowings Outstandingh 108,066 108,554 110,263 106,757 110,379 Total Equity 35,463 37,918 32,313 29,570 29,289 Current Value Basis 2004 2003 2002 2001 Net Income 1,129 3,436 2,853 1,460 of which current value adjustment (513) 394 881 367 Net Return on Average Earning Assets 0.76 2.25 1.86 0.89i Return on Equity 3.36 11.16 10.07 4.98i Equity-to-Loans Ratio 29.07 26.36 23.10 21.43 Cash and Liquid Investmentsf 31,126 26,620 25,056 24,407 Loans Outstanding 112,608 122,593 126,454 123,062 Borrowings Outstandingh 109,675 116,695 114,502 110,290 Total Equity 36,421 35,675 32,466 29,744 a. Amounts include transactions with IFC and capitalized front-end fees. b. Amounts are presented before the effects of FAS 133 to facilitate comparison to prior years. c. Includes income from commitment charges. d. Excludes the one-time cumulative effect of the adoption of FAS 133. e. Before the effects of FAS 133. See Section 5, Funding Resources-Equity for additional discussion. f. Excludes restricted cash. g. Prior to FY 2001, this amount includes accumulated provision for guarantee losses. For FY 2001 through FY 2004, the accu- mulated provision for guarantees is included in other liabilities. h. Outstanding borrowings, excluding swaps, net of premium/discount. i. Excludes the one-time cumulative effect of the adoption of the current value basis of accounting. 4 THE WORLD BANK ANNUAL REPORT 2004 2. BASIS OF REPORTING market risks (composed of interest rate and currency risks) associated with its financial assets and Financial Statement Reporting liabilities. IBRD uses derivative instruments for asset/ IBRD prepares its financial statements in accordance liability management of individual positions and with accounting principles generally accepted in the portfolios, and to reduce borrowing costs. United States of America and International Financial Reporting Standards (together referred to in this IBRD's funding operations are designed to meet a document as the `reported basis'). major organizational objective of providing lower cost funds to borrowing members. Because of the The standards require that all derivatives be recorded extent of IBRD's long-dated funding, the reported on IBRD's balance sheet at their fair value. volatility under FAS 133 may be more pronounced Additionally, FAS 133 allows IBRD to designate than for many other financial institutions. The hedging relationships and apply hedge accounting, if effects of applying FAS 133 may significantly affect certain criteria are met. While IBRD believes that its reported results in each accounting period, hedging strategies achieve its objectives, the depending on changes in market rates. However, application of these criteria to IBRD's derivative IBRD believes that its funding and asset/liability portfolio would not consistently reflect its hedging management strategies accomplish its objectives of strategies. Therefore, IBRD elected not to define any protection from market risk and provision of lower qualifying hedging relationships and, as a result, all cost funding, and that a current value basis provides changes in the fair value of the derivative financial more meaningful information for risk management instruments are recognized immediately in earnings. and management reporting. For management reporting purposes, IBRD has disclosed current value financial statements which IBRD believes that a current value presentation IBRD believes reflect the risk management strategy reflects the economic value of all of its financial that IBRD employs. instruments. The current value model is based on the present value of expected cash flows. The model Management Reporting incorporates available market data in determining In implementing its risk management strategy, IBRD the cash flow and discount rates for each instrument. makes extensive use of derivatives to manage the The current value financial statements do not Box 2: Hedging Strategy and Use of Derivatives IBRD is a financial intermediary, borrowing funds in international capital markets for on-lending to member countries. In order to achieve the lowest funding costs, IBRD issues bonds in those currencies and markets throughout the world in which it has a comparative funding cost advantage. As a matter of policy, IBRD avoids interest rate risk in its financing operations and avoids open foreign exchange risk positions. Therefore, both on a transaction-by-transaction basis and on a portfolio basis, IBRD enters into derivatives transactions to eliminate mismatches between the interest rate and cur- rency composition of its assets and liabilities. This approach insulates IBRD's balance sheet from material interest rate or currency exposure. (See Section 6 - Financial Risk Management) FAS 133 requires that all derivatives be marked to market, with the effects of those changes reflected in the balance sheet and income statement. The recorded value of derivatives will therefore increase or decrease depending on move- ments of market interest rates and other factors. For example, IBRD has a large portfolio of derivatives that convert long- dated fixed-rate borrowings into floating-rate obligations. In general, when market interest rates increase, the reported value of these derivatives will decline; similarly, declining interest rates will result in an increase in the value of these derivatives. Although these derivatives economically offset other financial positions on bonds and loans, those positions are generally not marked to market, so their reported values are not affected by interest rate movements. Thus, an asymmetry results when the value of economically offsetting transactions are reported on different bases. FAS 133 contains hedge accounting provisions which are intended to mitigate this mismatch but in order to qualify for hedge accounting, transactions must meet particular criteria. A number of the tools that IBRD utilizes would not qualify for hedge accounting treatment. Accordingly, IBRD has elected not to define any qualifying hedge relationships. While IBRD's policies and hedging strategy achieve its risk minimization objectives, that result is not fully evident in the reported financial statements, because the derivatives and the underlying liabilities/assets that they hedge would typi- cally be reported on different bases under FAS 133. For management reporting purposes, IBRD instead uses current value financial statements, as shown in Table 2 in Section 2, which marks both the derivatives and the underlying liabili- ties and assets to market. In FY2002 and FY2003 interest rates for most currencies were declining. Accordingly, application of FAS 133 in FY2002 and FY2003 resulted in reported net income being substantially higher than it would otherwise have been (by $854 mil- lion and $2,323 million, respectively). Conversely, application of FAS 133 in FY2004 in a rising interest rate environment resulted in a net loss on a reported basis (including a loss of $4,100 million due to application of FAS 133). Both the pos- itive and the negative FAS 133 adjustments reflect the impact of changing rates on the marked-to-market value of the derivatives, which represent only one side of hedged transactions. The impact of changing market rates on the other side of hedged transactions - the underlying liabilities or assets - generally is not reflected in the reported financial state- ments. Therefore, IBRD uses current value financial statements for management reporting purposes and focuses on operating income in its annual allocation and distribution decisions. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 5 purport to present the net realizable, liquidation, or Current Value Balance Sheets market value of IBRD as a whole. Loan Portfolio Current Value Basis All of IBRD's loans are made to or guaranteed by The Condensed Current Value Balance Sheets in Table 1 countries that are members of IBRD. In addition, IBRD present IBRD's estimates of the economic value of its may also make loans to the International Finance financial assets and liabilities, after considering market Corporation, an affiliated organization, without any and credit risks. The current year's Condensed Current guarantee. IBRD does not currently sell its loans, nor Value Balance Sheet is presented with a reconciliation to does management believe there is a market for loans the reported basis. The prior year's Condensed Current comparable to those made by IBRD. The current value Value Balance Sheet is presented, with a reconciliation of loans incorporates management's best estimate of the to the reported basis, in Table 18 in Section 10. probable expected cash flows of these instruments to IBRD. IBRD's Condensed Current Value Comprehensive Statement of Income, with a reconciliation to the The current value of loans, including associated reported basis at June 30, 2004, is presented in Table 2. financial derivatives, is based on a discounted cash flow The prior year's Condensed Current Value method. The estimated cash flows from principal Comprehensive Statement of Income is presented, with repayments and interest are discounted using the rate at a reconciliation to the reported basis, in Table 19 in which IBRD would currently originate a similar loan. Section 10. The discount rate is based on the applicable market yield curves for IBRD's funding cost, plus IBRD's lending A summary of the effects on net income of the current spread, adjusted for available interest waivers. value adjustments in the balance sheet is presented in Table 3. Table 1: Condensed Current Value Balance Sheets at June 30, 2004 and June 30, 2003 In millions of U.S. dollars June 30, 2004 June 30, 2003 Reversal of Current Current Reported FAS 133 Value Value Current Value Basis Effects Adjustments Basis Basis Due from Banks $ 1,803 $ -- $ -- $ 1,803 $ 1,929 Investments 31,986 -- -- 31,986 28,128 Loans Outstanding 109,610 -- 2,998 112,608 122,593 Less Accumulated Provision for Loan Losses and Deferred Loan Income (3,984) -- -- (3,984) (4,478) Swaps Receivable -- -- Investments 12,476 -- -- 12,476 10,301 Loans 90 5 * 95 -- Borrowings 69,548 (1,202) 1,202 69,548 70,316 Other Asset/Liability 908 (181) 181 908 726 Other Assets 6,776 -- (436) 6,340 6,735 Total Assets $229,213 $(1,378) $3,945 $231,780 $236,250 Borrowings $108,066 $ (835) $2,444 $109,675 $116,695 Swaps Payable Investments 14,284 -- -- 14,284 11,862 Loans 93 (*) * 93 -- Borrowings 64,777 (733) 733 64,777 64,779 Other Asset/Liability 1,077 (199) 199 1,077 810 Other Liabilities 5,453 5,453 6,429 Total Liabilities 193,750 (1,767) 3,376 195,359 200,575 Paid in Capital Stock 11,483 -- -- 11,483 11,478 Retained Earnings and Other Equity 23,980 389 569 24,938 24,197 Total Liabilities and Equity $229,213 $(1,378) $3,945 $231,780 $236,250 6 THE WORLD BANK ANNUAL REPORT 2004 Table 2: Condensed Current Value Comprehensive Statements of Income for the years ended June 30, 2004 and June 30, 2003 In millions of U.S. dollars FY 2004 FY 2003 Adjustments Current Value Current Value to Current Comprehensive Comprehensive Reported Basis Value Basis Basis Income from Loans $ 4,403 $ -- $4,403 $5,742 Income from Investments, net 304 (54) 250 439 Other Income 235 -- 235 202 Total Income 4,942 (54) 4,888 6,383 Borrowing Expenses 2,789 -- 2,789 3,594 Administrative Expenses 1,113 -- 1,113 1,038 Release of Provision for Losses on Loans and Guarantees (665) 665 -- -- Other Expenses 9 -- 9 9 Total Expenses 3,246 665 3,911 4,641 Operating Income 1,696 (719) 977 1,742 Current Value Adjustments -- (513) (513) 394 Release of Provision for Losses on Loans and Guarantees--Current Value -- 665 665 1,300 Effects of applying FAS 133 (4,100) 4,100 -- -- Net (Loss) Income $(2,404) $3,533 $1,129 $3,436 Table 3: Summary of Current Value Adjustments In millions of U.S. dollars Total Income Statement Balance Sheet Effects as of June 30, 2004 Effect Less Prior Other Years' Loans Borrowings Asset/Liability Effects FY 2004 FY 2003 Total Current Value Adjustments on Balance Sheet $2,998 $(2,411)a $(18) $(1,408)b $(839) $ 40 Unrealized Gains (Losses) on Investmentsc 54 (21) Currency Translation Adjustmentd 272 375 Total Current Value Adjustments $(513) $394 a. Amount is net of the current value adjustments for swaps, and unamortized issuance costs. b. Includes $116 million representing a one-time cumulative effect of recording the adoption, on July 1, 2000, of the current value basis of accounting. c. Unrealized gains (losses) on the investment portfolio have been moved from Operating Income under the reported basis and included as part of current value adjustments for current value reporting. d. The currency translation effects have been moved from Other Comprehensive Income under the reported basis and included in Comprehensive Current Value Net Income for purposes of current value reporting. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 7 The current value also includes IBRD's assessment of for losses on loans and guarantees of $665 million, the appropriate credit risk, considering various are presented as part of the adjustment related to factors including its history of payment receipts from current value. borrowers. IBRD has always eventually collected all For FY 2004 the net current value adjustment contractual principal and interest due on its loans. declined by $513 million (increase of $394 million However, IBRD has suffered losses resulting from the for FY 2003) as shown in Table 3. The current value difference between the discounted present value of adjustment reflects the effects of changes in both payments for interest and charges, according to the interest rates and currency exchange rates. loan's contractual terms, and the actual timing of cash flows. To recognize the credit risk inherent in Impact of Changes in Interest Rates these and any other potential overdue payments, During the year ended June 30, 2004, the net IBRD adjusts the value of its loans through its loan decrease in the current value adjustments on the loss provision. balance sheet was $839 million. This net decrease is the result of a $3,355 million decrease in unrealized The $2,998 million ($6,353 million--June 30, 2003) gains in the loan portfolio, offset by a $2,535 million positive adjustment to IBRD's loan balance from the decrease in unrealized losses in the borrowings reported basis to the current value basis reflects the portfolio, and a $19 million decrease in unrealized fact that the loans in the portfolio, on average, carry a gains in other asset/liability swaps. Interest rates for higher rate of interest than the rate at which IBRD the reference markets increased during the fiscal year would currently originate a similar loan. thereby decreasing the current value adjustments for Investment Portfolio all portfolios (see Figure 11). Under both the reported and current value basis, the Impact of Changes in Exchange Rates investment securities and related financial During FY 2004 and FY 2003, there was a positive net instruments held in IBRD's trading portfolio are currency translation adjustment as both the euro and carried and reported at fair values. Fair value is based the Japanese yen appreciated against the U.S. dollar. on market quotations; instruments for which market quotations are not readily available have been valued using market-based methodologies and market 3. DEVELOPMENT ACTIVITIES information. IBRD offers loans, related derivative products, and Borrowings Portfolio guarantees to its borrowing member countries to The current value of the borrowings portfolio help meet their development needs. It also provides includes debt securities and associated financial technical assistance and other advisory services to derivatives, and represents the present value of support poverty reduction in these countries. expected cash flows on these instruments. The valuation model incorporates available market data Loans in determining the expected cash flow and discount From its establishment through June 30, 2004, IBRD rates for each instrument. Market data include had approved loans, net of cancellations, totaling exchange rates, reference market interest rates, $342,552 million to borrowers in 129 countries. A interest rate volatilities and call probabilities. The summary of cumulative lending is contained in $2,411 million ($4,946 million--June 30, 2003) Table 4. increase in the borrowing portfolio due to current Table 4: Lending Status at June 30 value adjustments, results from the average cost of the borrowing portfolio being higher than the rate at In millions of U.S. dollars which IBRD could currently obtain funding. 2004 2003 Cumulative Approvalsa $342,552 $333,501 Current Value Comprehensive Statements of Cumulative Repaymentsb $202,933 $184,493 Income Current Value Adjustments For purposes of the current value presentation, all a. Net of cancellations. unrealized gains and losses are presented as current b. Multicurrency pool loan repayments are included at value adjustments. Therefore, the change of $54 exchange rates in effect on the date of original disburse- ment. All other amounts are based on U.S. dollar equiva- million in the mark-to-market unrealized gain on the lents at the time of receipt. investments, as well as a reduction in the provision 8 THE WORLD BANK ANNUAL REPORT 2004 Box 3: Lending Operations Principles (i) IBRD makes loans to governments, governmental authorities or private enterprises in the territories of member countries. A loan that is not made directly to the member in whose territories the project is located must be guaranteed as to principal, interest and other charges by the member or its central bank or a comparable agency of the member acceptable to IBRD. A guarantee by the member itself has been obtained in all such cases to date. (ii) IBRD's loans are designed to promote the use of resources for productive purposes in its member countries. Projects financed by IBRD loans are required to meet IBRD's standards for technical, economic, financial, institutional and environmental soundness. (iii)In making loans, IBRD must act prudently and pay due regard to the prospects of repayment. Deci- sions to make loans are based upon, among other things, studies by IBRD of a member country's economic structure, including assessments of its resources and ability to generate sufficient foreign exchange to meet debt-service obligations. (iv)IBRD must be satisfied that in the prevailing market conditions (taking into account the member's overall external financing requirements), the borrower would be unable to obtain financing under conditions which, in the opinion of IBRD, are reasonable for the borrower. IBRD is intended to promote private investment, not to compete with it. (v)The use of loan proceeds is supervised. IBRD makes arrangements to ensure that funds loaned are used only for authorized purposes and, where relevant, with due attention to considerations of cost- effectiveness. This policy is enforced primarily by requiring borrowers (a) to submit documentation establishing, to IBRD's satisfaction, that the expenditures financed with the proceeds of loans are made in conformity with the applicable lending agreements and (b) to maximize competition in the procurement of goods and services by using, wherever possible, international competitive bidding or, when it is not appropriate, other procedures that ensure maximum economy and efficiency. At June 30, 2004, the total volume of outstanding Figure 1: Commitments by Region loans was $109,610 million, $6,630 million lower 6,000 than the $116,240 million of outstanding loans at June 30, 2003. This decrease was due to negative net 5,000 disbursements, including $4,614 million of dollars 4,000 S. prepayments, partially offset by positive currency U. of 3,000 translation adjustments. Undisbursed balances at June 30, 2004 totaled $32,128 million, a decrease of 2,000 millions In $903 million from June 30, 2003. This change was 1,000 due to cancellations and disbursements, partially 0 offset by new commitments and positive currency FY00 FY01 FY02 FY03 FY04 translation adjustments. Africa East Asia and Pacific Europe and Central Europe Latin America and the Caribbean During FY 2004, commitments of new loans to Middle East and North Africa South Asia member countries were $11,045 million, ($11,231 million--FY 2003). During both FY 2004 and FY Under IBRD's Articles of Agreement (the Articles), as 2003, Latin America and the Caribbean accounted applied, the total amount outstanding of direct loans for the largest share of commitments. Figure 1 made by IBRD, participation in loans and callable presents the regional composition of commitments guarantees may not exceed the statutory lending from FY 2000 to FY 2004. limit. At June 30, 2004, outstanding loans and callable guarantees (net of the accumulated provision for losses on loans and guarantees) totaled $106,509 million, equal to 49.7% of the statutory lending limit. IBRD's lending operations have conformed generally to five principles derived from its Articles. These principles, taken together, seek to ensure that IBRD IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 9 loans are made to member countries for financially Figure 2: IBRD Lending Commitments and economically sound purposes to which those Percent countries have assigned high priority, and that funds 100% lent are utilized as intended. The five principles are described in Box 3. Within the scope permitted by the Articles, application of these principles must be 75% Investment developed and adjusted in light of experience and changing conditions. 50% Lending Cycle The process of identifying and appraising a project and approving and disbursing a loan often extends 25% over several years. However, on numerous occasions Adjustment IBRD has shortened the preparation and approval cycle in response to emergency situations such as 0% natural disasters. FY98 FY99 FY00 FY01 FY02 FY03 FY04 Generally, the appraisal of projects is carried out by In FY 2004, new IBRD commitments for adjustment IBRD's operational staff (economists, engineers, lending accounted for 40% of total commitments financial analysts, and other sector and country (37%--FY 2003; 64%--FY 2002). specialists). With certain exceptionsa, each loan must In FY 1999, IBRD introduced special structural and be approved by IBRD's Executive Directors. sector adjustment loans to support structural and Loan disbursements are subject to the fulfillment of social reforms by creditworthy IBRD borrowers with conditions set out in the loan agreement. During exceptional external financing needs due to a implementation of IBRD-supported operations, potential or actual crisis. experienced IBRD staff review progress, monitor On rare occasions, IBRD will provide enclave compliance with IBRD policies and assist in lending for a large, foreign exchange generating resolving any problems that may arise. An project in a member country usually eligible only for independent IBRD unit, the Operations Evaluation loans from the International Development Department, evaluates the extent to which Association (IDA). In these circumstances operations have met their major objectives, and these appropriate risk mitigation measures are evaluations are reported directly to the Executive incorporated (including off-shore escrow accounts Directors. and debt-service reserves acceptable to IBRD) to Lending Instruments ensure that the risks to IBRD are minimized. At June IBRD lending generally falls into one of two 30, 2004, IBRD had $135 million in outstanding categories: investment or adjustment lending. loans for enclave projects ($116 million--June 30, Investment lending is generally used to finance 2003). No new enclave lending was approved during goods, works, and services in support of economic FY 2004 or FY 2003. and social development projects in a broad range of Financial Terms of Loans sectors. In contrast, adjustment lending generally Financial Terms of Currently Available Products supports social, structural, and institutional reforms. IBRD currently offers a product mix that is intended In the past, the majority of IBRD loans were for to provide borrowers with the flexibility to select investment projects or programs. However, as shown terms that are both compatible with their debt in Figure 2 the percentage of IBRD loans approved management strategy and suited to their debt- for adjustment lending over the past seven years servicing capacity. As of June 30, 2004, IBRD offers occasionally exceeded 50 percent. the following two basic types of loan terms, each denominated in the currency or currencies chosen by the borrower provided it is a currency in which IBRD can efficiently intermediate: variable-spread loans, a. For Adaptable Program Loans (APLs), the Board approves all and fixed-spread loans. Variable-spread loans, which first-phase APLs and delegates to Management the approval of were introduced in FY 1993, have a variable spread subsequent phases subject to agreed procedures. Learning and Innovation Loans are loans of $5 million or less approved by Man- over LIBOR that is adjusted every six months. Fixed- agement. spread loans, which were introduced in FY 2000, 10 THE WORLD BANK ANNUAL REPORT 2004 have a fixed spread over LIBOR that is fixed for the manner consistent with the purpose of the loan. life of the loan. Repayment profiles may be level repayment of principal, an annuity type schedule, a single lump- Borrowers selecting the fixed-spread loan product sum repayment, or a customized schedule. may, for a fee, change the currency or interest rate Repayment profiles cannot be changed after a loan is basis over the life of the loan. For example, signed. borrowers have the option to fix, unfix, or re-fix the interest rate at market rates on all or a part of the Prior to the introduction of special structural and disbursed amounts for up to the remaining maturity sector adjustment loans, IBRD approved and of the loan. disbursed several large loans totaling $7,000 million on non-standard loan terms. These loans, which Transaction fees range from 0 to 25 basis points of were issued in response to the global financial crises the notional transaction amount. Any conversion of FY 1998 and FY 1999, carry a six-month U.S. requests accepted by IBRD are executed at market dollar LIBOR interest rate plus a fixed spread ranging rates. from 75 to 100 basis points and a front-end fee. Table 5 summarizes the financial terms for these None of these loans is eligible for waivers of interest types of loans. or commitment charges. During FY 2004, $1,731 million of these loans were repaid (including Repayment terms for fixed-spread loans are more prepayments of $831 million), resulting in an flexible than for variable-spread loans, subject to outstanding balance on these loans of $3,469 million certain constraints on the average repayment at June 30, 2004. maturity and final maturity on a country basis. Within these constraints, borrowers have flexibility to configure grace periods and maturity profiles in a Table 5: Loan Pricing - Financial Terms of Currently Available Products Basis Points Special Structural and Sector Variable Spread Fixed Spread Loans Adjustment Loans Loans (VSL) (FSL) (SSAL) Reference Market Rate Six month LIBOR SIx month LIBOR Six month LIBOR Spread Contractual Lending Spread 75 (new loans)a 75 400 50 (old loans)b Market Risk Premium -- 5c -- Funding Cost Margin Weighted average Projected funding -- spread to LIBOR of spread to LIBOR debt allocated to VSLs Charges Commitment charge 75 85d 75 Front-end fee 100 (new loans) 100 100 0 (old loans) Eligible for Waivers Interest Yes Yes No Commitment Yes Yes No Front-end feee Yes Yes No Final Maturity 15-20 years 15-25 years 5 years Grace period 3-5 years 3-8 years 3 years a. Loans for which the invitation to negotiate was issued on or after July 31, 1998. b. Loans for which the invitation to negotiate was issued prior to July 31, 1998. c. The market risk premium is meant to compensate IBRD for additional funding risk associated with this product. d. The commitment charge is 85 basis points for the first four years and 75 basis points thereafter to compensate IBRD for additional funding and refinancing risk associated with this product. e. On August 3, 2004 the Board of Executive Directors approved a 50 basis point waiver of the front end fee on all loans (other than special structural adjustment loans) to be presented to the Board in FY 2005. This waiver also applies retroactively for FY 2004 to loans presented on or after March 1, 2004. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 11 At June 30, 2004, 56% (49%--June 30, 2003) of connection with existing IBRD loans. These loans outstanding were variable-spread loans or derivative products include currency and interest fixed-spread loans, including special structural and rate swaps, and interest rate caps and collars. sector adjustment loans and loans with non-standard IBRD will pass through its market cost of the terms. instrument to the borrower, and will charge a Loans with a Deferred Drawdown Option transaction fee comparable to the fee charged on the A Deferred Drawdown Option (DDO) for use with fixed-spread loan conversion features. These IBRD adjustment loans gives IBRD borrowers the instruments may be executed either under a master option of deferring the loan's disbursement for up to derivatives agreement which substantially conforms three years. Loans with a DDO are subject to a to industry standards, or in individually negotiated commitment fee of 100 basis points, which is 25 basis transactions. The first such currency swap points higher than that for standard IBRD loans. transaction was executed between IBRD and one of Also, the front-end fee which is normally payable at its borrowers under a Master Derivatives Agreement the time a loan becomes effective, is only payable for in November 2003. Further details are provided in a DDO loan at the time it is disbursed. the Notes to Financial Statements--Note D. Derivative Products Financial Terms of Previously Available Products Along with the approval of the introduction of the In previous years, IBRD offered loans with a variety fixed-spread loan product with its various risk of other financial terms including: multicurrency management features such as rate fixing and pool loans and fixed-rate single currency loans. currency conversion, the Executive Directors also Table 6 summarizes the financial terms for variable- approved the offer of new derivative products for rate multicurrency and single-currency pool loans borrowers. These products respond to borrowers' and fixed-rate single-currency loans. needs for access to better risk management tools in Table 6: Loan Pricing - Financial Terms of Previously Available Products Basis Points Variable rate multicurrency Variable rate single Fixed rate single pool loans currency pool loansa currency Loansb (1982-2001) (1996-1998) (1995-1999) Weighted average cost of Weighted average Cost Base allocated debt cost of allocated debt LIBOR Spread Contractual Lending Spread 75 (new loans)c 50 75 (new loans) 50 (old loans)d 50 (old loans) Market Risk Premium -- -- 0-10 Funding Cost Margin -- -- IBRD's funding spread to LIBOR Charges Commitment charge 75 75 75 Front-end fee 100 (new loans) -- 100 (new loans) 0 (old loans) -- 0 (old loans) Eligible for Waivers Interest Yes Yes Yes Commitment Yes Yes Yes Final Maturity 15-20 years based on original 12-20 years loan agreement Grace period 3-5 years based on original 3 years loan agreement a. Converted from variable-rate multicurrency pool loans. b. Cost base and spread are fixed on rate-fixing date for amounts disbursed during the preceding six months. c. Loans for which the invitation to negotiate was issued on or after July 31, 1998. d. Loans for which the invitation to negotiate was issued prior to July 31, 1998. 12 THE WORLD BANK ANNUAL REPORT 2004 Prior to 1980, IBRD offered loans at fixed rates payments of principal, interest and other charges determined at the time a loan was contracted and set within 30 calendar days of the due dates during the at a specified spread over then-current borrowing preceding six months, on all their loans. Waivers of a costs. The currency composition of each loan portion of the commitment charge owed on the depended on the currencies disbursed on that loan. undisbursed portion of loans are also determined In 1980, IBRD established the currency pool system, annually and have been in effect since FY 1990. All funded primarily with fixed rate medium-to-long borrowers receive the commitment charge waiver on term borrowings. In 1982, IBRD mitigated its their eligible loans. Table 7 presents a breakdown of interest rate risk by moving from offering a fixed rate IBRD's loan charge waivers. Further details are to a variable rate on these loans. provided in the Notes to Financial Statements-Note D. The currency composition of multicurrency pool loans is determined on the basis of a pool, which Table 7: Loan Charge Waivers provides a currency composition that is the same for Basis points all loans in the pool. Pursuant to a policy established by the Executive Directors and subject to their Interest Period Commencing periodic review, at least 90% of the U.S. dollar equivalent value of the pool is in a fixed ratio of one FY 2005 FY 2004 FY 2003 U.S. dollar to 125 Japanese yen to one euro. Commitment charge waivers 50 50 50 Interest waiversa During FY 1997, IBRD offered borrowers the option Old loans 5 5 5 to elect to modify their currency choice by New loans 25 25 25 converting multicurrency pool loans to single Average eligibility n.a. 98% 96% currency loan terms or single currency pool terms. Front-end fee waiversb 50 -- -- The lending rate formulation for loans with single currency pool terms is the same as that for a. On loans to eligible borrowers. multicurrency pool loans. b. On August 3, 2004 the Board of Executive Directors approved a Single-currency pool loans are held in U.S. dollars, 50 basis point waiver of the front end fee on all loans (other than special structural adjustment loans) to be presented to the Japanese yen, and euro. Fixed-rate single currency Board in FY 2005. This waiver also applies retroactively for FY loans were offered in all currencies in which IBRD 2004 to loans presented on or after March 1, 2004. could efficiently intermediate. Guarantees Any fixed-rate multicurrency pool loans that were IBRD offers guarantees on loans from private subsequently converted to single currency pools investors for projects in countries eligible to borrow continued to carry their fixed rate. from IBRD, although they can also be offered on Fixed-rate single currency loans carry lending rates securities issued by entities eligible for IBRD loans, fixed on semi-annual rate fixing dates for amounts and in exceptional cases offered in countries only disbursed during the preceding six months. For the eligible to borrow from IDA. IBRD applies the same interim period from the date each disbursement is country creditworthiness and project evaluation made until its rate fixing date, interest accrues at the criteria to guarantees as it applies to loans. rate applicable to variable-spread loans. IBRD guarantees can be customized to suit varying At June 30, 2004, 44% (51%--June 30, 2003) of country and project circumstances. They can be loans outstanding carried these previously available targeted to mitigate specific risks, generally risks financial terms. relating to political, regulatory and government Figure 3 presents a breakdown of IBRD's loan performance, which the private sector is not portfolio by loan product. For more information, see normally in a position to absorb or manage. the Notes to Financial Statements--Note D. Each guarantee requires the counter-guarantee of the Waivers member government. IBRD prices guarantees Waivers of a portion of interest owed by all eligible consistent with the way it prices its loans. borrowers are determined annually and have been in effect since FY 1992. Eligibility for the partial waiver of interest is limited to borrowers that have made full IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 13 Figure 3: Loan Portfolio by Loan Product (In millions of U.S. dollars) Loans Outstanding June 30, 2004 June 30, 2003 Variable-Rate Single Currency Variable-Rate Single Currency Multicurrency Pool Pool Loans Fixed-Rate Single Multicurrency Pool Pool Loans Loans Fixed-Rate Single $16,489 Currency Loansa Loans $20,490 $18,799 (15%) (18%) Currency Loansa $13,063 $22,728 (17%) $15,528 (12%) (20%) (13%) Special Structural Other Loansb and Sector $355 Adjustment Loansc (*%) Other Loansb $5,017 Special Structural $415 (5%) and Sector (*%) Adjustment Loansc $8,454 Variable-Spread (7%) Variable-Spread Fixed-Spread Loans Loans Loans $17,152 Fixed-Spread Loans $38,735 $36,211 (16%) $12,414 (35)% (31)% (11%) Total loans outstanding: $109,610 Total loans outstanding: $116,240 June 30, 2004 Undisbursed Balances June 30, 2003 Variable-Rate Variable-Rate Special Structural Special Structural Multicurrency Pool Multicurrency Pool Single and Sector and Sector Loans Loans Currency Pool Adjustment Loans Fixed-Spread Loans Adjustment Loans $1,400 $724 Loans $125 Single Currency Pool $8,564 $125 (4%) $8 Fixed-Spread Loans (2%) (*%) Loans (26%) (1%) (*%) $11,619 $1 Fixed-Rate Single (36%) (*%) Currency Loans $1,784 Fixed-Rate Single (5%) Currency Loans $990 (3%) Variable-Spread Variable-Spread Loans Loans $18,669 $21,150 (58%) (64%) Total undisbursed balances: $32,128 Total undisbursed balances: $33,031 a. Includes fixed-rate single currency loans for which the rate had not yet been fixed at fiscal year-end. b. Includes loans issued prior to 1980, loans to IFC, and fixed-rate multicurrency pool loans. c. Includes loans with non-standard terms. * Indicates amounts less than 0.5%. IBRD generally provides the following types of projects in a member country usually eligible only guarantees: for credits from IDA. Fees charged for enclave guarantees are higher than those charged for non- Partial risk guarantees: These cover debt-service enclave guarantees. The annual commitment of defaults on a loan that result from non-performance enclave guarantees is limited to an aggregate of government obligations. guaranteed amount of $300 million. As of June 30, Partial credit guarantees: These are used for public 2004 no enclave guarantees were outstanding. sector projects when there is a need to extend loan During FY 2003, one IBRD guarantee was called on maturities and guarantee specified interest or certain bonds that had been issued by Argentina. In principal payments on loans to the government or its accordance with the terms of the guarantee, IBRD instrumentalities. paid $250 million to the holders of the guarantee. Policy-based guarantees: When partial credit IBRD and Argentina have agreed to a reimbursement guarantees are used in support of agreed structural, arrangement for the amount paid out. This amount institutional and social policies and reforms, they are is included in Loans Outstanding on the balance considered policy-based guarantees. Eligibility for sheet. Pursuant to the terms of the guarantee, the IBRD adjustment lending is a necessary condition guarantee was not reinstated. for eligibility for policy-based guarantees. IBRD's exposure at June 30, 2004 on its guarantees Enclave guarantees: These are offered in exceptional (measured by discounting each guaranteed amount cases for loans for foreign-exchange generating from its first call date) is detailed in Table 8. For 14 THE WORLD BANK ANNUAL REPORT 2004 additional information see the Notes to Financial currency and interest rate swaps (including currency Statements--Note D. forward contracts), asset-backed (including mortgage-backed) securities, and futures and Table 8: Guarantee Exposure options contracts. In millions of U.S. dollars Liquidity risk arises in the general funding of IBRD's FY 2004 FY 2003 FY 2002 activities and in the management of its financial Partial risk $ 418 $ 456 $ 465 positions. It includes the risk of being unable to fund Partial credit 561 570 551 its portfolio of assets at appropriate maturities and Policy based 157 158 406 rates and the risk of being unable to liquidate a Total $1,136 $1,184 $1,422 position in a timely manner at a reasonable price. The objective of liquidity management is to ensure Other Activities the availability of sufficient cash flows to meet all of Consultation: In addition to its financial operations, IBRD's financial commitments. IBRD provides technical assistance to its member As one component of liquidity management, IBRD countries, both in connection with, and maintains a $500 million line of credit with an independently of, lending operations. There is a independent financial institution.a This facility is growing demand from borrowers for strategic used to cover any overnight overdrafts that may advice, knowledge transfer, and capacity building. occur due to failed trades. For further details about Such assistance includes assigning qualified this facility, see the Notes to Financial Statements-- professionals to survey developmental opportunities Note E. in member countries, analyzing their fiscal, economic and developmental environment, assisting Under IBRD's liquidity management policy, member countries in devising coordinated aggregate liquid asset holdings are kept at or above a development programs, appraising projects suitable specified prudential minimum in order to safeguard for investment and assisting member countries in against cash flow interruptions. That minimum is improving their asset and liability management equal to the highest consecutive six months of techniques. expected debt service obligations for the fiscal year, plus one-half of net approved loan disbursements as Research and Training: To assist its developing projected for the fiscal year. The FY 2005 prudential member countries, IBRD--through the World Bank minimum liquidity level has been set at $20 billion, Institute and its partners--provides courses and an increase of $2 billion from that set for FY 2004. other training activities related to economic policy IBRD also holds liquid assets over the specified development and administration for governments minimum to provide flexibility in timing its and organizations that work closely with IBRD. borrowing transactions and to meet working capital Trust Fund Administration: IBRD, alone or jointly needs. with IDA, administers on behalf of donors, funds The primary objective for IBRD in the management restricted for specific uses. These funds are held in of liquid assets is to protect the principal amount of trust and are not included in the assets of IBRD. See these investments. In addition, IBRD seeks to achieve the Notes to Financial Statements-Note J. a reasonable return on the liquid asset portfolio Investment Management: IBRD offers investment using prudent asset and risk management management services to several external institutions, techniques. The General Investment Authorization including central banks of member countries. One for IBRD approved by the Board of Executive objective of providing the services to central banks is Directors provides the basic authority under which to assist them in developing portfolio management the liquid assets of IBRD can be invested. Further, all skills. These managed funds are not included in the investment activities are conducted in accordance assets of IBRD. See the Notes to Financial with a more detailed set of Investment Guidelines. Statements--Note J. The Investment Guidelines are approved by the Chief Financial Officer and implemented by the 4. LIQUIDITY MANAGEMENT Treasurer. These Investment Guidelines set out detailed trading and operational rules including IBRD's liquid assets are held principally in highly- providing criteria for eligible instruments for rated fixed income securities. These securities include obligations of governments and other official entities, time deposits and other unconditional a. This line of credit is held jointly with the International Devel- obligations of banks and financial institutions, opment Association (IDA), an affiliated organization. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 15 investment; establishing risk parameters versus program and can be used to take advantage of benchmarks such as an overall stop-loss limit and attractive market opportunities. duration deviation; specifying concentration limits Figure 4 represents IBRD's liquid asset portfolio size on counterparties and instrument classes; as well as and structure at the end of FY 2004 and FY 2003, establishing clear lines of responsibility on risk excluding investment assets associated with certain monitoring and compliance. other postemployment benefits. At the end of FY Liquid assets may be held in three distinct sub- 2004, the aggregate size of the IBRD liquid asset portfolios: stable; operational; and discretionary, portfolio stood at $30,915 million, an increase of each with different risk profiles and performance $4,492 million from FY 2003. Of this amount, $1,350 benchmarks. million ($1,338 million in FY 2003) in the stable portfolio was managed by external firms. IBRD's The stable portfolio is principally an investment liquid asset portfolio is largely composed of assets portfolio holding the prudential minimum level of denominated in U.S. dollars with net exposure to liquidity, which is set at the beginning of each fiscal short-term interest rates. The debt funding these year. Investment of up to 20% of the stable portfolio liquid assets also shares similar currency and may be contracted out to external managers. duration profiles. This is a direct consequence of Separate investment guidelines which conform to IBRD's exchange rate and interest rate risk IBRD's overall Investment Guidelines are provided management policies (see Section 6--Financial Risk to each external manager. Management), combined with appropriate The operational portfolio provides working capital investment benchmarks. In addition to monitoring for IBRD's day-to-day cash flow requirements. gross investment returns compared to their benchmarks, IBRD also monitors overall investment The discretionary portfolio, when used, provides earnings net of funding costs (see Section 8--Results flexibility for the execution of IBRD's borrowing of Operations). Figure 4: Liquid Asset Portfolio Composition (In millions of U.S. dollars) June 30, 2004 June 30, 2003 Stable Portfolio Stable Portfolio $18,213 $18,024 59% 68% Discretionary Portfolio Operational Portfolio Operational Portfolio $4,045 $8,657 $8,399 13% 28% 32% Table 9: Liquid Asset Portfolio Returns and Average Balances In millions of U.S. dollars Average Balances Financial Return (%) FY 2004 FY 2003 FY 2004 FY 2003 IBRD Overall Portfolio $29,142 $25,354 1.04 1.62 Stable 18,111 18,172 1.04 1.73 Operational 7,009 7,182 0.99 1.34 Discretionary 4,022 -- 1.10 -- 16 THE WORLD BANK ANNUAL REPORT 2004 Table 10: Contractual Cash Obligations In millions of U.S. dollars Payments due by period Less than 1 Morethan Total year 1-3 years 3-5 years 5 years Long-term debt $106,059 $19,881 $26,937 $17,157 $42,084 Capital lease 69 8 17 17 27 Operating leases 100 27 37 24 12 Contractual purchases and capital expenditures 110 110 -- -- -- Other long-term liabilities 376 54 56 50 216 Total $106,714 $20,080 $27,047 $17,248 $42,339 The returns and average balances of the liquid asset Excluded from the table are a number of obligations portfolio in FY 2004 compared to FY 2003 are to be settled in cash. These obligations are presented presented in Table 9. These returns exclude in IBRD's balance sheet and include undisbursed investment assets funding certain other loans; short-term borrowings; payable for currency postemployment benefits. and interest rate swaps; payable for investment securities purchased, and payable for transfers The lower returns in FY 2004 are due primarily to approved by the Board of Governors. the lower average interest rate environment in FY 2004 as compared to FY 2003, as shown in Figure 10. 5. FUNDING RESOURCES IBRD enters into derivative transactions to manage Equity its investment portfolio. The main purposes of these derivative instruments are to enhance the return, Total shareholders' equity, as reported in IBRD's and manage the overall duration, of the portfolio. balance sheet at June 30, 2004, was $35,463 million compared with $37,918 million at June 30, 2003. The Contractual Obligations decrease from FY 2003 primarily reflects the decrease In the normal course of business, IBRD enters into in retained earnings. various contractual obligations that may require IBRD's equity base plays a critical role in securing its future cash payments. Table 10 summarizes IBRD's financial objectives. By enabling IBRD to absorb risk significant contractual cash obligations, by out of its own resources, its equity base protects remaining maturity, at June 30, 2004. Long-term shareholders from a possible call on callable capital. debt includes direct medium- and long-term The adequacy of IBRD's equity capital is judged on borrowings excluding swaps, but does not include the basis of its ability to generate future net income any adjustment for unamortized premiums, sufficient to absorb potential risks and support discounts or effects of applying FAS 133 (additional normal loan growth, without reliance on additional information can be found in the Notes to Financial shareholder capital. Statements--Note E--Borrowings). Capital and operating lease expenditures primarily represent For management purposes, IBRD closely monitors future cash payments for real estate-related equity as defined and utilized in the equity-to-loans obligations and equipment. Other long-term ratio. Table 11 presents the composition of this liabilities include accrued liabilities for staff measure at June 30, 2004 and 2003. compensation and benefits. Capital and operating The equity-to-loans ratio is a summary statistic that leases, contractual purchases and capital IBRD uses as one measure of the adequacy of its risk- expenditures, and other long term obligations bearing capacity. IBRD also uses a stress test as a include amounts which will be shared with IDA, IFC measure of income-generating capacity and an input and MIGA in accordance with individual cost to the assessment of capital adequacy. See discussion sharing agreements (additional information can be in Section 6, Financial Risk Management-- found in the Notes to Financial Statements--Note Managing Risk-Bearing Capacity. I--Administrative Expenses, Contributions to Special Programs, and Other Income.) IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 17 Table 11: Equity Capital In millions of U.S. dollars June 30, 2004 June 30, 2003 Usable Capital Paid-in Capital $ 11,483 $ 11,478 Restricted Paid-in Capital (2,455) (2,464) Net Receivable for Maintenance of Value (94) (433) Total Usable Capital 8,934 8,581 Special Reserve 293 293 General Reserve, including allocation of FY 2004/FY 2003 net income 22,222 21,542 Cumulative Translation Adjustmenta (117) (389) Equity used in Equity-to-Loans Ratio--Reported Basis $ 31,332 $ 30,027 Current Value Adjustments 569 1,408 Equity used in Equity-to-Loans Ratio--Current Value Basis $ 31,901 $ 31,435 Loans and Guarantees Outstanding, net of Accumulated Provision for Losses on Loans and Guarantees and Deferred Loan Income $106,750 $112,922 Current Value Loans and Guarantees Outstanding, net of Accumulated Provision for Losses on Loans and Guarantees and Deferred Loan Income $109,748 $119,275 Equity-to-Loans Ratio--Reported Basis 29.35% 26.59% Equity-to-Loans Ratio--Current Value Basis 29.07% 26.36% a. Excluding cumulative translation amounts associated with the FAS 133 adjustment. As presented in Figure 5, IBRD's equity-to-loans Reserve of $680 million that was approved on August ratio increased during FY 2004, on both a reported 3, 2004, was included in this ratio at June 30, 2004 basis (excluding cumulative translation adjustments ($2,410 million--June 30, 2003). The increase in this associated with the FAS 133 adjustments) and a ratio from 26.59% at June 30, 2003 to 29.35% at June current value basis. 30, 2004 was due to the decrease in net loans outstanding and the overall increase in equity in FY Figure 5: Equity-to-Loans Ratio 2004. During FY 2004, IBRD increased the General 31.0% Reserves in order to improve its risk-bearing 29.0% capacity. 27.0% Reported Basis Capital 25.0% Shareholder support for IBRD is reflected in the 23.0% capital backing it has received from its members. At 21.0% June 30, 2004, the authorized capital of IBRD was 19.0% Current Value Basis $190,811 million, of which $189,718 million had 17.0% been subscribed. Of the subscribed capital, $11,483 million had been paid in and $178,235 million was 15.0% callable. Of the paid-in capital, $8,934 million was 97 98 99 00 01 02 03 04 available for lending and $2,549 million was not un-J un-J un-J un-J un-J un-J un-J un-J available for lending.The terms of payment of IBRD's capital and the restrictions on its use that are In accordance with the financial policy defining this derived from the Articles and from resolutions of ratio, the amount of the transfer to the General IBRD's Board of Governors are as follows: 18 THE WORLD BANK ANNUAL REPORT 2004 Paid-in Capital No call has ever been made on IBRD's callable (i) $2,628 million of IBRD's capital was initially capital. Any calls on unpaid subscriptions are paid in gold or U.S. dollars or was converted required to be uniform, but the obligations of the from the currency of the subscribing members members of IBRD to make payment on such calls are into U.S. dollars. This amount may, under the independent of each other. If the amount received on Articles, be freely used by IBRD in its opera- a call is insufficient to meet the obligations of IBRD tions. for which the call is made, IBRD has the right and is (ii) $8,705 million of IBRD's capital was paid in the bound to make further calls until the amounts national currencies of the subscribing members. received are sufficient to meet such obligations. Under the Articles this amount is subject to However, no member may be required on any such maintenance of value obligations and may be call or calls to pay more than the unpaid balance of used for funding loans only with the consent of its capital subscription. the member whose currency is involved, or used for administrative expenses without the need for At June 30, 2004, $103,604 million (58.1%) of the consent of the member whose currency is uncalled capital was callable from the member involved. In addition, these national currencies countries of IBRD that are also members of the may be used by IBRD following a decision by the Development Assistance Committee (DAC) of the Board of Executive Directors, to invest or lend in Organization for Economic Cooperation and that currency, or swap the national currency into Development (OECD). This amount slightly another currency for investment or lending pur- exceeded IBRD's outstanding borrowings including poses, provided it has the consent of the mem- swaps at June 30, 2004. Table 12 sets out the capital ber whose currency is involved. In accordance with such consents for lending, $5,750 million of subscriptions of those countries and the callable this amount was being used in IBRD's lending amounts. operations at June 30, 2004. Table 12: Capital Subscriptions of DAC Members of (iii) $150 million of IBRD's capital was converted to OECD Countries U.S. dollars from the currency of the subscribing In millions of U.S. dollars members by providing U.S. dollar denominated nonnegotiable, non-interest bearing demand Total Capital Uncalled Portion Member Countrya Subscription of Subscription notes, encashable in the currency of the sub- scribing member. This amount may, under the terms of the note, be encashed for administrative United States $ 31,965 $ 29,966 expenses or, after all subscribed capital has been Japan 15,321 14,377 called, IBRD will have the right to encash the Germany 8,734 8,191 note to meet its obligations. France 8,372 7,851 United Kingdom 8,372 7,832 Callable Capital Canada 5,404 5,069 (iv) $151,775 million of IBRD's capital may, under Italy 5,404 5,069 the Articles, be called only when required to Netherlands 4,283 4,018 meet obligations of IBRD for funds borrowed or Belgium 3,496 3,281 on loans guaranteed by it. This amount is thus Spain 3,377 3,171 not available for use by IBRD in making loans. Switzerland 3,210 3,012 Payment on any such call may be made, at the Australia 2,951 2,770 option of the particular member, either in gold, Sweden 1,806 1,696 in U.S. dollars or in the currency required to dis- Denmark 1,623 1,525 charge the obligations of IBRD for which the call Austria 1,335 1,254 is made. Norway 1,204 1,132 Finland 1,033 971 (v) $26,461 million of IBRD's capital is to be called New Zealand 873 821 only when required to meet obligations of IBRD Portugal 659 620 for funds borrowed or on loans guaranteed by it, Ireland 636 599 pursuant to resolutions of IBRD's Board of Gov- Greece 203 189 ernors (though such conditions are not required Luxembourg 199 190 by the Articles). Of this amount, 10% would be Total $110,460 $103,604 payable in gold or U.S. dollars and 90% in the national currencies of the subscribing members. While these resolutions are not legally binding a. See details regarding the capital subscriptions of all on future Boards of Governors, they do record members of IBRD at June 30, 2004 in Financial State- ments-Statement of Subscriptions to Capital Stock and an understanding among members that this Voting Power. amount will not be called for use by IBRD in its lending activities or for administrative purposes. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 19 The United States is IBRD's largest shareholder. Under the Bretton Woods Agreements Act, the Par Table 13: Funding Operations Indicators Value Modification Act and other U.S. legislation, the Secretary of the U.S. Treasury is permitted to pay up FY 2004 FY 2003 to $7,663 million of the uncalled portion of the Total Medium- and Long-term subscription of the United States, if it were called by Borrowingsa (USD million) $12,535 $19,305 IBRD, without any requirement of further Average Maturityb (years) 3.9 6.1 congressional action. The balance of the uncalled Number of Transactions 258 402 portion of the U.S. subscription, $22,303 million, has Number of Currencies 10 10 been authorized by the U.S. Congress but not a. Includes one-year notes and represents net proceeds on appropriated. Further action by the U.S. Congress a settlement date basis. would be required to enable the Secretary of the b. Average maturity to first call date. Treasury to pay any portion of this balance. The Figure 6: New Medium- and Long-term Funding General Counsel of the U.S. Treasury has rendered an Excluding Swaps by Currencya opinion that the entire uncalled portion of the U.S. (In millions of U.S. dollars equivalent) subscription is an obligation backed by the full faith and credit of the United States, notwithstanding that FY 2004 congressional appropriations have not been obtained New with respect to certain portions of the subscription. Zealand Dollars U.S. Dollars For a further discussion of capital stock, restricted $2,077 $4,247 currencies, maintenance of value and membership (17%) (34%) refer to the Notes to Financial Statements--Notes A and B. Australian Borrowings Dollars Euro Source of Funding $3,159 (25%) Others Japanese $134 IBRD diversifies its sources of funding by offering its $1,179 Yen (1%) securities to institutional and retail investors globally. (9%) $1,739 (14%) Under its Articles, IBRD may borrow only with the approval of the member in whose markets the funds FY 2003 are raised and the member in whose currency the Australian borrowing is denominated, and only if each such Dollars Others Canadian member agrees that the proceeds may be exchanged $5,019 $958 (26%) Dollars for the currency of any other member without (5%) $1,729 restriction. Japanese (9%) Yen New medium- and long-term funding excluding $3,847 (20%) swaps by currency for FY 2004, as compared to FY 2003, is shown in Figure 6. Euro U.S. Dollars $1,112 $6,640 Funding Operations (6%) (34%) In FY 2004, medium- and long-term debt raised a. Includes one-year notes and represents net proceeds on a directly in financial markets by IBRD amounted to settlement date basis. $12,535 million compared to $19,305 million in FY 2003. Table 13 summarizes IBRD's funding Funding raised in any given year is used for IBRD's operations for FY 2004 and FY 2003. general operations, including loan disbursements, refinancing of maturing debt and prefunding of future lending activities. The decrease in funding in FY 2004 was primarily attributable to lower borrowing requirements as a result of the reduction in the loan portfolio. All proceeds from new funding 20 THE WORLD BANK ANNUAL REPORT 2004 are initially invested in the liquid asset portfolio until for asset/liability management purposes to match the they are required for IBRD's operations. Debt is pool of liabilities as closely as possible to the interest allocated on a periodic basis to the different debt rate and currency characteristics of liquid assets and pools funding loans as necessary, in accordance with loans. IBRD does not enter into derivatives for operating guidelines. In both FY 2004 and FY 2003, speculative purposes in the borrowings portfolio. IBRD followed a strategy of selective bond issuance, A more detailed analysis of borrowings outstanding composed of cost-effective private placements, is provided in the Notes to Financial Statements public issues placed with large institutional investors, --Note E. and public issues targeted to retail investors. IBRD strategically repurchases, calls or prepays its 6. FINANCIAL RISK MANAGEMENT debt to reduce the cost of borrowings and to reduce IBRD assumes various kinds of risk in the process of exposure to refunding requirements in a particular providing development banking services. Its year or to meet other operational needs. In response activities can give rise to four major types of risk: to market conditions, during FY 2004, IBRD credit risk; market risk (interest rate and exchange repurchased or called $3,996 million of its rate); liquidity risk; and operational risk. The major outstanding borrowings ($6,293 million during FY inherent risk to IBRD is country credit risk, or loan 2003). portfolio risk. Use of Derivatives Governance Structure All new funding is initially swapped into floating- The risk management governance structure includes rate U.S. dollars, with conversion to other currencies a Risk Management Secretariat supporting the or fixed-rate funding being carried out subsequently Management Committee in its oversight function, in accordance with loan funding requirements. particularly in the coordination of different aspects Figures 7a and 7b illustrate the effect of swaps on of risk management, and in connection with risks both the interest rate structure and currency that cut across functional areas. composition of the borrowings portfolio at June 30, 2004. Interest rate and currency swaps are also used Figure 7a: Effect of Swaps on Interest Rate Structures--June 30, 2004 Borrowings excluding swaps Borrowings including swaps Floating 17% Floating 70% Fixed 30% Fixed 83% Figure 7b: Effect of Swaps on Currency Composition--June 30, 2004 Borrowings excluding swaps Borrowings including swaps Japanese Japanese Yen Yen Others 16% Euro 4% 1% Euro Others 11% 13% 26% U.S. Dollars U.S. Dollars 84% 45% IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 21 For financial risk management, there is a Finance units responsible for managing these risks. The Committee chaired by the Chief Financial Officer. Corporate Finance Department works with IBRD's The Finance Committee makes recommendations financial managers, who are responsible for the day- and, where appropriate to the topic, takes decisions to-day management of these risks, to establish and in the areas of financial policy, the adequacy and document processes that facilitate, control and allocation of risk capital, and oversight of financial monitor risk. These processes are built on a reporting. Three subcommittees that report to the foundation of initial identification and measurement Finance Committee are the Market Risk and of risks by each of the business units. Under the Currency Management Subcommittee, the Credit direction of the Finance Committee, policies and Risk Subcommittee and the Financial Instruments procedures for measuring and managing such risks Subcommittee. are formulated, approved and communicated throughout IBRD. Senior managers represented on The Market Risk and Currency Management the Committee are responsible for maintaining Subcommittee develops and monitors the policies sound credit assessments, addressing transaction and under which market and commercial credit risks product risk issues, providing an independent review faced by IBRD are measured, reported and managed. function and monitoring the loans, investments and The subcommittee also monitors compliance with borrowings portfolios. policies governing commercial credit exposure and currency management. Specific areas of activity Primary responsibility for the management of include reviewing and endorsing guidelines for operational risk in IBRD's financial operations limiting balance sheet and market risks, the use of resides with each of IBRD's managers. These derivative instruments, setting investment individuals are responsible for identifying guidelines, and monitoring matches between assets operational risks and establishing, maintaining and and their funding. The Credit Risk Subcommittee monitoring appropriate internal control in their monitors the measurement and reporting of country respective areas using an operational risk credit risk and reviews the impact on the provision management framework. for losses on loans and guarantees of any changes in This framework requires each business unit to exposure, risk ratings of borrowing member document operational risks and controls, assess the countries, or movements between the accrual and likelihood and impact of operational risks and nonaccrual portfolios. The Financial Instruments evaluate the design and effectiveness of existing Subcommittee reviews the financial, organizational controls using guidelines established by IBRD. An and implementational issues of new products offered independent operational risk control unit supports to IBRD borrowers. this process by undertaking periodic reviews, Country credit risk, the primary risk faced by IBRD, performing quality assurance testing and reporting is identified, measured and monitored by the exceptions. Country Credit Risk Department, led by the Chief The processes and procedures by which IBRD Credit Officer. This unit is independent from IBRD's manages its risk profile continually evolve as its business units. In addition to continuously reviewing activities change in response to market, credit, the creditworthiness of IBRD borrowers, this product, and other developments. The Executive department is responsible for assessing loan portfolio Directors, particularly the Audit Committee risk, determining the adequacy of provisions for members, periodically review trends in IBRD's risk losses on loans and guarantees, and monitoring profiles and performance, as well as any significant borrowers that are vulnerable to crises in the near developments in risk management policies and term. The Chief Credit Officer reports to the Vice controls. President of Strategy, Finance, and Risk Management who is a member of the Operations Managing Risk-Bearing Capacity Committee, which reviews IBRD's Country The Board of Executive Directors assesses IBRD's Assistance Strategies and selected planned risk-bearing capacity based on a variety of metrics, adjustment loans. including an income-based stress test and an equity- Market risks, liquidity risks and counterparty credit to-loans ratio, to measure its income generating risks in IBRD's financial operations are identified, capacity and capital adequacy. measured and monitored by the Corporate Finance Department, which is independent from the business 22 THE WORLD BANK ANNUAL REPORT 2004 The stress test provides a basis for evaluating whether current value and reported basis has been increasing IBRD has sufficient financial capacity to be able to (i) over the last two years. absorb the income loss due to a credit shock,a and Credit Risk (ii) generate sufficient income to support loan growth without causing the post-shock equity-to- Country Credit Risk loans ratio to fall below a minimum level over the Country credit risk is the risk of loss due to a country next ten years. The credit shock event used in the not meeting its contractual obligations. IBRD's stress test is an estimate of the amount of the loan Credit Risk Department continuously reviews the portfolio that could enter nonaccrual status creditworthiness of its borrowing member countries. (payment arrears in excess of six months) in the next These reviews are taken into account in determining three years at an appropriate confidence level. IBRD's overall country programs and lending operations, used to estimate the appropriate level of The risk that a significant portion of its loan provisions for losses on loans and guarantees, and portfolio may go into extended arrears is the most used to assess the adequacy of IBRD's income- significant risk faced by IBRD, and almost all of generating capacity and risk-bearing capital. In IBRD's equity capital is held against this risk. Credit keeping with standard practice, probable losses risk is measured in terms of both probable and inherent in the portfolio due to country credit risk unexpected losses from protracted payments arrears. are covered by the accumulated provision for losses Probable losses are covered by IBRD's accumulated on loans and guarantees, while unexpected losses due provision for losses on loans and guarantees, and to country credit risk are covered by income- unexpected losses are covered by income-generating generating capacity and risk-bearing capital. capacity and equity. Portfolio concentration risk, which arises when a IBRD's equity supports its risk-bearing capacity for small group of borrowers account for a large share of its lending operations. IBRD strives to immunize its loans outstanding, is a key concern for IBRD and is risk-bearing capacity from fluctuations in interest carefully managed, in part, through a single and exchange rates. Therefore, IBRD uses the equity- borrower exposure limit. According to an approach to-loans ratio (on a current value basis) as one tool approved by the Executive Directors in 1997, the to monitor the sensitivity of its risk-bearing capacity single borrower exposure limit is set at the lower of to movements in interest and exchange rates. One of an equitable access limit and a concentration risk IBRD's financial risk management objectives is to limit. The equitable access limit is equal to 10% of seek to protect the equity-to-loans ratio from IBRD's subscribed capital, reserves and unallocated movements arising from market risks. surplus, and the concentration risk limit is estimated To the extent that the duration of its equity capital is by stress testing IBRD's income-generating capacity matched to that of its loan portfolio, this ratio is and risk-bearing capital (taking into account not protected against interest rate movements. However, only current exposure ­ loans outstanding plus the the sensitivity of IBRD's operating income to present value of guarantees ­ but also projected changes in market interest rates has been increasing exposure over the ensuing three year period). The as borrowers have chosen to borrow from IBRD single borrower exposure limit is determined by the primarily on floating rate terms since the Executive Directors each year at the time they introduction of LIBOR-based loans. To the extent consider IBRD's reserves adequacy and the allocation that the currency composition of its equity capital is of its net income from the preceding fiscal year. For matched with that of its loan portfolio, the equity-to- FY 2005, the single borrower exposure limit is $13.5 loans ratio is also protected from exchange rate billion, unchanged from FY 2004, which is the lower movements. of the concentration risk limit ($13.5 billion) and the equitable access limit ($21.4 billion). As depicted in As presented in Figure 5 in Section 5, Funding Figure 8, IBRD's largest exposure (including the Resources, IBRD's equity-to-loans ratio on both the present value of guarantees) to a single borrowing country was $10.9 billion at June 30, 2004. a. Income loss arises from borrower in nonaccrual status no longer paying interest on their loans. In addition, an increase in the loan loss provision is typically warranted as a result of the non- accrual event. This increase in the provision must be recognized as an expense, which further reduces net income in the year of the shock, and through that, impacts the equity-to-loans ratio. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 23 Figure 8: single borrower exposure limit by entering into an Top Eight Country Exposures at June 30, 2004 arrangement that would prevent its net exposure (in billions of U.S. dollars) from exceeding the limit. Any such arrangement would need to be approved in advance by IBRD's 16 Executive Directors. During FY 2003, IBRD entered Exposure Limit ($13.5 billion) 14 into the first such arrangement with one borrower, 12 China. As of June 30, 2004, China had not exceeded the single borrower exposure limit and therefore, 10 activation of the arrangement was not required. 8 6 Overdue and Non-performing Loans When a borrower fails to make payment on any 4 principal, interest or other charges due to IBRD, 2 IBRD has an option to suspend disbursements 0 immediately on all loans. IBRD's current policy however, is to exercise this option through a China Brazil India Russia Mexico Turkey graduated approach as summarized in Box 4. These Indonesia Argentina policies also apply to those member countries who are eligible to borrow from both IBRD and IDA, and Since the current exposure data presented are at a whose payments on IDA credits may become point in time, evaluating these exposures relative to overdue. For borrowers with IBRD loans who the limit requires consideration of the repayment become overdue in their debt service payments on profiles of existing loans, as well as disbursement IDA credits, IBRD also applies the treatment profiles and projected new loans and guarantees. described in Box 4. Under certain circumstances, IBRD would be able to continue to lend to a borrower that was reaching the Box 4: Treatment of Overdue Payments Overdue by 30 days Where the borrower is the member country, no new loans to the member country, or to any other borrower in the country, will be presented to the Board of Executive Directors for approval, nor will any previously approved loan be signed, until payments for all amounts 30 days overdue or longer have been received. Where the borrower is not the member country, no new loans to that borrower will be signed or approved. In either case, the borrower will lose its eligibility for any waiver of interest charges in effect at that time. Overdue by 45 days In addition to the provisions cited above for overdue by 30 days, to avoid proceeding further on the notification process leading to suspension of disbursements, the country as borrower or guarantor and all borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due regardless of the number of days since they have fallen due. Where the borrower is not the member country, no new loans to, or guaranteed by, the member country, will be signed or approved. Overdue by 60 days In addition to the suspension of approval for new loans and signing of previously approved loans, disbursements on all loans to or guaranteed by the member country are suspended until all overdue amounts have been paid. This policy applies even when the borrower is not the member country. Overdue by more than six All loans made to or guaranteed by a member of IBRD are placed in nonaccrual status, unless IBRD determines that the overdue amount will be months collected in the immediate future. Unpaid interest and other charges not yet paid on loans outstanding are deducted from the income of the current period. To the extent that these payments are received, they are included in income. At the time of arrears clearance, a decision is made on the restoration of accrual status on a case by case basis; in certain cases that decision may be deferred until after a suitable period of payment performance has passed. 