JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Special Purpose Cash Basis Financial Statements and Independent Auditor's Report 31 December 2017 Contents INDEPENDENT AUDITOR'S REPORT SPECIAL PURPOSE CASH BASIS FINANCIAL STATEMENTS Special Purpose Cash Basis Statement of Project Sources and Uses of Funds............................................ Special Purpose Cash Basis Statement of Uses of Funds by Project Activity................................................2 Special Purpose Cash Basis Statement of Designated Account...........................................................................3 Special Purpose Cash Basis Statement of Financial Position...............................................................................4 Notes to the Special Purpose Cash Basis Financial Statements: 1. Background ..................................................................................................................................................S5 2. Basis of preparation ....................................................................................................................................5 3. Significant accounting policies..................................................................................................................... 6 4. Reconciliation between withdrawal applications and disbursed amounts ..................................................7 -L pwc Independent Auditor's Report To the Management of Biological Farming Association Elkana - Implementation Entity Our opinion In our opinion, the Special Purpose Cash Basis Project Financial Statements of the Japan Social Development Fund Grant ("JSDF Grant") for the Empowering Poor Communities and Micro- Entrepreneurs in the Georgia Tourism Sector Project - Grant NTFo18661 (the "financial statements") for the year ended 31 December 2017 are prepared, in all material respects, in accordance with the International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accounting". What we have audited The financial statements comprise: * Special Purpose Cash Basis Statement of Project Sources and Uses of Funds; * Special Purpose Cash Basis Statement of Uses of Funds by Project Activity; * Special Purpose Cash Basis Statement of Designated Account; * Special Purpose Cash Basis Statement of Financial Position; * the notes to the Special Purpose Cash Basis Financial Statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Implementation Entity in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation of these Special Purpose Cash Basis Project Financial Statements in accordance with International Public Sector Accounting Standard "Financial Reporting under the Cash Basis of Accounting" promulgated by the International Federation of Accountants and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. In preparing these Special Purpose Cash Basis Project Financial Statements, management is responsible for assessing the Implementation Entity's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Implementation Entity or to cease operations, or has no realistic alternative but to do so. PricewaterhouseCoopers Georgia LLC; Address: #12 Aleksidze Street, Business Center King David, Tbilisi oz6o, Georgia, T: +99532 250 80So0, F; +99532250 8o 60, www.pwc.con/ge pwc Those charged with governance are responsible for overseeing the Implementation Entity's financial reporting process. Auditor's responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Implementation Entity's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of managements use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Implementation Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Implementation Entity to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of these financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. For and on behalf ofPricewaterhouseCoopers Georgia LLC (Reg.# SARAS-F-775813) Lasha Jane ( -A-562091) 29 June oi8 TbP2isi,Ge Page 2Of 2 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Special Purpose Cash Basis Statement of Project Sources and Uses of Funds (Amounts are expressed in US Dollars) ACTUAL PLANNED VARIANCE 2017 Cumulative 2017 Cumulative 2017 Cumulative Cash and cash equivalents at the beginning of the year 324,255 - Sources of funds: IBRD Funds 1,150,000 1,973,743 1,700,476 2,200,705 550,476 226,962 Total funds 1,474,255 1,973,743 1,700,476 2,200,705 550,476 226,962 Currency translation difference (193) (26) Uses of funds: Goods and non-consulting services (1,050) (7,654) (1,200) (7,804) 150 150 Consultants' services (139,122) (402,163) (144,640) (414,913) 5,518 12,750 Training (84,263) (106,441) (194,196) (209,788) 109,933 