Management’s Discussion and Analysis and Condensed Consolidated Financial Statements March 31, 2019 (Unaudited) INTERNATIONAL FINANCE CORPORATION Page 2 Management’s Discussion and Analysis March 31, 2019 CONTENTS Page I Introduction ........................................................................................................................................... 4 II Selected Financial Data and Financial Ratios ........................................................................................ 4 III Overview ............................................................................................................................................... 5 IV Client Services ...................................................................................................................................... 6 V Liquid Assets ......................................................................................................................................... 10 VI Funding Resources ............................................................................................................................... 11 VII Results of Operations ............................................................................................................................ 13 VIII Governance and Control ....................................................................................................................... 20 INTERNATIONAL FINANCE CORPORATION Page 3 Management’s Discussion and Analysis LIST OF TABLES Page Table 1: Reconciliation of reported Net (Loss) Income to Income Available for Designations 6 Table 2: FY19 YTD vs FY18 YTD Long-Term Finance and Core Mobilization 7 Table 3: Funds Managed by AMC and their Activities FY19 YTD vs FY18 YTD 8 Table 4: IFC's Capital 11 Table 5: IFC's Retained Earnings 11 Table 6: Main Elements of Net Income (Loss) and Comprehensive Income (Loss) 13 Table 7a: Change in Net (Loss) Income FY19 YTD vs FY18 YTD 14 Table 7b: Change in Net (Loss) Income FY19 Q3 vs FY18 Q3 15 Table 8: FY19 YTD Change in Income from Loans and Guarantees, including Realized Gains and Losses on Loans and Associated Derivatives 16 Table 9: Net Unrealized Gains and Losses on Non-Trading Financial Instruments FY19 YTD vs FY18 YTD 18 Table 10: Other Comprehensive Income (Loss) - Unrealized Gains and Losses on Equity Investments, Debt Securities and Borrowings FY19 YTD vs FY18 YTD 19 INTERNATIONAL FINANCE CORPORATION Page 4 Management’s Discussion and Analysis I. INTRODUCTION This document should be read in conjunction with the International Finance Corporation’s (IFC or the Corporation) consolidated financial statements and management’s discussion and analysis issued for the year ended June 30, 2018 (FY18). IFC undertakes no obligation to update any forward-looking statements. BASIS OF PREPARATION OF IFC’S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accounting and reporting policies of IFC conform to accounting principles generally accepted in the United States (GAAP). IFC’s accounting policies are discussed in detail in Note A to IFC’s condensed consolidated financial statements as of and for the three and nine months ended March 31, 2019 (FY19 YTD Financial Statements). Management uses income available for designations (Allocable Income) (a non-GAAP measure) as a basis for designations of retained earnings. Allocable Income generally comprises net income excluding net unrealized gains and losses on equity investments and net unrealized gains and losses on non-trading financial instruments accounted for at fair value, income from consolidated entities other than AMC, and expenses reported in net income related to prior year designations. II. SELECTED FINANCIAL DATA AND FINANCIAL RATIOS As of and As of and for the nine As of and for the three for the year months ended months ended ended March 31, March 31, March 31, March 31, June 30, Investment Program (US$ millions) 2019 2018 2019 2018 2018 Long-Term Finance $ 4,348 $ 7,774 $ 1,476 $ 3,087 $ 11,630 Core Mobilization 5,750 7,613 1,811 4,687 11,671 Total commitments (Long-Term Finance and Core Mobilization) $ 10,098 $ 15,387 $ 3,287 $ 7,774 $ 23,301 Condensed Consolidated Statement of Operations (US$ millions) (Loss) income before grants to IDA $ (192) $ 950 $ 655 $ 515 $ 1,360 Grants to IDA — — — — (80) Net (loss) income $ (192) $ 950 $ 655 $ 515 $ 1,280 Income available for designations (a non- GAAP measure) $ 709 $ 892 as of as of as of March 31, March 31, June 30, 1 Key Financial Ratios 2019 2018 2018 Deployable strategic capital (DSC) as a percentage of Total Resources Available (TRA) 12.0% 7.1% 8.7% Cash and liquid investments as a percentage of next three years’ estimated net cash requirements 100% 101% 100% Debt to equity ratio 2.2:1 2.8:1 2.5:1 Return on average assets (GAAP-basis)* (0.4)% 1.3% 1.4% Return on average capital (GAAP-basis)* (1.4)% 4.9% 5.0% * These ratios are not directly comparable with prior periods due to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities on July 1, 2018. IFC’s Capital Adequacy, as measured by DSC was 12.0% at the end of FY19 Q3, higher than the 8.7% level at the end of FY18. Of the 3.3 percentage points (pp) increase in DSC in FY19 Q3, 0.3 pp is due to the one-time accounting change for equities, and 3.0 pp is due to portfolio changes, as well as positive allocable income. IFC’s debt-to-equity ratio was 2.2:1, well within the maximum of 4:1 required by the policy approved by IFC’s Board of Directors and IFC’s overall liquidity as a percentage of the next three years' estimated net cash needs stood at 100%, above the minimum requirement of the Board of 45%. 1 Returns on average assets and capital are annualized. INTERNATIONAL FINANCE CORPORATION Page 5 Management’s Discussion and Analysis III. OVERVIEW IFC is the largest global development institution focused on the private sector in developing countries. Established in 1956, IFC is owned by 1852 member countries, a group that collectively determines its policies. IFC is a member of the World Bank Group (WBG)3 but is a legal entity separate and distinct from IBRD, IDA, MIGA, and ICSID, with its own Articles of Agreement, share capital, financial structure, management, and staff. Membership in IFC is open only to member countries of IBRD. The mission of the WBG is defined by two goals (the Twin Goals): to end extreme poverty by reducing the percentage of people living on less than $1.90 per day to no more than 3% globally by 2030; and to promote shared prosperity in a sustainable manner by fostering income growth for the bottom 40% of the population of every developing country. IFC helps developing countries achieve sustainable growth by financing private sector investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. IFC’s principal investment products are loans and equity investments, with smaller debt security and guarantee portfolios. IFC also plays an active and direct role in mobilizing additional funding from other investors and lenders through a variety of means. Such means principally comprise: loan participations, parallel loans, sales of loans, the non-IFC portion of structured finance transactions which meet core mobilization criteria, the non-IFC portion of commitments in IFC’s initiatives, and the non-IFC investment portion of commitments in funds managed by IFC’s wholly owned subsidiary, IFC Asset Management Company LLC (AMC), (collectively Core Mobilization). Unlike most other development institutions, IFC does not accept host government guarantees of its exposures. IFC raises virtually all of the funds for its lending activities through the issuance of debt obligations in the international capital markets, while maintaining a small borrowing window with IBRD. Equity investments are funded from capital (or net worth). IFC’s capital base and its assets and liabilities, other than its equity investments, are primarily denominated in US dollars ($ or US$) or swapped into US dollars but it has a growing portion of borrowings denominated in currencies other than USD and which are invested in liquid assets and/or loans in such currencies. Overall, IFC seeks to minimize foreign exchange and interest rate risks arising from its loans and liquid assets by closely matching the currency and rate bases of its assets in various currencies with liabilities having the same characteristics. IFC generally manages non-equity investment related and certain lending related residual currency and interest rate risks by utilizing currency and interest rate swaps and other derivative instruments. Following the Spring Meetings in April 2018, a financing package, comprising: (i) a three-step capital raising process: conversion of a portion of retained earnings into paid-in capital, a Selective Capital Increase (SCI) and a General Capital Increase (GCI) that would provide up to $5.5 billion in additional paid-in capital; (ii) a planned suspension of grants to IDA after the conclusion of the IDA 184 replenishment cycle; and (iii) internal measures for increased efficiency was endorsed by the Board of Governors. The Management’s Discussion and Analysis contains forward looking statements which may be identified by such terms as “anticipates,” “believes,” “expects,” “intends,” “plans” or words of similar meaning. Such statements involve a number of assumptions and estimates that are based on current expectations, which are subject to risks and uncertainties beyond IFC’s control. Consequently, actual future results could differ materially from those currently anticipated. FINANCIAL PERFORMANCE SUMMARY Beginning in FY19, IFC’s net income includes all unrealized gains and losses on investments in equity securities, resulting from adopting ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities (ASU 2016-01), as discussed in more detail in Note A to the FY19 YTD Financial Statements. This has resulted in, and will continue to result in, volatility in net income given the size of IFC’s current equity portfolio, the higher balances of equity investments recorded at fair value through net income, and the volatility inherent in security prices and investment valuations. The overall market environment also has a significant influence on IFC’s financial performance. Emerging equity markets improved in FY19 Q3, reversing a negative trend that began at the start of calendar year 2018; commodity prices, including oil, rose for the quarter; and IFC’s major investment currencies were generally flat against IFC’s reporting currency, the US dollar. IFC experienced a net loss in both FY19 Q1 ($446 million net loss) and FY19 Q2 ($401 million net loss) with a significant improvement in FY19 Q3 ($655 million net income). The primary driver of IFC’s net loss in FY19 YTD, and decline compared to the nine months ended March 31, 2018 (FY18 YTD), was the overall loss on equity investments from lower valuations and lower realized gains on sales. IFC also recorded higher debt security impairment losses due to the significant depreciation of a currency that was deemed other than temporary in FY19 Q1. However, IFC also recorded higher foreign currency transaction gains on non-trading activities related to economic hedges of the exposure to this currency, which substantially offset the impact of the debt security impairment losses. IFC also recorded higher income from liquid asset trading activities, higher loan and debt security income, higher net foreign currency gains on non-trading activities, and lower provisions for losses on loans and guarantees. 2 On April 13, 2019, Tuvalu became the 185th member country of IFC. 3 The other institutions of the World Bank Group are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guaranty Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). 4 A replenishment occurs every three years and involves donors and borrower representatives determining IDA’s strategic directions, financing, and allocation rules. INTERNATIONAL FINANCE CORPORATION Page 6 Management’s Discussion and Analysis IFC reported a net loss of $192 million in FY19 YTD, as compared to income of $950 million in FY18 YTD, a decrease of $1,142 million. IFC’s financial performance is detailed more fully in Section VII - Results of Operations. Income Available for Designations (a non-GAAP measure) was $709 million in FY19 YTD, compared with $892 million in FY18 YTD. Given the adoption of ASU 2016-01, IFC is reviewing the calculation of Income Available for Designations during FY19 Q4. Table 1: Reconciliation of reported Net (Loss) Income to Income Available for Designations (US$ millions) FY19 YTD FY18 YTD Net (loss) income $ (192) $ 950 Adjustments to reconcile Net (Loss) Income to Income Available for Designations Unrealized losses (gains) on investments 837 (196) Unrealized losses on borrowings 32 102 Advisory Services Expenses from prior year designations 30 34 Other 2 2 Income Available for Designations $ 709 $ 892 IV. CLIENT SERVICES BUSINESS OVERVIEW IFC fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments. For all new investments, IFC articulates the expected impact on sustainable development, and, as the projects mature, assesses the quality of the development benefits realized. IFC’s strategic focus areas are aligned to advance the WBG’s global priorities. INVESTMENT SERVICES IFC’s investments are normally made in its developing member countries. The Articles of Agreement mandate that IFC shall invest in productive private enterprise. The requirement for private ownership does not disqualify enterprises that are partly owned by the public sector if such enterprises are organized under local commercial and corporate law, operate free of host government control in a market context and according to profitability criteria, and/or are in the process of being totally or partially privatized. IFC provides a range of financial products and services to its clients to promote sustainable enterprises, encourage entrepreneurship, and mobilize resources that wouldn’t otherwise be available. IFC’s financing products are tailored to meet the needs of each project. Investment services product lines include: loans, equity investments, trade finance, loan participations, structured finance, client risk management services, and blended finance. IFC supervises its projects to monitor project performance and compliance with contractual obligations and with IFC’s internal policies and procedures. INVESTMENT PROGRAM COMMITMENTS In FY19 YTD, the Long-Term Finance program was $4,348 million, as compared to $7,774 million in FY18 YTD and Core Mobilization was $5,750 million, as compared to $7,613 million in FY18 YTD, a total decrease of 34%. In addition, the average outstanding balance of Short-Term Finance was $3,452 million at March 31, 2019, as compared to $3,435 million at June 30, 2018. INTERNATIONAL FINANCE CORPORATION Page 7 Management’s Discussion and Analysis CORE MOBILIZATION Core Mobilization is financing from entities other than IFC that becomes available to clients due to IFC’s direct involvement in raising resources. IFC mobilizes such private sector finance from other entities through a number of means, as outlined in the Table below. Table 2: FY19 YTD vs FY18 YTD Long-Term Finance and Core Mobilization (US$ millions) FY19 YTD FY18 YTD Total Long-Term Finance and Core Mobilization5 $ 10,098 $ 15,387 Long-Term Finance Loans $ 3,748 $ 6,578 Equity investments 375 922 Guarantees 191 208 Client risk management 34 66 Total Long-Term Finance $ 4,348 $ 7,774 Core Mobilization Loan participations, parallel loans, and other mobilization Parallel loans $ 2,519 $ 3,939 Loan participations 1,257 1,090 Managed Co-lending Portfolio Program 302 219 Debt Security Mobilization 86 — Other Mobilization 504 1,223 Total loan participations, parallel loans and other mobilization $ 4,668 $ 6,471 AMC (see definitions in Table 3) GEM Funds $ 89 $ 87 Asia Fund 43 15 Global Infrastructure Fund 33 — FIG Fund 18 — MENA Fund 9 16 WED Fund 9 — Catalyst Funds 3 5 Total AMC-Related $ 204 $ 123 Other: Debt and Asset Recovery Program $ 486 $ 75 Public Private Partnership 351 465 Global Trade Liquidity Program, Critical Commodities Finance Program and Global Warehouse Finance Program 41 479 Total other $ 878 $ 1,019 Total Core Mobilization $ 5,750 $ 7,613 INVESTMENT DISBURSEMENTS IFC disbursed $7,008 million for its own account in FY19 YTD ($7,774 million in FY18 YTD): $5,582 million of loans ($5,318 million in FY18 YTD), $651 million of equity securities ($1,007 million in FY18 YTD), and $775 million of debt securities ($1,449 million in FY18 YTD). INVESTMENT PORTFOLIO The carrying value of IFC’s investment portfolio was $43,641 million at March 31, 2019 ($42,264 million at June 30, 2018), comprising the loan portfolio of $24,165 million ($23,609 million at June 30, 2018), the equity portfolio of $13,425 million ($13,032 million at June 30, 2018), and the debt security portfolio of $6,051 million ($5,623 million at June 30, 2018). The carrying value of IFC’s investment portfolio comprises: (i) the disbursed investment portfolio; (ii) less reserves against losses on loans; (iii) unamortized deferred loan origination fees, net and other; (iv) disbursed amount allocated to a related financial 5 Debt security commitments are included in loans and equity investments based on their predominant characteristics. INTERNATIONAL FINANCE CORPORATION Page 8 Management’s Discussion and Analysis instrument reported separately in other assets or derivative assets; (v) unrealized gains and losses on equity investments held by consolidated variable interest entities; and (vi) unrealized gains and losses on investments. The carrying value of IFC’s investment portfolio at March 31, 2019 includes $1,433 million of cumulative unrealized gains on equity securities as of June 30, 2018 that were previously accounted for at cost less impairment. GUARANTEES AND PARTIAL CREDIT GUARANTEES IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds and/or loans. IFC’s guarantee is available for debt instruments and trade obligations of clients and covers commercial as well as noncommercial risks. IFC will provide local currency guarantees, but when a guarantee is called, the client will generally be obligated to reimburse IFC in US dollar terms. Guarantees of $3,577 million were outstanding (i.e., not called) at March 31, 2019 ($4,096 million at June 30, 2018). AMC AMC, a wholly-owned subsidiary of IFC, invests third-party capital and IFC capital, enabling outside investors to benefit from IFC’s expertise in achieving attractive returns, as well as positive development impact in the countries in which it invests in developing and frontier markets. Investors in funds managed by AMC include sovereign wealth funds, national pension funds, multilateral and bilateral development institutions, national development agencies and international financial institutions (IFIs). AMC helps IFC mobilize additional capital resources for investment in productive private enterprise in developing countries. Cumulatively through March 31, 2019, AMC has raised total funds of $10.1 billion ($10.1 billion at June 30, 2018). The Funds Managed by AMC and their activities as of and for the nine months ended March 31, 2019 and 2018 are summarized below: Table 3: Funds Managed by AMC and their Activities FY19 YTD vs FY18 YTD (US$ millions unless otherwise indicated) For the nine months ended Through March 31, 2019 March 31, 2019 Total funds raised since inception Cumulative Investment From investment commitments Investment From other commitments made by Fund disbursements Total IFC investors ** *** made by Fund Investment Period China-Mexico Fund, LP (China-Mexico Fund) $ 1,200 $ — $ 1,200 $ 320 $ — $ 30 IFC Financial Institutions Growth Fund, LP (FIG Fund) 505 150 355 158 25 6 IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds (Japan Parallel), LP (collectively, GEM Funds) 800 150 650 507 110 63 IFC Middle East and North Africa Fund, LP (MENA Fund) 162 60 102 66 14 7 Women Entrepreneurs Debt Fund, LP (WED Fund) 115 30 85 110 23 24 IFC Emerging Asia Fund, LP (Asia Fund) 693 150 543 145 55 45 Post Investment Period IFC Capitalization (Equity) Fund, L.P. (Equity Capitalization Fund) 1,275 775 500 1,226 — — IFC Capitalization (Subordinated Debt) Fund, L.P. (Sub-Debt Capitalization Fund) 1,725 225 1,500 1,614 — — IFC African, Latin American and Caribbean Fund, LP (ALAC Fund) 1,000 200 800 876 — 2 Africa Capitalization Fund, Ltd. (Africa Capitalization Fund) 182 — 182 130 — — IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, Catalyst Funds) 418 75 343 384 5 47 IFC Global Infrastructure Fund, LP (Global Infrastructure Fund)* 1,430 200 1,230 931 40 55 IFC Russian Bank Capitalization Fund, LP (Russian Bank Cap Fund)**** 550 250 300 82 — — Total $10,055 $ 2,265 $ 7,790 $ 6,549 $ 272 $ 279 * Includes co-investment fund managed by AMC on behalf of Fund LPs. ** Net of commitment cancellations. *** Excludes commitment cancellations from prior periods. **** The Russian Bank Cap Fund has completed the exit from all its investments and was liquidated during FY18. INTERNATIONAL FINANCE CORPORATION Page 9 Management’s Discussion and Analysis For the nine months ended Through March 31, 2018 March 31, 2018 Total funds raised since inception Cumulative Investment From investment commitments Investment From other commitments made by Fund disbursements Total IFC investors ** *** made by Fund Investment Period IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, Catalyst Funds) $ 418 $ 75 $ 343 $ 335 $ 29 $ 32 IFC Global Infrastructure Fund, LP (Global Infrastructure Fund)* 1,430 200 1,230 868 — — China-Mexico Fund, LP (China-Mexico Fund) 1,200 — 1,200 320 — 63 IFC Financial Institutions Growth Fund, LP (FIG Fund) 505 150 355 133 — — IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds (Japan Parallel), LP (collectively, GEM Funds) 800 150 650 315 107 71 IFC Middle East and North Africa Fund, LP (MENA Fund) 162 60 102 52 25 2 Women Entrepreneurs Debt Fund, LP (WED Fund) 115 30 85 89 19 32 IFC Emerging Asia Fund, LP (Asia Fund) 693 150 543 90 20 11 Post Investment Period IFC Capitalization (Equity) Fund, L.P. (Equity Capitalization Fund) 1,275 775 500 1,226 — — IFC Capitalization (Subordinated Debt) Fund, L.P. (Sub-Debt Capitalization Fund) 1,725 225 1,500 1,619 — — IFC African, Latin American and Caribbean Fund, LP (ALAC Fund) 1,000 200 800 901 — 25 Africa Capitalization Fund, Ltd. (Africa Capitalization Fund) 182 — 182 130 — — IFC Russian Bank Capitalization Fund, LP (Russian Bank Cap Fund)**** 550 250 300 82 — — Total $10,055 $ 2,265 $ 7,790 $ 6,160 $ 200 $ 236 * Includes co-investment fund managed by AMC on behalf of Fund LPs. ** Net of commitment cancellations. *** Excludes commitment cancellations from prior periods. **** The Russian Bank Cap Fund has completed the exit from all its investments and was liquidated during FY18. ADVISORY SERVICES It takes more than finance to achieve sustainable development. IFC’s experience shows the powerful role advice can play in unlocking private sector investment, helping businesses to expand and create jobs. IFC’s advisory engagements play an important role in helping to strengthen the WBG’s efforts to end poverty and boost shared prosperity. To help address increasingly complex development challenges, IFC initiated a holistic approach to create markets and mobilize private investment as articulated in IFC’s Creating Markets strategy. Advisory is critical for IFC’s delivery on this new strategy by bringing together the diverse WBG actions needed to create markets and by focusing on building a pipeline of bankable projects, especially in IDA countries and Fragile and Conflict Affected States (FCS). Advisory will also continue to deliver proven solutions that support clients to raise their standards and expand their market access, while working to enable sector reform and develop a level playing field in IFC’s client countries. INVESTMENT PORTFOLIO INITIATIVES MANAGED CO-LENDING PORTFOLIO PROGRAM (MCPP) The MCPP is an investment platform that uses a portfolio approach to mobilize third-party investors alongside IFC for the benefit of IFC's emerging market clients. The MCPP offers an innovative new approach to syndications and represents one of the few active delivery mechanisms for leveraging new pools of private-sector capital for development objectives. INTERNATIONAL FINANCE CORPORATION Page 10 Management’s Discussion and Analysis MCPP creates loan portfolios for investors that mimic segments of IFC's own future portfolio-similar to an index fund. Each MCPP facility is crafted to meet the individual needs of investors and to address the business challenges and regulatory hurdles they face in taking emerging market exposures. As of March 31, 2019, eight global investors have committed over $8.1 billion to MCPP; four investors participate exclusively in infrastructure projects, two exclusively in financial institutions, and two others are cross-sectoral. Investors have also approved funding for 146 projects totaling $5.8 billion across 44 countries as of FY19 Q3. IFC will continue to deploy the remaining funds raised as IFC identifies projects that meet investors’ eligibility criteria. PRIVATE SECTOR WINDOW A $2.5 billion IFC-MIGA Private Sector Window (PSW) has been created in the IDA 18 Replenishment. Its goal is to mobilize private sector investments in IDA-only and IDA-eligible FCS countries. The PSW is deployed through four facilities: the Local Currency Facility, the Risk Mitigation Facility, MIGA Guarantee Facility and the Blended Finance Facility. These facilities have been designed to target critical challenges faced by the private sector in these difficult markets and leverage IFC and MIGA’s business platforms and instruments. As of March 31, 2019, $294 million of instruments under the PSW had been approved, of which $197 million related to IFC. Refer to Note Q to the FY19 YTD Financial Statements for transactions details. V. LIQUID ASSETS All liquid assets are managed according to an investment authority approved by the Board of Directors and liquid asset investment guidelines approved by IFC’s Corporate Risk Committee, a subcommittee of IFC’s Management Team. IFC funds its liquid assets from two sources, borrowings from the market (funded liquidity) and capital (managed net worth). Liquid assets are managed in a number of portfolios related to these sources. IFC generally invests its liquid assets in highly rated fixed and floating rate instruments issued by, or unconditionally guaranteed by, governments, government agencies and instrumentalities, multilateral organizations, and high quality corporate issuers; these include asset-backed securities (ABS) and mortgage-backed securities (MBS), time deposits, and other unconditional obligations of banks and financial institutions. Diversification across multiple dimensions ensures a favorable risk return profile. IFC manages the individual liquid asset portfolios on an aggregate portfolio basis against each portfolios benchmark within specified risk parameters. In implementing these portfolio management strategies, IFC utilizes derivative instruments, principally currency and interest rate swaps and futures and options, and it takes positions in various industry sectors and countries. IFC’s liquid assets are accounted for as trading portfolios. The net asset value of the liquid assets portfolio was $39.4 billion at March 31, 2019 ($38.9 billion at June 30, 2018). The increase in FY19 YTD was primarily due to an increase of $1.4 billion in the Managed Net Worth portfolio that reflects investment of cash from equity sales net of new equity investments plus net income from Investment Operations and liquidity management. Funded Liquidity declined by $1.0 billion due to net debt redemptions and net disbursements to clients. FUNDED LIQUIDITY The primary funding source for liquid assets is borrowings from market sources (Funded Liquidity). Proceeds of borrowings from market sources not immediately disbursed for loans and loan-like debt securities are managed internally against money market benchmarks. A small portion of Funded Liquidity is managed by third parties with the same benchmark as that managed internally. MANAGED NET WORTH The second funding source of liquid assets is that portion of IFC’s net worth not invested in equity and equity-like investments (Managed Net Worth) which is managed against a U.S. Treasury benchmark. A portion of these assets are managed by third parties with the same benchmark as that managed internally. Income from liquid assets trading activities6 was $905 million in FY19 YTD, $644 million from Funded Liquidity and $261 million from Managed Net Worth. 6 Reported gross of borrowing costs and excluding foreign exchange gains and losses on local currency Funded Liquidity which are reported separately from income from liquid assets trading activities in foreign currency gains and losses on non-trading activities and the effects of internal trades related to foregone swapping of market borrowings and Funded Liquidity in certain currencies. INTERNATIONAL FINANCE CORPORATION Page 11 Management’s Discussion and Analysis VI. FUNDING RESOURCES BORROWINGS The major source of IFC’s borrowings is the international capital markets. Under the Articles of Agreement, IFC may borrow in the public markets of a member country only with approvals from that member, together with the member in whose currency the borrowing is denominated. IFC’s new medium and long-term borrowings (after the effect of borrowing-related derivatives) totaled $13.1 billion during FY19 YTD ($14.0 billion in FY18 YTD) reflecting paced implementation of the funding program for FY19 and in consideration of the Corporation's maturing borrowings and net disbursement needs. IFC is increasingly using its borrowings issuances as a tool to promote capital markets development in emerging and frontier markets. Proceeds of these issuances not disbursed into loans have primarily been invested in securities of the related sovereign and sovereign instrumentalities in the currency of the issuances. As a result, borrowings from market sources at March 31, 2019 with no associated interest rate swap or currency swap amounted to 5% of the total borrowings from market sources (5% at June 30, 2018). Market borrowings are generally swapped into floating-rate obligations denominated in US dollars. IFC’s mandate to help develop domestic capital markets can result in raising local currency funds. As of March 31, 2019, $2.6 billion ($2.7 billion as of June 30, 2018) of such non-US$ denominated market borrowings were outstanding, denominated in Botswana pula, Chinese renminbi, Costa Rican colon, Dominican peso, Georgian lari, Indian rupee, Indonesian rupiah, Kazakhstan tenge, Myanmar kyat, Namibian dollar, New Romanian lei, New Serbian dinar, Philippine peso, Rwanda franc, Turkish lira, Ukraine hrivnya and Uzbekistan sum. Proceeds of such borrowings were invested in such local currencies, on-lent to clients, and/or partially swapped into US dollars. IFC has short term discount note programs in US dollar, Chinese renminbi and Turkish lira to provide an additional funding and liquidity management tool for IFC in support of certain of IFC’s trade finance and supply chain initiatives and to expand the availability of short term local currency finance. The discount note programs provide for issuances with maturities ranging from overnight to one year. During FY19 YTD, IFC issued $11.0 billion of discount notes and $2.7 billion were outstanding as of March 31, 2019. CAPITAL AND RETAINED EARNINGS Table 4: IFC's Capital (US$ millions) March 31, 2019 June 30, 2018 Capital Capital stock, authorized $ 2,580 $ 2,580 Capital stock, subscribed and paid-in $ 2,566 $ 2,566 Accumulated other comprehensive (loss) income (870) 264 Retained earnings 25,986 23,306 Total capital $ 27,682 $ 26,136 At March 31, 2019 and June 30, 2018, retained earnings comprised the following: Table 5: IFC's Retained Earnings (US$ millions) March 31, 2019 June 30, 2018 Undesignated retained earnings $ 25,596 $ 23,116 Designated retained earnings: Creating Markets Advisory Window (CMAW) 178 122 Grants to IDA 115 — Advisory services 78 46 IFC SME Ventures for IDA countries 16 17 Performance-based grants 3 5 Total designated retained earnings $ 390 $ 190 Total retained earnings $ 25,986 $ 23,306 INTERNATIONAL FINANCE CORPORATION Page 12 Management’s Discussion and Analysis As discussed in Note A to the accompanying condensed consolidated financial statements, IFC adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, on July 1, 2018, and recorded a transition adjustment, which resulted in an increase of $2,872 million in retained earnings and a decrease of $1,359 million in accumulated other comprehensive income, for a total increase in capital of $1,513 million. DESIGNATIONS OF RETAINED EARNINGS Amounts available to be designated are determined based on a Board of Directors-approved income-based formula and, beginning in FY08, on a principles-based Board of Directors-approved financial distribution policy, and are approved by the Board of Directors. IFC’s Board of Directors approved a change to the sliding-scale formula and the methodology used for calculating the incremental rate of designation, beginning with the designation in respect of FY17. The revised approach establishes a threshold that no designations of any kind can take place if IFC’s DSC ratio is below 2%, and establishes a framework for prioritizing future designations to advisory services and for transfers to IDA based on IFC’s DSC ratio and a cushion for advisory services. IFC has also created a new mechanism that was funded for the first time in FY18, CMAW, to focus on market creation in eligible IDA countries and fragile and conflict situations. The revised approach also establishes a maximum cumulative amount that can be contributed to IDA, during the IDA 18 Replenishment, of $300 million, with no more than $100 million in any given year (plus any shortfall from earlier years). The approach also caps transfers to IDA during a fiscal year at IFC’s Net Income, if any, for the nine months ended March 31 of that fiscal year with actual transfer to occur in June of that fiscal year. Any amounts designated the prior year and not transferred pursuant to this requirement would be deferred to the next fiscal year. Transfers to IDA will also be deferred to the next fiscal year if capital as reported on IFC’s condensed consolidated balance sheet has declined between June 30 of the prior fiscal year and March 31 of that fiscal year. IFC recognizes designations of retained earnings for Advisory Services and CMAW when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. Expenditures for the various approved designations are recorded as expenses in IFC’s condensed consolidated statement of operations in the period in which they occur, and have the effect of reducing retained earnings designated for this specific purpose. On August 9, 2018, the Board of Directors approved a designation of $70 million of IFC’s retained earnings for IFC’s CMAW, $45 million of IFC’s retained earnings for advisory services, and, subject to the conditions detailed above, a designation of up to $115 million of IFC’s retained earnings for grants to IDA. These designations were noted with approval by the Board of Governors on October 12, 2018. The $115 million designation to IDA is to be evaluated in FY19 Q4 against the distribution policy given the adoption of ASU 2016-01 in FY19 Q1 INTERNATIONAL FINANCE CORPORATION Page 13 Management’s Discussion and Analysis VII. RESULTS OF OPERATIONS OVERVIEW The overall market environment has a significant influence on IFC’s financial performance. The main elements of IFC’s net income (loss) and comprehensive income (loss) and influences on the level and variability from year to year are: Table 6: Main Elements of Net Income (Loss) and Comprehensive Income (Loss) ELEMENTS SIGNIFICANT INFLUENCES Net income: Yield on interest earning assets Market conditions including spread levels and degree of competition. Nonaccruals and recoveries of interest on loans formerly in nonaccrual status and income from participation notes on individual loans are also included in income from loans. Liquid asset income Realized and unrealized gains and losses on the liquid asset portfolios, which are driven by external factors such as: the interest rate environment and liquidity of certain asset classes within the liquid asset portfolio. Income from the equity investment Global climate for emerging markets equities, fluctuations in currency and commodity portfolio markets and company-specific performance for equity investments. Overall performance of the equity portfolio. Provisions for losses on loans and Risk assessment of borrowers and probability of default and loss given default. guarantees Other income and expenses Level of advisory services provided by IFC to its clients, the level of expense from the staff retirement and other benefits plans, and the approved and actual administrative expenses and other budgets. Gains and losses on other non-trading Principally, differences between changes in fair values of borrowings, excluding IFC’s financial instruments accounted for at credit spread (beginning in FY19 Q1, changes attributable to IFC’s credit spread are fair value reported in other comprehensive income, prior to FY19 Q1, such changes were reported in net income) and associated derivative instruments and unrealized gains or losses associated with the investment portfolio including puts, warrants and stock options which in part are dependent on the global climate for emerging markets. These securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-observable. Grants to IDA Level of the Board of Governors-approved grants to IDA. Other comprehensive income (loss): Unrealized gains and losses on debt Global climate for emerging markets, fluctuations in currency and commodity markets securities accounted for as available- and company-specific performance and consideration of the extent to which unrealized for-sale losses are considered other than temporary. Debt securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non- observable. Unrealized gains and losses Fluctuations in IFC’s own credit spread measured against US dollar LIBOR resulting attributable to instrument-specific from changes over time in market pricing of credit risk. As credit spreads widen, credit risk on borrowings at fair value unrealized gains are recorded and when credit spreads narrow, unrealized losses are under the fair value option recorded. Unrecognized net actuarial gains and Returns on pension plan assets and the key assumptions that underlay projected losses and unrecognized prior service benefit obligations, including financial market interest rates, staff expenses, past costs on benefit plans experience, and management’s best estimate of future benefit cost changes and economic conditions. INTERNATIONAL FINANCE CORPORATION Page 14 Management’s Discussion and Analysis The following paragraphs detail significant variances between FY19 YTD vs FY18 YTD, covering the periods included in IFC’s FY19 YTD condensed consolidated financial statements. NET INCOME NINE MONTHS ENDED MARCH 31, 2019 IFC reported a loss before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA of $127 million in FY19 YTD, as compared to income of $887 million in FY18 YTD. The $1,014 million decrease in income in FY19 YTD when compared to FY18 YTD was principally a result of the following: Table 7a: Change in Net (Loss) Income FY19 YTD vs FY18 YTD (US$ millions) Increase (decrease) FY19 YTD vs FY18 YTD Higher unrealized losses on equity investments and associated derivatives, net $ (835) Lower realized gains on equity investments and associated derivatives, net (577) Higher charges on borrowings (449) Higher other-than-temporary impairments on debt securities (217) Lower dividend income on equity investments (64) Higher foreign currency transaction gains on non-trading activities 243 Lower other-than-temporary impairments on equity investments 304 Higher income from liquid asset trading activities 311 Higher income from loans and guarantees, realized gains and losses on loans and associated derivatives 352 Other, net (82) Change in (loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA $ (1,014) FY19 YTD FY18 YTD (Loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA $ (127) $ 887 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (65) 63 Net (loss) income $ (192) $ 950 INTERNATIONAL FINANCE CORPORATION Page 15 Management’s Discussion and Analysis THREE MONTHS ENDED MARCH 31, 2019 IFC reported income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA of $590 million in FY19 Q3, as compared to income of $518 million in FY18 Q3. The $72 million increase in income in FY19 Q3 when compared to FY18 Q3 was principally a result of the following: Table 7b: Change in Net Income FY19 Q3 vs FY18 Q3 (US$ millions) Increase (decrease) FY19 Q3 vs FY18 Q3 Higher unrealized gains on equity investments and associated derivatives, net $ 380 Higher income from loans and guarantees, realized gains and losses on loans and associated derivatives 162 Higher income from liquid asset trading activities 116 Lower dividend income on equity investments (25) Higher provisions for losses on loans, guarantees, accrued interest and other receivables (31) Higher charges on borrowings (148) Lower realized gains on equity investments and associated derivatives, net (337) Other, net (45) Change in (loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA $ 72 FY19 Q3 FY18 Q3 (Loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA $ 590 $ 518 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 65 (3) Net (loss) income $ 655 $ 515 A more detailed analysis of the components of IFC’s net income (loss) follows. INCOME FROM LOANS AND GUARANTEES, INCLUDING REALIZED GAINS AND LOSSES ON LOANS AND ASSOCIATED DERIVATIVES IFC’s primary interest earning asset is its loan portfolio. Income from loans and guarantees, including realized gains and losses on loans and associated derivatives for FY19 YTD totaled $1,351 million, compared with $999 million in FY18 YTD, an increase of $352 million. The disbursed loan portfolio increased by $375 million from $25,172 million at June 30, 2018 to $25,547 million at March 31, 2019. The increase in the loan portfolio is primarily due to disbursements net of repayments ($775 million in FY19 YTD), partially offset by reduction in loans outstanding due to currency exchange rate fluctuations ($196 million in FY19 YTD) and write-offs net of recoveries ($191 million in FY19 YTD). IFC’s reporting currency, the US dollar, appreciated against Euro and emerging market investment currencies in FY19 YTD. The remainder of the change is primarily due to loan sales, conversions, and capitalized charges. The weighted average contractual interest rate on loans at March 31, 2019 was 6.4% (6.0% as of June 30, 2018), up from 5.6% at March 31, 2018 reflecting the rise in LIBOR as many of IFC’s loans periodically reprice. INTERNATIONAL FINANCE CORPORATION Page 16 Management’s Discussion and Analysis Table 8: FY19 YTD Change in Income from Loans and Guarantees, including Realized Gains and Losses on Loans and Associated Derivatives (US$ millions) Income from loans and guarantees, including realized gains and losses on loans and associated derivatives in FY18 YTD $ 999 Increase due to increase in interest rates 148 Increase due to higher income from derivatives associated with loans 66 Increase due to higher realized gains on loans and associated derivatives 49 Increase due to higher recognition of deferred interest 47 Increase due to increase in loan portfolio 30 Increase due to lower amount of interest reversed on non-accruing loans, net 21 Decrease due to lower income from participation notes, fees and other income (9) Change in Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 352 Income from loans and guarantees, including realized gains and losses on loans and associated derivatives in FY19 YTD $ 1,351 (LOSS) INCOME FROM EQUITY INVESTMENTS AND ASSOCIATED DERIVATIVES Income from the equity investment portfolio, including associated derivatives, decreased by $1,171 million from $726 million of income in FY18 YTD to losses of $445 million in FY19 YTD. IFC sells equity investments where IFC’s developmental role is complete, where pre-determined sales trigger levels have been met and, where applicable, lock ups have expired. Gains and losses on equity investments and associated derivatives comprise realized and unrealized gains. IFC recognized realized net gains on equity investments and associated derivatives in FY19 YTD of $231 million, as compared with $808 million in FY18 YTD, a decrease of $577 million. Realized gains on equity investments and associated derivatives are concentrated in a small number of investments. In FY19 YTD, there were four investments that generated individual realized capital gains in excess of $20 million for a total of $264 million, compared to fifteen investments that generated individual capital gains in excess of $20 million for a total of $569 million. Dividend income in FY19 YTD totaled $124 million, as compared with $188 million in FY18 YTD. Beginning in FY19, all equity investments are accounted for at fair value through net income due to the adoption of ASU 2016-01 as discussed in Note A to the accompanying condensed consolidated financial statements. As a result, there were no other-than- temporary impairments on equity investments in FY19 YTD, as compared with $304 million in FY18 YTD. Net unrealized losses on equity investments and associated derivatives were $804 million (including reversals of unrealized gains, measured against original disbursement, upon realization) in FY19 YTD compared to net unrealized gains of $31 million in FY18 YTD due to lower valuations coupled with the higher balance of equity investments recorded at fair value through net income due to the adoption of ASU 2016-01. At March 31, 2019, $13,410 million of equity investments were accounted for at fair value with changes in fair value being reported in net income compared to $6,794 million at June 30, 2018. Prior to FY19, the change in fair value of equity investments classified as available-for-sale were recorded in other comprehensive income, and no unrealized gains and losses were recorded on equity investments measured at cost less impairment. ASU 2016-01 was applied through a cumulative adjustment to beginning period balances with no change to prior period reported results. INCOME FROM DEBT SECURITIES AND REALIZED GAINS AND LOSSES ON DEBT SECURITIES AND ASSOCIATED DERIVATIVES Income from debt securities and associated derivatives declined by $216 million from $253 million in FY18 YTD to $37 million in FY19 YTD. The decrease was primarily due to other-than-temporary impairments on debt securities of $247 million in FY19 YTD ($30 million in FY18 YTD), which includes $238 million in FY19 Q1 related to cumulative foreign exchange losses reflecting the significant currency depreciation in a country with a large debt security exposure deemed as other than temporary, and lower realized gains of $3 million (compared to $68 million in FY18 YTD). This was partially offset by an increase in interest income by $63 million in FY19 YTD when compared with FY18 YTD driven by higher average debt security balances. PROVISION FOR LOSSES ON LOANS, GUARANTEES, ACCRUED INTEREST AND OTHER RECEIVABLES Non performing loans (NPLs) decreased by $123 million, from $1,400 million of the disbursed loan portfolio at June 30, 2018 to $1,277 million7 at March 31, 2019. The decrease of $123 million was due to write-offs ($221 million), positive developments such as repayments and prepayments ($195 million) and other changes ($45 million), partially offset by increase in NPL balances due to $338 million of loans and loan-like debt securities being placed in NPL status. In FY19 YTD, eight loans greater than $10 million, totaling $293 million, were placed in NPL status. 7 Includes $48 million reported as debt securities on the Balance Sheet as of March 31, 2019 ($23 million - June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 17 Management’s Discussion and Analysis IFC recorded a net provision for losses on loans, guarantees, accrued interest and other receivables of $72 million in FY19 YTD ($62 million specific provisions on loans, $6 million release of portfolio provisions on loans, $16 million net provision on guarantees, other receivables and accrued interest) as compared to a provision of $82 million in FY18 YTD ($97 million specific provisions on loans; $26 million release of portfolio provisions on loans; and net $11 million provision on guarantees, other receivables and accrued interest). Project-specific developments on ten loans comprised 71% of the specific provision for losses on loans in FY19 YTD (excluding release of provisions). At March 31, 2019, IFC’s total reserves against losses on loans were $1,167 million or 4.8% of the carrying value of loans at amortized cost ($1,293 million or 5.4% at June 30, 2018), a decrease of $126 million from June 30, 2018. The decrease in reserves against losses on loans was due to write-offs net of recoveries of $185 million and foreign exchange gains of $7 million related to reserves held against non-US dollar-denominated loans, was partially offset by provisions of $56 million and other adjustments of $10 million. Specific reserves against losses on loans at March 31, 2019 of $535 million ($651 million at June 30, 2018) are held against impaired loans of $1,160 million ($1,258 million at June 30, 2018), a coverage ratio of 46% (52% at June 30, 2018). INCOME FROM LIQUID ASSET TRADING ACTIVITIES The liquid asset portfolio, net of derivatives and securities lending activities, increased by $0.5 billion from $38.9 billion at June 30, 2018, to $39.4 billion at March 31, 2019. Income, net of allocated funding costs, from liquid asset trading activities totaled $304 million in FY19 YTD compared to $187 million in FY18 YTD, an increase of $117 million. Interest income in FY19 YTD totaled $569 million, compared to $472 million in FY18 YTD. The portfolio of ABS and MBS experienced fair value losses totaling $27 million in FY19 YTD. Holdings in other products, including US Treasuries, global government bonds, high quality corporate bonds and derivatives generated $363 million of gains in FY19 YTD, resulting in a total gain of $336 million (realized and unrealized). This compares to a total gain (realized and unrealized) of $122 million in FY18 YTD. In FY19 YTD, the liquid assets portfolios outperformed their benchmarks by $121 million, down from $233 million in FY18 YTD. The decline was largely attributable to securitized products, which outperformed significantly in FY18 YTD. In FY19 Q3, performance over benchmarks was primarily generated by investments in international securitized products, government-related securities and money markets. For FY19 YTD, most fixed-income sectors outperformed the funded liquidity benchmarks, while heightened volatility in interest-rates weighed on excess returns for Agency MBS. Much of the excess return was attributable to investments in instruments (bonds and money markets) denominated in foreign-currencies that benefited from deviations from interest-rate parity. During FY19 YTD, decreases in investments in securitized products and covered bonds were partially offset by investments in developed markets’ government-related securities, emerging market sovereign bonds and money markets. Liquid asset holdings remain well diversified geographically and are concentrated in money-market instruments. At March 31, 2019, trading securities with a fair value of $17 million are classified as Level 3 securities (unobservable inputs for the securities used to measure fair value), which is 0.1% of total trading securities at fair value ($18 million - June 30, 2018). CHARGES ON BORROWINGS IFC’s charges on borrowings increased by $449 million, from $718 million in FY18 YTD (net of $2 million gain on extinguishment of borrowings) to $1,167 million in FY19 YTD (net of $1 million gain on extinguishment of borrowings), largely attributable to higher LIBOR rates compared to the same period in the previous fiscal year. OTHER INCOME Other income of $424 million for FY19 YTD was $24 million higher than $400 million in FY18 YTD due to an increase in income from advisory services and service fees, primarily mobilization and evaluation service fees, partially offset by lower returns on the pension assets which are partly invested in global equities and reflected the less favorable market for equity investments in FY19 YTD as compared to the same period in FY18 YTD. OTHER EXPENSES Administrative expenses (the principal component of other expenses) increased by $283 million from $755 million in FY18 YTD to $1,038 million in FY19 YTD primarily due to $178 million of pension service costs included in administrative expenses due to the prospective adoption of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, beginning in FY19 Q1, as disclosed in Note A to the accompanying condensed consolidated financial statements. The remainder of the increase was principally due to an increase in staff costs, in large part due to the separation of staff in FY19 Q3 under a work force planning initiative, the cost of shared services agreements with IBRD and consultant and contractual services. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC’s reimbursable program and expenses incurred in relation to workout situations of $18 million in FY19 YTD ($17 million in FY18 YTD). Advisory services expenses increased by $17 million from $232 million in FY18 YTD to $249 million in FY19 YTD due to an increase in clients’ fees and donor funds utilized in providing advisory services. INTERNATIONAL FINANCE CORPORATION Page 18 Management’s Discussion and Analysis FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES ON NON-TRADING ACTIVITIES Foreign currency transaction gains reported in net income in FY19 YTD totaled $154 million (losses of $89 million - FY18 YTD). Foreign currency transaction losses on debt securities accounted for as available-for-sale of $144 million in FY19 YTD (gains of $103 million - FY18 YTD) are reported in Other Comprehensive Income, while gains and losses on the derivatives economically hedging such debt securities are reported in Net Income. IFC has recorded foreign exchange related gains of $10 million ($14 million gains - FY18 YTD) in a combination of Net Income and Other Comprehensive Income. The net foreign exchange related gain or loss is largely due to a small population of unhedged non-US dollar-denominated loans and debt securities. NET UNREALIZED GAINS AND LOSSES ON NON-TRADING FINANCIAL INSTRUMENTS IFC accounts for certain financial instruments at fair value with unrealized gains and losses on such financial instruments being reported in net income, namely: (i) all market borrowings that are economically hedged with financial instruments that are accounted for at fair value with changes therein reported in net income; (ii) unrealized gains and losses on certain loans, debt securities and associated derivatives; and (iii) borrowings from IDA. Table 9: Net Unrealized Gains and Losses on Non-Trading Financial Instruments FY19 YTD vs FY18 YTD (US$ millions) FY19 YTD FY18 YTD Unrealized gains and losses on loans, debt securities and associated derivatives $ (33) $ 165 Unrealized gains and losses on borrowings from market, IDA and associated derivatives, net (32) (102) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value $ (65) $ 63 IFC reported net unrealized losses on loans, debt securities and associated derivatives of $33 million in FY19 YTD ($165 million gains in FY18 YTD). In FY19 YTD, this comprised unrealized gains of $73 million on the loan and debt securities portfolio carried at fair value, unrealized losses of $70 million on lending-related swaps, unrealized losses of $29 million on client risk management swaps and unrealized losses of $7 million on other derivatives, mainly conversion features, warrants in investment contracts and interest rate and currency swaps economically hedging client obligations. The unrealized losses of $70 million on lending-related swaps is driven mainly by the US dollar, Indian rupee and Chinese yuan swap portfolios, where lower discount rates over FY19 YTD increased the valuation of swap payables. Changes in the fair value of IFC’s borrowings from market, IDA and associated derivatives, net, includes the impact of changes in IFC’s own credit spread when measured against US dollar LIBOR. As credit spreads widen, unrealized gains are recorded and when credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but does not alter the cash flows. IFC’s policy is to generally match currency, amount and timing of cash flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. Beginning in FY19, the portion of the total change in fair value of borrowings, accounted for at fair value, resulting from a change in IFC’s own credit spread is reported as a separate component of Other Comprehensive Income due to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, as discussed in Note A to the accompanying condensed consolidated financial statements. ASU 2016-01 was applied through a cumulative adjustment to beginning period balances with no change to prior period reported results. In FY19 Q3, US Treasury yields declined further as the rally in US fixed income markets that began last October continued apace as the US Federal Reserve signaled a shift from monetary tightening to the prevailing neutral policy. The yield on the benchmark 5-year U.S. Treasury bond stood at 2.3 percent at end-March, compared to 2.5 percent at end-December and around 2.7 percent at the beginning of the fiscal year. In FY19 YTD, IFC recorded unrealized losses of $604 million through net income on medium and long-term borrowings carried at fair value, comprising $586 million loss on market borrowings and a $18 million loss on IDA borrowings. A gain of $572 million was recorded on borrowing-related derivatives. The unrealized losses in FY19 YTD include $66 million of unrealized losses on IFC’s Indian rupee denominated borrowings where IFC holds Indian rupee liquid assets and loans that act as an economic hedge. These unrealized losses were offset by unrealized gains on borrowings in other currencies which are economically hedged with currency swaps, but where swap FX basis spread movements drive such unrealized gains and losses. Overall, IFC has reported $32 million of net unrealized losses on borrowings from market sources and associated derivatives, net and borrowings from IDA in FY19 YTD (net unrealized losses $102 million in FY18 YTD). INTERNATIONAL FINANCE CORPORATION Page 19 Management’s Discussion and Analysis OTHER COMPREHENSIVE INCOME (OCI) UNREALIZED GAINS AND LOSSES