24 THE WORLD BANK ANNUAL REPORT 2004 See Notes to Financial Statements--Note D for a country: that has emerged from a current or former summary of countries with loans or guarantees in member of IBRD; that is assuming responsibility for nonaccrual status at June 30, 2004. a share of the debt of such member; that because of a major armed conflict in its territory involving Accumulated Provision for Losses on Loans and Guaran- tees extensive destruction of physical assets, has limited IBRD maintains an accumulated provision for losses creditworthiness for servicing the debt it is assuming; on loans and guarantees to recognize the probable and for which a rescheduling/refinancing would losses inherent in both the accrual and nonaccrual result in a significant improvement in its repayment portfolios. The methodology for determining the capacity, if appropriate supporting measures are accumulated provision for losses on loans and taken. This treatment was based on a precedent guarantees is discussed in Section 7, Critical established in 1975 after Bangladesh became Accounting Policies. independent from Pakistan. IBRD does not believe that any other borrowers with loans in nonaccrual IBRD's provision for losses on loans and guarantees status currently meet these eligibility criteria. covers probable credit losses from protracted arrears. The Credit Risk Subcommittee reviews the allowance The accumulated arrears on loans to the former for losses on loans and guarantees at least quarterly Socialist Federal Republic of Yugoslavia (SFRY), for and, if necessary, adjustments are made to the which BiH and SAM undertook responsibility, were provision. cleared through new consolidation loans extended by IBRD in FY 1996 and FY 2002, respectively. The The accumulated provision for losses on loans and reschedulings were structured to maintain the values guarantees decreased by $549 million (this comprises of payments to IBRD in accordance with the terms of a release of provision for losses on loan and the original loan agreements. These reschedulings guarantees of $665 million and positive translation did not change IBRD's net exposure to these adjustments of $116 million) during FY 2004. This borrowers. These new loans included the loan decrease was primarily due to a net improvement in principal outstanding assumed, respectively, by BiH borrowers' risk ratings and negative net and SAM as part of their conditions for succession to disbursements on loans, including $4,614 million of membership of the former SFRY, as well as all prepayments, which reduced loans outstanding. unpaid interest and charges related to the former Treatment of Protracted Arrears SFRY's loans. This resulted in an increase in loans In 1991, the Executive Directors adopted a policy to outstanding of $168 million for BiH and $799 assist members with protracted arrears to IBRD to million for SAM. The offset to these amounts was mobilize sufficient resources to clear their arrears initially classified as deferred loan income, which was and to support a sustainable growth-oriented presented along with the accumulated provision for adjustment program over the medium term. This loan losses as a determinant of net loans outstanding policy is conditional on members agreeing to on the balance sheet. implement certain requirements including an During FY 2003, IBRD determined that the offset to acceptable structural adjustment program, adopting loans outstanding related to BiH and SAM, that was a financing plan to clear all arrears to IBRD and initially classified as Deferred Loan Income, should other multilateral creditors, and continuing to be reclassified to Accumulated Provision for Loan service their obligations to IBRD and other Losses to better reflect the nature of these amounts. multilateral creditors on time. Following the reclassification, the required It is IBRD's practice not to reschedule interest or provisions for these countries were reassessed, which principal payments on its loans or participate in debt resulted in a positive effect on income of $591 rescheduling agreements with respect to its loans. million in FY 2003. See the Notes to Financial However, during FY 1996 and FY 2002, exceptions Statements--Note D for additional information. were made to that practice with regard to Bosnia and Commercial Credit Risk Herzegovina (BiH) and Serbia and Montenegro Commercial credit risk is the risk of loss due to a (SAM), formerly the Federal Republic of Yugoslavia, counterparty not honoring its contractual based on criteria approved by the Executive obligations. Directors in connection with the financial assistance package for Bosnia and Herzegovina in 1996. These IBRD's commercial credit risk is concentrated in criteria limited eligibility for such treatment to a investments in debt instruments issued by sovereign IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 25 governments, agencies, banks and corporate entities. most commonly used volume measure in the The majority of these investments are in AAA and derivative and foreign exchange markets, it is not a AA rated instruments. measure of credit or market risk. In the normal course of its business, IBRD utilizes Mark-to-market exposure is a measure, at a point in various derivatives and foreign exchange financial time, of the value of a derivative or foreign exchange instruments to meet the financial needs of its contract in the open market. When the mark-to- borrowers, to generate income through its market is positive, it indicates the counterparty owes investment activities and to manage its exposure to IBRD and, therefore, creates an exposure for IBRD. fluctuations in interest and currency rates. When the mark-to-market is negative, IBRD owes the counterparty and does not have replacement risk. Derivative and foreign exchange transactions involve credit risk. The effective management of credit risk is When IBRD has more than one transaction vital to the success of IBRD's funding, investment outstanding with a counterparty, and the parties and asset/liability management activities. The have entered into a master derivatives agreement monitoring and managing of these risks is a which contains legally enforceable close-out netting continuous process due to changing market provisions, the "net" mark-to-market exposure environments. represents the netting of the positive and negative exposures with the same counterparty. If this net IBRD controls the credit risk arising from mark-to-market is negative, then IBRD's exposure to investments, derivatives and foreign exchange the counterparty is considered to be zero. For the transactions through its credit approval process, the contractual value, notional amounts and related use of collateral agreements and risk limits, and credit risk exposure amounts by instrument, see the monitoring procedures. The credit approval process Notes to Financial Statements--Note G. involves evaluating counterparty creditworthiness, assigning credit limits and determining the risk Table 14 provides details of IBRD's estimated credit profile of specific transactions. Credit limits are exposure on its investments and swaps (excluding calculated and monitored on the basis of potential those with borrowing member countries), net of exposures taking into consideration current market collateral held, by counterparty rating category. values, estimates of potential future movements in The increase in the proportion of AA rated those values and collateral agreements with investments, compared to the prior year, is mainly counterparties. If there is a collateral agreement with due to the increase in deposits with commercial the counterparty to reduce credit risk, then the banks. After the effects of netting arrangements, the amount of collateral obtained is based on the credit credit exposure from swaps decreased from $6,599 rating of the counterparty. Collateral held includes million at June 30, 2003 to $5,598 million at June 30, cash and government securities. 2004. The swap credit exposure of $5,598 million is IBRD treats the credit risk exposure as the offset by collateral of $4,103 million, which results in replacement cost of the derivative or foreign a total net swap exposure of $1,495 million. exchange product. This is also referred to as replacement risk or the mark-to-market exposure amount. While contractual principal amount is the Table 14: Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars At June 30, 2004 At June 30, 2003 At June 30, 2002 Investments Agencies, Net Total Exposure Total Exposure Total Exposure Counterparty Banks & Swap on Investments % of on Investments % of on Investments % of Rating Sovereigns Corporates Exposure and Swaps Total and Swaps Total and Swaps Total AAA $ 288 $11,592 $ 386 $12,266 40 $10,949 39 $ 11,217 47 AA 379 14,541 1,055 15,975 51 12,649 46 9,253 38 A 1,194 1,616 54 2,864 9 4,231 15 3,537 15 Total $1,861 $27,749 $1,495 $31,105 100 $27,829 100 $24,007 100 26 THE WORLD BANK ANNUAL REPORT 2004 Market Risk particular requirements for that product or liquid IBRD faces risks which result from market asset and within prescribed risk parameters. The movements, primarily changes in interest and current value information is used in the asset/liability exchange rates. In comparison to country credit risk, management process. IBRD's exposure to market risks is small. IBRD has Use of Derivatives an integrated asset/liability management framework As part of its asset/liability management process, to flexibly assess and hedge market risks associated IBRD employs derivatives to manage and align the with the characteristics of the products in IBRD's characteristics of its assets and liabilities. IBRD uses portfolios. derivative instruments to adjust the interest rate Asset/Liability Management repricing characteristics of specific balance sheet assets and liabilities, or groups of assets and liabilities The objective of asset/liability management for IBRD with similar repricing characteristics, and to modify is to ensure adequate funding for each loan product the currency composition of net assets and liabilities. and liquid asset at the most attractive available cost, and to manage the currency composition, maturity Table 15 details the current value information of profile and interest rate sensitivity characteristics of each loan product, the liquid asset portfolio, and the the portfolio of liabilities supporting each lending debt allocated to fund these assets. product and liquid asset in accordance with the Table 15: Financial Instrument Portfolios In millions of U.S. dollars At June 30, 2004 At June 30, 2003 Current Current Value Value Carrying Contractual Adjust- Carrying Contractual Adjust- Value Yield ments Value Yield ments Loansa $109,610 3.44% $2,998 $116,240 4.09% $6,353 Variable-Rate Multicurrency Pool Loans 18,799 3.80 1,599 22,728 4.62 2,447 Single Currency Pool Loansb 16,489 5.24 604 20,490 6.95 1,682 Variable-Spread Loans c 38,813 1.64 16 36,424 1.62 44 Fixed-Rate Single Currency Loans 12,985 6.29 695 15,315 6.45 1,756 Special Structural and Sector Adjustment Loansd 5,017 3.06 * 8,454 3.33 8 Fixed-Spread Loans 17,152 3.23 78 12,414 3.18 401 Other Fixed Rate Loans 355 8.09 6 415 7.92 15 Liquid Asset Portfolioe $ 30,915 1.42% $ 26,423 1.51% Borrowings Allocation (including swaps)f $103,952 2.56% $2,411 $107,845 2.75% $4,946 Variable-Rate Multicurrency Pools 12,308 4.36 1,909 13,615 3.96 2,624 Single Currency Pools 10,813 4.64 469 12,857 5.68 1,046 Variable-Spread 23,916 1.06 (169) 25,151 1.05 (186) Fixed-Rate Single Currency 11,392 6.06 569 12,400 6.13 1,451 Special Structural and Sector Adjustment 5,008 0.98 (8) 8,012 1.04 (22) Fixed-Spread 8,096 3.08 (95) 7,146 2.61 133 Other Debtg 32,419 1.32 (264) 28,664 1.42 (100) a. Contractual yield is presented before the application of interest waivers. b. Excludes fixed-rate single currency pool loans, which have been classified in other fixed-rate loans. c. Includes fixed-rate single currency loans for which the rate had not yet been fixed at fiscal year-end. d. Includes loans with non-standard terms as described in Financial Terms of Loans. e. The liquid asset portfolio is carried and reported at market value and excludes investment assets associated with certain other postemployment benefits.The yield information represents the weighted average market yield to maturity. f. Carrying amounts and contractual yields are on a basis which includes accrued interest and any unamortized amounts, but does not include the effects of applying FAS 133. g. Includes amounts not yet allocated at June 30, 2004 and June 30, 2003. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 27 Interest Rate Risk date has been approximately $242 million. The fair There are two main sources of potential interest rate value of the debt overhang remaining to be hedged is risk to IBRD. The first is the interest rate sensitivity approximately $283 million as of June 30, 2004. The associated with the net spread between the rate IBRD cost of the overhang will vary with interest rates until earns on its assets and the cost of borrowings, which the program of hedging swaps is completed at the fund those assets. The second is the interest rate end of FY 2005. sensitivity of the income earned from funding a Interest rate risk on non-cost pass-through products, portion of IBRD assets with equity. In general, lower which currently account for 32% of the existing loan nominal interest rates result in lower lending rates portfolio (31% at the end of FY 2003), is managed by which, in turn, reduce the nominal earnings on using interest rate swaps to closely align the rate IBRD's equity. In addition, as the loan portfolio sensitivity characteristics of the loan portfolio with shifts from pool loans to LIBOR based loans, the those of their underlying funding. As the portfolio of sensitivity of IBRD's operating income to changes in fixed-spread loans increases, the proportion of non- market interest rates will increase. cost pass-though products will grow. The borrowing cost pass-through formulation The interest rate risk on IBRD's liquid portfolio, incorporated in the lending rates charged on most of which includes the risk that the value of assets in the IBRD's existing loans has traditionally helped limit liquid portfolio will fluctuate due to changes in the interest rate sensitivity of the net spread earnings market interest rates, is managed within specified on its loan portfolio. Such cost pass-through loans duration-mismatch limits and is further limited by currently account for approximately 68% of the stop-loss limits. existing outstanding loan portfolio (69% at the end of FY 2003). All cost pass-through loans, including Interest rate risk also arises from a variety of other single currency and multicurrency pool loans as well factors, including differences in the timing between as variable-spread loans, pose some residual interest the contractual maturity or repricing of IBRD's rate risk, given the lag inherent in the lending rate assets, liabilities and derivative financial instruments. calculation. On floating rate assets and liabilities, IBRD is exposed to timing mismatches between the re-set Another potential risk arises because the cost pass- dates on its floating rate receivables and payables. To through currency pool products have traditionally mitigate its exposure to these timing mismatches, been funded with a large share of medium- and long- IBRD has executed some overlay interest rate swaps term fixed-rate debt, to provide the borrowers with a to reduce this mismatch risk. reasonably stable interest basis. Given that the cumulative impact of interest rate changes over time Exchange Rate Risk has resulted in a decline in the level of interest rates, In order to minimize exchange rate risk in a the cost of these historical fixed-rate borrowings in multicurrency environment, IBRD matches its the multicurrency pool and the single currency pools borrowing obligations in any one currency (after is currently considerably higher than IBRD's new swap activities) with assets in the same currency, as borrowing costs. The amount of debt allocated to the prescribed by the Articles. In addition, IBRD's policy multicurrency debt pool will exceed the balance of is to minimize the exchange rate sensitivity of its the multicurrency loan pool after FY 2009. The debt equity-to-loans ratio. It carries out this policy by which funds these loans has maturities that extend undertaking currency conversions periodically to beyond those of the loans and this debt overhang align the currency composition of its equity to that of presents a risk of loss to IBRD because the debt its outstanding loans. This policy is designed to carries fixed interest rates. minimize the impact of exchange rate fluctuations on the equity-to-loans ratio, thereby preserving Over-funding reaches a maximum of approximately IBRD's ability to better absorb unexpected losses $5.8 billion in FY 2015. Strategies for managing this from arrears regardless of the market environment. risk include changing the interest rate characteristics of the over-funded portion of the debt from fixed to Figure 9 presents the currency composition of floating rates beyond 2009 through the use of significant balance sheet components (net of swaps) forward-starting swaps. IBRD began executing these at the end of FY 2004 and FY 2003. forward-starting swaps in FY 2000 and the cost to 28 THE WORLD BANK ANNUAL REPORT 2004 Figure 9: Relative Currency Composition of Significant Balance Sheet Components--Current Value Basis At June 30, 2004 At June 30, 2003 IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 29 Liquidity Risk · Key risks and control weaknesses are evalu- Liquidity risk arises from the general funding needs ated on an annual basis by an internal of IBRD's activities and in the management of its panel. The panel evaluates and categorizes these to determine if they pose a threat to assets and liabilities. For a discussion on how management's ability to make a positive liquidity is managed, please refer to Section 4 assertion on the adequacy of internal con- --Liquidity Management. trols surrounding IBRD's external financial Operational Risk reporting. Operational risk is the potential for loss resulting · The results of the work undertaken to eval- from inadequate or failed internal processes or uate the effectiveness of internal controls systems, human factors, or external events, and over financial reporting are reported to the includes business disruption and system failure, Audit Committee through an annual transaction processing failures and failures in report. execution of legal, fiduciary and agency · Operational risk data is captured in a data- responsibilities. IBRD, like all financial institutions, base to facilitate reporting and sharing of is exposed to many types of operational risks. information with business unit managers and senior management. IBRD attempts to mitigate operational risk by maintaining a system of internal control that is · On a periodic basis, operational risks and designed to keep that risk at appropriate levels in controls are assessed and reviewed to moni- tor significant changes. view of the financial strength of IBRD and the characteristics of the activities and markets in which Internal Control Over Financial Reporting IBRD operates. Since 1996, IBRD has used a COSOa- Management has carried out an evaluation of based integrated internal control framework. internal control over external financial reporting for During FY 2004, IBRD implemented an enhanced the purpose of determining if there were any changes framework for operational risk management for its made in internal controls during the fiscal year finance activities. This framework which was covered by this report, that had materially affected, implemented in conjunction with operational units or would be reasonably likely to materially affect involves the following core steps: IBRD's internal control over external financial reporting. As of June 30, 2004 no such significant · Key operational risks and mitigating con- changes occurred. trols are identified and documented based on a business process review of key activities Annually IBRD's management has made an assertion within finance. This review is undertaken that, as of June 30 of each fiscal year since 1997, its using a combination of tools including system of internal control over its external financial business process maps and tailored risk and reporting has met the criteria for effective internal control categories which are applied consis- control over external financial reporting as described tently across finance. in COSO. Since FY 1997, IBRD's external auditors · Operational risks are quantified based on have provided an attestation report that likelihood of occurrence and the resulting management's assertion regarding the effectiveness financial impact using probability and of internal control over external financial reporting severity parameters. is fairly stated in all material respects. · The design and operating effectiveness of Disclosure Controls and Procedures controls are evaluated using self assessment workshops, independent quality assurance Disclosure controls and procedures are those reviews and annual internal representation processes which are designed to ensure that letters from business unit managers. information required to be disclosed is accumulated and communicated to management, as appropriate · Action plans are developed for issues identi- fied and followed up on a periodic basis. to allow timely decisions regarding required disclosure by IBRD. Management has undertaken an evaluation of the effectiveness of such controls and procedures. Based on that evaluation, the President a. In 1992, the Committee of Sponsoring Organizations of the and the Managing Director and Chief Financial Treadway Commission (COSO) issued its Internal Control-Inte- grated Framework, which provided a common definition of inter- Officer have concluded that these controls and nal control and guidance on judging its effectiveness. procedures were effective as of June 30, 2004. 30 THE WORLD BANK ANNUAL REPORT 2004 7. CRITICAL ACCOUNTING POLICIES Fair Value of Financial Instruments The Notes to IBRD's financial statements contain a Under the current value basis of reporting, IBRD summary of IBRD's significant accounting policies. carries all of its financial assets and liabilities at The following is a description of those accounting estimated values. Under the reported basis, IBRD policies which involve significant management carries its investments and derivatives, as defined by judgments that are difficult, complex or subjective FAS 133, on a fair value basis. These derivatives and relate to matters that are inherently uncertain. include certain features in debt instruments that, for accounting purposes, are separately valued and Provision for Losses on Loans and accounted for as either assets or liabilities. When Guarantees possible, fair value is determined by quoted market IBRD's accumulated provision for losses on loans prices. If quoted market prices are not available, then and guarantees reflects probable losses in its fair value is based on discounted cash flow models nonaccrual and accrual portfolios. There are several using market estimates of cash flows and discount steps required to determine the appropriate level of rates. provisions for each portfolio. First the total loan portfolio is segregated into the accrual and All the financial models used for input to IBRD's nonaccrual portfolios. In both portfolios, the financial statements are subject to both internal and exposure for each country (defined as loans external verification and review by qualified outstanding plus the present value of guarantees) is personnel. These models use market sourced inputs, then assigned a credit risk rating. Each risk rating is such as interest rate yield curves, exchange rates, and mapped to an expected default probability using option volatilities. Selection of these inputs may IBRD's credit migration matrix. The provision involve some judgment. Imprecision in estimating required is calculated by multiplying the outstanding these factors, and changes in assumptions, can exposure, by the expected default frequency impact net income and IBRD's financial position as (probability of default to IBRD) and by the assumed reported in the balance sheet. severity of the loss given default. IBRD believes its estimates of fair value are The determination of borrowers' rating is based on reasonable given its processes for obtaining external both quantitative and qualitative analyses of various prices and parameters; ensuring that valuation factors, which include political risk, external debt models are reviewed and validated both internally and liquidity, fiscal policy and public debt burden, and externally; and applying its approach balance of payments risks, economic structure and consistently from period to period. growth prospects, monetary and exchange rate policy, financial sector risks and corporate sector 8. RESULTS OF OPERATIONS debt and other vulnerabilities. IBRD periodically In FY 2004, operating income declined to $1,696 reviews such factors and reassesses the adequacy of million as releases of provisions contributed less than the accumulated provision for losses on loans and in FY 2003 and net interest income narrowed. guarantees accordingly. Actual losses may differ from Reported income was negative, a net loss of $2,404 expected losses due to unforeseen changes in any of million in FY 2004. This reflects IBRD's application the factors that affect borrowers' creditworthiness. of FAS 133 and the sharp increase in reference The accumulated provision for loan losses is market rates. For more details please refer to FAS 133 separately reported in the balance sheet as a Adjustments. deduction from IBRD's total loans. The accumulated Interest Rate Environment provision for losses on guarantees is included in During FY 2004, short-term market interest rates other liabilities. Increases or decreases in the increased, compared with a decline throughout FY accumulated provision for losses on loans and 2003. The increase in rates occurred predominantly guarantees are reported in the Statement of Income in the fourth quarter of FY 2004. However, the as provision for losses on loans and guarantees. average markets rates for FY 2004 were lower than Additional information on IBRD's provisioning the average rates in FY 2003. Figure 10 illustrates policy and the status of nonaccrual loans can be these movements. found in the Notes to Financial Statements--Notes A and D. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 31 Figure 10: Six-Month LIBOR Interest Rates During FY 2003 the overall reduction in provision U.S. Dollar for losses on loans and guarantees amounted to $1,300 million, resulting from the following factors. 2.5 The provisioning requirements were reduced by $709 million due primarily to a net improvement in 2.0 borrowers' risk ratings, and to a lesser extent due to FY 2003 changes in the size and distribution of the portfolio tnecr including negative net disbursements (of which 1.5Average for FY 2003 prepayments were $6,972 million). In addition, the Pe Average for FY 2004 provisioning requirements for BiH and SAM were FY 2004 1.0 reassessed in FY 2003, resulting in an additional $591 million being taken into income (see Section 6-- Financial Risk Management). 0.5 n l g p t n b r r y n Ju Ju FY 2003 versus FY 2002 Au Se Oc Nov Dec Ja Fe Ma Ap Ma Ju FY 2003 operating income was $3,021 million, $1,097 million higher than in FY 2002. The majority Operating Income of this increase was due to a reduction in the IBRD's operating income can be seen as broadly provision for loan loss expense of $1,300 million, as comprising a spread on earning assets, plus the discussed above. contribution of equity, less provisions for loan losses and administrative expenses. Table 16 shows a Net Interest Income breakdown of IBRD's net income. FY 2004 versus FY 2003 FY 2004 versus FY 2003 Loan interest income, net of funding costs, decreased by $560 million largely due to lower returns on the FY 2004 operating income was $1,696 million, equity funded component of loans, as a result of both $1,325 million lower than for FY 2003. The main the lower lending rates of the cost pass-through loan reasons for the decrease in operating income were products and the effect of lower market interest rates. reductions in the release of provision for losses on Lower average loan balances, particularly in higher- loans and guarantees and in loan interest income, net yielding loan products, as well as lower margins from of funding costs. cost pass-through products, also contributed to the During FY 2004, provisioning requirements were decline in net interest income. The margins for cost reduced by $665 million due to a net improvement pass-through products in FY 2003 were high, in part in borrowers' risk ratings, and negative net reflecting the effect of favorable interest rate disbursements, including $4,614 million of loan repricing lags in a falling interest rate environment as prepayments. well as significant prepayment premium income (see also FY 2003 versus FY 2002). Table 16: Net Income In millions of U.S. dollars FY 2004 FY 2003 FY 2002 Loan interest income, net of funding costs Debt funded $ 628 $ 936 $ 848 Equity funded 1,231 1,483 1,714 Total loan interest income, net of funding costs 1,859 2,419 2,562 Other loan income 37 111 98 Release of Provision for losses on loans and guarantees 665 1,300 15 Investment income, net of funding costs 22 36 32 Net noninterest expense (887) (845) (783) Operating Income 1,696 3,021 1,924 Effects of applying FAS 133 (4,100) 2,323 854 Net (Loss) Income--Reported Basis $(2,404) $5,344 $2,778 32 THE WORLD BANK ANNUAL REPORT 2004 FY 2003 versus FY 2002 to changes in the underlying actuarial assumptions Loan interest income, net of funding costs, decreased and a decrease in the value of the pension assets by $143 million due primarily to lower returns on during FY 2002. the equity funded component of loans, and lower FAS 133 Adjustments average loan balances, offset partially by the interest As discussed earlier, IBRD has marked all derivative rate repricing lag inherent in the cost pass-through instruments, as defined by FAS 133, to market. IBRD loans in a falling interest rate environment. Interest generally uses derivatives to modify fixed-rate U.S. income was also affected by an increase in dollar and non-U.S. dollar borrowings to variable- prepayment premiums. rate U.S. dollar borrowings. When IBRD borrows in Net Noninterest Expense currencies that are not needed for lending, to take The main components of net noninterest expense are advantage of the arbitrage opportunities which may presented in Table 17. exist, it immediately swaps the borrowings into the needed currencies. FY 2004 versus FY 2003 During FY 2004, the effects of applying FAS 133 were Net noninterest expense increased by $42 million negative $4,100 million compared to positive $2,323 primarily due to a $50 million increase in other million for FY 2003. This negative impact in the administrative expenses and a $31 million increase in effects of applying FAS 133 was due primarily to a staff costs and operational travel. This was offset by a significant rise in the interest rates for certain $33 million increase in service fee revenues and other currencies in FY 2004 as compared to FY 2003. This net income. increase in interest rates caused a significant decrease FY 2003 versus FY 2002 in the value of the liability swaps. These swaps are financially equivalent to fixed-rate assets. While Net noninterest expense increased by $62 million economically this decrease in the value of liability primarily due to a $134 million increase in pension swaps has been offset by a corresponding decrease in and other postretirement benefit costs. This was the value of the fixed-rate borrowings, IBRD's offset by a $55 million decrease in other application of FAS 133 requires that only derivative administrative expenses and a $23 million increase in instruments be marked to market. service fee revenues. The increase in pension and other postretirement benefits costs was primarily due Table 17: Net Noninterest Expense In millions of U.S. dollars FY 2004 FY 2003 FY 2002 Gross Administrative Expenses Staff Costs $ 422 $ 406 $ 428 Consultant Fees 83 78 86 Operational Travel 101 86 91 Pension and other postretirement benefits 47 58 17 Other Expenses 460 410 430 Total Gross Administrative Expenses 1,113 1,038 1,052 Less: Contribution to Special Programs 179 156 176 Total Net Administrative Expenses 934 882 876 Contribution to Special Programs 179 156 176 Service Fee Revenues (196) (178) (155) Income from Staff Retirement Plan and other post retirement benefit plans -- -- (93) Net Other Income (30) (15) (21) Total Net Noninterest Expense $ 887 $ 845 $ 783 IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 33 For management reporting purposes, IBRD has the full Board of Executive Directors in discharging prepared the Current Value financial statements in its responsibilities. Table 2. IBRD believes that these statements make Audit Committee fully evident the risk management strategy that IBRD employs. During FY 2004, the effects of the current Membership value adjustments were negative $513 million as The Audit Committee consists of eight members of compared to positive $394 million for FY 2003. This the Board of Executive Directors. Membership on movement can be explained by the upward shift in the Committee is determined by the Board of IBRD's U.S. dollar funding curve in FY 2004 as Executive Directors, based upon nominations by the compared to FY 2003 (see Figure 11 for U.S. dollars). Chairman of the Board, following informal consultation with the Executive Directors. In Figure 11: IBRD's U.S. Dollar Funding Curve addition, membership of the Committee is expected 7 to reflect the economic and geographic diversity of IBRD's member countries. Other relevant selection 6 criteria include seniority, continuity and relevant 5 experience. Generally, Committee members are 4 entc appointed for a two year term; reappointment to a second term, when possible, is desirable for Per3 6/30/2004 continuity. Audit Committee meetings are generally 2 6/30/2003 open to any member of the Board who may wish to 1 6/30/2002 attend, and non-Committee members of the Board 0 may participate in the discussion. In addition, the 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y Chairman of the Audit Committee may speak in that capacity at meetings of the Board of Executive Directors, with respect to discussions held in the 9. GOVERNANCE Audit Committee. General Governance Key Responsibilities Board Membership The Audit Committee is appointed by the Board to In accordance with its Articles of Agreement, assist it in the oversight and assessment of IBRD's members of IBRD's Board of Executive Directors are finances and accounting, including the effectiveness appointed or elected by their member governments. of financial policies, the integrity of financial These Executive Directors are neither officers nor statements, the system of internal controls regarding staff of IBRD. The President is the only management finance, accounting and ethics (including fraud and member of the Board of Executive Directors, serving corruption), and financial and operational risks. The as a non-voting member and as Chairman of the Audit Committee also has the responsibility for Board. The Executive Directors have established reviewing the performance and recommending to several Committees including: the Board the appointment, of the external auditor, · Committee on Development Effectiveness as well as monitoring the independence of the external auditor and meeting with it in executive · Audit Committee session. The Audit Committee participates in · Budget Committee oversight of the internal audit function, including reviewing the responsibilities, staffing and the · Personnel Committee effectiveness of internal audit. The Committee also · Ethics Committee reviews the annual internal audit plan and meets with the Auditor General in executive session. In the · Committee on Governance and Adminis- trative Matters execution of its role, the Committee discusses with management, the external auditors, and the internal The Executive Directors and their Committees auditors, financial issues and policies which have a function in continuous session at the principal bearing on the institution's financial position and offices of IBRD, as business requires. Each risk-bearing capacity. The Audit Committee Committee's terms of reference establishes its monitors the evolution of developments in corporate respective roles and responsibilities. As Committees governance and the role of audit committees on an do not vote on issues, their role is primarily to serve 34 THE WORLD BANK ANNUAL REPORT 2004 ongoing basis and revised its terms of reference in FY staff. To facilitate this effort, IBRD has in place a 2004. Code of Professional Ethics-Living our Values. The Code applies to all staff (including managers, Communications consultants, and temporary employees) worldwide. The Audit Committee communicates regularly with the full Board through distribution of the following: This Code is available in nine languages on IBRD's website, www.worldbank.org. Staff relations, · The minutes of its meetings. conflicts of interest, and operational issues, including · Reports of the Audit Committee prepared the accuracy of books and records, are key elements by the Chairman, which document discus- of the Code. sions held. These Reports are distributed to the Executive Directors, Alternates, World In addition to the Code, an essential element of Bank Group Senior Management and Vice appropriate conduct is compliance with the Presidents of IBRD. obligations embodied in the Principles of Staff Employment, Staff Rules, and Administrative Rules, · "Statement(s) of the Chairman" and state- the violation of which may result in disciplinary ments issued by other members of the actions. In accordance with the Staff Rules, senior Committee. managers must complete a confidential financial · The Annual Report to the Board of Execu- disclosure instrument with the Office of Ethics and tive Directors, which provides an overview Business Conduct. of the main issues addressed by the Com- mittee over the year. Guidance for staff is also provided through programs, training materials, and other resources. The Audit Committee's communications with the Managers are responsible for ensuring that internal external auditor are described in the Auditor systems, policies, and procedures are consistently Independence section. aligned with IBRD's ethical goals. In support of its Executive Sessions efforts on ethics, IBRD offers a variety of methods for Members of the Committee may convene in informing staff of these resources. Many of these executive session at any time, without management efforts are headed by the following groups: present. Under the Committee's terms of reference, · The Office of Ethics and Business Conduct it meets separately in executive session with the provides leadership, management and over- external and internal auditors. sight for IBRD's ethics infrastructure including the Ethics HelpLine, a consoli- Access to Resources and to Management dated conflicts of interest disclosure/resolu- Throughout the year, the Audit Committee receives tion system, financial disclosure, ongoing a large volume of information, which supports the training to both internal and external audi- preparation of the financial statements. The Audit ences, and communication resources. Committee meets both formally and informally · The Department of Institutional Integrity is throughout the year to discuss financial and charged with investigating allegations of accounting matters. Executive Directors have fraud and corruption in IBRD-funded complete access to management. The Audit projects worldwide. The Department also Committee reviews and discusses with management investigates allegations of misconduct by the quarterly and annual financial statements. The IBRD staff, and trains and educates staff Committee also reviews with the external auditor the and clients in detecting and reporting fraud financial statements prior to their publication and and corruption in IBRD-funded projects. recommends them for approval to the Board of The Department reports directly to the Executive Directors. President and is composed of professionals from a range of disciplines including finan- The Audit Committee has the capacity, under cial analysts, researchers, investigators, law- exceptional circumstances, to obtain advice and yers, prosecutors, forensic accountants, and assistance from outside legal, accounting or other IBRD staff with operational experience. advisors as deemed appropriate. IBRD has in place procedures for the receipt, Code of Ethics retention and treatment of complaints received IBRD strives to foster and maintain a positive work regarding accounting, internal control and auditing environment that supports the ethical behavior of its matters. IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 35 IBRD offers both the Ethics HelpLine, as well as a approval of a resolution by the Board of Executive Fraud and Corruption hotline run by an outside firm Directors. staffed by trained specialists. This third-party service As a standard practice, the external auditor is present offers numerous methods of communication in as an observer at virtually all Audit Committee addition to a toll free hotline in countries where meetings and is frequently asked to present its access to telecommunications may be limited. In perspective on issues. In addition, the Audit addition there are other methods by which the Committee meets periodically with the external Department of Institutional Integrity may receive auditor in private session without management allegations, including directly by email, present. Communication between the external anonymously, or through confidential submission auditor and the Audit Committee is ongoing, as through its website, as well as the postal service and frequently as is deemed necessary by either party. telephone. IBRD's auditors follow the communication Auditor Independence requirements with audit committees set out under In February 2003, the Board of Executive Directors U.S. generally accepted auditing standards and adopted a set of principles applicable to the International Standards on Auditing. In keeping appointment of the external auditor for IBRD. Key with these standards, significant formal features of those principles include: communications include: · Prohibition of the external auditor from the · Quarterly and annual financial statement provision of all non audit-related services. reporting. · All audit-related services must be pre- · Annual appointment of the external audi- approved on a case-by-case basis by the tors. Board of Executive Directors, upon recom- · Presentation of the external audit plan. mendation of the Audit Committee. · Presentation of control recommendations · Mandatory rebidding of the external audit and discussion of the COSO attestation and contract every five years. report. · Prohibition of any firm serving as external · Presentation of a statement regarding inde- auditors for more than two consecutive pendence. five-year terms. In addition to Committee meetings, individual · Mandatory rotation of the senior partner members of the Audit Committee have independent after five years. access to the external auditor. · An evaluation of the performance of the external auditor at the mid-point of the five 10. RECONCILIATION OF PRIOR YEAR year term. CURRENT VALUE FINANCIAL STATEMENTS In FY 2004, IBRD's external auditor, Deloitte and TO REPORTED BASIS Touche, began a new five-year term and will have IBRD's Condensed Current Value Balance Sheet at served 11 years as auditor upon completion of that June 30, 2003 is presented, with a reconciliation to term, pursuant to a one-time grandfathered the reported basis, in Table 18 below. Similarly, exemption from the above-referenced ten-year limit. IBRD's Condensed Current Value Comprehensive Even within a five-year term the service of the Statement of Income for the year ended June 30, external auditors is subject to recommendation by 2003 is presented, with a reconciliation to the the Audit Committee for annual reappointment and reported basis, in Table 19. 