103,348 Operating costs (24,676) (59,688) (60,440) (95,382) 35,764 35,693 Goods works, and services for Sub-projects under Parts 3 and 4 of the Project (998,595) (1,171,414) (1,300,000) (1,472,819) 301,405 301,405 Total project expenditures (1,247,706) (1,747,361) (1,700,476) (2,200,705) 452,770 453,345 Designated account - (cash and cash equivalents at the end of the year) 226,356 226,356 Approved for issue and signed by the management of Biological Farming Association - Elkana implementation entity on 29 June 2018: Mikheil Pakatsoshvili Koka Dolidze Project Manager Project Finance Manager The accompanying notes on pages 5 to 7 are an integral part of these special purpose cash basis financial statements. JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Special Purpose Cash Basis Statement of Uses of Funds by Project Activity (Amounts are expressed in US Dollars) Actual Planned Variance 2017 Cumulative 2017 Cumulative 2017 Cumulative Component I. Market, MSMEs and Gender Assessment 504 54,026 - 53,321 504 704 Component II. Technical Assistance and Capacity Building 85,333 123,738 106,696 145,540 (21,363) (21,801) Component III. Access to Finance (Matching Grants) 762,373 929,486 841,900 1,007,214 (79,527) (77,729) Component IV: Grant Facility for Community Sites Improvement 286,216 354,588 606,800 671,244 (320,584) (316,656) Component V: Impact Evaluation and Project Management 113,280 285,524 145,080 323,386 (31,800) (37,862) Total project expenditures 1,247,706 1,747,361 1,700,476 2,200,705 (452,770) (453,345) The accompanying notes on pages 5 to 7 are an integral part of these special purpose cash basis financial statements. 2 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Special Purpose Cash Basis Statement of Designated Account (Amounts are expressed in US Dollars) For the period from For the year ended I January to Related Grant: No. TF018661 31 December 2017 31 December 2016 Designated account number GE84TB7392636080100001 Bank: JSC TBC Bank Location: Chavchavadze ave.11, Tbilisi, Georgia US Dollars - Opening balance 324,255 113,389 Add: IBRD advancefreplenishment 1,150,000 573,743 Deduct: Amount of eligible project expenditures paid (1,247,706) (363,007) - Currency translation difference (193) 150 Transit account (2) (51) Balance as at 31 December 226,354 324,204 The accompanying notes on pages 5 to 7 are an Integral part of these special purpose cash basis financial statements. 3 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs In the Georgia Tourism Sector Project - Grant No. TF018661 Special Purpose Cash Basis Statement of Financial Position (Amounts are expressed in US Dollars) 31 December 2017 31 December 2016 ASSETS Cash and cash equivalents Designated account IBRD grant NW TF01 8661 226,364 324,204 Transit account in JSC TBC Bank 2 51 Total cash and cash equivalents 226,356 324,255 Project expenditures 1,747,361 499,654 TOTAL ASSETS 1,973,717 823,00 FUNDS IBRD fund 1,973,743 823,743 Currency translation difference (26) 166 TOTAL FUNDS 1,973,717 823,0 The accompanying notes on pages 5 to 7 are an integral part of these special purpose cash basis financial statements. 4 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs In the Georgia Tourism Sector Project - Grant No. TF01 8661 Notes to the Special Purpose Cash Basis Financial Statements (Amounts are expressed in US Dollars) 1. Background The project - Empowering Poor Communities and Micro-entrepreneurs in the Georgia Tourism Sector - is financed by the Japan Social Development Fund through the International Bank of Reconstruction and Development ('IBRD") according to the grant agreement N. TF018661 signed on 15 January 2015 with an effective date on 19 February 2015. This is a three year project implemented by the Biological Farming Association Elkana. On 12 February 2018 World Bank approved changes to the provision of grant agreement and prolonged the project completion date with 6 month period ending on 19 August 2018. The Biological Farming Association Elkana is the implementation entity, a Georgian non-governmental organization, was founded in 1994. The entity is a union of farmers aimed at improvement of the socio- economic conditions of the Georgian population and environmental protection through the fostering the development of sustainable organic farming and increasing self-reliance of the rural population. The overall objective of the project is to generate employment and increase household income of poor and vulnerable communities in the Kakheti and Imereti regions of Georgia, where there are ongoing World Bank- financed regional development projects to support tourism development and urban regeneration. The funding will