ON EQUITY INVESTMENTS AND DEBT SECURITIES Through June 30, 2018, IFC’s investments in debt securities and equity investments that were listed in markets that provide readily determinable fair values were classified as available-for-sale, with unrealized gains and losses on these investments being reported in OCI until realized. When realized, the gain or loss was transferred to net income. Effective July 1, 2018, all equity investments are accounted for at fair value through net income upon adoption of ASU 2016-01, and IFC is electing the fair value option for all new debt securities. As a result, no unrealized gains and losses on equity investments are recorded in OCI in FY19 YTD, and unrealized gains and losses on debt securities in OCI are associated with debt securities invested prior to July 1, 2018 with readily determinable fair values. Changes in unrealized gains and losses on debt securities reported in OCI are significantly impacted by (i) the global environment for emerging markets; and (ii) the realization of gains on sales of such debt securities. As discussed in Note A to the accompanying condensed consolidated financial statements, effective July 1, 2018, the portion of the change in fair value of borrowings under the FVO resulting from the change of IFC’s own credit risk is recorded in OCI. In prior periods, these amounts were recognized in net income. Table 10: Other Comprehensive Income (Loss) - Unrealized Gains and Losses on Equity Investments, Debt Securities and Borrowings FY19 YTD vs FY18 YTD (US$ millions) FY19 YTD FY18 YTD Net unrealized gains and losses on equity investments arising during the period: Unrealized gains $ — $ 945 Unrealized losses — (275) Reclassification adjustment for realized gains and other-than-temporary impairments included in net income — (446) Net unrealized gains on equity investments $ — $ 224 Net unrealized gains and losses on debt securities arising during the period: Unrealized gains $ 323 $ 338 Unrealized losses (473) (263) Reclassification adjustment for realized gains, non-credit related portion of impairments which were recognized in net income and other-than-temporary impairments included in net income 244 6 Net unrealized gains on debt securities $ 94 $ 81 Net unrealized gains and losses attributable to instrument-specific credit risk on borrowings at fair value under the fair value option arising during the period: Unrealized gains $ 367 $ — Unrealized losses (262) — Reclassification adjustment for realized gains included in net income upon derecognition of borrowings 1 — Net unrealized gains on borrowings $ 106 $ — Total unrealized gains on equity investments, debt securities and borrowings $ 200 $ 305 In FY19 YTD, other-than-temporary impairments on debt securities of $247 million ($30 million in FY18 YTD) includes $238 million from a cumulative foreign exchange loss reclassified to Net Income in FY19 Q1, reflecting the significant currency depreciation in a country considered other than temporary with a large debt security exposure. Net unrealized gains on equity investments, debt securities and borrowings were $200 million in FY19 YTD, ($305 million in FY18 YTD). A gain of $106 million was recognized through other comprehensive income in FY19 YTD due to movements in the instrument specific credit risk on borrowings at fair value. This was primarily due to IFC bond issuances in US dollars where after swap credit spreads increased from between 3 to 5 basis points at most tenors from the end of FY18, and from issuances in Australian dollars and Turkish lira where credit spreads on IFC bonds were also higher over the YTD. INTERNATIONAL FINANCE CORPORATION Page 20 Management’s Discussion and Analysis VIII. GOVERNANCE AND CONTROL SENIOR MANAGEMENT CHANGES The following is a list of the principal officers of IFC as of March 31, 2019: President Dr. Jim Yong Kim (*) Chief Executive Officer Philippe Le Houérou Chief Operating Officer Stephanie von Friedeburg Regional Vice President, Latin America & Caribbean and Europe & Central Asia Georgina Baker Regional Vice President, Middle-East and Africa Sérgio Pimenta Regional Vice President, South Asia and East Asia & Pacific Nena Stoiljkovic Vice President and General Counsel, Legal, Compliance Risk, and ESG Sustainability Ethiopis Tafara Vice President, Risk and Finance Mohamed Gouled Vice President, Corporate Strategy and Resources Monish Mahurkar Vice President, Treasury and Syndications John Gandolfo (**) Vice President, Economics and Private Sector Development Hans Peter Lankes Vice President, CEO, IFC Asset Management Company LLC (a wholly-owned subsidiary of IFC) Marcos Brujis Vice President, Partnerships, Communications and Outreach Karin Finkelston (*) On January 7, 2019, Dr. Jim Yong Kim announced that he will be leaving the World Bank Group effective February 1, 2019. Kristalina Georgieva, World Bank CEO, assumed the role of interim President. Effective April 9, 2019, David Malpass became the President of the World Bank Group. (**) On October 26, 2018, IFC announced that Jingdong Hua would be leaving IFC and has been appointed Vice President and Treasurer of the World Bank8 effective January 1, 2019. Sabrina Borlini assumed the role of acting Vice President, Treasury and Syndications in the interim period on January 1, 2019. John Gandolfo was appointed the Vice President, Treasury and Syndications, effective February 16, 2019. AUDITOR INDEPENDENCE The external auditor is appointed to a five-year term, with a limit of two consecutive terms, and is subject to annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by the Board. On November 28, 2017, following a mandatory rebidding of the external audit contract, IFC’s Directors approved the appointment of Deloitte as IFC’s external auditor for a five-year term commencing FY19. The appointment of the external auditor for IFC is governed by a set of Board-approved principles that previously included prohibiting the external auditor from providing any non-audit-related services. During FY17, the Board approved amendments to the policy on the appointment of an external auditor which went into effect for the FY19 audit period. The primary amendments now permit the external auditor to provide non-prohibited non-audit related services subject to monetary limits. Broadly, the list of prohibited non-audit services include those that would put the external auditor in the roles typically performed by management or in a position of auditing their own work, such as accounting services, internal audit services, and provision of investment advice. The total non-audit services fees over the term of the relevant external audit contract shall not exceed 70 percent of the audit fees over the same period. OTHER During FY19 Q3, the Supreme Court of the United States decided on a narrow question of US law, which was whether international organizations such as IFC have the same type of immunity from suit as Foreign States under certain US laws. This means that under those specific laws the immunity from suit of certain international organizations such as IFC has certain exceptions. The United States Supreme Court decision did not affect IFC’s other immunities under US law, nor did it cover other sources of IFC’s immunities under international law such as the IFC Charter and the UN Convention on the Privileges and Immunities of the Specialized Agencies. There are currently two court cases in the United States that are impacted by United States Supreme Court decision. Such cases have now restarted in United States lower courts, and IFC will continue to present several defenses in both cases. See also Note S to the FY19 YTD Financial Statements. 8 The World Bank consists of IBRD and IDA. INTERNATIONAL FINANCE CORPORATION Page 21 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2019 CONTENTS Page Condensed Consolidated Balance Sheets ...................................................................................................................... 22 Condensed Consolidated Statements of Operations ...................................................................................................... 23 Condensed Consolidated Statements of Comprehensive Income (Loss) ........................................................................ 24 Condensed Consolidated Statements of Changes in Capital .......................................................................................... 25 Condensed Consolidated Statements of Cash Flows ..................................................................................................... 26 Notes to Condensed Consolidated Financial Statements ............................................................................................... 28 Independent Auditors’ Review Report ............................................................................................................................. 85 INTERNATIONAL FINANCE CORPORATION Page 22 CONDENSED CONSOLIDATED BALANCE SHEETS as of March 31, 2019 (unaudited) and June 30, 2018 (unaudited) (US$ millions) March 31 June 30 Assets Cash and due from banks .......................................................................................................... $ 1,260 $ 1,249 Time deposits ............................................................................................................................. 17,953 13,156 Trading securities - Note K ......................................................................................................... 27,014 28,909 Securities purchased under resale agreements and receivable for cash collateral pledged ...................................................................................................... 2,124 1,989 Investments - Notes B, D, E, F, G, K and M Loans $1,024 at March 31, 2019, $927 at June 30, 2018 at fair value; net of reserve against losses of $1,167 at March 31, 2019, $1,293 at June 30, 2018) - Notes D, E, K and M ........................................................................................................... 24,165 23,609 Equity investments ($13,425 at March 31, 2019, $10,322 at June 30, 2018 at fair value) - Notes B, D, G, K and M ................................................................................................................................... 13,425 13,032 Debt securities - Notes D, F, K and M ........................................................................................ 6,051 5,623 Total investments ................................................................................................................. 43,641 42,264 Derivative assets - Notes J, K and P ........................................................................................... 2,697 2,809 Receivables and other assets ..................................................................................................... 3,848 3,896 Total assets ............................................................................................................................ $ 98,537 $ 94,272 Liabilities and capital Liabilities Securities sold under repurchase agreements and payable for cash collateral received - Note P .................................................................................... $ 8,127 $ 6,364 Borrowings outstanding - Note K From market and other sources at amortized cost .............................................................. 3,502 2,874 From market sources at fair value ....................................................................................... 49,286 49,414 From International Development Association at fair value ................................................... 704 807 Total borrowings ............................................................................................................... 53,492 53,095 Derivative liabilities - Notes J, K and P ..................................................................................... 4,196 4,289 Payables and other liabilities ................................................................................................... 5,040 4,388 Total liabilities ................................................................................................................... 70,855 68,136 Capital Capital stock, authorized (2,580,000 at March 31, 2019 and June 30, 2018) shares of $1,000 par value each Subscribed and paid-in ....................................................................................................... 2,566 2,566 Accumulated other comprehensive (loss) income - Note H ...................................................... (870) 264 Retained earnings - Note H ..................................................................................................... 25,986 23,306 Total capital ......................................................................................................................... 27,682 26,136 Total liabilities and capital ..................................................................................................... $ 98,537 $ 94,272 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 23 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for each of the three and nine months ended March 31, 2019 (unaudited) and March 31, 2018 (unaudited) (US$ millions) Three months Nine months ended ended March 31, March 31, 2019 2018 2019 2018 Income from investments Income from loans and guarantees, including realized gains and losses on loans and associated derivatives - Note E ................................................. $ 503 $ 341 $ 1,351 $ 999 (Provision) release of provision for losses on loans, guarantees, accrued interest and other receivables - Note E ...................................................... (21) 10 (72) (82) (Loss) income from equity investments and associated derivatives - Note G. 388 284 (445) 726 Income from debt securities, including realized gains and losses on debt securities and associated derivatives - Note F ........................................... 93 151 37 253 Total income from investments .............................................................. 963 786 871 1,896 Income from liquid asset trading activities - Note C ....................................... 343 227 905 594 Charges on borrowings ................................................................................. (413) (265) (1,167) (718) Income from investments and liquid asset trading activities, after charges on borrowings ............................................................................... 893 748 609 1,772 Other income Advisory services income .............................................................................. 81 73 225 206 Service fees ................................................................................................... 21 36 71 62 Other - Note B ............................................................................................... 60 34 128 132 Total other income ................................................................................... 162 143 424 400 Other expenses Administrative expenses - Note O ................................................................. (377) (236) (1,038) (755) Advisory services expenses .......................................................................... (86) (85) (249) (232) Pension and other postretirement benefit plans - Note O .............................. (2) (61) (5) (183) Other - Note B ............................................................................................... (7) (8) (22) (26) Total other expenses ............................................................................... (472) (390) (1,314) (1,196) Foreign currency transaction gains (losses) on non-trading activities ............ 7 17 154 (89) (Loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA ....... 590 518 (127) 887 Net unrealized (losses) gains on non-trading financial instruments accounted for at fair value - Note I ........................................................... 65 (3) (65) 63 Net (loss) income ......................................................................................... $ 655 $ 515 $ (192) $ 950 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 24 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) for each of the three and nine months ended March 31, 2019 (unaudited) and March 31, 2018 (unaudited) (US$ millions) Three months ended Nine months March 31, ended March 31, 2019 2018 2019 2018 Net (loss) income ............................................................................................ $ 655 $ 515 $ (192) $ 950 Other comprehensive income (loss) Unrealized gains and losses on debt securities Net unrealized (losses) gains on available-for-sale debt securities arising during the period ....................................................................................... 60 (31) (150) 75 Reclassification adjustment for realized gains included in net income (income from debt securities and realized gains and losses on debt securities and associated derivatives) ....................................................... (1) (13) (3) (24) Reclassification adjustment for other-than-temporary impairments included in net income (income from debt securities and realized gains and losses on debt securities and associated derivatives) .......................................... 1 5 247 30 Net unrealized gains (losses) on debt securities ................................... 60 (39) 94 81 Unrealized gains and losses on equity investments Net unrealized gains (losses) on equity investments arising during the period ........................................................................................................ — 489 — 670 Reclassification adjustment for realized gains included in net income (income from equity investments and associated derivatives) ................... — (301) — (578) Reclassification adjustment for other-than-temporary impairments included in net income (income from equity investments and associated derivatives) ................................................................................................ — 50 — 132 Net unrealized gains on equity investments ............................................. — 238 — 224 Unrealized gains and losses on borrowings Net unrealized gains (losses) arising during the period attributable to instrument-specific credit risk on borrowings at fair value under the fair value option ............................................................................................... (78) — 105 — Reclassification adjustment for realized gains included in net income upon derecognition of borrowings ...................................................................... — — 1 — Net unrealized gains (losses) on borrowings ...................................... (78) — 106 — Net unrecognized net actuarial gains and unrecognized prior service credits on benefit plans - Note O .............................................................. 