36 THE WORLD BANK ANNUAL REPORT 2004 Table 18: Condensed Current Value Balance Sheet at June 30, 2003 In millions of U.S. dollars June 30, 2003 Reported Reversal of FAS Current Value Current Basis 133 Effects Adjustments Value Basis Cash $ 1,929 $ 1,929 Investments 28,128 -- 28,128 Loans Outstanding 116,240 -- $ 6,353 122,593 Less Accumulated Provision for Loan Losses and Deferred Loan Income (4,478) -- -- (4,478) Swaps Receivable Investments 10,301 -- -- 10,301 Borrowings 70,316 $(7,084) 7,084 70,316 Other Asset/Liability 726 -- -- 726 Other Assets 7,190 -- (455) 6,735 Total Assets $230,352 $(7,084) $12,982 $236,250 Borrowings $108,554 $(1,559) $ 9,700 $116,695 Swaps Payable Investments 11,862 -- -- 11,862 Borrowings 64,779 (1,875) 1,875 64,779 Other Asset/Liability 810 1 (1) 810 Other Liabilities 6,429 -- -- 6,429 Total Liabilities 192,434 (3,433) 11,574 200,575 Paid in Capital Stock 11,478 -- -- 11,478 Retained Earnings and Other Equity 26,440 (3,651) 1,408 24,197 Total Liabilities and Equity $230,352 $(7,084) $12,982 $236,250 Table 19: Condensed Current Value Comprehensive Statement of Income for the year ended June 30, 2003 In millions of U.S. dollars FY 2003 Reported Current Value Comprehensive Adjustments to Comprehensive Basis Current Value Basis Income from Loans $5,742 $5,742 Income from Investments, net 418 $ 21 439 Other Income 202 -- 202 Total Income 6,362 21 6,383 Borrowing Expenses 3,594 -- 3,594 Administrative Expenses 1,038 -- 1,038 Release of Provision for Losses on Loans and Guarantees (1,300) 1,300 -- Other Expenses 9 -- 9 Total Expenses 3,341 1,300 4,641 Operating Income 3,021 (1,279) 1,742 Current Value Adjustments -- 394 394 Release of Provision for Losses on Loans and Guarantees-- Current Value -- 1,300 1,300 Effects of applying FAS 133 2,323 (2,323) -- Net Income $5,344 $(1,908) $3,436 IBRD MANAGEMENT'S DISCUSSION AND ANALYSIS: JUNE 30, 2004 37 GLOSSARY OF TERMS Asset-backed Securities: Asset-backed securities are instru- ments to (or from) IBRD are required in the event the par ments whose cash flow is based on the cash flows of a pool value of the currency is reduced (or increased) to a signifi- of underlying assets managed by a trust. cant extent, in the opinion of IBRD. Currency Swaps (including Currency Forward Contracts): Net Disbursements: Loan disbursements net of repay- Currency swaps are agreements between two parties to ments and prepayments. exchange cash flows denominated in different currencies at New Loans: Loans for which the invitation to negotiate was one or more certain times in the future. The cash flows are issued on or after July 31, 1998. based on a predetermined formula reflecting rates of inter- est and an exchange of principal. Old Loans: Loans for which the invitation to negotiate was issued prior to July 31, 1998. Equity-to-Loans Ratio: This ratio is the sum of usable cap- ital plus the special and general reserves, cumulative trans- Options: Options are contracts that allow the holder of the lation adjustment (excluding amounts associated with option the right, but not the obligation, to purchase or sell applying the provisions of FAS 133) and the proposed a financial instrument at a specified price within a specified transfer from unallocated net income to general reserves period of time from or to the seller of the option. The pur- divided by the sum of loans outstanding, the present value chaser of an option pays a premium at the outset to the of guarantees, net of the accumulated provision for losses seller of the option, who then bears the risk of an unfavor- on loans and guarantees and deferred loan income. able change in the price of the financial instrument under- lying the option. Failed Trades: Failed trades are securities transactions that do not settle on the contractual settlement date. Repurchase and Resale Agreements and Securities Loans: Repurchase agreements are contracts under which a party FAS 133: FAS 133 refers collectively to the Statement of sells securities and simultaneously agrees to repurchase the Financial Accounting Standards No. 133, "Accounting for same securities at a specified future date at a fixed price. Derivative Instruments and Hedging Activities", along The reverse of this transaction is called a resale agreement. with its amendments, as well as the derivative accounting A resale agreement involves the purchase of securities with requirements of International Accounting Standard (IAS) a simultaneous agreement to sell back the same securities 39 (Revised), "Financial Instruments: Recognition and at a stated price on a stated date. Securities loans are con- Measurement". tracts under which securities are lent for a specified period Forward Starting Swaps: A forward starting swap is an of time at a fixed price. agreement under which the cash flow exchanges of the Return on Equity: This return is computed as net income underlying interest rate swaps would begin to take effect divided by the average equity balance during the year. from a specified future date. Risk-bearing Capacity: The ability to absorb risks in the Futures: Futures are contracts for delivery of securities or balance sheet while continuing normal operations without money market instruments in which the seller agrees to having to call on callable capital. make delivery at a specified future date of a specified instrument at a specified price or yield. Futures contracts Short Sales: Short sales are sales of securities not held in the are traded on U.S. and international regulated exchanges. seller's portfolio at the time of the sale. The seller must purchase the security at a later date and bears the risk that Government and Agency Obligations: These obligations the market value of the security will move adversely include marketable bonds, notes and other obligations between the time of the sale and the time the security must issued by governments. be delivered. Hedging: Hedging is a risk management technique of Statutory Lending Limit: Under IBRD's Articles of Agree- entering into offsetting commitments to eliminate or min- ment, as applied, the total amount outstanding of loans, imize the impact of adverse movements in value or cash participations in loans, and callable guarantees may not flow of the underlying. exceed the sum of subscribed capital, reserves and surplus. Interest Rate Swaps: Interest rate swaps are agreements Swaptions: A swaption is an option that gives the holder involving the exchange of periodic interest payments of the right to enter into an interest rate or currency swap at a differing character, based on an underlying notional prin- certain future date. cipal amount for a specified time. Time Deposits: Time deposits include certificates of LIBOR: London interbank offered rate. deposit, bankers' acceptances, and other obligations issued Maintenance of Value: Agreements with members provide or unconditionally guaranteed by banks and other finan- for the maintenance of the value, from the time of sub- cial institutions. scription, of certain restricted currencies. Additional pay- 38 THE WORLD BANK ANNUAL REPORT 2004 I NTERNATIONAL B ANK FOR R ECONSTRUCTION AND D EVELOPMENT F INANCIAL S TATEMENTS AND I NTERNAL C ONTROL R EPORTS J UNE 3 0 , 2 0 0 4 Management's Report Regarding Effectiveness of Internal Controls Over External Financial Reporting 40 Report of Independent Accountants on Management's Assertion Regarding Effectiveness of Internal Controls Over External Financial Reporting 42 Report of Independent Accountants 43 Balance Sheet 44 Statement of Income 46 Statement of Comprehensive Income 47 Statement of Changes in Retained Earnings 47 Statement of Cash Flows 48 Summary Statement of Loans 50 Statement of Subscriptions to Capital Stock and Voting Power 53 Notes to Financial Statements 57 IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 39 M A N A G E M E N T S' R E P O R T R E G A R D I N G E FF E C T I V E N E S S O F I NT E R N A L CO N T R O L SO V E R E X T E R N A L F IN A N C I A L R E P O R T I N G 40 THE WORLD BANK ANNUAL REPORT 2004 IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 41 R E P O R T O F IN D E P E N D E N T A C C O U N T A N T S O N M A N A G E M E N T S ' A S S E R T I O NR E G A R D I N G E F F E C T I V E N E S S O F I N T E R N A L CO N T R O L S O V E R E X T E R N A L F IN A N C I A L R E P O R T I N G 42 THE WORLD BANK ANNUAL REPORT 2004 RE P O R T O FI ND E P E N D E N TAC C O U N T A N T S IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 43 B A L A N C E S H E E T June 30, 2004 and June 30, 2003 Expressed in millions of U.S. dollars 2004 2003 Assets Due from Banks Unrestricted currencies $ 1,138 $ 1,259 Currencies subject to restrictions--Note B 665 670 1,803 1,929 Investments--Trading (including securities transferred under repurchase or security lending agreements of $nil million--June 30, 2004; $153 million--June 30, 2003)--Notes C and G 31,146 27,916 Securities Purchased Under Resale Agreements--Note C 840 212 Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Subscribed Capital 1,790 1,794 Receivable from Currency and Interest Rate Swaps Investments--Notes C and G 12,476 10,301 Loans--Notes D and G 90 -- Borrowings--Notes E and G 69,548 70,316 Other Asset/Liability--Notes F and G 908 726 83,022 81,343 Receivable to Maintain Value of Currency Holdings on Account of Subscribed Capital 113 166 Other Receivables Receivable from investment securities traded 152 275 Accrued income on loans 918 1,248 1,070 1,523 Loans Outstanding (see Summary Statement of Loans, Notes D and G) Total loans 141,738 149,271 Less undisbursed balance 32,128 33,031 Loans outstanding 109,610 116,240 Less: Accumulated provision for loan losses 3,505 4,045 Deferred loan income 479 433 Net loans outstanding 105,626 111,762 Other Assets Unamortized issuance costs of borrowings 436 455 Prepaid pension cost--Note K 2,074 2,014 Premises and equipment (net) 706 730 Miscellaneous 587 508 3,803 3,707 Total assets $229,213 $230,352 44 THE WORLD BANK ANNUAL REPORT 2004 2004 2003 Liabilities Borrowings--Notes E and G Short-term $ 3,146 $ 3,432 Medium- and long-term 104,920 105,122 108,066 108,554 Securities Sold Under Repurchase Agreements, Securities Lent Under Securities Lending Agreements, and Payable for Cash Collateral Received--Note C -- 153 Payable for Currency and Interest Rate Swaps Investments--Notes C and G 14,284 11,862 Loans--Notes D and G 93 -- Borrowings--Notes E and G 64,777 64,779 Other Asset/Liability--Notes F and G 1,077 810 80,231 77,451 Payable to Maintain Value of Currency Holdings on Account of Subscribed Capital 92 64 Other Liabilities Payable for investment securities purchased 342 1,328 Accrued charges on borrowings 1,460 1,633 Payable for transfers approved by the Board of Governors--Note H 1,748 1,474 Liabilities under other postretirement benefits plans--Note K 169 157 Accounts payable and miscellaneous liabilities--Notes D and K 1,642 1,620 5,361 6,212 Total liabilities 193,750 192,434 Equity Capital Stock (see Statement of Subscriptions to Capital Stock and Voting Power, Note B) Authorized capital ( 1,581,724 shares--June 30, 2004 and June 30, 2003) Subscribed capital ( 1,572,661 shares--June 30, 2004; 1,571,412 shares--June 30, 2003) 189,718 189,567 Less uncalled portion of subscriptions 178,235 178,089 11,483 11,478 Amounts to Maintain Value of Currency Holdings--Note B (73) (331) Retained Earnings (see Statement of Changes in Retained Earnings, Note H) 23,982 27,031 Accumulated Other Comprehensive Income (Loss)--Note M 71 (260) Total equity 35,463 37,918 Total liabilities and equity $229,213 $230,352 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 45 S T A T E M E N T O F I N C O M E For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Income Loans--Note D Interest $ 4,328 $5,659 $6,779 Commitment charges 75 83 82 Investments­Trading--Note C Interest 339 428 747 Net losses (35) (10) (9) Staff Retirement Plan and other postretirement benefit plans--Note K -- -- 93 Other--Notes I and J 235 202 184 Total income 4,942 6,362 7,876 Expenses Borrowings--Note E Interest 2,708 3,509 4,797 Amortization of issuance and other borrowing costs 81 85 110 Administrative--Notes I, J and K 934 882 876 Contributions to special programs--Note I 179 156 176 Release of provision for losses on loans and guarantees--Note D (665) (1,300) (15) Other 9 9 8 Total expenses 3,246 3,341 5,952 Operating Income 1,696 3,021 1,924 Effects of applying FAS 133--Note N (4,100) 2,323 854 Net (Loss) Income $(2,404) $5,344 $2,778 The Notes to Financial Statements are an integral part of these Statements. 46 THE WORLD BANK ANNUAL REPORT 2004 S T A T E M E N T O F C O M P R E H E N S I V E IN C O M E For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Net (loss) income $(2,404) $5,344 $2,778 Other comprehensive income--Note M Reclassification of FAS 133 transition adjustment to net income (2) (117) (128) Currency translation adjustments 333 606 224 Total other comprehensive income 331 489 96 Comprehensive (loss) income $(2,073) $5,833 $2,874 S T A T E M E N T O F C H A N G E S I N R E T A I N E D E A R N I N G S For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Retained earnings at beginning of the fiscal year $27,031 $22,227 $19,851 Transfers approved by the Board of Governors--Note H International Development Association (300) (300) (302) Heavily Indebted Poor Countries Debt Initiative Trust Fund (240) (240) (100) Trust Fund for Gaza and West Bank (80) -- -- Low-Income Countries Under Stress Implementation Trust Fund (25) -- -- Net (loss) income for the fiscal year (2,404) 5,344 2,778 Retained earnings at end of the fiscal year $23,982 $27,031 $22,227 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 47 S T A T E M E N T O F C A S H F L O W S For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Cash flows from investing activities Loans Disbursements $(10,024) $(11,809) $(11,154) Principal repayments 13,903 12,945 10,745 Principal prepayments 4,614 6,972 1,323 Loan origination fees received 8 8 7 Net cash provided by investing activities 8,501 8,116 921 Cash flows from financing activities Medium- and long-term borrowings New issues 12,062 17,246 22,803 Retirements (16,325) (24,136) (21,691) Net short-term borrowings (311) (1,525) (2,112) Net currency and interest rate swaps--Borrowings (1,109) 357 (656) Payments for transfers approved by the Board of Governors International Development Association (55) (300) (2) Debt Reduction Facility for IDA-Only Countries (17) -- (3) Trust Fund for Gaza and West Bank (80) (13) -- Heavily Indebted Poor Countries Debt Initiative Trust Fund (240) (240) (100) Low-Income Countries Under Stress Implementation Trust Fund (25) -- -- Net capital stock transactions 84 59 75 Net cash used in financing activities (6,016) (8,552) (1,686) Cash flows from operating activities Net (loss) income (2,404) 5,344 2,778 Adjustments to reconcile net (loss) income to net cash provided by oper- ating activities Effects of applying FAS 133 4,100 (2,323) (854) Depreciation and amortization 757 585 124 Income for Staff Retirement Plan and other postretirement benefit plans -- -- (93) Release of provision for losses on loans and guarantees (665) (1,300) (15) Changes in other assets and liabilities Decrease in accrued income on loans 343 413 400 Increase in miscellaneous assets (151) (116) (7) Decrease in accrued charges on borrowings (181) (709) (947) Decrease in accounts payable and miscellaneous liabilities -- (16) (62) Net cash provided by operating activities 1,799 1,878 1,324 Effect of exchange rate changes on unrestricted cash and liquid investments 222 122 90 Net increase in unrestricted cash and liquid investments 4,506 1,564 649 Unrestricted cash and liquid investments at beginning of the fiscal year 26,620 25,056 24,407 Unrestricted cash and liquid investments at end of the fiscal year $ 31,126 $26,620 $ 25,056 48 THE WORLD BANK ANNUAL REPORT 2004 2004 2003 2002 Composition of unrestricted cash and liquid investments: Investments--Trading $31,146 $27,916 $24,256 Unrestricted currencies 1,138 1,259 415 Net payable for investment securities traded/purchased--Trading (190) (1,053) (548) Net payable from currency and interest rate swaps-- Investments (1,808) (1,561) (887) Net receivable from securities purchased/sold under resale/repurchase agreements and payable for cash collateral received 840 59 1,820 $31,126 $26,620 $25,056 Supplemental disclosure Increase (decrease) in ending balances resulting from exchange rate fluctuations Loans outstanding $ 1,778 $ 2,647 $ 2,736 Borrowings 4,095 4,922 4,093 Currency and interest rate swaps--Borrowings (2,866) (3,194) (2,230) Capitalized loan origination fees included in total loans 85 112 102 Capitalized interest and charges related to loans for which Serbia and Montenegro undertook responsibility -- -- 799 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 49 S UMMARY S TATEMENT OF L OANS June 30, 2004 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage but not yet balance of Loans of total loans Borrower or guarantor Total loans effectivea effective loansb outstanding outstanding Algeria $ 1,316 $ -- $ 328 $ 988 0.90% Argentina 9,588 836 1,201 7,551 6.89 Armenia 7 -- -- 7 0.01 Bangladesh 4 -- -- 4 * Barbados 21 -- 10 11 0.01 Belarus 96 -- 20 76 0.07 Belize 42 -- 2 40 0.04 Bolivia 15 15 -- -- * Bosnia and Herzegovina 524 -- -- 524 0.48 Botswana 4 -- -- 4 * Brazil 11,140 774 1,994 8,372 7.64 Bulgaria 1,633 150 234 1,249 1.14 Cameroon 132 -- 1 131 0.12 Chad 40 -- 7 33 0.03 Chile 582 -- 174 408 0.37 China 15,835 952 4,155 10,728 9.79 Colombia 3,974 280 511 3,183 2.90 Costa Rica 105 -- 31 74 0.07 Côte d'Ivoire 444 -- -- 444 0.41 Croatia 1,123 49 289 785 0.72 Cyprus 11 -- -- 11 0.01 Czech Republic 55 -- -- 55 0.05 Dominica 5 -- 1 4 * Dominican Republic 571 50 131 390 0.36 Ecuador 1,023 54 109 860 0.78 Egypt, Arab Republic of 1,043 347 191 505 0.46 El Salvador 559 -- 199 360 0.33 Estonia 46 -- -- 46 0.04 Fiji 10 -- -- 10 0.01 Gabon 42 -- 2 40 0.04 Ghana 3 -- -- 3 * Grenada 17 -- 11 6 0.01 Guatemala 784 80 277 427 0.39 Honduras 77 -- -- 77 0.07 Hungary 244 -- 13 231 0.21 India 7,950 40 3,573 4,337 3.96 Indonesia 10,395 497 685 9,213 8.40 Iran, Islamic Republic of 1,069 359 373 337 0.31 50 THE WORLD BANK ANNUAL REPORT 2004 S UMMARY S TATEMENT OF L OANS (Continued) June 30, 2004 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage but not yet balance of Loans of total loans Borrower or guarantor Total loans effectivea effective loansb outstanding outstanding Iraq $ 49 $ -- $ -- $ 49 0.04% Jamaica 550 -- 97 453 0.41 Jordan 1,186 38 169 979 0.89 Kazakhstan 1,453 -- 208 1,245 1.14 Kenya 2 -- -- 2 * Korea, Republic of 3,956 -- -- 3,956 3.61 Latvia 205 -- 27 178 0.16 Lebanon 668 -- 294 374 0.34 Lesotho 32 -- 15 17 0.02 Liberia 151 -- -- 151 0.14 Lithuania 327 -- 52 275 0.25 Macedonia, former Yugoslav Republic of 261 50 24 187 0.17 Malawi * -- -- * * Malaysia 697 -- 32 665 0.61 Mauritius 87 -- 7 80 0.07 Mexico 12,526 608 1,749 10,169 9.28 Moldova 184 -- 2 182 0.17 Morocco 2,796 68 190 2,538 2.31 Nigeria 1,079 -- -- 1,079 0.98 Pakistan 2,577 -- 51 2,526 2.30 Panama 335 -- 75 260 0.24 Papua New Guinea 336 -- 77 259 0.24 Paraguay 310 24 44 242 0.22 Peru 2,971 57 195 2,719 2.48 Philippines 3,986 60 624 3,302 3.01 Poland 2,881 -- 536 2,345 2.14 Romania 3,128 150 737 2,241 2.04 Russian Federation 7,414 261 1,200 5,953 5.43 St. Kitts and Nevis 24 -- 11 13 0.01 St. Lucia 23 4 9 10 0.01 St. Vincent and the Grenadines 8 3 4 1 * Serbia and Montenegro 2,536 -- -- 2,536 2.32 Seychelles 3 -- -- 3 * Slovak Republic 477 -- 98 379 0.35 Slovenia 72 -- 4 68 0.06 South Africa 39 -- 20 19 0.02 Sri Lanka 2 -- -- 2 * Swaziland 26 -- 5 21 0.02 Tanzania 2 -- -- 2 * IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 51 S UMMARY S TATEMENT OF L OANS (Continued) June 30, 2004 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage but not yet balance of Loans of total loans Borrower or guarantor Total loans effective a effective loansb outstanding outstanding Thailand $ 1,139 $ -- $ 117 $ 1,022 0.93% Trinidad and Tobago 102 -- 24 78 0.07 Tunisia 2,251 37 521 1,693 1.55 Turkey 8,762 1,282 1,826 5,654 5.16 Turkmenistan 36 -- 4 32 0.03 Ukraine 2,964 232 544 2,188 2.00 Uruguay 1,119 -- 413 706 0.64 Uzbekistan 461 -- 163 298 0.27 Venezuela, República Bolivariana de 469 -- 81 388 0.35 Zimbabwe 449 -- 0 449 0.41 Subtotale 141,640 7,357 24,771 109,512 99.91 Caribbean Development Bankc 1 -- -- 1 * International Finance Corporationd 97 -- -- 97 0.09 Total--June 30, 2004e $141,738 $7,357 $24,771 $109,610 100.00% Total--June 30, 2003 $149,271 $5,937 $27,094 $116,240 *Indicates amount less than $0.5 million or less than 0.005 percent. NOTES a. Loans totaling $4,206 million ($4,333 million--June 30, 2003) have been approved by IBRD, but the related agreements have not been signed. Loan agreements totaling $3,151 million ($1,604 million--June 30, 2003) have been signed, but the loans do not become effective and disbursements thereunder do not start until the borrowers and guarantors, if any, take certain actions and furnish certain documents to IBRD. b. Of the undisbursed balance, IBRD has entered into irrevocable commitments to disburse $524 million ($579 million--June 30, 2003). c. These loans are for the benefit of The Bahamas, Barbados, Grenada, Guyana, Jamaica, Trinidad and Tobago, and territories of the United Kingdom (Associated States and Dependencies) in the Caribbean Region, that are severally liable as guarantors to the extent of sub-loans made in their territories. d. Loans to the International Finance Corporation have a weighted average interest rate of 6.49% and a weighted average maturity of 1.6 years. These loans are not eligible for IBRD's interest waivers. e. May differ from the sum of individual figures shown due to rounding. The Notes to Financial Statements are an integral part of these Statements. 52 THE WORLD BANK ANNUAL REPORT 2004 S TATEMENT OF S UBSCRIPTIONS TO C APITAL S TOCK AND VOTING P OWER June 30, 2004 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Amounts Number Percentage of Total Amounts subject of of Member Shares total amounts paid ina to calla,b votes total Afghanistan 300 0.02% $ 36.2 $ 3.6 $ 32.6 550 0.03% Albania 830 0.05 100.1 3.6 96.5 1,080 0.07 Algeria 9,252 0.59 1,116.1 67.1 1,049.0 9,502 0.59 Angola 2,676 0.17 322.8 17.5 305.4 2,926 0.18 Antigua and Barbuda 520 0.03 62.7 1.3 61.5 770 0.05 Argentina 17,911 1.14 2,160.7 132.2 2,028.4 18,161 1.12 Armenia 1,139 0.07 137.4 5.9 131.5 1,389 0.09 Australia 24,464 1.56 2,951.2 181.8 2,769.5 24,714 1.53 Austria 11,063 0.70 1,334.6 80.7 1,253.9 11,313 0.70 Azerbaijan 1,646 0.10 198.6 9.7 188.8 1,896 0.12 Bahamas, The 1,071 0.07 129.2 5.4 123.8 1,321 0.08 Bahrain 1,103 0.07 133.1 5.7 127.4 1,353 0.08 Bangladesh 4,854 0.31 585.6 33.9 551.6 5,104 0.32 Barbados 948 0.06 114.4 4.5 109.9 1,198 0.07 Belarus 3,323 0.21 400.9 22.3 378.5 3,573 0.22 Belgium 28,983 1.84 3,496.4 215.8 3,280.6 29,233 1.81 Belize 586 0.04 70.7 1.8 68.9 836 0.05 Benin 868 0.06 104.7 3.9 100.8 1,118 0.07 Bhutan 479 0.03 57.8 1.0 56.8 729 0.05 Bolivia 1,785 0.11 215.3 10.8 204.5 2,035 0.13 Bosnia and Herzegovina 549 0.03 66.2 5.8 60.4 799 0.05 Botswana 615 0.04 74.2 2.0 72.2 865 0.05 Brazil 33,287 2.12 4,015.6 245.5 3,770.1 33,537 2.07 Brunei Darussalam 2,373 0.15 286.3 15.2 271.1 2,623 0.16 Bulgaria 5,215 0.33 629.1 36.5 592.6 5,465 0.34 Burkina Faso 868 0.06 104.7 3.9 100.8 1,118 0.07 Burundi 716 0.05 86.4 3.0 83.4 966 0.06 Cambodia 214 0.01 25.8 2.6 23.2 464 0.03 Cameroon 1,527 0.10 184.2 9.0 175.2 1,777 0.11 Canada 44,795 2.85 5,403.8 334.9 5,068.9 45,045 2.78 Cape Verde 508 0.03 61.3 1.2 60.1 758 0.05 Central African Republic 862 0.05 104.0 3.9 100.1 1,112 0.07 Chad 862 0.05 104.0 3.9 100.1 1,112 0.07 Chile 6,931 0.44 836.1 49.6 786.6 7,181 0.44 China 44,799 2.85 5,404.3 335.0 5,069.3 45,049 2.78 Colombia 6,352 0.40 766.3 45.2 721.1 6,602 0.41 Comoros 282 0.02 34.0 0.3 33.7 532 0.03 Congo, Democratic Republic of 2,643 0.17 318.8 25.4 293.5 2,893 0.18 Congo, Republic of 927 0.06 111.8 4.3 107.5 1,177 0.07 Costa Rica 233 0.01 28.1 1.9 26.2 483 0.03 Côte d'Ivoire 2,516 0.16 303.5 16.4 287.1 2,766 0.17 Croatia 2,293 0.15 276.6 17.3 259.3 2,543 0.16 Cyprus 1,461 0.09 176.2 8.4 167.9 1,711 0.11 Czech Republic 6,308 0.40 761.0 45.9 715.0 6,558 0.41 Denmark 13,451 0.86 1,622.7 97.8 1,524.9 13,701 0.85 Djibouti 559 0.04 67.4 1.6 65.9 809 0.05 Dominica 504 0.03 60.8 1.1 59.7 754 0.05 Dominican Republic 2,092 0.13 252.4 13.1 239.3 2,342 0.14 Ecuador 2,771 0.18 334.3 18.2 316.1 3,021 0.19 Egypt, Arab Republic of 7,108 0.45 857.5 50.9 806.6 7,358 0.45 IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 53 S TATEMENT OF S UBSCRIPTIONS TO C APITAL S TOCK AND VOTING P OWER (Continued) June 30, 2004 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Amounts Number Percentage of Total Amounts subject of of Member Shares total amounts paid ina to calla,b votes total El Salvador 141 0.01% $ 17.0 $ 1.7 $ 15.3 391 0.02% Equatorial Guinea 715 0.05 86.3 2.7 83.5 965 0.06 Eritrea 593 0.04 71.5 1.8 69.7 843 0.05 Estonia 923 0.06 111.3 4.3 107.1 1,173 0.07 Ethiopia 978 0.06 118.0 4.7 113.3 1,228 0.08 Fiji 987 0.06 119.1 4.8 114.3 1,237 0.08 Finland 8,560 0.54 1,032.6 61.9 970.8 8,810 0.54 France 69,397 4.41 8,371.7 520.4 7,851.3 69,647 4.30 Gabon 987 0.06 119.1 5.1 113.9 1,237 0.08 Gambia, The 543 0.03 65.5 1.5 64.0 793 0.05 Georgia 1,584 0.10 191.1 9.3 181.8 1,834 0.11 Germany 72,399 4.60 8,733.9 542.9 8,190.9 72,649 4.49 Ghana 1,525 0.10 184.0 12.7 171.2 1,775 0.11 Greece 1,684 0.11 203.1 14.1 189.1 1,934 0.12 Grenada 531 0.03 64.1 1.4 62.7 781 0.05 Guatemala 2,001 0.13 241.4 12.4 229.0 2,251 0.14 Guinea 1,292 0.08 155.9 7.1 148.8 1,542 0.10 Guinea-Bissau 540 0.03 65.1 1.4 63.7 790 0.05 Guyana 1,058 0.07 127.6 5.3 122.3 1,308 0.08 Haiti 1,067 0.07 128.7 5.4 123.3 1,317 0.08 Honduras 641 0.04 77.3 2.3 75.0 891 0.06 Hungary 8,050 0.51 971.1 58.0 913.1 8,300 0.51 Iceland 1,258 0.08 151.8 6.8 144.9 1,508 0.09 India 44,795 2.85 5,403.8 333.7 5,070.1 45,045 2.78 Indonesia 14,981 0.95 1,807.2 110.3 1,697.0 15,231 0.94 Iran, Islamic Republic of 23,686 1.51 2,857.4 175.8 2,681.5 23,936 1.48 Iraq 2,808 0.18 338.7 27.1 311.6 3,058 0.19 Ireland 5,271 0.34 635.9 37.1 598.8 5,521 0.34 Israel 4,750 0.30 573.0 33.2 539.8 5,000 0.31 Italy 44,795 2.85 5,403.8 334.8 5,069.0 45,045 2.78 Jamaica 2,578 0.16 311.0 16.8 294.2 2,828 0.17 Japan 127,000 8.08 15,320.6 944.0 14,376.7 127,250 7.86 Jordan 1,388 0.09 167.4 7.8 159.6 1,638 0.10 Kazakhstan 2,985 0.19 360.1 19.8 340.3 3,235 0.20 Kenya 2,461 0.16 296.9 15.9 281.0 2,711 0.17 Kiribati 465 0.03 56.1 0.9 55.2 715 0.04 Korea, Republic of 15,817 1.01 1,908.1 114.5 1,793.5 16,067 0.99 Kuwait 13,280 0.84 1,602.0 97.4 1,504.6 13,530 0.84 Kyrgyz Republic 1,107 0.07 133.5 5.7 127.9 1,357 0.08 Lao People's Democratic Republic 178 0.01 21.5 1.5 20.0 428 0.03 Latvia 1,384 0.09 167.0 7.8 159.2 1,634 0.10 Lebanon 340 0.02 41.0 1.1 39.9 590 0.04 Lesotho 663 0.04 80.0 2.3 77.6 913 0.06 Liberia 463 0.03 55.9 2.6 53.3 713 0.04 Libya 7,840 0.50 945.8 57.0 888.8 8,090 0.50 Lithuania 1,507 0.10 181.8 8.7 173.1 1,757 0.11 Luxembourg 1,652 0.11 199.3 9.8 189.5 1,902 0.12 Macedonia, former Yugoslav Republic of 427 0.03 51.5 3.2 48.3 677 0.04 Madagascar 1,422 0.09 171.5 8.1 163.5 1,672 0.10 Malawi 1,094 0.07 132.0 5.6 126.4 1,344 0.08 54 THE WORLD BANK ANNUAL REPORT 2004 S TATEMENT OF S UBSCRIPTIONS TO C APITAL S TOCK AND VOTING P OWER (Continued) June 30, 2004 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Amounts Number Percentage of Total Amounts subject of of Member Shares total amounts paid ina to calla,b votes total Malaysia 8,244 0.52% $ 994.5 $ 59.5 $ 935.0 8,494 0.52% Maldives 469 0.03 56.6 0.9 55.7 719 0.04 Mali 1,162 0.07 140.2 6.1 134.1 1,412 0.09 Malta 1,074 0.07 129.6 5.4 124.1 1,324 0.08 Marshall Islands 469 0.03 56.6 0.9 55.7 719 0.04 Mauritania 900 0.06 108.6 4.1 104.4 1,150 0.07 Mauritius 1,242 0.08 149.8 6.7 143.1 1,492 0.09 Mexico 18,804 1.20 2,268.4 139.0 2,129.4 19,054 1.18 Micronesia, Federated States of 479 0.03 57.8 1.0 56.8 729 0.05 Moldova 1,368 0.09 165.0 7.6 157.4 1,618 0.10 Mongolia 466 0.03 56.2 2.3 53.9 716 0.04 Morocco 4,973 0.32 599.9 34.8 565.1 5,223 0.32 Mozambique 930 0.06 112.2 4.8 107.4 1,180 0.07 Myanmar 2,484 0.16 299.7 16.1 283.6 2,734 0.17 Namibia 1,523 0.10 183.7 8.8 174.9 1,773 0.11 Nepal 968 0.06 116.8 4.6 112.1 1,218 0.08 Netherlands 35,503 2.26 4,282.9 264.8 4,018.1 35,753 2.21 New Zealand 7,236 0.46 872.9 51.9 821.0 7,486 0.46 Nicaragua 608 0.04 73.3 2.1 71.3 858 0.05 Niger 852 0.05 102.8 3.8 99.0 1,102 0.07 Nigeria 12,655 0.80 1,526.6 92.7 1,433.9 12,905 0.80 Norway 9,982 0.63 1,204.2 72.6 1,131.6 10,232 0.63 Oman 1,561 0.10 188.3 9.1 179.2 1,811 0.11 Pakistan 9,339 0.59 1,126.6 67.8 1,058.9 9,589 0.59 Palau 16 * 1.9 0.2 1.8 266 0.02 Panama 385 0.02 46.4 3.2 43.2 635 0.04 Papua New Guinea 1,294 0.08 156.1 7.1 149.0 1,544 0.10 Paraguay 1,229 0.08 148.3 6.6 141.6 1,479 0.09 Peru 5,331 0.34 643.1 37.5 605.6 5,581 0.34 Philippines 6,844 0.43 825.6 48.9 776.7 7,094 0.44 Poland 10,908 0.69 1,315.9 79.6 1,236.3 11,158 0.69 Portugal 5,460 0.35 658.7 38.5 620.2 5,710 0.35 Qatar 1,096 0.07 132.2 9.0 123.3 1,346 0.08 Romania 4,011 0.26 483.9 30.5 453.4 4,261 0.26 Russian Federation 44,795 2.85 5,403.8 333.9 5,070.0 45,045 2.78 Rwanda 1,046 0.07 126.2 5.2 120.9 1,296 0.08 St. Kitts and Nevis 275 0.02 33.2 0.3 32.9 525 0.03 St. Lucia 552 0.04 66.6 1.5 65.1 802 0.05 St. Vincent and the Grenadines 278 0.02 33.5 0.3 33.2 528 0.03 Samoa 531 0.03 64.1 1.4 62.7 781 0.05 San Marino 595 0.04 71.8 2.5 69.3 845 0.05 São Tomé and Principe 495 0.03 59.7 1.1 58.6 745 0.05 Saudi Arabia 44,795 2.85 5,403.8 335.0 5,068.9 45,045 2.78 Senegal 2,072 0.13 250.0 13.0 237.0 2,322 0.14 Serbia and Montenegro 2,846 0.18 343.3 21.5 321.9 3,096 0.19 IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 55 S TATEMENT OF S UBSCRIPTIONS TO C APITAL S TOCK AND VOTING P OWER (Continued) June 30, 2004 Expressed in millions of U.S. dollars Subscriptions Voting Power Percentage Amounts Number Percentage of Total Amounts subject of of Member Shares total amounts paid ina to calla,b votes total Seychelles 263 0.02% $ 31.7 $ 0.2 $ 31.6 513 0.03% Sierra Leone 718 0.05 86.6 3.0 83.6 968 0.06 Singapore 320 0.02 38.6 3.9 34.7 570 0.04 Slovak Republic 3,216 0.20 388.0 23.0 365.0 3,466 0.21 Slovenia 1,261 0.08 152.1 9.5 142.6 1,511 0.09 Solomon Islands 513 0.03 61.9 1.2 60.7 763 0.05 Somalia 552 0.04 66.6 3.3 63.3 802 0.05 South Africa 13,462 0.86 1,624.0 98.8 1,525.2 13,712 0.85 Spain 27,997 1.78 3,377.4 206.8 3,170.6 28,247 1.75 Sri Lanka 3,817 0.24 460.5 26.1 434.3 4,067 0.25 Sudan 850 0.05 102.5 7.2 95.3 1,100 0.07 Suriname 412 0.03 49.7 2.0 47.7 662 0.04 Swaziland 440 0.03 53.1 2.0 51.1 690 0.04 Sweden 14,974 0.95 1,806.4 110.2 1,696.2 15,224 0.94 Switzerland 26,606 1.69 3,209.6 197.2 3,012.4 26,856 1.66 Syrian Arab Republic 2,202 0.14 265.6 14.0 251.7 2,452 0.15 Tajikistan 1,060 0.07 127.9 5.3 122.5 1,310 0.08 Tanzania 1,295 0.08 156.2 10.0 146.2 1,545 0.10 Thailand 6,349 0.40 765.9 45.2 720.7 6,599 0.41 Timor-Leste 517 0.03 62.4 1.9 60.4 767 0.05 Togo 1,105 0.07 133.3 5.7 127.6 1,355 0.08 Tonga 494 0.03 59.6 1.1 58.5 744 0.05 Trinidad and Tobago 2,664 0.17 321.4 17.6 303.7 2,914 0.18 Tunisia 719 0.05 86.7 5.7 81.1 969 0.06 Turkey 8,328 0.53 1,004.6 59.8 944.8 8,578 0.53 Turkmenistan 526 0.03 63.5 2.9 60.5 776 0.05 Uganda 617 0.04 74.4 4.4 70.1 867 0.05 Ukraine 10,908 0.69 1,315.9 79.3 1,236.6 11,158 0.69 United Arab Emirates 2,385 0.15 287.7 22.6 265.1 2,635 0.16 United Kingdom 69,397 4.41 8,371.7 539.5 7,832.2 69,647 4.30 United States 264,969 16.85 31,964.5 1,998.4 29,966.2 265,219 16.39 Uruguay 2,812 0.18 339.2 18.6 320.7 3,062 0.19 Uzbekistan 2,493 0.16 300.7 16.1 284.7 2,743 0.17 Vanuatu 586 0.04 70.7 1.8 68.9 836 0.05 Venezuela, República Bolivariana de 20,361 1.29 2,456.2 150.8 2,305.5 20,611 1.27 Vietnam 968 0.06 116.8 8.1 108.7 1,218 0.08 Yemen, Republic of 2,212 0.14 266.8 14.0 252.8 2,462 0.15 Zambia 2,810 0.18 339.0 20.0 319.0 3,060 0.19 Zimbabwe 3,325 0.21 401.1 22.4 378.7 3,575 0.22 Total--June 30, 2004b 1,572,661 100.00% $189,718 $11,483 $178,235 1,618,661 100.00% Total--June 30, 2003 1,571,412 $189,567 $11,478 $178,089 1,617,412 * Indicates amounts less than 0.005 percent. NOTES a. See Notes to Financial Statements--Note B. b. May differ from the sum of individual figures shown due to rounding. The Notes to Financial Statements are an integral part of these Statements. 