support communities to (i) start/grow small and micro enterprises in the tourism and organic food processing sectors and (ii) implement small community works in vicinity of cultural heritage sites. The grant agreement specifies provision in regard to eligible expenditures which could be withdrawn by recipient and specifies the categories that may be financed out of the proceeds of the grant. The below table summarises the allocations of the amounts of the grant to each category: Amount of the grant allocated Percentage of expenditures to Category (expressed In US Dollars) be financed (inclusive of taxes) Goods and non-consulting services 7,700 100% Consultants' services 496,830 100% Training 262,950 100% Operating costs 132,520 100% Goods works, and services for Sub-projects 1,600,000 100% under Parts 3 and 4 of the Project Total amount 2,500,000 On 12 February 2018 World Bank approved changes to the provision of grant agreement, according to which allocations of the amounts of the grant to each category has been amended. Below table summarises amended amounts: Amount of the grant allocated Percentage of expenditures to Category (expressed In US Dollars) be financed (inclusive of taxes) Goods and non-consulting services 7,700 100% Consultants' services 500,000 100% Training 159,780 100% Operating costs 132,520 100% Goods works, and services for Sub-projects 1,700,000 100% under Parts 3 and 4 of the Project Total amount 2,500,000 2. Basis of preparation These special purpose cash basis financial statements (the "financial statements") have been prepared in accordance with International Public Sector Accounting Standard ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" promulgated by the International Federation of Accountants. 5 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Notes to the Special Purpose Cash Basis Financial Statements (Amounts are expressed in US Dollars) 3. Significant accounting policies Cash basis of accounting. The cash basis of accounting recognizes transactions and events only when cash (including cash equivalents) is received or paid by the entity. Financial statements prepared under the cash basis provide information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date. Reporting currency and translation methodology. The reporting currency of the Project financial statements is US Dollars ("USD") and the majority of the Project financing was made in USD on a designated account. The Project also has transit account in Georgian Lari ("GEL), which is used for the expenses in local currency. The project designated and transit accounts are opened in TBC Bank, local commercial bank in Georgia. The assets and expenditures paid in GEL were translated into USD using the following principles of translation: * Monetary assets denominated in GEL have been translated into USD using TBC Bank commercial exchange rate prevailing at the balance sheet date. . Income and expenditures earned/incurred in GEL have been translated into USD using TBC Bank commercial exchange rate at the transaction date Gains/losses resulting from the translation of movements in the project designated and transit accounts are recorded as a currency translation difference in the Special Purpose Cash Basis Statement of Project Sources and Uses of Funds. Taxes. The project related taxes and mandatory payments are calculated and paid in accordance with the tax regulations of the Georgia. 7 6 JSDF Grant for the Empowering Poor Communities and Micro-Entrepreneurs in the Georgia Tourism Sector Project - Grant No. TF018661 Notes to the Special Purpose Cash Basis Financial Statements (Amounts are expressed in US Dollars) 4. Reconciliation between withdrawal applications and disbursed amounts Withdrawal Withdrawal G,Non- G,W,serv.for Withdrawal application Disbursed application Summary of expenditures consulting Consulting Training Operating SPs Parts 3, 4 application submission amount by No. submitted (SOEs) services (1) (2) (3) Costs (4) (5) amount date IBRD N2 6 204,217 - 47,842 8,126 9,869 138,380 210,000 14-Feb-17 210,000 N2 7 190,638 574 34,840 32,232 9,048 113,944 190,000 28-May-17 190,000 Ne 8 267,477 477 22,606 8,878 2,622 232,894 250,000 2-Aug-17 250,000 N2 9 280,364 - 18,502 13,651 3,308 244,903 230,000 06-Sep-17 230,000 N2 10 259,315 - 25,703 10,804 2,747 220,061 270,000 06-Nov-17 270,000 Total 1,202,011 1,050 149,492 73,692 27,596 950,181 1,150,000 1,150,000 The summary of expenditures of USD 204,217 submitted to World Bank on 14 February 2017 includes 2016 expenditures amounting to USD 67,137. The summary of expenditures of USD 112,832 was submitted to World Bank on 4 February 2018, which includes only 2017 expenditures. 7