8 10 25 32 Total other comprehensive income (loss) ................................................... (10) 209 225 337 Total comprehensive income ......................................................................... $ 645 $ 724 $ 33 $ 1,287 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 25 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL for each of the nine months ended March 31, 2019 (unaudited) and March 31, 2018 (unaudited) (US$ millions) Attributable to IFC Accumulated other Undesignated Designated Total comprehensive Non- retained retained retained income (loss) - Capital Total IFC controlling Total earnings earnings earnings Note H stock capital interests capital At June 30, 2017 $ 21,901 $ 125 $ 22,026 $ 458 $ 2,566 $ 25,050 $ 3 $ 25,053 Nine months ended March 31, 2018 Net income attributable to IFC 950 950 950 950 Other comprehensive income 337 337 337 Designations of retained earnings - Note H (205) 205 — — — Expenditures against designated retained earnings - Note H 34 (34) — — — Non-controlling interests redeemed (3) (3) At March 31, 2018 $ 22,680 $ 296 $ 22,976 $ 795 $ 2,566 $ 26,337 $ — $ 26,337 At June 30, 2018 $ 23,116 $ 190 $ 23,306 $ 264 $ 2,566 $ 26,136 $ — $ 26,136 Cumulative effect of adoption of ASU 2016-01, effective July 1, 2018 - Note A 2,872 2,872 (1,359) 1,513 1,513 Nine months ended March 31, 2019 Net loss (192) (192) (192) (192) Other comprehensive income 225 225 225 Designations of retained earnings - Note H (230) 230 — — — Expenditures against designated retained earnings - Note H 30 (30) — — — At March 31, 2019 $ 25,596 $ 390 $ 25,986 $ (870) $ 2,566 $ 27,682 $ — $ 27,682 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 26 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the nine months ended March 31, 2019 (unaudited) and March 31, 2018 (unaudited) (US$ millions) 2019 2018 Cash flows from investing activities Loan disbursements ........................................................................................................................ $ (5,582) $ (5,318) Investments in equity securities ....................................................................................................... (651) (1,007) Investments in debt securities ......................................................................................................... (775) (1,449) Loan repayments ............................................................................................................................ 4,807 4,505 Debt securities repayments ............................................................................................................. 172 428 Proceeds from sales of loan investments ........................................................................................ 22 28 Proceeds from sales of equity investments ..................................................................................... 1,316 1,707 Proceeds from sales of debt securities ............................................................................................ 35 134 Investment in land and building for headquarters ............................................................................ (36) (15) Net cash used in investing activities ...................................................................................... (692) (987) Cash flows from financing activities Medium and long-term borrowings Issuance .......................................................................................................................................... 13,272 14,439 Retirement ...................................................................................................................................... (12,001) (12,746) Medium and long-term borrowings related derivatives, net .............................................................. (176) (462) Short-term borrowings, net ................................................................................................................ (760) 1,832 Non-controlling interests redeemed ................................................................................................... — (3) Net cash provided by financing activities ................................................................................. 335 3,060 Cash flows from operating activities Net (loss) income ............................................................................................................................ (192) 950 Adjustments to reconcile net income or loss to net cash provided by operating activities: Realized (gains) losses on loans and associated derivatives, net ................................................. (40) 9 Realized gains on debt securities and associated derivatives, net ................................................ (3) (68) Losses (gains) on equity investments and related derivatives, net ................................................ 573 (839) Provision for losses on loans, guarantees, accrued interest and other receivables ....................... 72 82 Other-than-temporary impairments on debt securities ................................................................... 247 30 Other-than-temporary impairments on equity investments ............................................................ — 304 Net premiums (paid) received at issuance of borrowings (net of swaps) ....................................... (3) 3 Net discounts paid on retirement of borrowings ............................................................................ (40) (44) Net realized gains on extinguishment of borrowings ..................................................................... (1) (2) Foreign currency transaction (gains) losses on non-trading activities ............................................ (154) 89 Net realized losses (gains) on non-trading financial instruments accounted for at fair value ......... 65 (63) Change in accrued income on loans, time deposits and securities ............................................... (187) (142) Change in payables and other liabilities ........................................................................................ 1,614 (773) Change in receivables and other assets ....................................................................................... (190) (48) Change in trading securities and securities purchased and sold under resale and repurchase agreements ............................................................................................................................... 2,731 3,165 Net cash provided by operating activities .............................................................................. 4,492 2,653 Change in cash and cash equivalents ............................................................................................... 4,135 4,726 Effect of exchange rate changes on cash and cash equivalents ........................................................ 673 (497) Net change in cash and cash equivalents .......................................................................................... 4,808 4,229 Beginning cash and cash equivalents ................................................................................................ 14,405 14,683 Ending cash and cash equivalents ................................................................................................ $ 19,213 $ 18,912 Composition of cash and cash equivalents Cash and due from banks ............................................................................................................... $ 1,260 $ 1,443 Time deposits .................................................................................................................................. 17,953 17,469 Total cash and cash equivalents .................................................................................................... $ 19,213 $ 18,912 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 27 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the nine months ended March 31, 2019 (unaudited) and March 31, 2018 (unaudited) (US$ millions) Supplemental disclosure 2019 2018 Change in ending balances resulting from currency exchange rate fluctuations: Loans outstanding ........................................................................................................................ $ (196) $ 311 Debt securities .............................................................................................................................. (160) 35 Loan and debt security-related currency swaps ............................................................................ 315 (318) Borrowings .................................................................................................................................... 772 (88) Borrowing-related currency swaps ................................................................................................ (725) 93 Charges on borrowings paid, net ....................................................................................................... $ 986 $ 628 Non-cash items: Loan and debt security conversion to equity, net ........................................................................... $ 18 $ 62 The notes to the condensed consolidated financial statements are an integral part of these statements. INTERNATIONAL FINANCE CORPORATION Page 28 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PURPOSE The International Finance Corporation (IFC), an international organization, was established in 1956 to further economic development in its member countries by encouraging the growth of private enterprise. IFC is a member of the World Bank Group (WBG), which also comprises the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). Each member is legally and financially independent. Transactions with other World Bank Group members are disclosed in the notes that follow. IFC’s activities are closely coordinated with and complement the overall development objectives of the other World Bank Group institutions. IFC, together with private investors, assists in financing the establishment, improvement and expansion of private sector enterprises by making loans, equity investments and investments in debt securities where sufficient private capital is not otherwise available on reasonable terms. IFC’s share capital is provided by its member countries. It raises most of the funds for its investment activities through the issuance of notes, bonds and other debt securities in the international capital markets. IFC also plays a catalytic role in mobilizing additional funding from other investors and lenders through parallel loans, loan participations, partial credit guarantees, securitizations, loan sales, risk sharing facilities, and fund investments through the IFC Asset Management Company, LLC and other IFC crisis initiatives. In addition to project finance and mobilization, IFC offers an array of financial and technical advisory services to private businesses in the developing world to increase their chances of success. It also advises governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES The condensed consolidated financial statements include the financial statements of IFC and its consolidated subsidiary as detailed in Note B. The accounting and reporting policies of IFC conform with accounting principles generally accepted in the United States of America (US GAAP). In the opinion of management, the condensed consolidated financial statements reflect all adjustments necessary for the fair presentation of IFC’s financial position and results of operations. Condensed Consolidated Financial Statements presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. The accompanying condensed consolidated financial statements include IFC’s accounts as well as the accounts of other entities in which IFC has a controlling financial interest. All intercompany accounts and transactions have been eliminated. Results for the nine months ended March 31, 2019 may not necessarily be indicative of the results for the year ending June 30, 2019. Advisory services - Funding received for IFC advisory services from governments and other donors are recognized as contribution revenue when the conditions on which they depend are substantially met. Advisory services expenses are recognized in the period incurred. Advisory client fees and administration fees are recognized as income when earned. See Notes L and N. Functional currency - IFC’s functional currency is the United States dollar (US dollars or $). Use of estimates - The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of income and expense during the reporting periods. Actual results could differ from these estimates. A significant degree of judgment has been used in the determination of: the reserve against losses on loans and impairment of debt securities and equity investments; estimated fair values of financial instruments accounted for at fair value (including equity investments, debt securities, loans, trading securities and derivative instruments); projected benefit obligations, fair value of pension and other postretirement benefit plan assets, and net periodic pension income or expense. There are inherent risks and uncertainties related to IFC’s operations. The possibility exists that changing economic conditions could have an adverse effect on the financial position of IFC. IFC uses internal models to determine the fair values of derivative and other financial instruments and the aggregate level of the reserve against losses on loans and impairment of equity investments. IFC undertakes continuous review and analysis of these models with the objective of refining its estimates, consistent with evolving best practices appropriate to its operations. Changes in estimates resulting from refinements in the assumptions and methodologies incorporated in the models are reflected in net income in the period in which the enhanced models are first applied. Consolidation, non-controlling interests and variable interest entities - IFC consolidates: i) all majority-owned subsidiaries; ii) limited partnerships in which it is the general partner, unless the presumption of control is overcome by certain management participation or other rights held by minority shareholders/limited partners; and iii) variable interest entities (VIEs) for which IFC is deemed to be the VIE's primary beneficiary (together, consolidated subsidiaries). Significant intercompany accounts and transactions are eliminated in consolidation. INTERNATIONAL FINANCE CORPORATION Page 29 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) An entity is a VIE if: i) its equity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; ii) its equity investors do not have decision-making rights about the entity's operations; or iii) its equity investors do not absorb the expected losses or receive the expected returns of the entity proportionally to their voting rights. A variable interest is a contractual, ownership or other interest whose value changes as the fair value of the VIE's net assets change. IFC's variable interests in VIEs arise from financial instruments, service contracts, guarantees, leases or other monetary interests in those entities. IFC is considered to be the primary beneficiary of a VIE if it has the power to direct the VIE's activities that most significantly impact its economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. Fair Value Option and Fair Value Measurements - IFC has adopted FASB Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820) and the Fair Value Option subsections of ASC Topic 825, Financial Instruments (ASC 825 or the Fair Value Option). ASC 820 defines fair value, establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels and applies to all items measured at fair value, including items for which impairment measures are based on fair value. ASC 825 permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by- instrument basis, that are not otherwise permitted to be accounted for at fair value under other accounting standards. The election to use the Fair Value Option is available when an entity first recognizes a financial asset or liability or upon entering into a firm commitment. The Fair Value Option IFC has elected the Fair Value Option (FVO) for the following financial assets and financial liabilities: i) investees in which IFC has significant influence: a) direct investments in securities issued by the investee and, if IFC would have otherwise been required to apply equity method accounting, all other financial interests in the investee (e.g., loans); b) investments in Limited Liability Partnerships (LLPs), Limited Liability Companies (LLCs) and other investment fund structures that maintain specific ownership accounts and loans or guarantees to such; ii) all market borrowings that are economically hedged with financial instruments that are accounted for at fair value with changes therein reported in earnings; iii) borrowings from IDA; through June 30, 2018: iv) direct equity investments representing 20 percent or more ownership but in which IFC does not have significant influence; v) all equity interests in private equity funds; vi) certain hybrid instruments in the investment portfolio; vii) investments in certain debt securities that are economically hedged with financial instruments that are accounted for at fair value with changes therein reported in earnings; effective July 1, 2018: viii) all investments in debt securities; and ix) substantially all hybrid instruments in the loan investment portfolio; All borrowings and, through June 30, 2018, investments in debt securities for which the Fair Value Option has been elected are economically hedged with derivative or other financial instruments that are accounted for at fair value with changes in fair value reported in earnings as such changes occur. Measuring at fair value those borrowings and investments for which the Fair Value Option has been elected mitigates the earnings volatility that would otherwise occur, due to measuring the borrowings and investments and related economic hedges differently, without having to apply ASC Topic 815’s, Derivatives and Hedging (ASC 815) complex hedge accounting requirements. Measuring at fair value those equity investments that would otherwise require equity method accounting simplifies the accounting and renders a carrying amount on the condensed consolidated balance sheet based on a measure (fair value) that IFC considers preferable to equity method accounting. For the investments that otherwise would require equity method accounting for which the Fair Value Option is elected, ASC 825 requires the Fair Value Option to also be applied to all eligible financial interests in the same entity. IFC has disbursed loans to certain of such investees; therefore, the Fair Value Option is also applied to those loans. IFC elected the Fair Value Option for equity investments, through June 30, 2018, with 20% or more ownership where it did not have significant influence so that the same measurement method (fair value) was applied to all equity investments with more than 20% ownership. INTERNATIONAL FINANCE CORPORATION Page 30 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) The FVO was elected through June 30, 2018, for certain hybrid instruments in the investment portfolio that would have otherwise required bifurcation of the host and embedded derivative. Election of the FVO for these instruments eliminated the bifurcation requirement. The FVO has been elected for all investments in debt securities and hybrid loan instruments recognized after June 30, 2018. Among other things, measuring all investments in debt securities and hybrid loan instruments at fair value eliminates the requirement to bifurcate the host and embedded derivative that may have otherwise applied in certain instances, results in more accounting consistency across IFC’s investment portfolio and results in a measurement method that is consistent with the manner in which the portfolio is managed. Fair Value Measurements ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability (i.e., an exit price) in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date assuming the transaction occurs in the entity’s principal (or most advantageous) market. Fair value must be based on assumptions market participants would use (inputs) in determining the price and measured assuming that market participants act in their economic best interest, therefore, their fair values are determined based on a transaction to sell or transfer the asset or liability on a standalone basis. Under ASC 820, fair value measurements are not adjusted for transaction costs. ASC 820 established a fair value hierarchy which gives the highest priority to unadjusted quoted prices in active markets for identical unrestricted assets and liabilities (Level 1), the next highest priority to observable market based inputs or unobservable inputs that are corroborated by market data from independent sources (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Fair value measurements are required to maximize the use of available observable inputs. Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. It includes IFC’s debt securities and equity investments, which are listed in markets that provide readily determinable fair values, government issues and money market funds in the liquid assets portfolio, and market borrowings that are listed on exchanges. Level 2: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly for substantially the full term of the asset or liability. It includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and financial instruments that are valued using models and other valuation methodologies. These models consider various assumptions and inputs, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity and current market and contractual pricing for the underlying asset, as well as other relevant economic measures. Substantially all of these inputs are observable in the market place, can be derived from observable data or are supported by observable levels at which market transactions are executed. Financial instruments categorized as Level 2 include non-exchange-traded derivatives such as interest rate swaps, cross-currency swaps, certain asset-backed securities, as well as the majority of trading securities in the liquid asset portfolio, and the portion of IFC’s borrowings accounted for at fair value not included in Level 1. Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. It consists of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are non-observable. It also includes financial instruments whose fair value is estimated based on price information from independent sources that cannot be corroborated by observable market data. Level 3 includes equity and debt securities in the investment portfolios that are not listed in markets that provide readily determinable fair values, all loans for which IFC has elected the Fair Value Option, and certain hard-to-price securities in the liquid assets portfolio. IFC estimates the fair value of its investments in private equity funds that do not have readily determinable fair value based on the funds’ net asset values (NAVs) per share as a practical expedient to the extent that a fund reports its investment assets at fair value and has all the attributes of an investment company, pursuant to ASC Topic 946, Financial Services - Investment Companies (ASC 946). If the NAV is not as of IFC’s measurement date, IFC adjusts the most recent NAV, as necessary, to estimate a NAV for the investment that is calculated in a manner consistent with the fair value measurement principles established by ASC 820. Remeasurement of foreign currency transactions - Assets and liabilities not denominated in US dollars, other than disbursed equity investments, are expressed in US dollars at the exchange rates prevailing at March 31, 2019 and June 30, 2018. Disbursed equity investments, other than those accounted for at fair value, are expressed in US dollars at the prevailing exchange rates at the time of disbursement. Income and expenses are recorded based on the rates of exchange prevailing at the time of the transaction. Transaction gains and losses are credited or charged to income. INTERNATIONAL FINANCE CORPORATION Page 31 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) Loans - IFC originates loans to facilitate project finance, restructuring, refinancing, corporate finance, and/or other developmental objectives. Loans are recorded as assets when disbursed. Loans are generally carried at the principal amounts outstanding adjusted for net unamortized loan origination costs and fees. It is IFC’s practice to obtain collateral security such as, but not limited to, mortgages and third-party guarantees. Certain loans are carried at fair value in accordance with the Fair Value Option as discussed above. Unrealized gains and losses on loans accounted for at fair value under the Fair Value Option are reported in Net unrealized gains and losses on non-trading financial instruments accounted for at fair value on the condensed consolidated statement of operations. Certain loans originated by IFC contain income participation, prepayment and conversion features. These features are bifurcated and separately accounted for in accordance with ASC 815 if IFC has not elected the Fair Value Option for the loan host contracts and the features meet the definition of a derivative and are not considered to be clearly and closely related to their host loan contracts. Otherwise, these features are accounted for as part of their host loan contracts in accordance with IFC’s accounting policies for loans as indicated herein. Loans held for sale are carried at the lower of cost or fair value. The excess, if any, of amortized cost over fair value is accounted for as a valuation allowance. Changes in the valuation allowance are recognized in net income as they occur. Revenue recognition on loans - Interest income and commitment fees on loans are recorded as income on an accrual basis. Loan origination fees and direct loan origination costs are deferred and amortized over the estimated life of the originated loan; such amortization is determined using the interest method unless the loan is a revolving credit facility in which case amortization is determined using the straight-line method. Prepayment fees are recorded as income when received. IFC does not recognize income on loans where collectability is in doubt or payments of interest or principal are past due more than 60 days unless management anticipates that collection of interest will occur in the near future. Any interest accrued on a loan placed in nonaccrual status is reversed out of income and is thereafter recognized as income only when the actual payment is received. Interest not previously recognized but capitalized as part of a debt restructuring is recorded as deferred income, included in the condensed consolidated balance sheet in payables and other liabilities, and credited to income only when the related principal is received. Such capitalized interest is considered in the computation of the reserve against losses on loans in the condensed consolidated balance sheet. Reserve against losses on loans - IFC recognizes impairment on loans not carried at fair value in the condensed consolidated balance sheet through the reserve against losses on loans, recording a provision or release of provision for losses on loans in net income, which increases or decreases the reserve against losses on loans. Individually impaired loans are measured based on the present value of expected future cash flows to be received, observable market prices, or for loans that are dependent on collateral for repayment, the estimated fair value of the collateral. The reserve against losses on loans reflects management’s estimates of both identified probable losses on individual loans (specific reserves) and probable losses inherent in the portfolio but not specifically identifiable (portfolio reserves). The determination of identified probable losses represents management’s judgment of the creditworthiness of the borrower. Reserves against losses are established through a review of individual loans undertaken on a quarterly basis. IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be unable to collect all amounts due according to the loan’s contractual terms. Information and events, with respect to the borrower and/or the economic and political environment in which it operates, considered in determining that a loan is impaired include, but are not limited to, the borrower’s financial difficulties, breach of contract, bankruptcy/reorganization, credit rating downgrade as well as geopolitical conflict, financial/ economic crisis, commodity price decline, adverse local government action and natural disaster. Unidentified probable losses are the losses incurred at the reporting date that have not yet been specifically identified. The risks inherent in the portfolio that are considered in determining unidentified probable losses are those proven to exist by past experience and include: country systemic risk; the risk of correlation or contagion of losses between markets; uninsured and uninsurable risks; nonperformance under guarantees and support agreements; and opacity of, or misrepresentation in, financial statements. For purposes of providing certain disclosures about IFC’s entire reserve against losses on loans, IFC considers its entire loan portfolio to comprise one portfolio segment. A portfolio segment is the level at which the method for estimating the reserve against losses on loans is developed and documented. Loans are written-off when IFC has exhausted all possible means of recovery, by reducing the reserve against losses on loans. Such reductions in the reserve are partially offset by recoveries, if any, associated with previously written-off loans. Equity investments - IFC invests primarily for developmental impact; IFC does not seek to take operational, controlling, or strategic equity positions within its investees. Equity investments are acquired through direct ownership of equity instruments of investees, as a limited partner in LLPs and LLCs, and/or as an investor in private equity funds. INTERNATIONAL FINANCE CORPORATION Page 32 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) Equity securities held by consolidated subsidiaries that are investment companies Pursuant to ASC Topic 946, Financial Services - Investment Companies (ASC 946) and ASC Topic 810, Consolidation, equity securities held by consolidated subsidiaries that are investment companies are accounted for at fair value, with unrealized gains and losses reported in earnings. Revenue recognition on equity investments - Pursuant to Accounting Standards Update 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) and ASC Topic 321, Investments - Equity Securities (ASC 321), effective July 1, 2018 all equity investments are measured at fair value, with unrealized gains and losses reported in earnings. Through June 30, 2018, equity investments, which were listed in markets that provided readily determinable fair values, were accounted for as available-for-sale securities at fair value with unrealized gains and losses reported in other comprehensive income. As noted above under “Fair Value Option and Fair Value Measurements”, direct equity investments and investments in LLPs and LLCs that maintained separate ownership accounts in which IFC had significant influence, direct equity investments representing 20 percent or more ownership but in which IFC did not have significant influence and all new equity interests in funds were accounted for at fair value under the Fair Value Option. Direct equity investments in which IFC did not have significant influence and which were not listed in markets that provided readily determinable fair values were carried at cost, less impairment. IFC’s investments in certain private equity funds in which IFC is deemed to have a controlling financial interest, are fully consolidated by IFC, as the presumption of control by the fund manager or the general partner has been overcome. Certain equity investments, for which recovery of invested capital is uncertain, are accounted for under the cost recovery method, such that receipts are first applied to recovery of invested capital and then to income from equity investments. The cost recovery method is applied to IFC's investments in its oil and gas unincorporated joint ventures (UJVs). IFC’s share of conditional asset retirement obligations related to investments in UJVs are recorded when the fair value of the obligations can be reasonably estimated. The obligations are capitalized and systematically amortized over the estimated economic useful lives. Unrealized gains and losses on equity investments accounted for at fair value are reported in income from equity investments and associated derivatives on the condensed consolidated statement of operations. Unrealized gains and losses on equity investments which were accounted for as available-for-sale were reported in other comprehensive income. Realized gains on the sale or redemption of equity investments are measured against the average cost of the investments sold. Through June 30, 2018, realized gains and losses on equity investments were recorded based on initial cash cost less write-downs; Effective July 1, 2018, realized gains and losses are recorded based on initial cash cost. Dividends on listed equity investments are recorded on the ex-dividend date, and dividends on unlisted equity investments are recorded upon receipt of notice of declaration. Realized gains on listed equity investments are recorded upon trade date, and realized gains on unlisted equity investments are recorded upon incurring the obligation to deliver the applicable shares. Losses are recognized when incurred. IFC enters into put and call option and warrant agreements in connection with equity investments; these are accounted for in accordance with ASC 815 to the extent they meet the definition of a derivative. Effective July 1, 2018, such agreements that do not meet the definition of a derivative are measured at fair value with unrealized gains and losses recognized in earnings in accordance with ASU 2016-01 and included in “Equity investments” on the condensed consolidated balance sheets. Gains and losses on debt conversions and exchanges of equity interests - Loan and debt security conversions to equity interests are based on the fair value of the equity interests received. Transfers of equity interests in exchange for equity interests in other entities and other non-cash transactions are generally accounted for based on the fair value of the asset relinquished unless the fair value of the asset received is more clearly evident in which case the accounting is based on the fair value of the asset received. The difference between the fair value of the asset received and the recorded amount of the asset relinquished is recorded as a gain or loss in the condensed consolidated statement of operations. Impairment of equity investments - Through June 30, 2018, equity investments accounted for at cost, less impairment and available-for-sale were assessed for impairment each quarter. When impairment was identified, it was generally deemed to be other-than-temporary, and the equity investment was written down to the impaired value, which became the new cost basis in the equity investment. Such other-than-temporary impairments were recognized in net income. Subsequent increases in the fair value of available-for-sale equity investments were included in other comprehensive income, while subsequent decreases in fair value, if not other-than-temporary impairment, also were included in other comprehensive income. Debt securities - Debt securities in the investment portfolio classified as available-for-sale are carried at fair value on the condensed consolidated balance sheet with unrealized gains and losses included in accumulated other comprehensive income until realized. INTERNATIONAL FINANCE CORPORATION Page 33 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) Unrealized gains and losses on debt securities accounted for at fair value under the Fair Value Option are reported in “Net unrealized gains and losses on non-trading financial instruments accounted for at fair value” on the condensed consolidated statement of operations. IFC invests in certain debt securities with conversion features; if the hybrid instrument is not measured at fair value with unrealized gains and losses reported in earnings, these features are accounted for in accordance with ASC 815 to the extent they meet the definition of a derivative. Impairment of debt securities - In determining whether an unrealized loss on debt securities classified as available-for-sale is other-than-temporary, IFC considers all relevant information including the length of time and the extent to which fair value has been less than amortized cost, whether IFC intends to sell the debt security or whether it is more likely than not that IFC will be required to sell the debt security, the payment structure of the obligation and the ability of the issuer to make scheduled interest or principal payments, any changes to the ratings of a security, and relevant adverse conditions specifically related to the security, an industry or geographic sector. Debt securities in the investment portfolio classified as available-for-sale are assessed for impairment each quarter. When impairment is identified, the entire impairment is recognized in net income if (1) IFC intends to sell the security, or (2) it is more likely than not that IFC will be required to sell the security before recovery. However, if IFC does not intend to sell the security and it is not more likely than not that IFC will be required to sell the security but the security has a credit loss, the impairment charge will be separated into the credit loss component, which is recognized in net income, and the remainder which is recorded in other comprehensive income. The impaired value becomes the new amortized cost basis of the debt security. Subsequent fair value increases and decreases in the fair value of debt securities, if not an additional other-than-temporary impairment, are included in other comprehensive income. The difference between the new amortized cost basis of debt securities for which an other-than-temporary impairment has been recognized in net income and the cash flows expected to be collected is accreted to interest income using the effective yield method. Significant subsequent increases in the expected or actual cash flows previously expected are recognized as a prospective adjustment of the yield. Guarantees - IFC extends financial guarantee facilities to its clients to provide credit enhancement for their debt securities and trade obligations. As part of these financial guarantee facilities, IFC offers partial credit guarantees to clients covering, on a risk- sharing basis, client obligations on bonds or loans. Under the terms of IFC's guarantees, IFC agrees to assume responsibility for the client’s financial obligations in the event of default by the client (i.e., failure to pay when payment is due). Guarantees are regarded as issued when IFC commits to the guarantee. Guarantees are regarded as outstanding when the underlying financial obligation of the client is incurred, and this date is considered to be the “inception” of the guarantee. Guarantees are regarded as called when IFC’s obligation under the guarantee has been invoked. There are two liabilities associated with the guarantees: (i) the stand-ready obligation to perform and (ii) the contingent liability. The fair value of the stand-ready obligation to perform is recognized at the inception of the guarantee unless a contingent liability exists at that time or is expected to exist in the near term. The contingent liability associated with the financial