56 THE WORLD BANK ANNUAL REPORT 2004 N O T E S T O F I N A N C I A L S T A T E M E N T S PURPOSE AND AFFILIATED ORGANIZATIONS estimates. Significant judgments have been used in the valuation of certain financial instruments, the The International Bank for Reconstruction and determination of the adequacy of the accumulated Development (IBRD) is an international organization provision for losses on loans and guarantees, the which commenced operations in 1946. The principal determination of net periodic income from pension purpose of IBRD is to promote sustainable economic and other postretirement benefits plans, and the development and reduce poverty in its member present value of benefit obligations. countries, primarily by providing loans, guarantees and related technical assistance for specific projects Certain reclassifications of the prior years' and for programs of economic reform in developing information have been made to conform with the member countries. The activities of IBRD are current year's presentation. complemented by those of three affiliated Translation of Currencies: IBRD's financial organizations, the International Development statements are expressed in terms of U.S. dollars solely Association (IDA), the International Finance for the purpose of summarizing IBRD's financial Corporation (IFC), and the Multilateral Investment position and the results of its operations for the Guarantee Agency (MIGA). Each of these convenience of its members and other interested organizations is legally and financially independent parties. from IBRD, with separate assets and liabilities, and IBRD is not liable for their respective obligations. IBRD is an international organization which conducts Transactions with these affiliates are disclosed in the its operations in the currencies of all of its members. notes that follow. IDA's main goal is to reduce poverty IBRD's resources are derived from its capital, through promoting sustainable economic borrowings, and accumulated earnings in those development in the less developed areas of the world various currencies. IBRD has a number of general included in IDA's membership by providing a policies aimed at minimizing exchange rate risk in a combination of grants and financing on multicurrency environment. IBRD matches its concessionary terms. IFC's purpose is to encourage borrowing obligations in any one currency (after the growth of productive private enterprises in its swaps) with assets in the same currency, as prescribed member countries through loans and equity by its Articles of Agreement. In addition, IBRD investments in such enterprises without a member's periodically undertakes currency conversions to more guarantee. MIGA was established to encourage the closely match the currencies underlying its Equity flow of investments for productive purposes between with those of the net loans outstanding. member countries and, in particular, to developing Assets and liabilities are translated at market exchange member countries by providing guarantees against rates in effect at the end of the period. Income and noncommercial risks for foreign investment in its expenses are translated at either the market exchange developing member countries. rates in effect on the dates on which they are recognized or at an average of the market exchange NOTE A--SUMMARY OF SIGNIFICANT rates in effect during each month. Translation ACCOUNTING AND RELATED POLICIES adjustments are charged or credited to Accumulated IBRD's financial statements are prepared in Other Comprehensive Income. conformity with the accounting principles generally Valuation of Capital Stock: In the Articles of accepted in the United States of America (U.S. GAAP) Agreement, the capital stock of IBRD is expressed in and with International Financial Reporting Standards terms of "U.S. dollars of the weight and fineness in (IFRS). On August 3, 2004, the Board of Executive effect on July 1, 1944" (1944 dollars). Following the Directors approved these financial statements for abolition of gold as a common denominator of the issue. monetary system and the repeal of the provision of the The preparation of financial statements in conformity U.S. law defining the par value of the U.S. dollar in with generally accepted accounting principles requires terms of gold, the pre-existing basis for translating management to make estimates and assumptions that 1944 dollars into current dollars or into any other affect the reported amounts of assets and liabilities currency disappeared. The Executive Directors of and disclosure of contingent assets and liabilities at IBRD have decided, until such time as the relevant the date of the financial statements and the reported provisions of the Articles of Agreement are amended, amounts of income and expenses during the reporting that the words "U.S. dollars of the weight and fineness period. Actual results could differ from these in effect on July 1, 1944" in Article II, Section 2(a) of IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 57 the Articles of Agreement of IBRD are interpreted to Retirement Plan (SRP) and other postretirement mean the Special Drawing Right (SDR) introduced by benefits plans, and the cumulative accounting income the International Monetary Fund, as valued in terms or expense for these plans, from prior fiscal years. This of U.S. dollars immediately before the introduction of Pension Reserve is reduced when pension accounting the basket method of valuing the SDR on July 1, 1974, expenses exceed the actual funding of these plans. such value being $1.20635 for one SDR (1974 SDR). Surplus consists of earnings from prior fiscal years Maintenance of Value: Article II, Section 9 of the which are retained by IBRD until a further decision is Articles of Agreement provides for maintenance of the made on their disposition or the conditions of transfer value (MOV), at the time of subscription, of such for specified uses have been met. restricted currencies (see Note B). Maintenance of The Cumulative FAS 133 Adjustments consist of the value amounts are determined by measuring the effects associated with the application of FAS 133a foreign exchange value of a member's currency against from prior years. At June 30, 2004, this amount the standard of value of IBRD capital based on the includes the one-time cumulative effect of the 1974 SDR. Members are required to make payments adoption of FAS 133 on July 1, 2000, the to IBRD if their currencies depreciate significantly reclassification and amortization of the transition relative to the standard of value. Furthermore, the adjustments for prior fiscal years, and the unrealized Executive Directors have adopted a policy of gains or losses on certain derivative instruments, as reimbursing members whose currencies appreciate defined by FAS 133, for prior fiscal years. significantly in terms of the standard of value. Unallocated Net Income consists of earnings in the The net MOV amounts relating to restricted current fiscal year. Upon recommendation by the currencies out on loan, and amounts that have been Executive Directors, the Board of Governors, reclassified from receivables for those countries that consisting of one Governor appointed by each have been in arrears for two years or more, are member, periodically approves transfers out of included as a component of equity under Amounts to unallocated Net Income and Surplus to various Maintain Value of Currency Holdings. For amounts entities for development purposes consistent with on loan, these MOV amounts are shown as a IBRD's Articles of Agreement. component of Equity since MOV becomes effective only as such currencies are repaid to IBRD. Loans: All of IBRD's loans are made to or guaranteed by members, except loans to IFC. The majority of Retained Earnings: Retained Earnings consists of IBRD's loans have repayment obligations based on allocated amounts (Special Reserve, General Reserve, specific currencies. IBRD also holds multicurrency Pension Reserve, Surplus and Cumulative FAS 133 loans which have repayment obligations in various Adjustments) and unallocated Net Income. currencies determined on the basis of a currency The Special Reserve consists of loan commissions set pooling system. aside pursuant to Article IV, Section 6 of the Articles Any loan origination fees incorporated in a loan's of Agreement, which are to be held in liquid assets. terms are deferred and recognized over the life of the These assets may be used only for the purpose of loan as an adjustment of yield. However, incremental meeting liabilities of IBRD on its borrowings and direct costs associated with originating loans are guarantees in the event of defaults on loans made, expensed as incurred as such amounts are considered participated in, or guaranteed by IBRD. The Special insignificant. The unamortized balance of loan Reserve assets are included under Investments-- origination fees is included as a reduction of Loans Trading, and comprise obligations of the United States Outstanding on the balance sheet, and the loan Government, its agencies, and other official entities. origination fee amortization is included in Interest The allocation of such commissions to the Special under Income from Loans on the income statement. Reserve was discontinued in 1964 with respect to subsequent loans and no further additions are being It is IBRD's practice not to reschedule interest or made to it. principal payments on its loans or participate in debt a. For the purpose of this document, FAS 133 refers collectively to The General Reserve consists of earnings from prior the Statement of Financial Accounting Standards (FAS) No. 133, fiscal years which, in the judgment of the Executive "Accounting for Derivative Instruments and Hedging Activities", Directors, should be retained in IBRD's operations. along with its amendments, as well as the derivative accounting requirements of International Accounting Standard (IAS) 39 The Pension Reserve consists of the difference (Revised), "Financial Instruments: Recognition and Measure- between the cumulative actual funding of the Staff ment". 58 THE WORLD BANK ANNUAL REPORT 2004 rescheduling agreements with respect to its loans. In interest and other charges accrued on loans exceptional cases, however, such as when outstanding to the member are deducted from the implementation of a financed project has been income of the current period. Interest and other delayed, the loan amortization schedule may be charges on nonaccruing loans are included in income modified to avoid substantial repayments prior to only to the extent that payments have been received by project completion. IBRD. If collectibility risk is considered to be particularly high at the time of arrears clearance, the In addition, during fiscal years 1996 and 2002, member's loans may not automatically emerge from exceptions were made to that practice with regard to nonaccrual status, even though the member's Bosnia and Herzegovina (BiH) and Serbia and eligibility for new loans may have been restored. In Montenegro (SAM), formerly the Federal Republic of such instances, a decision on the restoration of accrual Yugoslavia, respectively, in connection with their status is made on a case-by-case basis after a suitable succession to membership of the former Socialist period of payment performance has passed from the Federal Republic of Yugoslavia (SFRY). One time of arrears clearance. component of the financial assistance packages for BiH and SAM was a plan for the clearance of arrears Guarantees: IBRD generally provides guarantees of under all loans to the former SFRY for which they loans undertaken for, or securities issued in support undertook responsibility. Under the arrears clearance of, projects located within a member country eligible plans, the accumulated arrears on loans to the former for IBRD loans, as well as loans undertaken or SFRY which were assumed by BiH and SAM were securities issued by entities eligible for IBRD cleared through the issuance of new loans extended by adjustment lending. These financial guarantees are IBRD. commitments issued by IBRD to guarantee payment performance by a borrower to a third party. IBRD's treatment of BiH and SAM was based on criteria approved by the Executive Directors in Guarantees are regarded as outstanding when the connection with the financial assistance package for underlying financial obligation of the borrower is BiH in fiscal year 1996. These criteria limit eligibility incurred, and called when a guaranteed party for such treatment to a country: (a) that has emerged demands payment under the guarantee. IBRD would from a current or former member of IBRD; (b) that is be required to perform under its guarantees if the assuming responsibility for a share of the debt of such payments guaranteed were not made by the debtor member; (c) that, because of a major armed conflict and the guaranteed party called the guarantee by in its territory involving extensive destruction of demanding payment from IBRD in accordance with physical assets, has limited creditworthiness for the terms of the guarantee. In the event that a servicing the debt it is assuming; and (d) for which guarantee is called, IBRD has the contractual right to rescheduling/refinancing would result in a significant require payment from the member country that has improvement in its repayment capacity, if appropriate provided the counter guarantee to IBRD on demand, supporting measures are taken. This treatment was or as IBRD may otherwise direct. based on a precedent established in 1975 after For guarantees issued or modified after December 31, Bangladesh became independent from Pakistan. 2002, in accordance with Financial Accounting IBRD does not believe that any other borrowers with Standards Board (FASB) Interpretation No. 45 (FIN loans in nonaccrual status currently meet these 45), "Guarantor's Accounting and Disclosure eligibility criteria. Requirements for Guarantees, Including Indirect It is the policy of IBRD to place in nonaccrual status Guarantees of Indebtedness to Others", IBRD will all loans made to or guaranteed by a member of IBRD record the fair value of the obligation to stand ready, if principal, interest, or other charges with respect to and a corresponding asset in the financial statements. any such loan are overdue by more than six months, IBRD has not issued or modified any guarantees after unless IBRD management determines that the December 31, 2002. For guarantees issued prior to overdue amount will be collected in the immediate January 1, 2003, fee income received from guarantees future. In addition, if development credits made by is deferred and amortized over the period of benefit. IDA to a member government are placed in In addition, IBRD records a contingent liability for the nonaccrual status, all loans made to or guaranteed by probable losses related to guarantees outstanding. The that member government will also be placed in provision for losses on guarantees as well as the nonaccrual status by IBRD. On the date a member's unamortized balance of the deferred guarantee fee loans are placed into nonaccrual status, unpaid IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 59 income are included in Accounts Payable and Other securities. These derivatives are carried at fair value. Liabilities on the balance sheet. From time to time, IBRD enters into forward contracts for the sale or purchase of investment Accumulated Provision for Losses on Loans and securities; these transactions are recorded at the time Guarantees: Delays in receiving loan payments result of commitment. in present value losses to IBRD since it does not charge fees or additional interest on any overdue Securities Purchased Under Resale Agreements interest or loan charges. These present value losses are and Securities Sold Under Repurchase equal to the difference between the present value of Agreements and Payable for Cash Collateral payments of interest and charges made according to Received: Securities purchased under resale the related loan's contractual terms and the present agreements, securities lent under securities lending value of its expected future cash flows. IBRD has not agreements, and securities sold under repurchase written off any of its loans. agreements are recorded at historical cost. IBRD receives securities purchased under resale agreements, Management determines the appropriate level of monitors the fair value of the securities and, if accumulated provisions for losses on loans and necessary, closes out transactions and enters into new guarantees on a borrower-by-borrower basis for both repriced transactions. The securities transferred to the nonaccrual and accrual portfolios at the balance IBRD under the repurchase and security lending sheet date. The appropriate level of provisions for arrangements and the securities transferred to each borrower is estimated as the sum product of its counterparties under the resale agreements have not expected default frequency (or probability of default met the accounting criteria for treatment as a sale. to IBRD), its loans outstanding (plus the present value Therefore, securities transferred under repurchase of guarantees), and the assumed severity of loss given agreements and security lending arrangements are default. retained as assets on IBRD's balance sheet, and The determination of borrowers' ratings is based on securities received under resale agreements are not both quantitative and qualitative analyses of various recorded on IBRD's balance sheet. factors. IBRD periodically reviews these factors and Nonnegotiable, Noninterest-bearing Demand reassesses the adequacy of the accumulated provision Obligations on Account of Subscribed Capital: for losses on loans and guarantees accordingly. Payments on these instruments are due to IBRD upon Adjustments to the accumulated provision are demand and are held in bank accounts which bear recorded as a charge or addition to income. IBRD's name. Accordingly, these instruments are Cash and Liquid Investments: IBRD considers carried and reported at face value as assets on the unrestricted cash, as well as financial instruments held balance sheet. in the investment portfolio, as elements of liquidity in Premises and Equipment: Premises and equipment, the Statement of Cash Flows, since they are readily including leasehold improvements, are carried at cost convertible to known amounts of cash. less accumulated depreciation and amortization. Investments: Investment securities are classified IBRD computes depreciation and amortization using based on management's intention on the date of the straight-line method over the estimated useful purchase, their nature, and IBRD's policies governing lives of the owned assets, which range between two the level and use of such investments. At June 30, and fifty years. For leasehold improvements, 2004 and June 30, 2003, all investment securities were depreciation and amortization is computed over the held in a trading portfolio. Investment securities and lesser of the remaining term of the leased facility or related financial instruments held in IBRD's trading the estimated economic life of the improvement. portfolio are carried and reported at fair value, using Maintenance and repairs are charged to expense as trade-date accounting. The first-in first-out (FIFO) incurred, while major improvements are capitalized method is used to determine the cost of securities sold and amortized over the estimated useful life. in computing the realized gains and losses on these instruments. Unrealized gains and losses for Borrowings: To ensure funds are available for lending investment securities and related financial and liquidity purposes, IBRD borrows in the instruments held in the trading portfolio are included worldwide capital markets offering its securities to in income. Derivative instruments are used in private and governmental buyers. IBRD issues short- liquidity management to take advantage of profitable term and medium- and long-term debt instruments trading opportunities and as a proxy for cash denominated in various currencies with both fixed 60 THE WORLD BANK ANNUAL REPORT 2004 and adjustable interest rates. Borrowings are carried are subject to both internal and periodic external on the balance sheet at their par value (face value), verification and review. These models use market adjusted for any unamortized premiums or discounts, sourced inputs such as interest rate yield curves, and include adjustments for embedded derivatives exchange rates, and option volatilities. Selection of and fair value hedges that existed at June 30, 2000, as these inputs may involve some judgement, as does required by FAS 133. Issuance costs associated with a estimating prices when no external parameters exist. bond offering are deferred and amortized over the Accounting and Reporting Developments: In April period during which the related indebtedness is 2003 and December 2003, FASB issued FAS No. 149, outstanding. Amortization of discounts and "Amendment of Statement 133 on Derivative premiums is included in Interest under Borrowing Instruments and Hedging Activities", and FASB Expenses on the income statement. Interpretation No. 46 (revised), "Consolidation of IBRD uses derivatives in its borrowing and liability Variable Interest Entities", respectively. These management activities. In the borrowing portfolio, standards did not have a material impact on IBRD's derivatives are used to take advantage of cost saving financial statements for the fiscal year ended June 30, opportunities in non-target currencies in various 2004. capital markets. These derivatives are used to modify In December 2003, FASB issued FAS No. 132 (Revised the interest rate and/or currency characteristics of the 2003), "Employers Disclosures about Pensions and borrowing portfolio, and are carried at fair value in Other Post Retirement Benefits". This statement accordance with FAS 133. The interest component of revises employers' disclosures about pension plans these derivatives is recognized as an adjustment to the and other postretirement benefit plans. Adoption of borrowing cost over the life of the derivative contract this standard has resulted in additional disclosures in and included in Interest under Borrowing Expenses the notes to IBRD's financial statements. on the income statement. In December 2003, as part of its improvements to Accounting for Derivatives: IBRD complies with International Accounting Standards (IAS) project, the derivative accounting requirements of FAS 133. IASB issued fifteen revised International Accounting FAS 133 requires that derivative instruments, as Standards to eliminate redundancies and conflicts defined by these standards, be recorded on the balance between existing standards. The revised standards are sheet at fair value. to be applied for fiscal years beginning on or after IBRD uses derivative instruments in its investments, January 1, 2005. IBRD is currently examining what loans and borrowings portfolios and for asset/liability impact these standards may have on IBRD's financial management purposes. In applying FAS 133 for the statements. purposes of financial statement reporting, IBRD has elected not to define any qualifying hedging NOTE B--CAPITAL STOCK, RESTRICTED relationships. Rather, all derivative instruments, as CURRENCIES, MAINTENANCE OF VALUE, AND defined by FAS 133, have been marked to fair value MEMBERSHIP and all changes in fair value have been recognized in Capital Stock: At June 30, 2004, IBRD's capital net income. While IBRD believes that its hedging comprised 1,581,724 authorized shares (1,581,724 strategies achieve its objectives, the application of FAS shares--June 30, 2003), of which 1,572,661 shares had 133 qualifying hedge criteria would not make fully been subscribed (1,571,412 shares--June 30, 2003). evident the risk management strategies that IBRD Each share has a par value of 0.1 million 1974 SDRs, employs. valued at the rate of $1.20635 per 1974 SDR. Of the Valuation of Financial Instruments: Derivative subscribed capital, $11,483 million ($11,478 financial instruments and investment securities are million--June 30, 2003) has been paid in, and the recorded in IBRD's financial statements at fair value. remaining $178,235 million ($178,089 million--June Disclosures related to the fair value of these, and other 30, 2003) is subject to call only when required to meet financial instruments are included in Note O. Fair the obligations of IBRD created by borrowing or value is based on market quotations when possible. guaranteeing loans. Financial instruments for which market quotations Currencies Subject to Restrictions: A portion of are not readily available have been valued based on capital subscriptions paid in to IBRD has been paid in discounted cash flow models using market estimates the local currencies of the members. These amounts, of cash flows and discount rates. All the financial referred to as restricted currencies, are usable by IBRD models used for valuing IBRD's financial instruments IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 61 in its lending operations, only with the consent of the in obligations issued by an agency or instrumentality respective members, and for administrative expenses. of a government of a country, a multilateral organization or any other official entity with a Maintenance of Value: As of June 30, 2004, IBRD minimum credit rating of AA. For asset-backed had $73 million ($331 million--June 30, 2003) of net securities, IBRD may only invest in securities with a MOV amounts classified as a component of equity. AAA credit rating. Of this amount, IBRD had a net MOV payable of $119 million (net MOV receivable of $155 million--June With respect to futures and options, IBRD generally 30, 2003) relating to restricted currencies out on loan closes out most open positions prior to maturity. which become payable to IBRD on the same terms as Therefore, cash receipts or payments are mostly other MOV obligations only after such currencies are limited to the change in market value of the futures repaid to IBRD. The remaining amount is a net MOV contracts. These are settled on a daily basis. receivable of $192 million ($176 million--June 30, For options, IBRD only invests in exchange-traded 2003), representing receivables for countries that have options. The initial price of an option contract is amounts in arrears for two years or more. IBRD still equal to the premium paid by the purchaser and is considers these MOV receivables in arrears as significantly less than the contract or notional obligations due from the members concerned. amount. IBRD does not write uncovered option contracts as part of its investment portfolio strategy. NOTE C--INVESTMENTS As of June 30, 2004, IBRD had $nil million ($428 As part of its overall portfolio management strategy, million--June 30, 2003) of short sales included in IBRD invests in government and agency obligations, Payable for Investment Securities Purchased on the time deposits, asset-backed securities, repurchase balance sheet. agreements, securities loans, resale agreements and As of June 30, 2004, IBRD had received $851 million related financial derivatives including futures, ($212 million--June 30, 2003) of securities under currency swaps (including currency forward resale agreements. None of these securities had been contracts), interest rate swaps and options. transferred under repurchase or security lending For government and agency obligations, IBRD may agreements as of June 30, 2004 or June 30, 2003. only invest in obligations issued or unconditionally For the fiscal year ended June 30, 2004, IBRD had guaranteed by governments of countries with a included $54 million of unrealized gains in income minimum credit rating of AA; however, if such (unrealized losses of $21 million--June 30, 2003 and obligations are denominated in the home currency of $48 million--June 30, 2002). the issuer, no rating is required. IBRD may only invest A summary of IBRD's trading portfolio at June 30, 2004 and June 30, 2003, is as follows: In millions of U.S. dollars 2004 2003 Carrying Value Carrying Value Investments--Trading Government and agency obligations $ 9,774 $10,061 Time deposits 16,555 13,363 Asset-backed securities 4,817 4,492 Total $31,146 $27,916 62 THE WORLD BANK ANNUAL REPORT 2004 The following table summarizes the currency composition of IBRD's trading portfolio at June 30, 2004 and June 30, 2003: In millions of U.S. dollars equivalent 2004 2003 Average Average Carrying Average Repricing Carrying Average Repricing Currency Value Yield (%) (years)a Value Yield (%) (years)a Euro $10,591 2.62 0.93 $ 8,956 2.51 1.27 Japanese yen 1,162 0.10 1.05 1,150 0.19 1.95 U.S. dollars 16,990 1.48 0.24 16,675 1.52 1.58 Others 2,403 3.20 0.15 1,135 2.57 0.05 Total $31,146 1.95 0.50 $27,916 1.83 1.43 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD's net portfolio position as of June 30, 2004 and June 30, 2003: In millions of U.S. dollars Carrying Value 2004 2003 Investments--Trading $ 31,146 $ 27,916 Securities purchased under resale agreements 840 212 Repurchase agreements and securities loans -- (153) Receivable from currency and interest rate swaps Currency forward contracts 5,101 2,631 Currency swaps 7,348 7,620 Interest rate swaps 27 50 Total 12,476 10,301 Payable for currency and interest rate swaps Currency forward contracts (5,115) (2,651) Currency swaps (9,121) (9,117) Interest rate swaps (48) (94) Total (14,284) (11,862) Cash held in investment portfolioa 1,105 1,229 Receivable from investment securities traded 152 275 Payable for investment securities traded (342) (1,328) Net Investment Portfolio $ 31,093 $ 26,590 a. This amount is included in Unrestricted Currencies under Due from Banks on the balance sheet. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 63 The following table summarizes the currency composition of IBRD's net investment portfolio at June 30, 2004 and June 30 2003: In millions of U.S. dollars equivalent 2004 2003 Average Average Carrying Average Repricing Carrying Average Repricing Currency Value Yield (%) (years)a Value Yield (%) (years)a U.S. dollars $28,752 1.40 0.17 $24,618 1.54 0.13 Others 2,341 1.58 0.05 1,972 1.12 0.01 Total $31,093 1.42 0.16 $26,590 1.51 0.12 a. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. NOTE D--LOANS, GUARANTEES AND Waivers of Loan Interest and Commitment Charges DERIVATIVES FOR BORROWERS Waivers of a portion of interest owed by all eligible IBRD's loan portfolio includes multicurrency loans, borrowers, as well as waivers of a portion of the com- single currency pool loans, single currency loans and mitment charge on undisbursed balances on all eligi- ble IBRD loans, have been approved annually by the fixed spread loans. Single currency loans (variable Board of Executive Directors of IBRD since fiscal year spread loans and fixed-rate single currency loans), and 1990 in the case of commitment charge waivers, and fixed spread loans, include special structural and since fiscal year 1992 in the case of interest waivers. sector adjustment loans. At June 30, 2004 only These waivers have been approved for the fiscal year variable spread loans and fixed spread loans, including ending June 30, 2004. For the fiscal year ended June special structural and sector adjustment loans, were 30, 2004, the effect of the interest waiver was to reduce available for new commitments. net income by $112 million ($93 million--June 30, 2003, $102 million--June 30, 2002). For the fiscal year ended June 30, 2004, the effect of the commitment charge waiver was to reduce net income by $133 mil- lion ($146 million--June 30, 2003, $156 million-- June 30, 2002). 64 THE WORLD BANK ANNUAL REPORT 2004 A summary of IBRD's outstanding loans by currency and product at June 30, 2004 and June 30, 2003 follows: In millions of U.S. dollars equivalent 2004 Euro Japanese yen U.S. dollars Others Loans Outstanding Fixed Adjust. Fixed Adjust. Fixed Adjust. Fixed Adjust. Fixed Adjust. Total Multicurrency loansa,b Amount $ 85 $ 6,201 $ 45 $5,895 $ 138 $ 5,239 $ 87 $1,464 $ 355 $18,799 $ 19,154 Weighted average rate (%)c 8.31 3.80 7.81 3.80 8.27 3.80 7.74 3.80 8.09 3.80 3.88 Single currency pools Amount $ -- $ 2,332 $ -- $ 26 $ -- $14,131 $ -- $ -- $ -- $16,489 $ 16,489 Weighted average rate (%)c -- 4.86 -- 0.31 -- 5.31 -- -- -- 5.24 5.24 Average Maturity (years) -- 3.11 -- 2.23 -- 3.09 -- -- -- 3.09 3.09 Single currency loans Amount $ 652 $ 2,985 $ -- $ 166 $12,333 $40,550 $ -- $ 2 $12,985 $43,703 $ 56,688 Weighted average rate (%)c 5.42 2.41 -- 0.26 6.33 1.76 -- 0.64 6.29 1.79 2.82 Average Maturity (years) 3.34 5.58 -- 6.25 3.33 5.65 -- 2.97 3.33 5.65 5.12 Fixed-spread loans Amount $2,450 $ 2,432 $ 1 $ 1 $ 3,832 $ 8,563 $ -- $ -- $ 6,283 $10,996 $ 17,279 Weighted average rate (%)c 5.69 2.67 2.05 0.51 5.08 1.88 -- -- 5.31 2.06 3.24 Average maturity (years) 12.49 10.38 11.34 10.76 8.05 7.60 -- -- 9.78 8.22 8.79 Total Loans Amount $3,187 $13,950 $ 46 $6,088 $16,303 $68,483 $ 87 $1,466 $19,623 $89,987 $109,610 Weighted average rate (%)c 5.70 3.48 7.70 3.69 6.05 2.66 7.74 3.79 6.01 2.88 3.44 Total loans $109,610 Less accumulated provision for loan losses and deferred loan income 3,984 Net loans outstanding $105,626 Note: For footnotes see following page. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 65 In millions of U.S. dollars equivalent 2003 Euro Japanese yen U.S. dollars Others Loans Outstanding Fixed Adjust. Fixed Adjust. Fixed Adjust. Fixed Adjust. Fixed Adjust. Total Multicurrency loansa,b Amount $ 99 $ 7,538 $ 54 $6,878 $ 169 $ 6,668 $ 93 $1,644 $ 415 $22,728 $ 23,143 Weighted average rate (%)c 8.16 4.62 7.68 4.62 7.98 4.62 7.67 4.62 7.92 4.62 4.68 Single currency pools Amount $ -- $ 2,703 $ -- $ 31 $ -- $17,756 $ -- $ -- $ -- $20,490 $ 20,490 Weighted average rate (%)c -- 5.67 -- 1.07 -- 7.15 -- -- -- 6.95 6.95 Average Maturity (years) -- 3.41 -- 2.54 -- 3.44 -- -- -- 3.43 3.43 Single currency loans Amount $ 685 $ 2,694 $ -- $ 157 $14,630 $41,897 $ -- $ 2 $15,315 $44,750 $ 60,065 Weighted average rate (%)c 5.44 2.66 -- 0.29 6.49 1.89 -- 0.63 6.45 1.93 3.08 Average Maturity (years) 3.81 6.05 -- 6.58 3.79 5.58 -- 3.47 3.79 5.61 5.15 Fixed-spread loans Amount $2,216 $ 1,468 $ * $ -- $ 1,974 $ 6,884 $ -- $ -- $ 4,190 $ 8,352 $ 12,542 Weighted average rate (%)c 5.72 2.85 2.12 -- 5.31 1.86 -- -- 5.53 2.04 3.20 Average maturity (years) 13.68 12.50 12.34 -- 9.26 8.07 -- -- 11.60 8.85 9.77 Total Loans Amount $3,000 $14,403 $ 54 $7,066 $16,773 $73,205 $ 93 $1,646 $19,920 $96,320 $116,240 Weighted average rate (%)c 5.73 4.27 7.68 4.51 6.37 3.41 7.67 4.61 6.28 3.64 4.09 Total loans $116,240 Less accumulated provision for loan losses and deferred loan income 4,478 Net loans outstanding $111,762 a. Includes loans issued prior to 1980, and loans to IFC, in addition to multicurrency pool loans. b. Average Maturity - Multicurrency loans. IBRD maintains a targeted currency composition in its multicurrency loans. The present target ratio is one U.S. dollar for every 125 Japanese yen and one euro. These three major currencies comprise at least 90% of the multicurrency loans' U.S. dollar equivalent value, with the remainder in other currencies. The composition of the multicurrency loans is affected by the selection of currencies for disbursements on those loans and by the currencies selected for the billing of the principal repayments. Along with the selection of disbursement currencies, IBRD manages the selection of repayment currencies to maintain the alignment of the multicur- rency loans' composition with the target ratio. The selection of currencies for repayment billing by IBRD precludes the determination of aver- age maturity information for multicurrency loans by individual currency. Accordingly, IBRD only discloses the maturity periods for its multicurrency loans on a combined U.S. dollars equivalent basis. c. Excludes effects of any waivers of loan interest. * Less than $0.5 million. 66 THE WORLD BANK ANNUAL REPORT 2004 The weighted average maturity of IBRD's loan portfolio at June 30, 2004 is 5.16 years (5.11 years--June 30, 2003). The maturity structure of IBRD's loans at June 30, 2004 and June 30, 2003 is as follows: In millions of U.S. dollars 2004 July 1, 2004 July 1, 2005 July 1, 2009 through through through Product/Rate Type June 30, 2005 June 30, 2009 June 30, 2014 Thereafter Total Multicurrency loans Fixed $ 293 $ 61 $ 1 $ -- $ 355 Adjustable 3,080 10,203 5,056 460 18,799 Single currency pools Fixed -- -- -- -- -- Adjustable 3,407 9,779 3,196 107 16,489 Single currency loans Fixed 2,070 7,996 2,904 15 12,985 Adjustable 3,977 16,914 16,918 5,894 43,703 Fixed-spread loans Fixed 24 712 3,382 2,165 6,283 Adjustable 31 1,787 6,531 2,647 10,996 All Loans Fixed 2,387 8,769 6,287 2,180 19,623 Adjustable 10,495 38,683 31,701 9,108 89,987 Total loans outstanding $12,882 $47,452 $37,988 $11,288 $109,610 In millions of U.S. dollars 2003 July 1, 2003 July 1, 2004 July 1, 2008 through through through Product/Rate Type June 30, 2004 June 30, 2008 June 30, 2013 Thereafter Total Multicurrency loans Fixed $ 294 $ 117 $ 4 $ -- $ 415 Adjustable 3,568 11,773 6,545 842 22,728 Single currency pools Fixed -- -- -- -- -- Adjustable 3,750 11,670 4,773 297 20,490 Single currency loans Fixed 1,918 8,743 4,571 83 15,315 Adjustable 5,030 16,764 16,684 6,272 44,750 Fixed-spread loans Fixed 1 412 1,620 2,157 4,190 Adjustable -- 859 5,493 2,000 8,352 All Loans Fixed 2,213 9,272 6,195 2,240 19,920 Adjustable 12,348 41,066 33,495 9,411 96,320 Total loans outstanding $14,561 $50,338 $39,690 $11,651 $116,240 Guarantees loans, or in support of programs also financed by IBRD has provided partial guarantees of loans IBRD through regular loans. IBRD's partial syndicated by other financial institutions for projects. guarantees of such securities are included in the In addition, IBRD has also provided partial guarantees guarantees amount mentioned below. of securities issued by an entity eligible for IBRD IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 67 Guarantees of $1,218 million were outstanding at June LIBOR plus 400 basis points. The outstanding 30, 2004 ($1,254 million--June 30, 2003). This amount of $250 million is included in Loans amount represents the maximum potential amount of Outstanding on the balance sheet at June 30, 2003. undiscounted future payments that IBRD could be Derivatives for Borrowers required to make under these guarantees, and are not included in the balance sheet. Most of these In November 2003, the first currency swap transaction guarantees have maturities ranging between 10 and 15 was executed between IBRD and one of its borrowers, years, and expire in decreasing amounts through 2012. under a master derivatives agreement. No other transactions of this nature have been executed in this At June 30, 2004, liabilities related to IBRD's fiscal year. The net interest income associated with obligations under guarantees of $23 million ($33 this swap is included in Loan Interest income on the million--June 30, 2003), have been included in income statement. As of June 30, 2004, the receivable Accounts Payable and Miscellaneous Liabilities on the and payable legs of this swap had carrying values of balance sheet. These include the accumulated $90 million and $93 million, respectively. This swap provision for guarantee losses of $15 million ($24 matures in 2017. million--June 30, 2003). Overdue Amounts During the fiscal year ended June 30, 2004, no guarantees provided by IBRD were called. During the At June 30, 2004, no loans payable to IBRD, other than fiscal year ended June 30, 2003, IBRD's guarantee of those referred to in the following table, were overdue certain bonds that had been issued by Argentina was by more than three months. Subsequent to June 30, called and, in accordance with the terms of the 2004, principal installments of $7 million and charges guarantee, IBRD made a payment of $250 million to of $1 million payable to IBRD, became overdue by the holders of such guarantee. Pursuant to the terms three months, on July 16, 2004. The aggregate princi- pal outstanding to this borrower at July 16, 2004 was of the reimbursement agreement between IBRD and $438 million. The following tables provide a summary Argentina, IBRD directed Argentina to reimburse of selected financial information related to loans in IBRD for the entire $250 million in four equal semi- nonaccrual status as of June 30: annual installments, commencing October 15, 2005, and to repay interest on the outstanding amount at In millions of U.S. dollars 2004 2003 Recorded investment in nonaccrual loansa $3,188 $3,012 Accumulated provision for loan losses on nonaccrual loans $1,342 $1,269 Average recorded investment in nonaccrual loans $3,127 $2,793 Overdue amounts of nonaccrual loans: Principal $ 365 $ 319 Interest and charges 363 310 $ 728 $ 629 a. A loan loss provision has been recorded against each of the loans in the nonaccrual portfolio. In millions of U.S. dollars 2004 2003 2002 Interest income recognized on loans in nonaccrual status at end of fiscal year $112 $113 $84 Interest income not earned as a result of loans being in nonaccrual status $ 37 $ 28 $34 68 THE WORLD BANK ANNUAL REPORT 2004 A summary of countries with loans or guarantees in nonaccrual status follows: In millions of U.S. dollars 2004 Principal, Interest Principal and Charges Nonaccrual Borrower outstanding overdue since With overdues Iraq $ 49 $100 December 1990 Liberia 151 381 June 1987 Seychelles 3 1 August 2002 Zimbabwe 449 246 October 2000 Total 652 728 Without overdues Serbia and Montenegro 2,536 -- September 1992 Total $3,188 $728 During the fiscal year ended June 30, 2004, there were emerged from nonaccrual status after a period of time no loans placed into nonaccrual status or restored to by bringing up-to-date all principal payments and all accrual status. overdue service payments, including interest and other charges. To recognize the probable losses In July 2002, the Syrian Arab Republic and the inherent in its loan and guarantee portfolio, IBRD Democratic Republic of Congo cleared all of their maintains an accumulated provision for losses on overdue payments with IBRD, and all IBRD loans to, loans and guarantees. or guaranteed by, these two countries were restored to accrual status. As a result, income from loans for the During June 1996 and January 2002, the accumulated fiscal year ended June 30, 2003 increased by $57 arrears on loans to the former SFRY, for which BiH million, representing income that would have been and SAM undertook responsibility, were cleared accrued in previous fiscal years had these loans not through the issuance of new loans extended by IBRD been in nonaccrual status. The provision for loan to the two countries. The reschedulings were losses for the fiscal year ended June 30, 2003 was not structured to maintain the values of payments to affected by these events, since these events occurred in IBRD in accordance with the terms of the original the beginning of July 2002 and were considered in the loan agreements. These reschedulings did not change determination of the adequacy of the provision for IBRD's net exposure to these borrowers. These loans loan losses for the fiscal year ended June 30, 2002. included unpaid interest and charges related to SFRY's loans. This resulted in an increase in loans Accumulated Provision for Losses on Loans and Guarantees outstanding of $168 million for BiH and $799 million for SAM. The offset to these amounts was initially IBRD has always eventually collected all contractual classified as deferred loan income, which is presented principal and interest on its loans. However, IBRD along with the accumulated provision for loan losses suffers losses resulting from the difference between the as a determinant of net loans outstanding on the discounted present value of payments for interest and balance sheet. During fiscal year 2003, IBRD charges according to the related loan's contractual determined that these reductions should be terms and the actual cash flows. Certain borrowers reclassified as accumulated provision for loan losses to have found it difficult to make timely payments for better reflect the nature of these amounts. protracted periods, resulting in their loans being placed in nonaccrual status. Several borrowers have IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 69 Changes to the accumulated provision for losses on loans and guarantees for the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 are summarized below: In millions of U.S. dollars June 30, 2004 June 30, 2003 June 30, 2002 Accumulated provision for losses on loans and guarantees, beginning of the fiscal year $4,069 $5,094 $4,106 Additional amounts held for loans to Serbia and Montenegro -- -- 799 Release of provision for losses on loans and guarantees (665) (1,300) (15) Translation adjustment 116 275 204 Accumulated provision for losses on loans and guarantees, end of the fiscal year $3,520 $4,069 $5,094 Composed of: Accumulated provision for loan losses $3,505 $4,045 $5,053 Accumulated provision for guarantee losses 15 24 41 Total $3,520 $4,069 $5,094 Reported as Follows Balance Sheet Statement of Income Allowance for Losses on: Loans Accumulated Provision for Loan Losses Provision for Losses on Loans and Guarantees Guarantees Accounts Payable and Miscellaneous Liabilities Provision for Losses on Loans and Guarantees IBRD has endorsed a multilateral initiative for Fifth Dimension Program addressing the debt problems of a group of countries, Under IDA's Fifth Dimension program established in identified as heavily indebted poor countries (HIPC), September 1988, a portion of principal repayments to to ensure that the reform efforts of these countries will IDA are allocated on an annual basis to provide not be put at risk by unsustainable external debt supplementary IDA development credits to IDA- burdens. Under this initiative, creditors are to provide eligible countries that are no longer able to borrow on debt relief for those countries that demonstrated good IBRD terms, but have outstanding IBRD loans policy performance over an extended period to bring approved prior to September 1988 and have in place their debt burdens to sustainable levels. IBRD has not an IDA-supported structural adjustment program. entered into any commitments to provide debt relief Such supplementary IDA development credits are under this initiative. However, IDA is expected under allocated to countries that meet specified conditions, the HIPC debt initiative, to extend new credits to in proportion to each country's interest payments due certain IDA-eligible countries no longer able to that year on its pre-September 1988 IBRD loans. To be borrow on IBRD terms, but with outstanding IBRD eligible for such IDA supplemental development debt. These credits will be funded by IDA resources credits, a member country must meet IDA's eligibility other than transfers from IBRD. In determining the criteria for lending, must be ineligible for IBRD adequacy of the accumulated provision for losses on lending and must not have had an IBRD loan loans and guarantees, IBRD has taken the situation of approved within the last twelve months. To receive a these countries into consideration. supplemental development credit from the program, a member country cannot be more than 60 days overdue on its debt-service payments to IBRD or IDA. 70 THE WORLD BANK ANNUAL REPORT 2004 A summary of cumulative IDA development credits NOTE E--BORROWINGS committed and disbursed under this program from inception, at June 30, 2004 and June 30, 2003 is pre- Providing liquidity and minimizing the cost of funds sented below: are key objectives to IBRD's overall borrowing strategy. IBRD uses swaps in its borrowing strategy to lower the overall cost of its borrowings for those In millions of U.S. dollars members who benefit from IBRD loans. IBRD 2004 2003 initiates swap transactions with a list of authorized counterparties. Credit limits have been established for Commitments $1,715 $1,711 each counterparty. Disbursements $1,712 $1,699 The following table summarizes IBRD's borrowing portfolio at June 30, 2004 and June 30, 2003: In millions of U.S. dollars 2004 2003 Net Net Principal Unamortized Effects of Principal Unamortized Effects of at Face Premium Applying at Face Premium Applying Value (Discount) FAS 133 Total Value (Discount) FAS 133 Total Short-Term $ 3,148 $ (2) $ -- $ 3,146 $ 3,433 $ (1) $ -- $ 3,432 Medium-and Long-Term 106,059 (1,974) 835 104,920 105,792 (2,229) 1,559 105,122 Currency Swap Agreements (Net) (5,729) 1,165 239 (4,325) (2,160) 1,467 (3,007) (3,700) Interest Rate Swap Agreements (Net)a,b (43) 304 (707) (446) 404 (39) (2,202) (1,837) $103,435 $ (507) $367 $103,295 $107,469 $ (802) $(3,650) $103,017 a. The negative $43 million at June 30, 2004 ($404 million--June 30, 2003) represents the net unamortized premium (discount) on zero coupon trades. b. The net unamortized premium of $304 million at June 30, 2004 (discount of $39 million--June 30, 2003), represents the unamortized premium (discount) on non zero coupon trades. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 71 ThefollowingtablessummarizeIBRD'sborrowingportfoliobycurrencyandproductatJune30,2004andJune30,2003: Medium- and Long-term Borrowings and Swaps at June 30, 2004 In millions of U.S. dollars equivalent Currency Interest rate Direct borrowings swap agreements swap agreements Net currency obligations Notional Average Amount Average amount Average Amount Average Currency/ WACa maturity payable WACa maturity payable WACa maturity payable WACa maturityb Rate type Amount (%) (years) (receivable) (%) (years) (receivable) (%) (years) (receivable) (%) (years) Euro Fixed $10,425 6.02 5.73 $ 1,225 5.58 3.12 $ 2,282 5.38 10.91 $ 13,932 5.88 6.35 (9,002) 5.74 5.31 (822) 6.50 2.96 (9,824) 5.81 5.12 Adjustable 3,674 6.70 8.10 9,182 2.35 4.53 803 2.08 2.75 13,659 3.51 5.39 (4,486) 6.60 8.03 (2,282) 2.50 10.91 (6,768) 5.21 9.00 Japanese yen Fixed 5,390 4.43 4.42 130 4.64 6.53 2,005 0.25 0.51 7,525 3.32 3.41 (3,838) 4.86 3.05 (1,206) 2.33 3.45 (5,044) 4.25 3.15 Adjustable 11,631 3.90 24.62 2,903 0.03 1.14 1,206 1.55 3.45 15,740 3.00 18.66 (11,807) 3.51 24.44 (2,005) 0.02 0.51 (13,812) 3.00 20.97 U. S. dollars Fixed 44,436 5.38 4.28 3,883 9.81 2.08 21,818 5.33 6.94 70,137 5.61 4.98 (38) 9.49 0.47 (46,600) 4.81 3.39 (46,638) 4.81 3.39 Adjustable 1,560 4.34 8.66 45,714 1.04 10.65 51,796 1.11 3.35 99,070 1.13 6.80 (11,369) 1.14 3.81 (27,038) 1.65 6.16 (38,407) 1.50 5.47 Others Fixed 28,518 5.66 6.96 1,269 6.42 6.45 -- -- -- 29,787 5.69 6.94 (28,896) 5.61 6.66 (174) 6.66 2.26 (29,070) 5.61 6.66 Adjustable 425 6.05 14.18 -- -- -- 174 2.16 2.26 599 6.05 14.18 (599) 6.05 10.72 -- -- -- (599) 6.05 10.72 Total Fixed 88,769 5.49 5.32 6,507 26,105 121,381 5.52 5.52 (41,774) (48,802) (90,576) 5.15 4.61 Adjustable 17,290 4.59 19.41 57,799 53,979 129,068 1.63 8.12 (28,261) (31,325) (59,586) 2.31 9.51 Principal at face value $106,059 5.34 7.62 $ (5,729) $ (43) $100,287 2.75 a. WAC refers to weighted average cost. b. At June 30, 2004, the average repricing period of the net currency obligations for adjustable rate borrowings was three months. 72 THE WORLD BANK ANNUAL REPORT 2004 Medium- and Long-term Borrowings and Swaps at June 30, 2003 In millions of U.S. dollars equivalent Currency Interest rate Direct borrowings swap agreements swap agreements Net currency obligations Notional Average Amount Average amount Average Amount Average Currency/ WACa maturity payable WACa maturity payable WACa maturity payable WACa maturityb Rate type Amount (%) (years) (receivable) (%) (years) (receivable) (%) (years) (receivable) (%) (years) Euro Fixed $ 12,679 6.01 5.33 $ 1,212 5.42 3.17 $ 2,644 5.36 9.45 $ 16,535 5.86 5.83 (10,921) 5.85 5.07 (974) 6.61 3.25 (11,895) 5.91 4.93 Adjustable 4,678 5.89 8.39 8,807 2.74 4.55 958 2.13 1.94 14,443 3.72 5.62 (5,610) 5.81 7.60 (2,645) 2.65 9.45 (8,255) 4.80 8.19 Japanese yen Fixed 5,428 4.51 4.97 119 5.66 0.85 2,241 0.23 1.06 7,788 3.29 3.78 (4,058) 4.93 3.58 (1,576) 2.61 3.38 (5,634) 4.28 3.53 Adjustable 9,764 4.97 24.89 4,217 0.15 1.99 1,576 0.11 3.38 15,557 3.15 16.50 (10,008) 4.57 24.16 (2,241) 0.04 1.06 (12,249) 3.74 19.93 U. S. dollars Fixed 49,292 5.42 4.44 5,760 9.23 2.10 18,123 5.45 8.19 73,175 5.73 5.19 (150) 7.06 0.68 (46,528) 5.10 4.02 (46,678) 5.10 4.01 Adjustable 1,374 4.13 6.97 41,907 1.01 11.55 52,404 1.13 3.44 95,685 1.12 7.05 (11,712) 1.09 3.70 (23,578) 1.52 6.34 (35,290) 1.38 5.46 Others Fixed 22,337 5.95 8.62 485 7.62 5.08 -- -- -- 22,822 5.98 8.54 (21,796) 5.88 8.27 (173) 6.66 3.26 (21,969) 5.89 8.23 Adjustable 240 3.49 20.53 -- -- -- 173 3.46 3.26 413 3.48 13.30 (412) 5.11 13.32 -- -- -- (412) 5.11 13.32 Total Fixed 89,736 5.58 5.64 7,576 23,008 120,320 5.64 5.82 (36,925) (49,251) (86,176) 5.36 5.18 Adjustable 16,056 5.15 18.49 54,931 55,111 126,098 1.68 8.07 (27,742) (28,464) (56,206) 2.42 9.07 Principal at face value $105,792 5.51 7.59 $ (2,160) $ 404 $104,036 2.80 a. WAC refers to weighted average cost. b. At June 30, 2003, the average repricing period of the net currency obligations for adjustable rate borrowings was three months. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 73 Short-term Borrowings at June 30, 2004 and June 30, 2003 In millions of U.S. dollars equivalent 2004 2003 Currency/ Principal WACb Principal WACb Rate type outstandinga (%) outstanding (%) U. S. dollars Fixed $2,406 1.15 $2,833 1.06 Adjustable 742 1.41 600 1.19 Total Fixed 2,406 1.15 2,833 1.06 -- Adjustable 742 1.41 600 1.19 -- Principal at face value $3,148 1.21 $3,433 1.08 a. At June 30, 2004, the average repricing period of the principal outstanding for short-term borrowings was less than two months (less than one month--June 30, 2003.) b. WAC refers to weighted average cost. The maturity structure of IBRD's Medium-and Long-term borrowings outstanding at June 30, 2004 and June 30, 2003 is as follows: In millions of U.S. dollars In millions of U.S. dollars Period 2004 Period 2003 July 1, 2004 through June 30, 2005 $ 19,881 July 1, 2003 through June 30, 2004 $ 12,266 July 1, 2005 through June 30, 2006 15,013 July 1, 2004 through June 30, 2005 19,206 July 1, 2006 through June 30, 2007 11,924 July 1, 2005 through June 30, 2006 12,695 July 1, 2007 through June 30, 2008 10,376 July 1, 2006 through June 30, 2007 8,884 July 1, 2008 through June 30, 2009 6,781 July 1, 2007 through June 30, 2008 9,438 July 1, 2009 through June 30, 2014 13,884 July 1, 2008 through June 30, 2013 15,965 Thereafter 28,200 Thereafter 27,338 Total $106,059 Total $105,792 74 THE WORLD BANK ANNUAL REPORT 2004 Line of credit: IBRD maintains a line of credit with NOTE F--OTHER ASSET/LIABILITY SWAPS an independent financial institution. This facility was As part of asset/liability management, IBRD has created for the benefit of both IBRD and IDA. The entered into currency and interest rate swap available line of credit to each institution is $500 agreements to better align its currency composition million, but usage from both institutions cannot and duration of Equity with that of Loans exceed $500 million in aggregate. The line of credit is Outstanding. A summary of IBRD's other asset/ used to cover any overnight overdrafts that may occur liability swaps at June 30, 2004 and June 30, 2003 is due to failed trades. At June 30, 2004, IBRD had not presented below: drawn down under this facility ($1 million was drawn down at June 30, 2003). In millions of U.S. dollars equivalent 2004 2003 Currency swap agreements Interest rate swap agreements Net Derivative Asset/Liability Currency swap agreementsa Notional Amount Weighted Average Amount Weighted Average Amount Weighted Average Amount Weighted Average Receivable Average Maturity Receivable Average Maturity Receivable Average Maturity Receivable Average Maturity (payable) Cost (%) (years) (payable) Cost (%) (years) (payable) Cost (%) (years) (payable) Cost (%) (years) U.S. dollars $726 1.17 2.72 $1,250 3.68 4.31 $1,976 2.76 3.73 $726 1.26 3.72 (1,250) 1.30 4.31 (1,250) 1.30 4.31 Euro (382) 2.06 2.71 -- -- -- (382) 2.06 2.71 (360) 2.49 3.71 Japanese yen (495) (0.06) 2.72 -- -- -- (495) (0.06) 2.72 (450) (0.06) 3.73 Total Receivable 726 1.17 2.72 1,250 3.68 4.31 1,976 2.76 3.73 726 1.26 3.72 (Payable) (877) 0.86 2.72 (1,250) 1.30 4.31 (2,127) 1.12 3.00 (810) 1.07 3.72 Effects of applying FAS 133 1 (19) (18) * Total $(150) $ (19) $ (169) $ (84) a. There were no interest rate swap agreements at June 30, 2003. * Less than $0.5 million NOTE G--CREDIT RISK Country Credit Risk: This risk includes potential borrowers, stops servicing its loans for an extended losses arising from protracted arrears on payments period of time. from borrowers for loans, guarantees or related Commercial Credit Risk: For the purpose of risk derivatives. IBRD manages country credit risk management, IBRD is party to a variety of financial through individual country exposure limits according instruments, certain of which involve elements of to creditworthiness. These exposure limits are tied to credit risk. Credit risk exposure represents the performance on macroeconomic and structural maximum potential loss due to possible policies. In addition, IBRD establishes absolute limits nonperformance by obligors and counterparties on the share of outstanding loans to any individual under the terms of the contracts. For all securities, borrower. The country credit risk is further managed IBRD limits trading to a list of authorized dealers and by financial incentives such as pricing loans using counterparties. Credit risk is controlled through IBRD's own cost of borrowing and partial interest application of eligibility criteria and volume limits for charge waivers conditioned on timely payment that transactions with individual counterparties and give borrowers self-interest in IBRD's continued through the use of mark-to-market collateral strong intermediation capacity. Collectibility risk is arrangements for swap transactions. IBRD may covered by the accumulated provision for losses on require collateral in the form of cash or other loans and guarantees. IBRD also uses a simulation approved liquid securities from individual model to assess the adequacy of its equity including counterparties in order to mitigate its credit exposure. reserves in case a major borrower, or group of As of June 30, 2004, IBRD had received collateral of IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 75 $4,169 million in connection with swap agreements settlement. The reduction in exposure as a result of ($5,110 million--June 30, 2003). these netting provisions can vary as additional transactions are entered into under these agreements. As the transfer of this collateral did not meet the The extent of the reduction in exposure may therefore requirements of a sale, the collateral has not been change substantially within a short period of time included in the assets of IBRD. following the balance sheet date. IBRD has entered into master derivatives agreements The contract value/notional amounts and credit risk which contain legally enforceable close-out netting exposure, as applicable, of these financial instruments provisions. These agreements may further reduce the at June 30, 2004 and June 30, 2003 (prior to taking gross credit risk exposure related to the swaps shown into account any master derivatives or collateral below. Credit risk with financial assets subject to a arrangements that have been entered into) are given master derivatives arrangement is further reduced below: under these agreements to the extent that payments and receipts with the counterparty are netted at In millions of U.S. dollars 2004 2003 INVESTMENTS - TRADING PORTFOLIO Exchange traded Options and Futuresa · Notional Long position $ 2,812 $ 9,590 · Notional Short position 638 222 Currency swaps (including currency forward contracts) · Credit exposure 122 92 Interest rate swaps · Notional principal 1,260 4,575 · Credit exposure 27 50 BORROWING PORTFOLIO Currency swaps · Credit exposure 8,371 6,949 Interest rate swaps · Notional principal 79,812 82,112 · Credit exposure 2,905 5,079 OTHER ASSET/LIABILITYb Interest rate swaps · Notional principal 1,250 -- a. Exchange-traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All outstanding options and futures contracts as of June 30, 2004 and June 30, 2003, are interest rate contracts. b. There was no credit exposure for the currency swaps or interest rate swaps in this portfolio at June 30, 2004 and June 30, 2003. 76 THE WORLD BANK ANNUAL REPORT 2004 NOTE H--RETAINED EARNINGS, associated with the application of FAS 133 during fis- ALLOCATIONS AND TRANSFERS cal year 2003. The Executive Directors also approved a reduction of $29 million in the pension reserve, repre- Retained Earnings: Retained Earnings comprises the senting the excess of the accounting expense for the following elements at June 30, 2004 and June 30, 2003: Staff Retirement Plan and other postretirement bene- fits plans over the respective contribution amounts for the fiscal year ended June 30, 2003. In millions of U.S. dollars On September 24, 2003, IBRD's Board of Governors 2004 2003 approved the following transfers out of the net Special reserve $ 293 $ 293 income earned in the fiscal year ended June 30, 2003: General reserve 21,542 19,132 $300 million to IDA, $240 million as an immediate transfer to the Heavily Indebted Poor Countries Debt Pension reserve 934 963 Initiative Trust Fund, and the retention of $100 mil- Surplus 95 100 lion as Surplus. The $240 million transfer was made Cumulative FAS 133 on September 25, 2003. Adjustments 3,522 1,199 Unallocated net (loss) On February 4, 2004, IBRD's Board of Governors income (2,404) 5,344 approved the transfer of $80 million from Surplus for Total $23,982 $27,031 the replenishment of the Trust Fund for Gaza and West Bank. On March 4, 2004, IBRD's Board of Gov- ernors approved the transfer of $25 million from Sur- plus for immediate payment to the newly-created On July 31, 2003, IBRD's Executive Directors Low-Income Countries under Stress Implementation approved the allocation of $2,410 million of the net Trust Fund. These transfers were made during March income earned in the fiscal year ended June 30, 2003 2004. to the General Reserve and $2,323 million to Cumula- tive FAS 133 Adjustments, representing the effects The aggregate transfers and amounts payable for these transfers approved by the Board of Governors at June 30, 2004 and June 30, 2003 are included in the following table: In millions of U.S. dollars equivalent Fiscal Year 2003 Amount Payable Transfers from at June 30 Aggregate Transfers Unallocated Transfers to through June 30, 2003 Net Income Surplus 2004 2003 International Development Association $7,357 $300 $-- $1,584 $1,293 Debt Reduction Facility for IDA-only Countries 300 -- -- 64 81 Trust Fund for Gaza and West Bank 380 -- 80 -- -- Heavily Indebted Poor Countries Debt Initiative Trust Fund 1,640 240 -- 100 100 Low-Income Countries Under Stress Implementation Trust Fund -- -- 25 -- -- $1,748 $1,474 NOTE I--ADMINISTRATIVE EXPENSES, reflects the administrative costs of service delivery to CONTRIBUTIONS TO SPECIAL PROGRAMS, countries that are eligible for lending from IBRD and AND OTHER INCOME IDA. Administrative Expenses for the fiscal year ended June Contributions to special programs represent grants 30, 2004 are net of the share of administrative for agricultural research, and other developmental expenses allocated to IDA of $908 million ($846 activities. million--June 30, 2003, $654 million--June 30, IBRD recovers certain of its administrative expenses 2002). The allocation of expenses between IBRD and by billing third parties, including IFC and MIGA, for IDA is based on an agreed cost sharing formula that IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 77 services rendered. These amounts are included in At June 30, 2004 and June 30, 2003, the following Other Income. For the fiscal years ending June 30, payables (receivables) by IBRD to (from) its affiliated 2004, June 30, 2003, and June 30, 2002, the amount of organizations with regard to administrative services fee revenue associated with administrative services is and pension and other postretirement benefits are as follows: included in Miscellaneous Assets and Accounts Payable and Miscellaneous Liabilities: In millions of U.S. dollars 2004 2003 2002 Service fee revenue $196 $178 $155 Included in these amounts are the following: Fees charged to IFC 28 28 26 Fees charged to MIGA 5 3 3 In millions of U.S. dollars 2004 2003 Pension and Pension and Other Other Administrative Postretirement Administrative Postretirement Services Benefits Total Services Benefits Total IDA $(340) $ 723 $383 $(310) $698 $388 IFC (24) 291 267 (23) 277 254 MIGA (3) 16 13 (3) 15 12 $(367) $1,030 $663 $(336) $990 $654 NOTE J--MANAGEMENT OF EXTERNAL FUNDS assistance for borrowers including feasibility studies and project preparation, global and regional programs Trust Funds and research and training programs. These funds are IBRD, alone or jointly with IDA, administers on held in trust with IBRD and/or IDA, and are held in a behalf of donors, including members, their agencies separate investment portfolio which is not and other entities, funds restricted for specific uses commingled with IBRD's funds, nor are they included which include the cofinancing of IBRD lending in the assets of IBRD. projects, debt reduction operations, technical 78 THE WORLD BANK ANNUAL REPORT 2004 The trust fund assets by executing agent at June 30, 2004 and June 30, 2003 are summarized below: 2004 2003 Total fiduciary Number of Total fiduciary Number of assets trust fund assets trust fund (In millions of accounts (In millions of accounts U.S. dollars) (unaudited) U.S. dollars) (unaudited) IBRD executed $2,581 1,765 $1,695 1,991 Recipient executed 4,144 1,399 3,009 1,227 Total $6,725 3,164 $4,704 3,218 The responsibilities of IBRD under these At June 30, 2004, the assets managed under these arrangements vary and range from services normally agreements had a value of $8,789 million ($7,156 provided under its own lending projects to full project million--June 30, 2003). These funds are not implementation including procurement of goods and included in the assets of IBRD. services. During the fiscal year ended June 30, 2004, IBRD received $14 million ($14 million--June 30, 2003 and $11 million--June 30, 2002) as fees for NOTE K--PENSION AND OTHER administering trust funds. These fees have been POSTRETIREMENT BENEFITS recorded as Other Income. IBRD has a defined benefit SRP, a Retired Staff Investment Management Services Benefits Plan (RSBP) and a Post-Employment Benefits Plan (PEBP) that cover substantially all of its IBRD offers investment management services to one staff members as well as the staff of IFC and MIGA. non-affiliated organization and one affiliated organization. Under these arrangements, IBRD is The SRP provides regular pension benefits and responsible for managing investment account assets includes a cash balance plan. The RSBP provides on behalf of these institutions, and in return receives a certain health and life insurance benefits to eligible quarterly fee based on the average value of the retirees. The PEBP provides certain pension benefits portfolios. administered outside the SRP. In addition, IBRD offers asset management and IBRD uses a June 30 measurement date for its pension technical advisory services to central banks of member and other postretirement benefit plans. countries, under the Reserves Advisory and All costs associated with these plans are allocated Management Program, for capacity building and between IBRD, IFC, and MIGA based upon their other development purposes. One objective of this employees' respective participation in the plans. Costs program is to assist these central banks in developing allocated to IBRD are then shared between IBRD and their portfolio management skills. IBRD receives a fee IDA based on an agreed cost sharing ratio. IDA, IFC for these services. and MIGA reimburse IBRD for their proportionate The fee income from all of these investment share of any contributions made to these plans by management activities is included in service fee IBRD. Contributions to these plans are calculated as a revenues described in Note I. percentage of salary. IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 79 The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA for the fiscal years ended June 30, 2004, June 30, 2003, and June 30, 2002: In millions of U.S. dollars SRP RSBP PEBP 2004 2003 2002 2004 2003 2002 2004 2003 2002 Benefit Cost Service cost $213 $203 $202 $28 $28 $28 $ 9 $ 8 $13 Interest cost 411 451 412 49 57 54 7 8 6 Expected return on plan assets (595) (587) (761) (58) (57) (72) -- -- -- Amortization of prior service cost 13 13 7 (1) (1) -- * * -- Amortization of unrecog- nized net loss (gain) 17 -- (26) 14 17 5 (1) (1) (2) Amortization of Transition Asset -- (11) (11) -- -- -- -- -- -- Net periodic pension cost (income) $ 59 $ 69 $(177) $32 $44 $15 $15 $15 $17 of which: IBRD's share $ 26 $ 31 $ (93) $14 $20 $ 8 $ 7 $ 7 $ 9 IDA's share $ 33 $ 38 $ (84) $18 $24 $ 7 $ 8 $ 8 $ 8 * Less than $0.5 million included as a separate line item on the Statement of Income. IDA's share of the net periodic pension income/cost is included as a payable to/receivable from IDA in For the fiscal years ended June 30, 2004, and June 30, Miscellaneous Assets and Accounts Payable and 2003, expenses for these plans of $20 million and $24 Miscellaneous liabilities on the balance sheet. million, respectively, were allocated to IFC, and $1 million and $2 million, respectively, were allocated to The expenses for the SRP, RSBP and PEBP are MIGA. For the fiscal year ended June 30, 2002, net included in Administrative Expenses. The income income from these plans of $31 million, was allocated from the SRP and RSBP for prior fiscal years is to IFC, and $2 million was allocated to MIGA. 80 THE WORLD BANK ANNUAL REPORT 2004 The following table summarizes the projected benefit they do not qualify for off-balance sheet accounting obligations, fair value of plan assets, and funded status and are therefore included in IBRD's investment associated with the SRP, RSBP, and PEBP for the fiscal portfolio. The assets of the PEBP are invested in fixed years ended June 30, 2004, June 30, 2003, and June 30, income instruments. 2002. Since the assets for the PEBP are not held in an irrevocable trust separate from the assets of IBRD, In millions of U.S. dollars SRP RSBP PEBP 2004 2003 2002 2004 2003 2002 2004 2003 2002 Projected Benefit Obligation Beginning of year $ 8,857 $8,263 $ 7,277 $ 971 $929 $867 $139 $133 $103 Service cost 259 250 244 33 34 32 11 9 15 Interest cost 500 553 499 55 63 60 7 9 7 Employee contributions 75 75 65 10 8 8 1 1 * Amendments -- 77 19 -- 24 (38) -- 5 -- Benefits paid (336) (306) (304) (33) (29) (30) (6) (5) (5) Actuarial loss (gain) 237 (55) 463 40 (58) 30 7 (13) 13 End of year 9,592 8,857 8,263 1,076 971 929 159 139 133 Fair value of plan assets Beginning of year 9,415 9,413 10,364 834 818 894 -- -- -- Employee contributions 75 75 65 10 8 8 -- -- -- Actual return on assets 1,689 193 (712) 117 16 (70) -- -- -- Employer contributions 131 40 -- 38 21 16 -- -- -- Benefits paid (336) (306) (304) (33) (29) (30) -- -- -- End of year 10,974 9,415 9,413 966 834 818 -- -- -- Funded status Plan assets in excess of (less than) projected benefit obli- gation 1,382 558 1,150 (110) (137) (111) (159) (139) (133) Unrecognized net loss (gain) from past experience differ- ent from that assumed and from changes in assump- tions 438 1,186 714 286 314 344 (14) (23) (11) Unrecognized prior service cost 88 105 44 (10) (12) (38) 4 5 -- Unrecognized net transition asset -- -- (13) -- -- -- -- -- -- Prepaid (accrued) pension cost $1,908 $1,849 $1,895 $ 166 $165 $195 $(169) $(157) $(144) Accumulated Benefit Obligation $7,184 $6,590 $6,174 $1,076 $971 $929 $135 $116 $116 * Less than $0.5 million. The $1,908 million prepaid SRP cost at June 30, 2004 $69 million was attributable to IDA, IFC, and MIGA ($1,849 million--June 30, 2003) is included in ($68 million--June 30, 2003) and is included in Prepaid Pension Cost on the balance sheet. Of this Accounts Payable and Miscellaneous Liabilities on the amount $947 million was attributable to IDA, IFC, balance sheet. and MIGA ($909 million--June 30, 2003) and is Assumptions included in Accounts Payable and Miscellaneous Liabilities on the balance sheet. The actuarial assumptions used are based on financial market interest rates, past experience, and The $166 million prepaid RSBP cost at June 30, 2004 management's best estimate of future benefit changes ($165 million--June 30, 2003), is included in Prepaid and economic conditions. Changes in these Pension Cost on the balance sheet. Of this amount IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 81 assumptions will impact future benefit costs and used in determining the benefit obligation is selected obligations. by reference to the year-end AAA and AA corporate bonds. The expected long-term rate of return for the SRP assets is a weighted average of the expected long-term Actuarial gains and losses occur when actual results (10 years or more) returns for the various asset classes, are different from expected results. Amortization of weighted by the portfolio allocation. Asset class these unrecognized gains and losses will be included returns are developed using a forward-looking in income if, at the beginning of the fiscal year, they building block approach and are not strictly based on exceed 10 percent of the greater of the projected historical returns. Equity returns are generally benefit obligation or the market-related value of plan developed as the sum of expected inflation, expected assets. If required, the unrecognized gains and losses real earnings growth and expected long-term dividend are amortized over the expected average remaining yield. Bond returns are generally developed as the service lives of the employee group. sum of expected inflation, real bond yield, and risk The following tables present the weighted-average premium/spread (as appropriate). Other asset class assumptions used in determining the projected returns are derived from their relationship to equity benefit obligations and the net periodic pension costs and bond markets. The expected long-term rate of for the fiscal years ended June 30, 2004, June 30, 2003, return for the RSBP is computed using procedures and June 30, 2002: similar to those used for the SRP. The discount rate Weighted average assumptions used to determine projected benefit obligation In percent SRP RSBP PEBP 2004 2003 2002 2004 2003 2002 2004 2003 2002 Discount rate 6.25 5.75 6.75 6.25 5.75 6.75 6.25 5.75 6.75 Rate of compensation increase 6.40 5.40 6.40 Health care growth rates - at end of fiscal year 7.30 6.10 7.10 Ultimate health care growth rate 4.75 3.75 4.75 Year in which ultimate rate is reached 2012 2011 2011 Weighted average assumptions used to determine net periodic pension cost In percent SRP RSBP PEBP 2004 2003 2002 2004 2003 2002 2004 2003 2002 Discount rate 5.75 6.75 7.00 5.75 6.75 7.00 5.75 6.75 7.00 Expected return on plan assets 7.75 7.75 9.00 7.75 7.75 9.00 Rate of compensation increase 5.40 6.40 6.60 Health care growth rates - at end of fiscal year 6.10 7.10 7.40 - to year 2011 and thereafter 3.75 4.75 5.00 82 THE WORLD BANK ANNUAL REPORT 2004 The medical cost trend rate can significantly affect the shows the effects of a one-percentage-point change in reported postretirement benefit income or costs and the assumed healthcare cost trend rate: benefit obligations for the RSBP. The following table In millions of U.S. dollars One percentage point increase One percentage point decrease Effect on total service and interest cost $ 20 $ (16) Effect on postretirement benefit obligation 207 (165) Investment Strategy This analysis, referred to as an asset-liability analysis, also provides estimates of potential future contribu- The investment policy for the SRP and the RSBP is to tions and future asset and liability balances. Plan optimize the risk-return relationship as appropriate to assets are managed by external investment managers the respective plan's needs and goals, using a global and monitored by IBRD's pension investment depart- diversified portfolio of various asset classes. Specifi- ment. The pension plan assets are invested in diversi- cally, the long-term asset allocation is based on an fied portfolios of public equity, fixed income, and analysis that incorporates expected returns by asset alternative investments. The fixed-income and public class as well as volatilities and correlations across asset equity asset classes are rebalanced on a monthly basis. classes and the liability profile of the respective plans. The following table presents the weighted-average asset allocation at June 30, and the respective target allocation by asset category for the SRP and RSRP: In percent SRP RSBP Target % of Plan Assets Target % of Plan Assets Allocation Allocation 2004 2004 2003 2004 2004 2003 Asset Class Fixed Income 40% 40% 40% 30% 30% 30% Public Equity 35 42 42 30 43 46 Alternative Investments 25 18 18 40 27 24 Total 100% 100% 100% 100% 100% 100% Alternative Investments include: Private Equity up to 12 7.0 7.0 up to 28 11.0 10.5 Real Estate up to 8 4.0 5.5 up to 18 3.5 4.0 Hedge Funds up to 12 7.0 5.5 up to 23 12.5 9.5 IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 83 Estimated Future Benefits Payments liabilities of the SRP and RSBP. The best estimate of The following table shows the benefit payments the amount of contributions expected to be paid to expected to be paid in each of the next five years and the SRP and RSBP for IBRD and IDA during the fiscal subsequent five years. The expected benefit payments year beginning July 1, 2004 is $235 million and $41 are based on the same assumptions used to measure million, respectively. the benefit obligation at June 30, 2004: NOTE L--SEGMENT REPORTING In millions of U.S. dollars Based on an evaluation of IBRD's operations, SRP RSBP PEBP management has determined that IBRD has only one reportable segment since IBRD does not manage its July 1, 2004- June 30, 2005 $ 348 $ 29 $10 operations by allocating resources based on a July 1, 2005- June 30, 2006 388 33 11 determination of the contribution to net income from July 1, 2006- June 30, 2007 427 37 12 individual borrowers. In addition, given the nature of July 1, 2007- June 30, 2008 465 42 13 IBRD, the risk and return profiles are sufficiently July 1, 2008- June 30, 2009 510 47 15 similar among borrowers that IBRD does not July 1, 2009- June 30, 2014 3,106 315 86 differentiate between the nature of the products or services provided, the preparation process, or the method for providing the services among individual countries. Expected Contributions IBRD's contribution to the SRP and RSBP varies from For fiscal year 2004, loans to each of two countries year to year, as determined by the Pension Finance generated in excess of 10 percent of loan income. Committee, which bases its judgement on the results Loan income from these two countries was $609 of annual actuarial valuations of the assets and million and $532 million. The following table presents IBRD's loan outstanding balances and associated loan income, by geographic region, at June 30, 2004 and June 30, 2003: In millions of U.S. dollars 2004 2003 Region Loan Income Loans Outstanding Loan Income Loans Outstanding Africa $ 96 $ 2,479 $ 169 $ 2,692 East Asia and Pacific 1,381 29,155 1,814 33,561 Europe and Central Asia 844 26,746 1,031 26,523 Latin America and the Caribbean 1,528 36,803 1,945 37,800 Middle East and North Africa 332 7,461 402 7,670 South Asia 214 6,869 371 7,861 Othera 8 97 10 133 Total $4,403 $109,610 $5,742 $116,240 a. Represents loans to IFC, an affiliated organization. NOTE M--COMPREHENSIVE INCOME Comprehensive income consists of net income and related to the implementation of FAS 133, currency other gains and losses affecting equity that, under U.S. translation adjustments, and net income. These items GAAP and IFRS, are excluded from net income. For are presented in the Statement of Comprehensive IBRD, comprehensive income comprises the Income. cumulative effects of a change in accounting principle 84 THE WORLD BANK ANNUAL REPORT 2004 The following tables present the changes in Accumulated Other Comprehensive Income (Loss) for the fiscal years ended June 30, 2004, June 30, 2003, and June 30, 2002: In millions of U.S. dollars 2004 Total Cumulative Accumulated Cumulative Effect of Change Other Translation in Accounting Comprehensive Adjustment Principle Reclassificationa Income Balance, beginning of the fiscal year $ (346) $500 $(414) $(260) Changes from period activity 333 -- (2) 331 Balance, end of the fiscal year $ (13) $500 $(416) $ 71 In millions of U.S. dollars 2003 Total Cumulative Accumulated Cumulative Effect of Change Other Translation in Accounting Comprehensive Adjustment Principle Reclassificationa Loss Balance, beginning of the fiscal year $ (952) $500 $(297) $(749) Changes from period activity 606 -- (117) 489 Balance, end of the fiscal year $ (346) $500 $(414) $(260) In millions of U.S. dollars 2002 Total Cumulative Accumulated Cumulative Effect of Change Other Translation in Accounting Comprehensive Adjustment Principle Reclassificationa Loss Balance, beginning of the fiscal year $(1,176) $500 $(169) $(845) Changes from period activity 224 -- (128) 96 Balance, end of the fiscal year $ (952) $500 $(297) $(749) a. Reclassification of Cumulative effect of change in accounting principle to net income. NOTE N--EFFECTS OF APPLYING FAS 133 Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." On July 1, 2000, IBRD adopted FAS 133. These standards require that derivative instruments, as Upon adoption of FAS 133, IBRD's net income was defined by FAS 133, be recorded on the balance sheet increased by $219 million, and an additional $500 at fair value. IBRD has not defined any qualifying million was reported in other comprehensive income. hedging relationships under this standard. The allocation between net income and other comprehensive income was based upon the hedging Prior to the adoption of FAS 133, the derivative relationships that existed under generally accepted instruments in the borrowing portfolio were recorded accounting principles before the initial application of using synthetic accounting. The derivative FAS 133. instruments in the investment portfolio were, and continue to be, recorded at fair value in accordance The $500 million difference between the carrying with the requirements of Statement of Financial value and the fair value of those derivatives that were IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 85 hedging a cash flow exposure prior to the initial time of implementation, and were offset by the mark- application of FAS 133, was included in Other to-market adjustments on the related derivative Comprehensive Income at the time FAS 133 was instruments. The mark-to-market adjustments on the implemented. This amount is being reclassified into bonds are being amortized over the remaining lives of earnings in the same period or periods in which the the related bonds. hedged forecasted transactions affect earnings. The following table reflects the components of the Any gains or losses on those borrowings for which a effects of applying FAS 133 for the fiscal years ended fair value exposure was being hedged prior to June 30, 2004, June 30, 2003, and June 30, 2002. adoption of FAS 133 were recorded in income at the In millions of U.S. dollars 2004 2003 2002 Net unrealized (losses) gains on derivative instruments, as defined by FAS 133 $(4,052) $2,302 $783 Reclassification and amortization of transition adjustment Reclassification from Other Comprehensive Income--Cash Flow Hedges 2 117 128 Amortization of mark-to-market on borrowings associated with fair value hedges (50) (96) (57) Effects of applying FAS 133 $(4,100) $2,323 $854 86 THE WORLD BANK ANNUAL REPORT 2004 NOTE O--ESTIMATED AND FAIR VALUE DISCLOSURES The Condensed Balance Sheets below present IBRD's estimates of fair value of its assets and liabilities along with their respective carrying amounts as of June 30, 2004 and 2003. In millions of U.S. dollars June 30, 2004 June 30, 2003 Carrying Carrying Value Fair Value* Value Fair Value* Due from Banks $ 1,803 $ 1,803 $ 1,929 $ 1,929 Investments 31,986 31,986 28,128 28,128 Loans Outstanding 109,610 112,608 116,240 122,593 Less Accumulated Provision for Loan Losses and Deferred Loan Income (3,984) (3,984) (4,478) (4,478) Net Loans Outstanding 105,626 108,624 111,762 118,115 Swaps Receivable Investments 12,476 12,476 10,301 10,301 Loans 90 95 -- -- Borrowings 69,548 69,548 70,316 70,316 Other Asset/Liability 908 908 726 726 Other Assets 6,776 6,340 7,190 6,735 Total Assets $229,213 $231,780 $230,352 $236,250 Borrowings $108,066 $109,675 $108,554 $116,695 Swaps Payable Investments 14,284 14,284 11,862 11,862 Loans 93 93 -- -- Borrowings 64,777 64,777 64,779 64,779 Other Asset/Liability 1,077 1,077 810 810 Other Liabilities 5,453 5,453 6,429 6,429 Total Liabilities 193,750 195,359 192,434 200,575 Paid in Capital Stock 11,483 11,483 11,478 11,478 Retained Earnings and Other Equity 23,980 24,938 26,440 24,197 Total Liabilities and Equity $229,213 $231,780 $230,352 $236,250 * Except for loans and related derivatives, which are on an estimated value (current value) basis. Valuation Methods and Assumptions Due from Banks loans, nor does it believe there is a comparable market The carrying amount of unrestricted and restricted for its loans. The current value of loans outstanding currencies is considered a reasonable estimate of the incorporates management's best estimate of the fair value of these positions. probable expected cash flows of these instruments to IBRD. Investments IBRD's investment securities and related financial The current value of loans is based on a discounted instruments held in the trading portfolio are carried cash flow method. The estimated cash flows from and reported at fair value. Fair value is based on principal repayments and interest are discounted market quotations. Instruments for which market using the market yield curves applicable to IBRD quotations are not readily available have been valued funding plus IBRD's relevant basis point lending using market-based methodologies and market spread adjusted for waivers. information. (See Note A). The current value of net loans outstanding also Net Loans Outstanding includes IBRD's assessment of the appropriate credit risk, considering its history of collections from All of IBRD's loans are made to or guaranteed by borrowers. This is reflected in the accumulated countries that are members of IBRD, except for those provision for loan losses. loans made to IFC. IBRD does not currently sell its IBRD FINANCIAL STATEMENTS: JUNE 30, 2004 87 Swaps Receivable and Swaps Payable Other Assets and Other Liabilities Certain derivatives, as defined by FAS 133, are These amounts are generally short-term in nature. recorded in the balance sheet at estimated fair value. Therefore, the carrying value is a reasonable estimate The fair value of swaps is based on market prices, of fair value. The difference between the carrying where such prices are available. Where no quoted value and fair value of other assets is due to the market price is available, the fair value is estimated carrying value of debt issuance costs being included in using a discounted cash flow method representing the other assets while the fair value of these costs is estimated cost of replacing these contracts on that included as part of the fair value of borrowings. date. (See Note A). Borrowings The fair value of borrowings is predominantly based on discounted cash flow techniques using appropriate market yield curves. 88 THE WORLD BANK ANNUAL REPORT 2004 S PE C I A L P U R P O S E FI N A N C I A L S T A T E M E N T S A N D I N T E R N A L C O N T R O L R E P O R T S O F T H E I NT E R N A T I O N A L D E V E L O P M E N T A S S O C I A T I O N Management's Report Regarding Effectiveness of Internal Controls Over External Financial Reporting 90 Report of Independent Accountants on Management's Assertion Regarding Effectiveness of Internal Controls Over External Financial Reporting 92 Report of Independent Accountants on Special Purpose Financial Statements 93 Statement of Sources and Applications of Development Resources 94 Statement of Income 96 Statement of Comprehensive Income 97 Statement of Changes in Accumulated Deficit 97 Statement of Cash Flows 98 Summary Statement of Development Credits 99 Statement of Voting Power and Subscriptions and Contributions 102 Notes to Special Purpose Financial Statements 106 Supplementary Information on the Heavily Indebted Poor Countries Debt Initiative 120 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 89 M A N A G E M E N T S' R E P O R T R E G A R D I N G EF F E C T I V E N E S S O F I NT E R N A L CO N T R O L SO V E R E X T E R N A L F I N A N C I A L R EP O R T I N G 90 THE WORLD BANK ANNUAL REPORT 2004 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 91 R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S O N M A N A G E M E N T S ' A S S E R T I O N R E G A R D I N G E F F E C T I V E N E S S O F I N T E R N A L C O N T R O L S O V E R E X T E R N A L F IN A N C I A L R E P O R T I N G 92 THE WORLD BANK ANNUAL REPORT 2004 R E P O R T O F IN D E P E N D E N T A C C O U N T A N T S O N S P E C I A L P U R P O S EF I N A N C I A LS T A T E M E N T S IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 93 S T A T E M E N T O F S O U R C E S A N D A P P L I C A T I O N S O F D E V E L O P M E N T R E S O U R C E S June 30, 2004 and June 30, 2003 Expressed in millions of U.S. dollars 2004 2003 Applications of Development Resources Net resources available for development activities Due from banks Unrestricted currencies $ 1,334 $ 590 Currencies subject to restriction 21 21 1,355 611 Investments--Notes B and F Investments--Trading (including securities transferred under repurchase or security lending agreements of $4,676 million--June 30, 2004; $5,922 million--June 30, 2003) 14,519 14,239 Net payable on investment securities transactions (1,432) (1,204) 13,087 13,035 Nonnegotiable, noninterest-bearing demand obligations on account of member subscriptions and contributions 8,031 7,935 Receivable from the International Bank for Reconstruction and Development--Note D 1,584 1,293 Receivable from the HIPC Debt Initiative Trust Fund--Note I 366 498 Payable for development grants--Note J (2,088) (1,063) Other resources, net 637 663 Total net resources available for development activities 22,972 22,972 Resources used for development credits (see Summary Statement of Development Credits, Notes E and F ) Total development credits 139,741 129,306 Less undisbursed balance 23,998 22,429 Development credits outstanding 115,743 106,877 Less allowance for HIPC Debt Initiative 10,785 10,395 Total resources used for development credits outstanding 104,958 96,482 Total applications of development resources $127,930 $119,454 94 THE WORLD BANK ANNUAL REPORT 2004 2004 2003 Sources of Development Resources Member subscriptions and contributions (see Statement of Voting Power, Subscriptions and Contributions, and Note C) Unrestricted $122,218 $118,054 Restricted 299 292 Subscriptions and contributions committed 122,517 118,346 Less subscriptions and contributions receivable and unamortized discounts on contributions--Note C 4,589 5,887 Subscriptions and contributions paid in 117,928 112,459 Deferred amounts receivable to maintain value of currency holdings (233) (234) 117,695 112,225 Transfers--Note D 7,873 7,392 Accumulated other comprehensive income--Note K 8,920 4,708 Accumulated deficit (see Statement of Changes in Accumulated Deficit) (6,558) (4,871) Total sources of development resources $127,930 $119,454 The Notes to Special Purpose Financial Statements are an integral part of these Statements. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 95 S T A T E M E N T O F I N C O M E For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Income Income from development credits--Note E Service charges $ 806 $ 816 $ 641 Commitment charges 76 -- -- Income from investments, net--Note B 54 1,159 773 Total income 936 1,975 1,414 Expenses Administrative--Notes G and H 908 846 568 Amortization of discount on contributions 15 5 -- Development grants--Note J 1,697 1,016 154 Total expenses 2,620 1,867 722 Operating (Loss) Income (1,684) 108 692 Effect of exchange rate changes on income before HIPC Debt Initiative 522 759 819 (Loss) Income before HIPC Debt Initiative (1,162) 867 1,511 HIPC Debt Initiative--Income (Expenses)--Notes E and I Provision for principal component of debt relief (727) (393) (1,883) Contribution from the HIPC Debt Initiative Trust Fund 202 207 108 Total net expenses for HIPC Debt Initiative (525) (186) (1,775) (Loss) Income after HIPC Debt Initiative $(1,687) $ 681 $ (264) The Notes to Special Purpose Financial Statements are an integral part of these Statements. 96 THE WORLD BANK ANNUAL REPORT 2004 S T A T E M E N T O F C O M P R E H E N S I V E I N C O M E For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 (Loss) Income after HIPC Debt Initiative $(1,687) $ 681 $ (264) Other comprehensive income--Note K Currency translation adjustment on development credits and development grants 4,212 5,222 4,454 Comprehensive income $2,525 $5,903 $4,190 S T A T E M E N T O F C H A N G E S I N A C C U M U L A T E D D E F I C I T For the fiscal years ended June 30, 2004 and June 30, 2003 Expressed in millions of U.S. dollars 2004 2003 Balance at Activity Balance at Balance at Activity Balance at beginning of during the end of the beginning of during the end of the the fiscal year fiscal year fiscal year the fiscal year fiscal year fiscal year Accumulated income before HIPC Debt Initiative $ 5,909 $ (1,162) $ 4,747 $ 5,042 $ 867 $ 5,909 HIPC Debt Initiative: Provision for principal component of debt relief (10,971) (727) (11,698) (10,578) (393) (10,971) Contribution from the HIPC Debt Initiative Trust Fund 1,093 202 1,295 886 207 1,093 HIPC grants (330) -- (330) (330) -- (330) Write down of development credits (572) -- (572) (572) -- (572) HIPC Debt Initiative (10,780) (525) (11,305) (10,594) (186) (10,780) Accumulated deficit $ (4,871) $ (1,687) $ (6,558) $ (5,552) $ 681 $ (4,871) The Notes to Special Purpose Financial Statements are an integral part of these Statements. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 97 S T A T E M E N T O F C A S H F L O W S For the fiscal years ended June 30, 2004, June 30, 2003 and June 30, 2002 Expressed in millions of U.S. dollars 2004 2003 2002 Cash flows from development activities Development credits Disbursements $ (6,185) $ (6,898) $ (6,601) Principal repayments 1,398 1,369 1,063 Reimbursements received from the HIPC Debt Initiative Trust Fund for principal repayments forgiven 334 268 192 Net cash used in development credit activities (4,453) (5,261) (5,346) Grant activities Development grant disbursements (751) (121) (11) HIPC grant disbursements -- (26) (45) Reimbursements received from the HIPC Debt Initiative Trust Fund for HIPC debt service grants disbursed -- -- 4 Net cash used in grant activities (751) (147) (52) Net cash used in development activities (5,204) (5,408) (5,398) Cash flows from Member subscriptions and contributions 5,341 4,671 4,088 Transfers from the International Bank for Reconstruction and Development 55 300 2 Transfers from the Trust Fund for Bosnia and Herzegovina 11 -- -- Cash flows from operating activities Operating (loss) income (1,684) 108 692 Adjustments to reconcile operating income to net cash provided by operating activities Amortization of discount on subscription advances 15 5 -- Development grants 1,695 1,016 154 Net changes in other development resources 52 138 (100) Net cash provided by operating activities 78 1,267 746 Effect of exchange rate changes on unrestricted cash and liquid investments 515 753 813 Net increase in unrestricted cash and liquid investments 796 1,583 251 Unrestricted cash and liquid investments at beginning of the fiscal year 13,625 12,042 11,791 Unrestricted cash and liquid investments at end of the fiscal year $14,421 $13,625 $12,042 Composed of: Due from banks--Unrestricted currencies $ 1,334 $ 590 $ 434 Investments 13,087 13,035 11,608 $14,421 $13,625 $12,042 Supplemental Disclosure Increase in ending balances of development credits outstanding, resulting from exchange rate fluctuations $ 4,291 $ 5,244 $ 4,454 Principal repayments forgiven under HIPC Debt Initiative (337) (268) (192) Development credits transferred from the Trust Fund for Bosnia and Herzegovina 124 -- -- The Notes to Special Purpose Financial Statements are an integral part of these Statements. 98 THE WORLD BANK ANNUAL REPORT 2004 S U M M A R Y S T A T E M E N T O F D E V E L O P M E N TC R E D I T S June 30, 2004 Expressed in millions of U.S. dollars Percentage of Total Undisbursed Development development development development credits credits Borrower or guarantor credits creditsa outstanding outstanding Afghanistan $ 390 $ 295 $ 95 0.08% Albania 786 189 597 0.52 Angola 363 72 291 0.25 Armenia 850 173 677 0.59 Azerbaijan 647 205 442 0.38 Bangladesh 9,666 1,576 8,090 6.99 Benin 801 72 729 0.63 Bhutan 98 45 53 0.05 Bolivia 1,872 274 1,598 1.38 Bosnia and Herzegovina 1,127 292 835 0.72 Botswana 7 - 7 0.01 Burkina Faso 1,219 328 891 0.77 Burundi 883 150 733 0.63 Cambodia 611 187 424 0.37 Cameroon 1,169 145 1,024 0.89 Cape Verde 210 32 178 0.15 Central African Republic 452 20 432 0.37 Chad 959 169 790 0.68 Chile 5 - 5 * China 10,360 173 10,187 8.80 Colombia 5 - 5 * Comoros 137 25 112 0.10 Congo, Democratic Republic of 2,705 844 1,861 1.61 Congo, Republic of 297 51 246 0.21 Costa Rica 1 - 1 * Côte d'Ivoire 1,937 148 1,789 1.55 Djibouti 142 27 115 0.10 Dominica 23 1 22 0.02 Dominican Republic 12 - 12 0.01 Ecuador 17 - 17 0.01 Egypt, Arab Republic of 1,619 209 1,410 1.22 El Salvador 13 - 13 0.01 Equatorial Guinea 51 - 51 0.04 Eritrea 474 161 313 0.27 Ethiopia 4,032 775 3,257 2.81 Gambia, The 275 47 228 0.20 Georgia 823 230 593 0.51 Ghana 4,517 561 3,956 3.42 Grenada 27 8 19 0.02 Guinea 1,328 114 1,214 1.05 Guinea-Bissau 313 29 284 0.25 Guyana 240 7 233 0.20 Haiti 534 - 534 0.46 Honduras 1,468 317 1,151 0.99 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 99 S U M M A R Y S T A T E M E N T O F D E V E L O P M E N TCR E D I T S ( c o n t i n u e d ) June 30, 2004 Expressed in millions of U.S. dollars Percentage of Total Undisbursed Development development development development credits credits Borrower or guarantor credits creditsa outstanding outstanding India $26,886 $4,057 $ 22,829 19.72% Indonesia 1,357 412 945 0.82 Jordan 48 - 48 0.04 Kenya 3,149 428 2,721 2.35 Korea, Republic of 52 - 52 0.05 Kyrgyz Republic 672 137 535 0.46 Lao People's Democratic Republic 702 123 579 0.50 Lesotho 293 42 251 0.22 Liberia 107 - 107 0.09 Macedonia, former Yugoslav Republic of 381 17 364 0.31 Madagascar 2,545 518 2,027 1.75 Malawi 2,132 182 1,950 1.68 Maldives 65 5 60 0.05 Mali 1,613 271 1,342 1.16 Mauritania 841 196 645 0.56 Mauritius 11 - 11 0.01 Moldova 285 102 183 0.16 Mongolia 349 109 240 0.21 Morocco 22 - 22 0.02 Mozambique 1,813 539 1,274 1.10 Myanmar 762 - 762 0.66 Nepal 1,600 221 1,379 1.19 Nicaragua 1,274 200 1,074 0.93 Niger 1,144 137 1,007 0.87 Nigeria 2,045 1,195 850 0.73 Pakistan 6,883 863 6,020 5.20 Papua New Guinea 84 - 84 0.07 Paraguay 23 - 23 0.02 Philippines 210 - 210 0.18 Rwanda 1,098 169 929 0.80 St. Kitts and Nevis 1 - 1 * St. Lucia 36 13 23 0.02 St. Vincent and the Grenadines 19 7 12 0.01 Samoa 83 25 58 0.05 São Tomé and Principe 79 5 73 0.06 Senegal 2,356 483 1,873 1.62 Serbia and Montenegro 575 282 293 0.25 Sierra Leone 605 65 540 0.47 Solomon Islands 47 3 44 0.04 Somalia 429 - 429 0.37 Sri Lanka 2,309 252 2,057 1.78 Sudan 1,255 - 1,255 1.08 Swaziland 4 - 4 * Syrian Arab Republic 25 - 25 0.02 Tajikistan 348 85 263 0.23 100 THE WORLD BANK ANNUAL REPORT 2004 Percentage of Total Undisbursed Development development development development credits credits Borrower or guarantor credits creditsa outstanding outstanding Tanzania $ 4,347 $ 820 $ 3,527 3.05% Thailand 78 - 78 0.07 Togo 682 - 682 0.59 Tonga 23 15 8 0.01 Tunisia 32 - 32 0.03 Turkey 80 - 80 0.07 Uganda 3,731 650 3,081 2.66 Uzbekistan 50 48 2 * Vanuatu 14 - 14 0.01 Vietnam 5,047 2,408 2,639 2.28 Yemen, Republic of 2,204 611 1,593 1.38 Zambia 2,653 223 2,430 2.10 Zimbabwe 499 9 490 0.42 Subtotal members b 139,530 23,883 115,647 99.93 West African Development Bank c 158 98 60 0.05 Bank of the States of Central Africa d 17 16 1 * Caribbean Development Bank e 26 -- 26 0.02 Subtotal regional development banks 201 114 87 0.07 African Trade Insurance Agency f 6 1 5 * Other g 4 -- 4 * Total--June 30, 2004 b $139,741 $23,998 $115,743 100.00% Total--June 30, 2003 $129,306 $22,429 $106,877 * Indicates amounts less than 0.005 per cent. NOTES a. Of the undisbursed balance at June 30, 2004, IDA has entered into irrevocable commitments to disburse $281 million ($318 million--June 30, 2003). b. May differ from the sum of individual figures shown due to rounding. c. These development credits are for the benefit of Benin, Burkina Faso, Côte d'Ivoire, Mali, Niger, Senegal and Togo. d. These development credits are for the benefit of Cameroon, Chad, Central African Republic, Republic of Congo, Gabon and Equatorial Guinea. e. These development credits are for the benefit of Grenada and territories of the United Kingdom (Associated States and Dependencies) in the Caribbean region. f. Represents development credit extended to the African Trade Insurance Agency (ATI) as implementing agency for the benefit of Burundi, Kenya, Malawi, Rwanda, Tanzania, Uganda and Zambia. g. Represents development credits made at a time when the authorities on Taiwan represented China in IDA (prior to May 15, 1980). The Notes to Special Purpose Financial Statements are an integral part of these Statements. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 101 S T A T E M E N T O F VO T I N GP OW E R A N D S UB S C R I P T I O N S A N D C O N T R I B U T I O N S June 30, 2004 Expressed in millions of U.S. dollars Subscriptions and Number of Percentage of contributions Member a votes total votes committed Part I Members Australia 183,741 1.30% $ 2,093.4 Austria 97,065 0.69 1,050.8 Belgium 158,185 1.12 1,795.4 Canada 417,713 2.95 5,279.2 Denmark 147,261 1.04 1,753.3 Finland 87,630 0.62 810.1 France 611,024 4.32 8,667.3 Germany 989,929 6.99 14,196.9 Greece 35,502 0.25 62.1 Iceland 33,217 0.23 30.1 Ireland 39,324 0.28 144.8 Italy 398,415 2.82 4,504.9 Japan 1,541,960 10.89 26,515.2 Kuwait 78,681 0.56 707.5 Luxembourg 36,266 0.26 85.3 Netherlands 312,030 2.20 4,541.4 New Zealand 41,449 0.29 156.6 Norway 147,135 1.04 1,650.5 Portugal 37,271 0.26 96.8 Russian Federation 39,573 0.28 204.0 South Africa 39,761 0.28 106.1 Spain 98,751 0.70 1,007.3 Sweden 279,568 1.98 3,293.1 Switzerlandb 154,326 1.09 1,914.6 United Arab Emirates 1,367 0.01 5.6 United Kingdom 715,264 5.05 9,750.3 United States 2,019,309 14.27 28,691.8 Subtotal Part I Members c 8,741,717 61.76 119,114.0 Part II Members Afghanistan 13,557 0.10 1.3 Albania 32,073 0.23 0.3 Algeria 27,720 0.20 5.1 Angola 48,362 0.34 7.9 Argentina 134,439 0.95 69.9 Armenia 5,317 0.04 0.5 Azerbaijan 3,803 0.03 0.9 Bangladesh 80,183 0.57 7.3 Barbados 29,714 0.21 0.6 Belize 4,553 0.03 0.3 Benin 13,166 0.09 0.7 Bhutan 19,583 0.14 0.1 Bolivia 39,768 0.28 1.4 Bosnia and Herzegovina 21,849 0.15 2.4 Botswana 32,495 0.23 1.6 Brazil 249,653 1.76 369.5 Burkina Faso 23,766 0.17 0.7 Burundi 25,706 0.18 1.0 102 THE WORLD BANK ANNUAL REPORT 2004 Subscriptions and Number of Percentage of contributions Member a votes total votes committed Cambodia 12,922 0.09% $ 1.3 Cameroon 25,284 0.18 1.4 Cape Verde 4,916 0.03 0.1 Central African Republic 13,620 0.10 0.7 Chad 13,590 0.10 0.7 Chile 31,782 0.22 4.5 China 273,252 1.93 41.3 Colombia 53,080 0.38 24.4 Comoros 13,141 0.09 0.1 Congo, Democratic Republic of 14,764 0.10 3.8 Congo, Republic of 10,985 0.08 0.7 Costa Rica 12,480 0.09 0.3 Côte d'Ivoire 23,069 0.16 1.4 Croatia 40,374 0.29 5.6 Cyprus 37,001 0.26 1.1 Czech Republic 66,501 0.47 43.3 Djibouti 532 * 0.2 Dominica 16,749 0.12 0.1 Dominican Republic 27,780 0.20 0.6 Ecuador 35,989 0.25 0.9 Egypt, Arab Republic of 67,384 0.48 6.7 El Salvador 6,244 0.04 0.4 Equatorial Guinea 6,167 0.04 0.4 Eritrea 25,295 0.18 0.1 Ethiopia 26,044 0.18 0.7 Fiji 9,423 0.07 0.7 Gabon 2,093 0.01 0.6 Gambia, The 19,444 0.14 0.3 Georgia 28,859 0.20 0.9 Ghana 23,831 0.17 3.0 Grenada 20,627 0.15 0.1 Guatemala 33,667 0.24 0.5 Guinea 30,687 0.22 1.3 Guinea-Bissau 6,790 0.05 0.2 Guyana 23,460 0.17 1.0 Haiti 24,871 0.18 1.0 Honduras 26,870 0.19 0.4 Hungary 107,092 0.76 54.6 India 440,607 3.11 56.6 Indonesia 126,774 0.90 14.6 Iran, Islamic Republic of 15,455 0.11 5.7 Iraq 9,407 0.07 1.0 Israel 47,294 0.33 25.4 Jordan 24,865 0.18 0.4 Kazakhstan 806 0.01 1.9 Kenya 46,951 0.33 2.2 Kiribati 11,777 0.08 0.1 Korea, Republic of 80,978 0.57 444.6 Kyrgyz Republic 2,700 0.02 0.5 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 103 S T A T E M E N T O F VO T I N GP O W E R A N D S UB S C R I P T I O N S A N D C O N T R I B U T I O N S ( c o n t i n u e d ) June 30, 2004 Expressed in millions of U.S. dollars Subscriptions and Number of Percentage of contributions Member a votes total votes committed Lao People's Democratic Republic 19,567 0.14% $ 0.6 Latvia 3,659 0.03 0.7 Lebanon 8,562 0.06 0.6 Lesotho 31,414 0.22 0.2 Liberia 22,467 0.16 1.0 Libya 7,771 0.05 1.3 Macedonia, former Yugoslav Republic of 18,707 0.13 1.0 Madagascar 40,456 0.29 1.3 Malawi 31,515 0.22 1.0 Malaysia 51,529 0.36 3.6 Maldives 30,186 0.21 0.1 Mali 24,808 0.18 1.2 Marshall Islands 4,902 0.03 * Mauritania 18,275 0.13 0.7 Mauritius 39,133 0.28 1.2 Mexico 102,666 0.73 138.3 Micronesia, Federated States of 18,424 0.13 * Moldova 612 * 0.7 Mongolia 24,389 0.17 0.3 Morocco 62,932 0.44 5.1 Mozambique 14,817 0.10 1.7 Myanmar 48,827 0.35 3.0 Nepal 34,400 0.24 0.7 Nicaragua 29,845 0.21 0.4 Niger 19,302 0.14 0.7 Nigeria 15,257 0.11 4.3 Oman 27,003 0.19 1.4 Pakistan 127,231 0.90 13.7 Palau 504 * * Panama 10,185 0.07 * Papua New Guinea 16,368 0.12 1.1 Paraguay 16,958 0.12 0.4 Peru 24,372 0.17 2.2 Philippines 16,583 0.12 6.4 Poland 322,515 2.28 62.9 Rwanda 20,312 0.14 1.0 St. Kitts and Nevis 7,888 0.06 0.2 St. Lucia 27,231 0.19 0.2 St. Vincent and the Grenadines 4,883 0.03 0.1 Samoa 18,441 0.13 0.1 São Tomé and Principe 6,414 0.05 0.1 Saudi Arabia 502,122 3.55 2,208.2 Senegal 37,824 0.27 2.3 Serbia and Montenegro 29,374 0.21 6.9 Sierra Leone 16,967 0.12 1.0 Singapore 5,099 0.04 18.4 Slovak Republic 42,400 0.30 14.5 Slovenia 38,999 0.28 3.1 Solomon Islands 518 * 0.1 Somalia 10,506 0.07 1.0 Sri Lanka 56,067 0.40 4.0 104 THE WORLD BANK ANNUAL REPORT 2004 Subscriptions and Number of Percentage of contributions Member a votes total votes committed Sudan 22,484 0.16% $ 1.3 Swaziland 15,373 0.11 0.4 Syrian Arab Republic 10,351 0.07 1.2 Tajikistan 20,568 0.15 0.5 Tanzania 46,951 0.33 2.2 Thailand 58,195 0.41 4.2 Timor-Leste 558 * 0.4 Togo 23,243 0.16 1.0 Tonga 16,813 0.12 0.1 Trinidad and Tobago 4,396 0.03 1.7 Tunisia 2,793 0.02 1.9 Turkey 96,613 0.68 128.5 Uganda 26,992 0.19 2.2 Ukraine 1,762 0.01 7.6 Uzbekistan 746 0.01 1.5 Vanuatu 13,821 0.10 0.3 Vietnam 19,203 0.14 2.0 Yemen, Republic of 40,727 0.29 2.1 Zambia 31,168 0.22 3.4 Zimbabwe 17,657 0.12 5.0 Subtotal Part II Members c 5,411,580 38.24 3,915.7 Total--June 30, 2004 b,c 14,153,297 100.00% $123,029.7 Total--June 30, 2003 b 13,767,940 $118,857.8 * Indicates amounts less than $0.05 million or less than 0.005 percent. NOTES a. See Notes to Special Purpose Financial Statements--Note A for an explanation of the two categories of membership. b. $512.3 million of Switzerland's subscription and contributions have not been included in the Statement of Sources and Applications of Development Resources at June 30, 2004 and June 30, 2003 since this represents the difference between the total cofinancing grants of $580.1 million provided by Switzerland directly to IDA borrowers as cofinancing grants between the fourth and the ninth replenishments of IDA resources, and the July 1992 contribution by Switzerland of $67.8 million. c. May differ from the sum of individual figures shown due to rounding. The Notes to Special Purpose Financial Statements are an integral part of these Statements. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 105 N O T E S T O S P E C I A L P U R P O S E FI N A N C I A L S T A T E M E N T S NOTE A--ORGANIZATION, OPERATIONS AND The preparation of these special purpose financial SIGNIFICANT ACCOUNTING AND RELATED statements requires management to make estimates POLICIES and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent Purpose and Affiliated Organizations assets and liabilities at the date of the financial The International Development Association (IDA) is statements and the reported amounts of revenue and an international organization that was established on expenses during the reporting period. Actual results September 24, 1960. IDA's main goal is reducing could differ from these estimates. Significant poverty through promoting sustainable economic judgments have been used in the computation of development in the less developed areas of the world estimated fair values of development credits and included in IDA's membership, by extending allowances for the HIPC Debt Initiative. concessionary financing in the form of grants, development credits and guarantees. IDA has three Reclassifications affiliated organizations, the International Bank for Certain reclassifications of the prior years' Reconstruction and Development (IBRD), the information have been made to conform to the International Finance Corporation (IFC), and the current year's presentation. Multilateral Investment Guarantee Agency (MIGA). Basis of Accounting Each of these other organizations is legally and financially independent from IDA, with separate IDA's special purpose financial statements are assets and liabilities, and IDA is not liable for their prepared on the accrual basis of accounting. That is, respective obligations. Transactions with these the effects of transactions and other events are affiliates are disclosed in the notes that follow. The recognized when they occur (and not as cash or its principal purpose of IBRD is to promote sustainable equivalent is received or paid) and are recorded in the economic development and reduce poverty in its accounting records and reported in the financial member countries, primarily by providing loans, statements of the periods to which they relate. guarantees and related technical assistance for specific IDA follows a special basis of accounting for member projects and for programs of economic reform in subscriptions and contributions and for development developing member countries. IFC's purpose is to credits as described under the discussion on encourage the growth of productive private significant accounting policies below. enterprises in its member countries through loans and equity investments in such enterprises without a Translation of Currencies member's guarantee. MIGA was established to IDA's special purpose financial statements are encourage the flow of investments for productive expressed in terms of U.S. dollars solely for the purposes between member countries and, in purpose of summarizing IDA's financial position and particular, to developing member countries by the results of its operations for the convenience of its providing guarantees against noncommercial risks for members and other interested parties. foreign investment in its developing member IDA is an international organization which conducts countries. its operations in Special Drawing Rights (SDRs) and Summary of Significant Accounting and Related U.S. dollars. Applications of development resources Policies and sources of development resources are translated at Due to the nature and organization of IDA, these market exchange rates in effect at the end of the financial statements have been prepared for the accounting period, except Member Subscriptions and specific purpose of reflecting the sources and Contributions which are translated in the manner applications of member subscriptions and described below. Income and expenses are translated contributions and other development resources. at either the market exchange rates in effect on the These financial statements are not intended to be a dates of income and expense recognition, or at an presentation in accordance with accounting principles average of the exchange rates in effect during each generally accepted in the United States of America or month. Translation adjustments relating to the with International Financial Reporting Standards. revaluation of development credits and development These special purpose financial statements have been grants denominated in SDRs are charged or credited prepared to comply with Article VI, Section 11(a) of to Accumulated Other Comprehensive Income. Other the Articles of Agreement of IDA, and are prepared in translation adjustments are shown in the Statement of accordance with the accounting policies outlined Income. below. On August 3, 2004, the Executive Directors approved these financial statements for issue. 106 THE WORLD BANK ANNUAL REPORT 2004 Member Subscriptions and Contributions For the purposes of its financial resources, the Recognition membership of IDA is divided into two categories: (1) Part I members, which make payments of Member Subscriptions and Contributions committed subscriptions and contributions provided to IDA in for each IDA replenishment are recorded in full as convertible currencies which may be freely used or Subscriptions and Contributions Committed upon exchanged by IDA in its operations and (2) Part II effectiveness of the relevant replenishment. members, which make payments of ten percent of A replenishment becomes effective when IDA receives their initial subscriptions in freely convertible Instruments of Commitments from members for currencies, and the remaining 90 percent of their subscriptions and contributions of a specified portion initial subscriptions, and all additional subscriptions of the full replenishment. Amounts not yet paid in, at and contributions in their own currencies or in freely the date of effectiveness, are recorded as Subscriptions convertible currencies. Certain Part II members and Contributions Receivable and shown as a provide a portion of their subscriptions and reduction of Subscriptions and Contributions contributions in the same manner as mentioned in (1) Committed. These receivables come due throughout above. IDA's Articles of Agreement and subsequent the replenishment period (generally three years) in replenishment agreements provide that the currency accordance with an agreed maturity schedule. The of any Part II member paid in by it may not be used by actual payment of receivables when they become due IDA for projects financed by IDA and located outside from certain members is conditional upon the the territory of the member except by agreement respective member's budgetary appropriation between the member and IDA. The cash paid and processes. notes deposited in nonconvertible local currencies for The Subscriptions and Contributions Receivable are the subscriptions of Part II members are recorded settled through payment of cash or deposit of either as currencies subject to restriction under Due nonnegotiable, noninterest-bearing demand notes. from Banks, or as restricted notes included under The notes are encashed by IDA as provided in the Nonnegotiable, noninterest-bearing demand relevant replenishment resolution over the obligations on account of member subscriptions and disbursement period of the credits committed under contributions. Restricted notes at June 30, 2004 were the replenishment. $44 million ($35 million--June 30, 2003). In certain replenishments, donors have had the option Valuation of paying all of their subscription and contribution The subscriptions and contributions provided amounts in cash before they become due, and thereby through the Third Replenishment are expressed in receiving discounts. In addition, some replenishment terms of "U.S. dollars of the weight and fineness in arrangements have incorporated an accelerated effect on January 1, 1960" (1960 dollars). Following encashment schedule. In these cases, IDA and the the abolition of gold as a common denominator of the donor agree that IDA will invest the cash and retain monetary system and the repeal of the provision of the the income. The related subscription and contribution U.S. law defining the par value of the U.S. dollar in is recorded at the full undiscounted amount. The terms of gold, the pre-existing basis for translating discount is recorded as unamortized discounts on 1960 dollars into current dollars or any other currency contributions (a reduction of Subscriptions and disappeared. The Executive Directors of IDA decided, Contributions Committed) and amortized over the with effect from that date and until such time as the projected encashment period. relevant provisions of the Articles of Agreement are Under the provisions governing replenishments, IDA amended, that the words "U.S. dollars of the weight must encash the notes or similar obligations of and fineness in effect on January 1, 1960" in Article II, contributing members on an approximately pro rata Section 2(b) of the Articles of Agreement of IDA are basis. As discussed in the previous paragraph, donors interpreted to mean the SDR introduced by the sometimes contribute resources on an advanced or an International Monetary Fund as the SDR was valued accelerated basis. IDA holds these resources until they in terms of U.S. dollars immediately before the become available for disbursement on a pro rata basis. introduction of the basket method of valuing the SDR on July 1, 1974, such value being equal to $1.20635 for Transfers to IDA from IBRD are recorded under one SDR (the 1974 SDR), and have also decided to Sources of Development Resources and are receivable apply the same standard of value to amounts upon approval by IBRD's Board of Governors. expressed in 1960 dollars in the relevant resolutions of the Board of Governors. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 107 The subscriptions and contributions provided below a certain level and the country may have only through the Third Replenishment are expressed on limited or no creditworthiness for IBRD lending. the basis of the 1974 SDR. Prior to the decision of the Development credits carry a service charge of 0.75 Executive Directors, IDA had valued these percent and generally have 35- or 40-year final subscriptions and contributions on the basis of the maturities and a 10-year grace period for principal SDR at the current market value of the SDR. payments. Commitment charges on the undisbursed balances of IDA credits are set annually by the Board The subscriptions and contributions provided under of Executive Directors of IDA. For the fiscal year the Fourth Replenishment and thereafter are ending June 30, 2004 the rate for undisbursed credits expressed in members' currencies or SDRs and are has been set at 0.50 percent (fiscal year ended June 30, payable in members' currencies. Beginning July 1, 2003--0 percent). Development credits are carried in 1986, subscriptions and contributions made available the Special Purpose Financial Statements at the full for disbursement in cash to IDA are translated at face amount of the borrowers' outstanding market exchange rates in effect on the dates they were obligations. made available. Prior to that date, subscriptions and contributions which had been disbursed or converted It is the practice of IDA to place in nonaccrual status into other currencies were translated at market all development credits made to a member exchange rates in effect on dates of disbursement or government or to the government of a territory of a conversion. Subscriptions and contributions not yet member if principal or charges with respect to any available for disbursements are translated at market such development credit are overdue by more than six exchange rates in effect at the end of the accounting months, unless IDA's management determines that period. the overdue amount will be collected in the immediate future. In addition, if loans by IBRD to a member Article IV, Section 2(a) and (b) of IDA's Articles of government are placed in nonaccrual status, all Agreement provides for maintenance of value development credits to that member government will payments on account of the local currency portion of also be placed in nonaccrual status by IDA. On the the initial subscription whenever the par value of the date a member's development credits are placed in member's currency or its foreign exchange value has, nonaccrual status, charges that had been accrued on in the opinion of IDA, depreciated or appreciated to a development credits outstanding to the member significant extent within the member's territories, so which remained unpaid are deducted from the long as, and to the extent that, such currency shall not income from development credits of the current have been initially disbursed or exchanged for the period. Charges on nonaccruing development credits currency of another member. The provisions of are included in income only to the extent that Article IV, Section 2(a) and (b) have by agreement payments have actually been received by IDA. If been extended to cover additional subscriptions and collectibility risk is considered to be particularly high contributions of IDA through the Third at the time of arrears clearance, the member's credits Replenishment, but are not applicable to those of the may not automatically emerge from nonaccrual Fourth and subsequent replenishments. status, even though the member's eligibility for new The Executive Directors decided on June 30, 1987 that credits may have been restored. A decision on the settlements of maintenance of value, which would restoration of accrual status is made on a case-by-case result from the resolution of the valuation issue on the basis. basis of the 1974 SDR, would be deferred until the In fulfilling its mission, IDA makes concessional loans Executive Directors decide to resume such to the poorest countries. Therefore, there is significant settlements. These amounts are shown as Deferred credit risk in the portfolio of development credits. Amounts Receivable to Maintain Value of Currency Management continually monitors this credit risk. No Holdings. provision for credit losses, other than allowances for Development Credits the Heavily Indebted Poor Countries (HIPC) Debt All development credits are made to or guaranteed by Initiative, has been established. Should losses occur, member governments or to the government of a they would be included in the Statement of Income. territory of a member (except for development credits The repayment obligations of IDA's development which have been made to regional development credits funded from resources through the Fifth institutions for the benefit of members or territories Replenishment are expressed in the development of members of IDA). In order to qualify for lending on credit agreements in terms of 1960 dollars. In June IDA terms, a country's per capita income must be 1987, the Executive Directors decided to value those 108 THE WORLD BANK ANNUAL REPORT 2004 development credits at the rate of $1.20635 per 1960 For guarantees issued prior to January 1, 2003, the fee dollar on a permanent basis. Development credits income received is deferred and amortized over the funded from resources provided under the Sixth period of benefit. The unamortized balance of the Replenishment and thereafter are denominated in deferred guarantee fee income is included in Other SDRs; the principal amounts disbursed under such Resources, net on the Statement of Sources and development credits are to be repaid in currency Applications of Development Resources. For amounts currently equivalent to the SDRs disbursed. guarantees issued or modified after December 31, 2002, in accordance with Financial Accounting Development Grants Standards Board (FASB) Interpretation No. 45 (FIN The Twelfth Replenishment Resolution authorized the 45), "Guarantor's Accounting and Disclosure use of Twelfth Replenishment donor funds to finance Requirements for Guarantees, Including Indirect grants in the context of the HIPC Debt Initiative, or Guarantees of Indebtedness to Others", IDA will grant assistance to post-conflict countries under a record the fair value of the obligation to stand ready in framework approved by the Executive Directors on the financial statements. IDA has not issued or July 31, 2001. modified any guarantees after December 31, 2002. IDA is authorized to provide a significant portion of Heavily Indebted Poor Countries (HIPC) Debt financing under the Thirteenth Replenishment as Initiative development grants. The annual net income transfers The HIPC Debt Initiative was launched in 1996 as a from IBRD for fiscal years 1997 through 2003 also joint effort by bilateral and multilateral creditors to authorized the use of such funds for IDA development ensure that reform efforts of HIPCs would not be put grants. at risk by unsustainable external debt burdens. As a Development grants are charged to income when the part of this process, the HIPC Debt Initiative Trust development grant agreement is signed by the Fund was established on November 7, 1996. It is recipient. administered by IDA and constituted by funds of donors including the IBRD, to help beneficiaries Commitment charges on the undisbursed balances of reduce their overall debt, including IDA debt. IDA grants are set annually by the Board of Executive Directors of IDA. For the fiscal years ending June 30, Under the Original Framework of the Initiative, 2004 and June 30, 2003, the commitment charge rate eligible countries received relief on IBRD and IDA on the undisbursed balances of IDA grants was 0 debt through three mechanisms: (i) partial financing percent. of lending operations with development grants; (ii) purchase and cancellation of IDA credits by the IBRD/ Guarantees IDA component of the HIPC Debt Initiative Trust IDA provides guarantees for loans or securities issued Fund subject to availability of funds; and (iii) the in support of projects located within a member provision of debt service on selected IDA credits, in country that are undertaken by private entities. These certain cases, by the HIPC Debt Initiative Trust Fund. financial guarantees are commitments issued by IDA Under the Enhanced Framework of the Initiative, to guarantee payment performance by a borrower to a which was approved by IDA's Executive Directors on third party. January 27, 2000, implementation mechanisms also Guarantees are regarded as outstanding when the include: (i) partial forgiveness of IDA debt service as it underlying financial obligation of the borrower is comes due, to be reimbursed to IDA by the IBRD/IDA incurred, and called when a guaranteed party component of the HIPC Debt Initiative Trust Fund; demands payment under the guarantee. IDA would be and (ii) in the case of countries with a substantial required to perform under its guarantees if the amount of outstanding IBRD debt, partial refinancing payments guaranteed are not made by the borrower by IDA resources (excluding transfers from IBRD) of and the guaranteed party called the guarantee by outstanding IBRD debt. demanding payment from IDA in accordance with the Upon approval of debt relief for a country under the terms of the guarantee. Enhanced HIPC Initiative by the Executive Directors In the event that a guarantee is called, IDA has the of IDA, the principal component of the estimated debt contractual right to require payment from the relief costs is recorded as a reduction of the disbursed member country that has provided the counter and outstanding development credits under the guarantee to IDA, on demand, or as IDA may Allowance for HIPC Debt Initiative, and as a charge to otherwise direct. income. This estimate is subject to periodic revision. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 109 The Allowance for HIPC Debt Initiative is reduced Statement of Sources and Applications of when debt relief is provided by IDA. Development Resources and securities received under resale agreements are not recorded on IDA's Upon signature by IDA of the country specific legal Statement of Sources and Applications of notification, immediately following the decision by Development Resources. the Executive Directors of IDA to provide debt relief to the country (the decision point), a receivable from the Accounting and reporting developments HIPC Debt Initiative Trust Fund is created (to the In December 2003, the FASB issued FASB extent that funds are available) and income is Interpretation No. 46 (revised), "Consolidation of recognized. The receivable is limited to the nominal Variable Interest Entities". This interpretation did not value equivalent of one-third of the net present value have a material impact on IDA's financial statements of the principal component of the total debt relief for the fiscal year ended June 30, 2004. committed to the specific country. The receivable is also the maximum debt relief that can be provided In December 2003, as part of its improvements to before the country reaches its completion point as International Accounting Standards (IAS) project, the defined by IDA's Executive Directors, and the International Accounting Standards Board issued country's other creditors have confirmed their full fifteen revised International Accounting Standards to participation in the debt relief initiative to the eliminate redundancies and conflicts between existing satisfaction of IDA. standards. The revised standards are to be applied for fiscal years beginning on or after January 1, 2005. IDA An additional receivable from the HIPC Debt is currently examining what impact these standards Initiative Trust Fund is created and income is may have on IDA's financial statements. recognized when the country reaches its completion point and the country's other creditors have NOTE B--INVESTMENTS confirmed their full participation in the debt relief initiative to the satisfaction of IDA. This additional As part of its portfolio management strategy, IDA receivable represents the remaining principal invests in the following financial instruments. component of the total debt relief committed that was Asset-backed Securities: Asset-backed securities are not recognized at the decision point. instruments whose cash flow is based on the cash Cash and Liquid Investments flows of a pool of underlying assets managed separately. IDA may only invest in asset-backed IDA considers unrestricted cash as well as securities securities with a AAA credit rating. held in the investment portfolio, as an element of liquidity in the Statement of Cash Flows, since they Currency Swaps: Currency swaps are agreements are readily convertible to known amounts of cash. between two parties to exchange cash flows denominated in different currencies at one or more IDA carries its investment securities and related certain times in the future. The cash flows are based financial instruments at fair value, using trade date on a predetermined formula reflecting rates of interest accounting. The first-in-first-out (FIFO) method is and an exchange of principal. IDA is authorized to used to determine the cost of securities sold in enter into currency swaps including currency forward computing the realized gains and losses on these contracts. instruments. Both realized and unrealized gains and losses are included in Income from investments. Futures: Futures are contracts for delivery of securities or money market instruments in which the seller Securities Purchased Under Resale Agreements and Securities Sold Under Repurchase Agreements agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Securities purchased under resale agreements and Futures contracts are traded on regulated United securities sold under repurchase agreements are States and international exchanges. IDA generally recorded at historical cost. IDA receives securities closes out most open positions in futures contracts purchased under resale agreements, monitors the fair prior to maturity. Therefore, cash receipts or value of the securities and, if necessary, requires payments are mostly limited to the change in market additional collateral. value of the futures contracts. Futures contracts The securities transferred to IDA under the generally entail daily settlement of the variation repurchase and security lending arrangements and the margin. securities transferred to counterparties under the Government and Agency Obligations: These resale agreements have not met the accounting criteria obligations include marketable bonds, notes and other for treatment as a sale. Therefore, securities obligations issued by governments. Obligations issued transferred under repurchase agreements and security or unconditionally guaranteed by governments of lending arrangements are retained as assets on IDA's 110 THE WORLD BANK ANNUAL REPORT 2004 countries require a minimum credit rating of AA if Repurchase and Resale Agreements and Securities denominated in a currency other than the home Loans: Repurchase agreements are contracts under currency of the issuer, otherwise no rating is required. which a party sells securities and simultaneously Obligations issued by an agency or instrumentality of agrees to repurchase the same securities at a specified a government of a country, a multilateral organization future date at a fixed price. The reverse of this or any other official entity require a minimum credit transaction is called a resale agreement. A resale rating of AA. agreement involves the purchase of securities with a simultaneous agreement to sell back the same Interest Rate Swaps: Interest rate swaps are securities at a stated price on a stated date. Securities agreements involving the exchange of periodic interest loans are contracts under which securities are lent for payments of differing character, based on an a specified period of time at a fixed price. underlying notional principal amount for a specified time. Short Sales: Short sales are sales of securities not held in the seller's portfolio at the time of the sale. The Options: Options are contracts that allow the holder seller must purchase the security at a later date and of the option the right, but not the obligation, to bears the risk that the market value of the security will purchase or sell a financial instrument at a specified move adversely between the time of the sale and the price within a specified period of time from or to the time the security must be delivered. As of June 30, seller of the option. The purchaser of an option pays a 2004, IDA had $1,010 million ($716 million--June 30, premium at the outset to the seller of the option, who 2003) of short sales included in Net payable on then bears the risk of an unfavorable change in the investment securities transactions in the Statement of price of the financial instrument underlying the Sources and Applications of Development Resources. option. IDA invests only in exchange-traded options. The initial price of an option contract is equal to the Time Deposits: Time deposits include certificates of premium paid by the purchaser and is significantly deposit, bankers' acceptances, and other obligations less than the contract or notional amount. issued or unconditionally guaranteed by banks and other financial institutions. A summary of IDA's investments, by instrument, at June 30, 2004 and June 30, 2003 is as follows: In millions of U.S. dollars equivalent Carrying Value 2004 2003 Government and agency obligations $ 9,402 $10,723 Time deposits 6,384 6,487 Asset-backed securities 2,609 1,715 Gross investment holdings 18,395 18,925 Securities purchased under resale agreements 948 1,461 Repurchase agreements and securities loans (4,823) (6,150) Receivable from currency and interest rate swaps 137 192 Payable for currency and interest rate swaps (138) (189) Investments--Trading 14,519 14,239 Receivable from securities traded 1,313 1,578 Payable for securities traded (2,745) (2,782) Net payable on investments securities transactions (1,432) (1,204) Investments 13,087 13,035 Cash held in Investment portfolioa 1,271 534 Net Investments Portfolio $14,358 $13,569 a. This amount is included in Unrestricted Currencies under Due from Banks on the Statement of Sources and Applications of Development Resources. IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 111 A summary of the currency composition of investments at June 30, 2004 and June 30, 2003 is as follows: Gross investment holdings In millions of U.S. dollars equivalent 2004 2003 Average Average Carrying Average Yield Repricing Carrying Average Yield Repricing value (%) (years) value (%) (years) Euro $ 6,597 3.13 3.90 $ 5,719 2.88 4.16 Pounds sterling 3,118 4.86 3.86 2,109 3.87 4.85 U.S. dollars 8,663 3.09 7.10 10,917 2.15 5.91 Other 17 3.97 2.72 180 2.17 2.59 Total $18,395 3.40 5.41 $18,925 2.57 5.24 Net Investments Portfolio In millions of U.S. dollars equivalent 2004 2003 Average Average Carrying Average Yield Repricing Carrying Average Yield Repricing value (%) (years) value (%) (years) Euro $ 5,526 3.31 4.52 $ 4,683 3.06 4.84 Japanese yen 1,314 -- -- 533 -- -- Pounds sterling 2,095 5.20 5.06 1,942 3.45 5.00 U.S. dollars 5,423 4.02 10.21 6,411 3.13 9.42 Total $14,358 3.53 6.33 $13,569 3.02 6.90 For the purpose of risk management, IDA is party to a may therefore change substantially within a short variety of financial instruments, certain of which period of time following the balance sheet date. involve elements of credit risk in excess of the amount The credit risk exposure and contract value, as reflected in the Statement of Sources and Applications applicable, of these financial instruments at June 30, of Development Resources. Credit risk exposure 2004 and June 30, 2003 (prior to taking into account represents the maximum potential accounting loss any master derivatives agreements or collateral due to possible nonperformance by obligors and arrangements that have been made) are given below: counterparties under the terms of the contracts. IDA limits trading to a list of authorized dealers and In millions of U.S. dollars equivalent counterparties. Credit limits have been established for 2004 2003 each counterparty by type of instrument and maturity category. Exchange traded Futures and options · Notional Long position $7,769 $1,193 In addition, IDA has entered into master derivatives · Notional Short position 2,682 405 Currency swaps agreements which contain legally enforceable close- · Credit exposure -- 3 out netting provisions. These agreements may further Interest rate swaps reduce the gross credit risk exposure related to the · Notional principal 80 -- · Credit exposure * -- swaps shown below. Credit risk with financial assets subject to a master derivatives agreement is further *Less than $0.5 million. reduced under these agreements to the extent that payments and receipts with the counterparty are Exchange traded instruments are normally subject to netted at settlement. The reduction in exposure as a daily margin requirements and are deemed to have no result of these netting provisions can vary as material credit risk. All outstanding futures and additional transactions are entered into under these options contracts at the end of June 30, 2004 and June agreements. The extent of the reduction in exposure 30, 2003 were interest rate contracts. 112 THE WORLD BANK ANNUAL REPORT 2004 As of June 30, 2004, IDA had received $954 million Membership: Ukraine became a member of IDA on ($1,533 million--June 30, 2003) of securities under May 27, 2004. resale agreements. Of these instruments held by IDA, $130 million ($179 million--June 30, 2003) has been NOTE D--TRANSFERS transferred under repurchase or security lending At June 30, 2004 and June 30, 2003, transfers were agreements. None of these securities have been comprised of : included in the assets of IDA. At June 30, 2004, IDA maintained a line of credit In millions of U.S. dollars equivalent facility with an independent financial institution. This 2004 2003 facility was created for the benefit of both IBRD and Transfers from the International IDA. The available line of credit to each institution is Bank for Reconstruction and $500 million, but usage from both institutions cannot Development $7,738 $7,392 exceed this amount in aggregate. The line of credit Transfers from the Trust Fund for Bosnia and Herzegovina 135 -- facility is being used to cover any overnight overdrafts that may occur due to failed trades. At June 30, 2004, Total Transfers $7,873 $7,392 IDA had not drawn down under this facility ($1 million--June 30, 2003). IBRD's Board of Governors has approved aggregate NOTE C--MEMBER SUBSCRIPTIONS AND transfers to IDA totaling $7,657 million through June CONTRIBUTIONS 30, 2004 ($7,357 million--June 30, 2003). The Subscriptions and Contributions Receivable: At June aggregate transfers of $7,738 million reported in the 30, 2004, receivables from subscriptions and above table differs from the amount of aggregate contributions were $4,589 million ($5,887 million-- transfers approved due to exchange rate movements June 30, 2003) of which $123 million ($77 million-- on the value of transfers that were approved in SDR. June 30, 2003) was due and $4,466 million ($5,810 Of the aggregate transfers, $300 million was approved million--June 30, 2003) was not yet due. by the IBRD Board of Governors in September 2003. Subscriptions and contributions due at June 30, 2004 At June 30, 2004, $1,584 million was receivable from were as follows: IBRD ($1,293 million--June 30, 2003). Of this amount, $385 million will be paid after all other In millions of U.S. dollars equivalent resources available to IDA for the purpose of the Amounts initially due from Eleventh Replenishment have been drawn down, and $954 million of the receivable amount will be paid in July 1, 2003 through June 30, 2004 $ 48 fiscal year 2005 at the end of the defined encashment June 30, 2003 and earlier 75 schedule for donor contributions to IDA's Twelfth Replenishment. The remaining $245 million will be Total $123 paid in accordance with the donor encashment schedule for IDA's Thirteenth Replenishment. Subscriptions and contributions not yet due at June On September 24, 2003, in accordance with the 30, 2004 will become due as follows: administration agreement for the Trust Fund for Bosnia and Herzegovina, the Executive Directors of IDA approved the termination of the trust fund and In millions of U.S. dollars equivalent the transfer of its assets to IDA. These assets included Period the right to receive repayments of credits totaling $124 million and $11 million in cash balances. At June 30, July 1, 2004 through June 30, 2005 $4,208 2004, these assets in the form of development credits July 1, 2005 through June 30, 2006 131 and cash had been transferred to IDA. Thereafter 127 Total $4,466 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 113 NOTE E--DEVELOPMENT CREDITS Overdue Amounts Currency Composition At June 30, 2004, other than those referred to in the following tables, there were no principal or charges on The currency composition of IDA's development development credits which were overdue by more credits outstanding at June 30, 2004 and June 30, 2003 than three months. is as follows: In millions of U.S. dollars equivalent 2004 2003 USD $ 12,638 $ 13,067 SDR 103,105 93,810 Development credits outstanding $115,743 $106,877 The following table provides a summary of selected financial information related to development credits in nonaccrual status as of June 30: In millions of U.S. dollars equivalent 2004 2003 2002 Aggregate recorded investment in nonaccrual credits $4,984 $4,763 $5,759 Overdue amounts: Principal 509 394 443 Charges 242 203 251 $ 751 $ 597 $ 694 Service charge income recognized on development credits coming out of nonaccrual status $ -- $ 91 $ 9 Service charge income not earned as a result of credits being in nonaccrual status $ 33 $ 31 $ 43 A summary of borrowers with development credits or guarantees in nonaccrual status follows: In millions of U.S. dollars equivalent June 30, 2004 Principal and Principal Charges Nonaccrual Borrower Outstanding Overdue Since With overdues Central African Republic $432 $31 June 2002 Haiti 534 43 September 2001 Liberia 107 38 April 1988 Myanmar 762 142 September 1998 Somalia 429 118 July 1991 Sudan 1,255 297 January 1994 Togo 682 46 May 2002 Zimbabwe 490 36 October 2000 Total 4,691 751 Without overdues Serbia and Montenegro 293 -- September 1992 Total $4,984 $751 114 THE WORLD BANK ANNUAL REPORT 2004 During the fiscal year ended June 30, 2004, there were relief that is expected to be provided to other eligible no development credits which were either placed into countries. nonaccrual status or restored to accrual status. Changes to the allowance for HIPC Debt Initiative for During the fiscal year ended June 30, 2003, the Syrian the fiscal years ended June 30, 2004 and June 30, 2003 Arab Republic, the Democratic Republic of Congo, are summarized below: the Solomon Islands and Afghanistan cleared all of their overdue payments to IDA and subsequently, all In millions of U.S. dollars equivalent development credits to, or guaranteed by, these four 2004 2003 countries were restored to accrual status. Balance, beginning of the fiscal year $10,395 $10,270 Allowance for HIPC Debt Initiative Provision for principal component Development credits outstanding are presented in the of debt relief 727 393 Principal component of debt relief Statement of Sources and Applications of forgiven in the fiscal year (337) (268) Development Resources before any allowance in connection with the HIPC Debt Initiative (see Note I). Balance, end of the fiscal year $10,785 $10,395 The allowance for HIPC Debt Initiative is the sum of the principal component of debt relief remaining to be provided to those countries that have reached their decision points, and in certain cases their completion points, and the estimated principal component of debt The maturity structure of IDA's development credits outstanding at June 30, 2004 and June 30, 2003 were as follows: In millions of U.S. dollars equivalent 2004 2003 July 1, 2004 through June 30, 2005 $ 2,590 July 1, 2003 through June 30, 2004 $ 2,208 July 1, 2005 through June 30, 2006 2,288 July 1, 2004 through June 30, 2005 2,011 July 1, 2006 through June 30, 2007 2,504 July 1, 2005 through June 30, 2006 2,217 July 1, 2007 through June 30, 2008 2,716 July 1, 2006 through June 30, 2007 2,422 July 1, 2008 through June 30, 2009 2,984 July 1, 2007 through June 30, 2008 2,626 July 1, 2009 through June 30, 2014 18,913 July 1, 2008 through June 30, 2013 16,903 July 1, 2014 through June 30, 2019 23,119 July 1, 2013 through June 30, 2018 20,953 July 1, 2019 through June 30, 2024 24,733 July 1, 2018 through June 30, 2023 22,743 July 1, 2024 through June 30, 2029 20,506 July 1, 2023 through June 30, 2028 19,408 July 1, 2029 through June 30, 2034 11,445 July 1, 2028 through June 30, 2033 11,246 July 1, 2034 through June 30, 2039 3,445 July 1, 2033 through June 30, 2038 3,613 July 1, 2039 through June 30, 2044 500 July 1, 2038 through June 30, 2043 527 Total $115,743 Total $106,877 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 115 Fifth Dimension Program Guarantees Under the Fifth Dimension program established in Guarantees of $129 million at June 30, 2004 September 1988, a portion of principal repayments to ($119 million--June 30, 2003) were not included in IDA is allocated on an annual basis to provide IDA's Statement of Sources and Applications of supplementary IDA development credits to IDA- Development Resources. These outstanding amounts eligible countries that are no longer able to borrow on represent the maximum potential undiscounted IBRD terms, but have outstanding IBRD loans future payments that IDA could be required to make approved prior to September 1988 and have in place under these guarantees. an IDA-supported structural adjustment program. The three existing guarantees issued by IDA expire in Such supplementary IDA development credits are 2011, 2015 and 2019. allocated to countries that meet specified conditions in proportion to each country's interest payments due Segment Reporting that year on its pre-September 1988 IBRD loans. To be Based on an evaluation of its operations, management eligible for such IDA supplemental credits, a member has determined that IDA has only one reportable country must meet IDA's eligibility criteria for segment since IDA does not manage its operations by lending, must be ineligible for IBRD lending and must allocating its resources based on the contribution to not have had an IBRD loan approved within the last net income from individual borrowers. In addition, twelve months. To receive a supplemental the risk and return profiles are sufficiently similar development credit from the program, a member among its borrowers so that IDA does not differentiate country cannot be more than 60 days overdue on its in terms of the nature of products or services debt-service payments to IBRD or IDA. provided, the preparation process, or the method of A summary of cumulative IDA credits committed and providing services to its borrowers. disbursed under this program from inception, at June For the year ended June 30, 2004, development credits 30, 2004 and June 30, 2003 is given below: to one country generated in excess of ten percent of total income from credits, amounting to $179 million. In millions of U.S. dollars equivalent 2004 2003 Commitments $1,715 $1,711 Disbursements 1,712 1,699 The following table presents IDA's development credits outstanding and associated charge income, by geographic region, at June 30, 2004 and June 30, 2003. In millions of U.S. dollars equivalent 2004 2003 Charge Development Credits Charge Development Credits Region Income Outstanding Income Outstanding Africa $344 $45,954 $359 $42,579 East Asia and Pacific 123 16,328 102 15,072 Europe and Central Asia 38 4,864 28 3,609 Latin America and the Caribbean 33 4,770 26 4,311 Middle East and North Africa 27 3,245 22 3,034 South Asia 317 40,582 279 38,272 Total $882 $115,743 $816 $106,877 116 THE WORLD BANK ANNUAL REPORT 2004 NOTE F--FAIR VALUE OF FINANCIAL months average CIRR as a discount rate provides an INSTRUMENTS alternative estimate for the grant element. Investments: IDA carries its investments at the fair Since IDA's development credits are denominated value of the portfolio. These fair values are based on either in U.S. dollars or SDRs, currency specific rates quoted market prices, where available. If quoted have been used to discount the corresponding future market prices are not available, fair values are based cash flows for each currency component of the on quoted market prices of comparable instruments. development credits before being aggregated to The fair value of short-term financial instruments provide the composite results. approximates their carrying value. The grant element calculations consider interest rates, Development Credits: IDA's development credits have maturity structures and grace periods for the credits. a significant grant element because of the concessional They do not consider credit risk, portfolio seasoning, nature of IDA's terms. Discounting the future cash multilateral and sovereign credit preferences and flows from IDA's development credits using other risks or indicators that would be relevant in government reference rates represented by interest calculating fair value. Estimating the impact of these rates of government securities having similar maturity factors is not practicable. to the portfolio of development credits, provides an However, under either alternative, the estimated fair estimate for the grant element. Under the HIPC Debt values of development credits outstanding are Initiative, development credits identified for sale to substantially lower than the $115,743 million reflected the HIPC Debt Initiative Trust Fund are written down on the Statement of Sources and Applications of to their estimated net present value using currency Development Resources at June 30, 2004 ($106,877 specific Commercial Interest Reference Rates (CIRRs) million--June 30, 2003), as shown in the following published monthly by the Organization for Economic table. Cooperation and Development (OECD). Using the six In millions of U.S. dollars equivalent June 30, 2004 June 30, 2003 Government Government reference reference rate- rate-based CIRR-based based CIRR-based fair value fair value fair value fair value Development credits outstanding $115,743 $115,743 $106,877 $106,877 Less grant equivalent 44,344 45,410 34,940 40,244 Estimated value of development credits outstanding $71,399 $70,333 $ 71,937 $ 66,633 Estimated grant element 38% 39% 33% 38% Discount Rates Used Discount Rates Used Government reference rates - US dollar 4.61% 3.58% - SDRa 4.41% 3.66% CIRRs: Average of six months to June 30 - U.S. dollar 4.76% 4.43% - SDR 4.53% 4.25% a. Implies weighted average government reference rates of the component currencies contained in the SDR. Discounting the future cash flows from IDA's alternative for the grant element. The estimated grant development credits using the standard 10 percent element based on this standard DAC rate for IDA's discount rate of the Development Assistance development credits is 65 percent as of June 30, 2004 Committee (DAC) of the OECD, provides another (66 percent--June 30, 2003). IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 117 NOTE G--ADMINISTRATIVE EXPENSES and other entities, funds restricted for specific uses which include the cofinancing of IDA lending Administrative expenses represent IDA's share of such projects, debt reduction operations for IDA members, expenses jointly incurred by IBRD and IDA. technical assistance for borrowers including feasibility The allocation of expenses is based upon an agreed studies and project preparation, global and regional cost sharing formula that reflects the administrative programs and research and training programs. These costs of service delivery to countries that are eligible funds are placed in trust with IDA and/or IBRD, and for lending from IBRD and IDA. are held in a separate investment portfolio which is not comingled with IDA and/or IBRD funds, nor are NOTE H--TRUST FUNDS ADMINISTRATION they included in the development resources of IDA. IDA, alone or jointly with IBRD, administers on behalf of donors, including members, their agencies At June 30, 2004 and June 30, 2003, the allocation of trust fund assets by executing agent were as follows: 2004 2003 Number of Number of Total fiduciary trust fund Total fiduciary trust fund assets accounts assets accounts (In millions) (Unaudited) (In millions) (Unaudited) IDA executed $1,385 1,340 $1,195 1,533 Recipient executed 2,332 871 2,503 805 Total $3,717 2,211 $3,698 2,338 The responsibilities of IDA under these arrangements Receivable from the HIPC Debt Initiative Trust Fund vary and range from services normally provided A summary of changes to the receivable from the under its own lending projects to full project HIPC Debt Initiative Trust Fund is presented below: implementation including procurement of goods and services. IDA receives fees for administering trust In millions of U.S. dollars funds as a reduction of the administrative expenses 2004 2003 shared with IBRD. During the fiscal year ended June 30, 2004, IDA received $18 million ($17 million-- Balance, beginning of the fiscal year $ 498 $ 559 June 30, 2003, $10 million--June 30, 2002) as fees for Contribution from the HIPC Debt Initiative Trust Fund 202 207 administering trust funds. Reimbursement received for principal repayments forgiven (334) (268) NOTE I--IMPACT FROM HEAVILY INDEBTED Balance, end of the fiscal year $ 366 $ 498 POOR COUNTRIES DEBT INITIATIVE Debt Service Relief As of June 30, 2004, total debt service relief of $1,093 Additional HIPC Debt Relief million has been provided by IDA consisting of $913 At June 30, 2004, the Executive Directors of IDA had million in principal repayments and $180 million in approved debt relief on outstanding IDA development service charges. These amounts have been reimbursed credit principal of about $470 million to one HIPC by the HIPC Debt Initiative Trust Fund. country subject to obtaining satisfactory assurances of full participation in the debt relief initiative from the HIPC Grants country's other creditors. This additional contingent As of June 30, 2004, HIPC grants of $101 million have relief has not been charged against income or included been disbursed. The HIPC Debt Initiative Trust Fund in IDA's Statement of Sources and Applications of has reimbursed $19 million of the disbursed grants. Development Resources. A summary of the debt relief provided under the HIPC Debt Initiative is included in the Supplementary Information appended to these financial statements. 118 THE WORLD BANK ANNUAL REPORT 2004 NOTE J--DEVELOPMENT GRANTS development resources that are excluded from net income. For IDA, comprehensive income comprises A summary of changes to the amounts payable for income or loss after HIPC Debt Initiative and development grants is presented below: currency translation adjustments on development credits and development grants. These items are In millions of U.S. dollars equivalent presented in the Statement of Comprehensive Income. 2004 2003 The total accumulated other comprehensive income represents the cumulative translation adjustment on Balance, beginning of the fiscal year $1,063 $ 148 Commitments 1,697 1,016 development credits and development grants. The Disbursements (751) (121) following table presents the changes in Accumulated Translation adjustment 79 20 Other Comprehensive Income balances for the years Balance, end of the period $2,088 $1,063 ended June 30, 2004, 2003 and 2002: In millions of U.S. dollars equivalent Accumulated Other At June 30, 2004, $270 million ($252 million - June 30, Comprehensive Income 2003) of development grants had been approved by 2004 2003 2002 IDA's Executive Directors but had not been charged to expense pending the signing of agreements with Balance, beginning of the fiscal year $4,708 $ (514) $(4,968) recipients. Changes from period activity 4,212 5,222 4,454 NOTE K--COMPREHENSIVE INCOME Balance, end of the fiscal year $8,920 $4,708 $ (514) Comprehensive income consists of net income and other gains and losses affecting sources of IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 119 S U P P L E M E N T A R Y I N F O R M A T I O N O N T H E H E A V I L Y I N D E B T E D P O O R C O U N T R I E S D E B T I N I T I A T I V E The summary table below shows debt relief for The debt relief shown under the HIPC Trust Fund in countries that have reached their decision or the table below relates only to the IBRD/IDA completion points as of June 30, 2004, and estimated component, and includes amounts approved up to amounts to be provided to other eligible countries June 30, 2004 by the Executive Directors of IDA. (with the exception of those countries for which cost As of June 30, 2004, the 27 countries that have reached estimates are not currently available), under the their decision or completion points are Benin, Bolivia, Heavily Indebted Poor Countries (HIPC) Debt Burkina Faso, Cameroon, Chad, Democratic Republic Initiative. In addition to the total debt relief of $13,923 Congo, Ethiopia, The Gambia, Ghana, Guinea, million, IDA is expected to extend new credits Guinea-Bissau, Guyana, Honduras, Madagascar, estimated at $232 million to certain IDA-eligible Malawi, Mali, Mauritania, Mozambique, Nicaragua, countries no longer able to borrow on IBRD terms, Niger, Rwanda, São Tomé and Principe, Senegal, but with outstanding IBRD debt. These credits will be Sierra Leone, Tanzania, Uganda, and Zambia. funded by IDA resources other than transfers from IBRD. In millions of U.S. dollars equivalent HIPC IDA Trust Fund Total Countries that have reached their decision or completion points Provided to date Principal $ 913 $ -- $ 913 Service charges 180 7 187 Grants 101 -- 101 Write down of development credits 572 571 1,143 Development grants 229 -- 229 Debt service -- 121 121 Total debt relief provided to date 1,995 699 2,694 Remainder to be provided Principal 8,954 -- 8,954 Service charges 257 -- 257 Total debt relief to be provided 9,211 -- 9,211 Other eligible countries that have not reached their decision points Estimated amount to be provided Principal 1,831 -- 1,831 Service charges 187 -- 187 Total estimated debt relief to other eligible countries 2,018 -- 2,018 Total Debt Relief $13,224 $699 $13,923 120 THE WORLD BANK ANNUAL REPORT 2004 Reconciliation to IDA's Financial Statements Reconciliation of the principal component of HIPC debt relief as reported in the Supplementary Information on the HIPC Debt Initiative to IDA's financial statements at June 30, 2004 is as follows: In millions of U.S. dollars equivalent June 30, 2004 Principal component of the remainder to be provided for countries that have reached their decision or completion points $ 8,954 Principal component of the estimated amount to be provided for other eligible countries that have not reached their decision points 1,831 Allowance for HIPC Debt Initiative (IDA's Statement of Sources and Application of Development Resources) 10,785 Principal component provided to date for countries that have reached their decision or completion points 913 Provision for principal component of debt relief--Balance at the end of the fiscal year (IDA's Statement of Changes in Accumulated Deficit) $11,698 IDA SPECIAL PURPOSE FINANCIAL STATEMENTS: JUNE 30, 2004 121 Financial Reporting Michael W. Child, Financial Reporting and Analysis, World Bank Philip A. Birkelbach, Financial Reporting and Analysis, World Bank Cover Photo Giacomo Pirozzi, Panos Cover Design Patricia Hord Graphik Design Printing Jarboe Printing THE WORLD BANK 1818 H Street, NW Washington, DC 20433 USA Telephone: 202 473 1000 Facsimile: 202 477 6391 Internet: www.worldbank.org E-mail: feedback@worldbank.org ISBN 0-8213-5971-1