guarantee is recognized when it is probable the guarantee will be called and when the amount of guarantee called can be reasonably estimated. When the guarantees are called, the amount disbursed is recorded as a new loan, and specific reserves against losses are established, based on the estimated probable loss. Guarantee fees are recorded in income as the stand-ready obligation to perform is fulfilled. Commitment fees on guarantees are recorded as income on an accrual basis. All liabilities associated with guarantees are included in payables and other liabilities, and the receivables are included in other assets on the condensed consolidated balance sheet. Designations of retained earnings - IFC establishes funding mechanisms for specific Board approved purposes through designations of retained earnings. Designations of retained earnings for grants to IDA are recorded as a transfer from undesignated retained earnings to designated retained earnings when the designation is approved by the Board of Governors. All other designations are recorded as a transfer from undesignated retained earnings to designated retained earnings when the designation is noted with approval by the Board of Directors. Total designations of retained earnings are determined based on IFC’s annual income before expenditures against designated retained earnings and net unrealized gains and losses on non-trading financial instruments accounted for at fair value in excess of $150 million, and contemplating the financial capacity and strategic priorities of IFC. Expenditures resulting from such designations are recorded as expenses in IFC’s condensed consolidated statement of operations in the year in which they are incurred and reduces the respective designated retained earnings for such purposes. Expenditures are deemed to have been incurred when IFC has ceded control of the funds to the recipient. If the recipient is deemed to be controlled by IFC, the expenditure is deemed to have been incurred only when the recipient disburses the funds to a non-related party. On occasion, recipients who are deemed to be controlled by IFC make investments. In such cases, IFC includes those assets on its condensed consolidated balance sheet until the recipient disposes of or transfers the asset or IFC is deemed to no longer be in control of the recipient. These investments have had no material impact on IFC’s financial position, results of operations, INTERNATIONAL FINANCE CORPORATION Page 34 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) or cash flows. Investments resulting from such designations are recorded on IFC’s condensed consolidated balance sheet in the year in which they occur, also having the effect of reducing the respective designated retained earnings for such purposes. Liquid asset portfolio - The liquid asset portfolio, as defined by IFC, consists of: time deposits and securities; related derivative instruments; securities purchased under resale agreements and receivable for cash collateral pledged, securities sold under repurchase agreements and payable for cash collateral received; receivables from sales of securities and payables for purchases of securities; and related accrued income and charges. IFC’s liquid funds are invested in government, agency and government- sponsored agency obligations, time deposits and asset-backed, including mortgage-backed, securities. Government and agency obligations include positions in high quality fixed rate bonds, notes, bills, and other obligations issued or unconditionally guaranteed by governments of countries or other official entities including government agencies and instrumentalities or by multilateral organizations. Asset-backed and mortgage-backed securities include agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, consumer, auto and student loan-backed securities, commercial real estate collateralized debt obligations and collateralized loan obligations. Securities and related derivative instruments within IFC’s liquid asset portfolio are classified as trading and are carried at fair value with any changes in fair value reported in income from liquid asset trading activities. Interest on securities and amortization of premiums and accretion of discounts are also reported in income from liquid asset trading activities. Gains and losses realized on the sale of trading securities are computed on a specific security basis. IFC classifies cash and due from banks and time deposits (collectively, cash and cash equivalents) as cash and as cash equivalents in the condensed consolidated statement of cash flows because they are generally readily convertible to known amounts of cash within 90 days of acquisition generally when the original maturities for such instruments are under 90 days (or in some cases are under 180 days). Repurchase, resale and securities lending agreements - Repurchase agreements are contracts under which a party sells securities and simultaneously agrees to repurchase the same securities at a specified future date at a fixed price. Resale agreements are contracts under which a party purchases securities and simultaneously agrees to resell the same securities at a specified future date at a fixed price. Securities lending agreements are similar to repurchase agreements except that the securities loaned are securities that IFC has received as collateral under unrelated agreements and allowed by contract to rehypothecate. Amounts due under securities lending agreements are included in securities sold under repurchase agreements and payable for cash collateral received on the condensed consolidated balance sheet. It is IFC’s policy to take possession of securities purchased under resale agreements, which are primarily liquid government securities. The market value of these securities is monitored and, within parameters defined in the agreements, additional collateral is obtained when their value declines. IFC also monitors its exposure with respect to securities sold under repurchase agreements and, in accordance with the terms of the agreements, requests the return of excess securities held by the counterparty when their value increases. Repurchase, resale and securities lending agreements are accounted for as collateralized financing transactions and recorded at the amount at which the securities were acquired or sold plus accrued interest. Borrowings - To diversify its access to funding, and reduce its borrowing costs, IFC borrows in a variety of currencies and uses a number of borrowing structures, including foreign exchange rate-linked, inverse floating rate and zero coupon notes. In managing the currency exposure inherent in borrowing in a variety of currencies, generally, IFC either simultaneously converts such borrowings into variable rate US dollar borrowings through the use of currency and interest rate swap transactions or utilizes liquid asset portfolio or debt investments denominated in the same currency to economically hedge changes in the fair value of certain borrowings. Under certain outstanding borrowing agreements, IFC is not permitted to mortgage or allow a lien to be placed on its assets (other than purchase money security interests) without extending equivalent security to the holders of such borrowings. Interest on borrowings and amortization of premiums and accretion of discounts are reported in charges on borrowings. Substantially all borrowings are carried at fair value under the Fair Value Option. All changes in the fair value of such borrowings through June 30, 2018 were reported in “Net unrealized gains and losses on non-trading financial instruments accounted for at fair value” in the condensed consolidated statement of operations. Effective July 1, 2018, in accordance with ASU 2016-01, the change in the fair value of these borrowings resulting from changes in instrument-specific credit risk is reported in other comprehensive income, while the remaining change in fair value is reported in “Net unrealized gains and losses on non-trading financial instruments accounted for at fair value” in the condensed consolidated statement of operations. Risk management and use of derivative instruments - IFC enters into transactions in various derivative instruments primarily for financial risk management purposes in connection with its principal business activities, including lending, investing in debt securities and equity investments, client risk management, borrowing, liquid asset portfolio management and asset and liability management. There are no derivatives designated as accounting hedges. INTERNATIONAL FINANCE CORPORATION Page 35 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) All derivative instruments are recorded on the condensed consolidated balance sheet at fair value as derivative assets or derivative liabilities. Where they are not clearly and closely related to the host contract, certain derivative instruments embedded in loans, debt securities and equity investments are bifurcated from the host contract and recorded at fair value as derivative assets or liabilities unless the hybrid instrument is accounted for at fair value with any changes in fair value reported in income. The fair value at inception of such embedded derivatives is excluded from the carrying amount of the host contracts on the condensed consolidated balance sheet. Changes in fair values of derivative instruments used in the liquid asset portfolio are recorded in income from liquid asset trading activities. Changes in fair values of derivative instruments other than those in the liquid asset portfolio and those associated with equity investments are recorded in net unrealized gains and losses on non-trading financial instruments accounted for at fair value. The risk management policy for each of IFC’s principal business activities and the accounting policies particular to them are described below. Lending activities IFC’s policy is to closely match the currency, interest rate basis, and maturity of its loans and borrowings. Derivative instruments are used to convert the cash flows from fixed rate US dollar or non-US dollar loans into variable rate US dollars. Client risk management activities IFC enters into derivatives transactions with its clients to help them hedge their own currency, interest rate, or commodity risk, which, in turn, improves the overall quality of IFC’s loan portfolio. To hedge the market risks that arise from these transactions with clients, IFC enters into offsetting derivative transactions with matching terms with authorized market counterparties. Changes in fair value of all derivatives associated with these activities are reported in net income in net unrealized gains and losses on non-trading financial instruments accounted for at fair value. Borrowing activities IFC issues debt securities in various capital markets with the objectives of minimizing its borrowing costs, diversifying funding sources, and developing member countries’ capital markets, sometimes using complex structures. These structures include borrowings payable in multiple currencies, or borrowings with principal and/or interest determined by reference to a specified index such as a stock market index, a reference interest rate, a commodity index, or one or more foreign exchange rates. IFC generally uses derivative instruments with matching terms, primarily currency and interest rate swaps, to convert certain of such borrowings into variable rate US dollar obligations, consistent with IFC’s matched funding policy. IFC elects to carry at fair value, under the Fair Value Option, all market borrowings for which a derivative instrument, liquid asset portfolio investment or debt investment is used to create an economic hedge. Changes in the fair value of such borrowings and the associated derivatives are reported in net unrealized gains and losses on non-trading financial instruments accounted for at fair value in the condensed consolidated statement of operations. Liquid asset portfolio management activities IFC manages the interest rate, currency and other market risks associated with certain of the time deposits and securities in its liquid asset portfolio by entering into derivative transactions to convert the cash flows from those instruments into variable rate US dollars or by utilizing market borrowings denominated in the same currency to economically hedge changes in the fair value of certain liquid asset portfolio investments. The derivative instruments used include short-term, over-the-counter foreign exchange forwards (covered forwards), interest rate and currency swaps, and exchange-traded interest rate futures and options. As the entire liquid asset portfolio is classified as trading portfolio, all securities (including derivatives) are carried at fair value with changes in fair value reported in income from liquid asset trading activities. Asset and liability management In addition to the risk managed in the context of its business activities detailed above, IFC faces residual market risk in its overall asset and liability management. Residual currency risk is managed by monitoring the aggregate position in each lending currency and reducing the net excess asset or liability position through sales or purchases of currency. Interest rate risk arising from mismatches due to write-downs, prepayments and re-schedulings, and residual reset date mismatches is monitored by measuring the sensitivity of the present value of assets and liabilities in each currency to each basis point change in interest rates. IFC monitors the credit risk associated with these activities by careful assessment and monitoring of prospective and actual clients and counterparties. In respect of liquid assets and derivatives transactions, credit risk is managed by establishing exposure limits based on the credit rating and size of the individual counterparty. In addition, IFC has entered into master agreements with its derivative market counterparties governing derivative transactions that contain close-out and netting provisions and collateral arrangements. Under these agreements, if the credit exposure to one of the parties to the agreement, on a mark-to-market basis, exceeds a specified level, that party must post collateral to cover the excess, generally in the form of liquid government securities or cash. IFC does not offset the fair value amounts of derivatives and obligations to return, or rights to receive, cash collateral associated with these master-netting agreements. Loan participations - IFC mobilizes funds from commercial banks and other financial institutions (Participants) by facilitating loan participations, without recourse. These loan participations are administered and serviced by IFC on behalf of the Participants. The disbursed and outstanding balances of loan participations that meet the applicable accounting criteria are accounted for as sales and are not included in IFC’s condensed consolidated balance sheet. All other loan participations are accounted for as secured borrowings and are included in loans on IFC’s condensed consolidated balance sheet, with the related secured borrowings included in payables and other liabilities on IFC’s condensed consolidated balance sheet. INTERNATIONAL FINANCE CORPORATION Page 36 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) Pension and other postretirement benefits - IBRD sponsors a Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and a Post-Employment Benefits Plan (PEBP) that are defined benefit plans and cover substantially all of its staff members as well as the staff of IFC and of MIGA. The SRP provides regular pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides pension benefits administered outside the SRP. All costs associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. In addition, IFC and MIGA reimburse IBRD for their share of any contributions made to these plans by IBRD. In accordance with ASU 2017-07, the service cost component of the net periodic benefit costs allocated to IFC is included in “Administrative expenses” in the condensed consolidated statement of operations. The remaining components of the net periodic benefit costs allocated to IFC are included in “Other pension cost” in the condensed consolidated statement of operations. IFC includes a receivable from IBRD in receivables and other assets, representing prepaid pension and other postretirement benefit costs. Recently adopted accounting standards - In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities (ASU 2016-01). ASU 2016-01 requires all investments in equity securities to be accounted for at fair value through net income (except investments accounted for under the equity method and those that result in consolidation of the investee), and separate presentation in other comprehensive income (OCI) the portion of the total change in fair value resulting from a change in the instrument-specific credit risk when the entity has elected to measure a liability at fair value under the FVO. Given the magnitude of its investments in equity securities and the inherent volatility of prices for equity securities, the adoption of ASU 2016-01 will have a significant impact on IFC’s future reported net earnings. IFC adopted this ASU on July 1, 2018 by means of a cumulative-effect adjustment to the condensed consolidated balance sheet, and a summary of the impact is listed below: Cumulative effect of adoption of ASU 2016-01, Increase (decrease) effective July 1, 2018 (in US$ millions) Accumulated other Equity comprehensive Retained investments income earnings Total Capital Recognizing cumulative unrealized gains on equity securities that were previously accounted for at cost less impairment $ 1,433 $ — $ 1,433 $ 1,433 Reclassifying cumulative unrealized gains on equity securities previously classified as available-for-sale — (1,402) 1,402 — Recognizing the fair value of other equity-related financial instruments 80 — 80 80 Reclassifying cumulative gains on borrowings measured at fair value under FVO due to changes in Instrument specific credit risk — 43 (43) — Total $ 1,513 $ (1,359) $ 2,872 $ 1,513 In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 replaces most existing revenue recognition guidance by establishing a single recognition model for revenue arising from contracts with customers to deliver goods and services and requires additional disclosure regarding those revenues - it does not change current accounting guidance for derivative contracts, investments in and transfers of financial instruments or guarantees. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that amends ASU 2014-09’s principal-versus-agent guidance. It requires a reporting entity to evaluate whether it is a principal or agent for each specified good or service in a contract with a customer and clarifies the application of the related indicators in accordance with ASU 2014-09’s control principle. ASU 2014-09 and ASU 2016-08 are currently applicable for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017 (which is the year ending June 30, 2019 for IFC). IFC adopted ASU 2016-08 and ASU 2014-09 effective July 1, 2018 with no material impact on IFC’s financial position, results of operations or cash flows. INTERNATIONAL FINANCE CORPORATION Page 37 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires an entity to report the service cost component of net periodic benefit costs in the same line item as other compensation costs. The other components of net periodic benefit cost are required to be presented in the statement of operations separately from the service cost component, and are not eligible for capitalization. For IFC, this ASU became effective from the quarter ended September 30, 2018. Given the immateriality of the amounts subject to reclassification under the ASU, IFC has applied the requirements prospectively from the quarter ended September 30, 2018. In June 2018, the FASB issued ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions made and Contributions Received (ASU 2018-08). ASU 2018-08 provides guidance to assist entities in evaluating whether transactions are contributions and whether a contribution is conditional. ASU 2018-08 is effective for annual periods beginning after June 15, 2018, including interim periods within those annual periods (which is the year ended June 30, 2019 for IFC). IFC adopted ASU 2018-08 effective July 1, 2018 with no material impact on IFC’s financial position, results of operations or cash flows. Accounting standards and regulations under evaluation - In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 introduces a new accounting model that will result in lessees recording most leases on the balance sheet, aligns many of the underlying profit recognition principles with those in ASU 2014-09. ASU 2016-02 is effective for fiscal years, and interim periods within the fiscal years, beginning after December 15, 2018, (which is the year ending June 30, 2020 for IFC). Earlier adoption is permitted. ASU 2016-02 is not expected to have a material impact on IFC’s financial position, results of operations or cash flows. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires the measurement of estimated credit losses on financial instruments held at the balance sheet date based on historical loss experience, current conditions, and reasonable and supportable forecasts of future economic conditions. Contrary to the incurred impairment loss accounting model currently in place, this forward-looking approach is intended to result in the immediate recognition of all estimated credit losses expected to occur over the remaining life of the instruments. The resulting allowance for current expected credit losses (CECL) reduces the amortized cost basis of a financial asset to an amount expected to be collected. For future periods which cannot be forecasted in a reasonable and supportable manner, the reporting entity will revert to historical loss experience. Although ASU 2016-13 does not prescribe a specific methodology, it requires a collective assessment for financial assets with similar risk characteristics. Credit losses for financial assets that do not share similar risk characteristics with other financial assets will be measured individually. Impairment of investments in available-for-sale debt securities will be recognized via the allowance method, which allows for immediate reversals of credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (which is the year ended June 30, 2021 for IFC). IFC is currently evaluating the impact of ASU 2016-13. In March, 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). ASU 2017-08 shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 (which is the year ended June 30, 2020 for IFC). ASU 2017-08 is not expected to have a material impact on IFC’s financial position, results of operations or cash flows. In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 amends the fair value disclosure requirements to include: (a) the amount of gain or loss for the period included other comprehensive income attributable to fair value changes in Level 3 assets or liabilities, and (b) for Level 3 fair value measurements, the range and weighted average used to develop significant unobservable inputs and the method of calculating the weighted average. Existing fair value disclosure requirements eliminated by ASU 2018-13 include: (a) the amounts and reasons for transfers between Level 1 and Level 2 fair value measurements, and (b) the policy for determining when transfers between fair value measurement Levels occur. ASU 2018-13 modifies existing fair value disclosure requirements by (a) requiring a narrative description of the uncertainty of fair value measurements from the use of significant unobservable inputs if those inputs reasonable could have been different at reporting date, and (b) requiring disclosure of the estimate of the timing of liquidation events for investments measured using the Net Asset Value practical expedient only if such information has been communicated to the investor or announced publicly by the investee. ASU 2018-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 (which is the year ended Jun 30, 2021 for IFC). Early adoption is permitted. The amendments that result in additional requirements and the narrative description with respect to uncertainty must be applied prospectively. All other amendments must be retrospectively applied to all periods presented. INTERNATIONAL FINANCE CORPORATION Page 38 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES (continued) In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). ASU 2018-14 amends the disclosure requirements for defined benefit pension and other postretirement benefit plans. The added disclosures include the weighted-average interest crediting rates used in the reporting entity’s cash balance pension plans and a narrative description for the reasons for significant gains or losses affecting the benefit obligation and any other significant changes in the benefit obligations or plan assets during the period that are not otherwise apparent in the other required disclosures. The disclosures removed include, among other things, the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit costs over the next year and the effects of a one-percent change in the assumed health care costs on service cost, interest cost, and the postretirement benefit obligation. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 (which is the year ended June 30, 2021 for IFC). Earlier adoption is permitted. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15). ASU 2018-15 amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance will be effective for IFC from the quarter ending September 30, 2020. IFC is currently evaluating the impact of ASU 2018-15. In October 2018, The FASB issued ASU 2018-17, Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities (ASU 2018-17). ASU 2018-17 amends the guidance for how a decision maker or service provider must determine whether its fee is a variable interest in a VIE when a related party also has an interest in the VIE. Under the amendment, the decision maker must consider interests held be its related parties on a proportionate basis when determining if such interests could absorb more than an insignificant amount of the VIE’s variability. Current guidance requires the decision maker to consider such interests in their entirety. ASU 2018-17 is effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2019 (which is the year ended June 30, 2021 for IFC). ASU 2018-17 is not expected to have a material impact on IFC’s financial position, results of operations or cash flows. During the nine months ended March 31, 2019, the FASB issued and/or approved various other ASUs. IFC analyzed and implemented the new guidance, as appropriate, with no material impact on the financial position, results of operations or cash flows of IFC. NOTE B - SCOPE OF CONSOLIDATION IFC Asset Management Company, LLC (AMC) and AMC Funds IFC, through its wholly owned subsidiary, AMC, mobilizes capital from outside IFC’s traditional investor pool and manages third- party capital. AMC is consolidated into IFC’s financial statements. At March 31, 2019, IFC has provided $2 million of capital to AMC ($2 million - June 30, 2018). As a result of the consolidation of AMC, amounts included in IFC’s condensed consolidated balance sheet at March 31, 2019 and June 30, 2018 comprise (US$ millions): March 31, June 30, 2019 2018 Cash, receivables and other assets $ 50 $ 55 Equity investments —* —* Payables and other liabilities 2 2 * Less than $0.5 million. As a result of the consolidation of AMC, amounts included in IFC’s condensed consolidated statement of operations for the three and nine months ended March 31, 2019 and 2018 comprise (US$ millions): INTERNATIONAL FINANCE CORPORATION Page 39 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE B - SCOPE OF CONSOLIDATION (continued) Three months ended Nine months March 31, ended March 31, 2019 2018 2019 2018 Other income $ 16 $ 20 $ 50 $ 61 Other expenses 6 6 18 18 At March 31, 2019, AMC managed twelve funds (collectively referred to as the AMC Funds), none of which requires consolidation by IFC. All AMC Funds are investment companies and are required to report their investment assets at fair value through net income. IFC’s ownership interests in these AMC Funds are shown in the following table: AMC Funds IFC’s ownership interest IFC Capitalization (Equity) Fund, L.P. 61%** IFC Capitalization (Subordinated Debt) Fund, L.P. 13% IFC African, Latin American and Caribbean Fund, LP 20% Africa Capitalization Fund, Ltd. — IFC Catalyst Funds 18%*** IFC Global Infrastructure Fund, LP 17% China-Mexico Fund, LP — IFC Financial Institutions Growth Fund, LP 30% IFC Global Emerging Markets Fund of Funds 19%**** IFC Middle East and North Africa Fund, LP 37% Women Entrepreneurs Debt Fund, LP 26% IFC Emerging Asia Fund, LP 22% ** By virtue of certain rights granted to non-IFC limited partner interests, IFC does not control or consolidate this fund. *** The ownership interest of 18% reflects IFC’s ownership interest taking into consideration the overall commitments for the IFC Catalyst Funds, which is comprised of IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, IFC Catalyst Funds). IFC does not have an ownership interest in either the IFC Catalyst Fund (UK), LP or the IFC Catalyst Fund (Japan), LP. **** The ownership interest of 19% reflects IFC’s ownership interest taking into consideration the current committed amounts for the IFC Global Emerging Markets Fund of Funds, which are comprised of IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds, (Japan Parallel) LP. IFC does not have an ownership interest in the IFC Global Emerging Markets Fund of Funds, (Japan Parallel) LP. IFC’s investments in AMC Funds are accounted for at fair value. Other Consolidated entities In August 2015, IFC created a special purpose vehicle, IFC Sukuk Company, to facilitate a $100 million Sukuk under IFC’s borrowings program. The Sukuk is scheduled to mature in September 2020. IFC Sukuk Company is a VIE and has been consolidated into these condensed consolidated financial statements because IFC is the VIE’s primary beneficiary. The collective impact of this and other entities consolidated into these condensed consolidated financial statements under the VIE or voting interest model is insignificant. INTERNATIONAL FINANCE CORPORATION Page 40 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C - LIQUID ASSET PORTFOLIO Income from liquid asset trading activities Income from liquid asset trading activities for the three and nine months ended March 31, 2019 and 2018 comprises (US$ millions): Three months ended Nine months March 31, ended March 31, 2019 2018 2019 2018 Interest income, net $ 195 $ 152 $ 569 $ 472 Net gains on trading activities (realized and unrealized) 148 75 336 122 Total income from liquid asset trading activities $ 343 $ 227 $ 905 $ 594 Net gains and losses on trading activities comprise net gains on asset-backed and mortgage-backed securities of $15 million and net losses $27 million for the three and nine months ended March 31, 2019 (net losses of $16 million and $27 million - three and nine months ended March 31, 2018) and net gains on other trading securities of $133 million and $363 million for the three and nine months ended March 31, 2019 (net gains of $91 million and $149 million - three and nine months ended March 31, 2018). Composition of liquid asset portfolio The composition of IFC’s liquid asset portfolio included in the condensed consolidated balance sheet captions is as follows (US $ millions): March 31, June 30, 2019 2018 Assets Cash and due from banks $ 841 $ 837 Time deposits 17,953 13,156 Trading securities 27,014 28,909 Securities purchased under resale agreements and receivable for cash collateral pledged 2,124 1,989 Derivative assets 309 689 Receivables and other assets: Receivables from unsettled security trades 443 868 Accrued interest income on time deposits and securities 160 154 Accrued income on derivative instruments 44 29 Total assets 48,888 46,631 Liabilities Securities sold under repurchase agreements and payable for cash collateral received 8,127 6,364 Derivative liabilities 138 233 Payables and other liabilities: Payables for purchase of securities 1,211 1,055 Short-term borrowings and others — 1 Accrued charges on derivative instruments 49 42 Total liabilities 9,525 7,695 Total net liquid asset portfolio $ 39,363 $ 38,936 The liquid asset portfolio is denominated primarily in US dollars; investments in other currencies, net of the effect of associated derivative instruments that convert non-US dollar securities into US dollar securities, represent 1.2% of the portfolio at March 31, 2019 (3.7% - June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 41 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - INVESTMENTS The carrying amount of investments at March 31, 2019 and June 30, 2018 comprises (US$ millions): March 31, June 30, 2019 2018 Loans Loans at amortized cost $ 24,308 $ 23,975 Less: Reserve against losses on loans (1,167) (1,293) Loans at amortized cost less reserve against losses 23,141 22,682 Loans accounted for at fair value under the Fair Value Option (outstanding principal balance $1,112 at March 31, 2019, $1,037 - June 30, 2018) 1,024 927 Total loans 24,165 23,609 Equity investments Equity investments at cost less impairment — 2,710 Equity investments accounted for at fair value as available-for-sale (cost* $0 at March 31, 2019, $2,126 - June 30, 2018) — 3,528 Equity investments accounted for at fair value** (cost* $13,074 at March 31, 2019, $6,096 - June 30, 2018) 13,425*** 6,794 Total equity investments 13,425 13,032 Debt securities Debt securities accounted for at fair value as available-for-sale (amortized cost $4,664 at March 31, 2019, $5,092 - June 30, 2018) 4,566 4,900 Debt securities accounted for at fair value under the Fair Value Option (amortized cost $1,402 at March 31, 2019, $692 - June 30, 2018) 1,485 723 Total debt securities 6,051 5,623 Total carrying amount of investments $ 43,641 $ 42,264 * Effective July 1, 2018, the cost of equity investments represents initial disbursement (cash cost), while through June 30, 2018, the cost of equity investments was initial cash cost less write-downs. Therefore, they are not directly comparable. ** Equity investments at fair value as of March 31, 2019 are comprised of investments in common or preferred shares of $9,244 million, equity interests in private equity funds of $4,152 million, and equity-related options and other financial instruments of $29 million. *** Includes $15 million of equity investments primarily accounted for under the cost recovery method. As the recovery of invested capital is uncertain, the fair value measurement is not applicable to these investments. NOTE E - LOANS AND GUARANTEES Loans Income from loans and guarantees, including realized gains and losses on loans and associated derivatives for the three and nine months ended March 31, 2019 and 2018 comprise the following (US$ millions): Three months ended Nine months ended March 31, March 31, 2019 2018 2019 2018 Interest income $ 428 $ 315 $ 1,229 $ 928 Commitment fees 12 11 31 31 Other financial fees 18 18 51 49 Realized gains (losses) on loans, guarantees and associated derivatives 45 (3) 40 (9) Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 503 $ 341 $ 1,351 $ 999 INTERNATIONAL FINANCE CORPORATION Page 42 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) Reserve against losses on loans and provision for losses on loans Changes in the reserve against losses on loans for the three and nine months ended March 31, 2019 and 2018, as well as the related recorded investment in loans evaluated for impairment individually (specific reserves) and on a pool basis (portfolio reserves) respectively, are summarized below (US$ millions): Three months ended March 31, Nine months ended March 31, 2019 2019 Specific Portfolio Total Specific Portfolio Total reserves reserves reserves reserves reserves reserves Beginning balance $ 579 $ 607 $ 1,186 $ 651 $ 642 $ 1,293 Provision (release of provision) for losses on loans, net (15) 25 10 62 (6) 56 Write-offs (38) — (38) (219) — (219) Recoveries of previously written-off loans 7 — 7 34 — 34 Foreign currency transaction adjustments (1) (1) (2) (3) (4) (7) Other adjustments* 3 1 4 10 — 10 Ending balance $ 535 $ 632 $ 1,167 $ 535 $ 632 $ 1,167 Related recorded investment in loans at March 31, 2019 evaluated for impairment** $ 24,308 $ 23,148 $ 24,308 $ 24,308 $ 23,148 $ 24,308 Recorded investment in loans with specific reserves $ 1,160 $ 1,160 Three months ended March 31, Nine months ended March 31, 2018 2018 Specific Portfolio Total Specific Portfolio Total reserves reserves reserves reserves reserves reserves Beginning balance $ 824 $ 648 $ 1,472 $ 841 $ 642 $ 1,483 Provision (release of provision) for losses on loans, net 9 (28) (19) 97 (26) 71 Write-offs (9) — (9) (132) — (132) Recoveries of previously written-off loans 11 — 11 13 — 13 Foreign currency transaction adjustments 7 2 9 13 6 19 Other adjustments* 3 — 3 13 — 13 Ending balance $ 845 $ 622 $ 1,467 $ 845 $ 622 $ 1,467 Related recorded investment in loans at March 31, 2018 evaluated for impairment** $ 23,902 $ 22,357 $ 23,902 $ 23,902 $22,357 $ 23,902 Recorded investment in loans with specific reserves $ 1,545 $ 1,545 * Other adjustments comprise reserves against interest capitalized as part of a debt restructuring. ** IFC individually evaluates all loans for impairment. Portfolio reserves are established for losses incurred, but not specifically identifiable, on loans for which no specific reserve is established. INTERNATIONAL FINANCE CORPORATION Page 43 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) Reserve for losses on guarantees, accrued interest and other receivables and provision for losses on guarantees and other receivables Changes in the reserve against losses on guarantees for the three and nine months ended March 31, 2019 and 2018, are summarized below (US$ millions): Three months ended Nine months ended March 31, March 31, 2019 2018 2019 2018 Beginning balance $ 19 $ 14 $ 15 $ 12 Provision (release of provision) for losses on guarantees 8 —* 12 2 Ending balance $ 27 $ 14 $ 27 $ 14 * Less than $0.5 million. Changes in the reserve against losses on other receivables and accrued interest for the three and nine months ended March 31, 2019 and 2018, are summarized below (US$ millions): Three months ended Nine months ended March 31, March 31, 2019 2018 2019 2018 Beginning balance $ 9 $ 8 $ 8 $ 8 Provision (release of provision) for losses on other receivables and accrued interest 3 9 4 9 Ending balance $ 12 $ 17 $ 12 $ 17 INTERNATIONAL FINANCE CORPORATION Page 44 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) Impaired loans The average recorded investment and the recorded investment in loans at amortized cost that are impaired at March 31, 2019 and June 30, 2018 are as follows (US$ millions): March 31, June 30, 2019 2018 Average recorded investment in loans at amortized cost that are impaired $ 1,277 $ 1,357 Recorded investment in loans at amortized cost that are impaired 1,160 1,258 Loans at amortized cost that are impaired with specific reserves are summarized by geographic region and industry sector as follows (US$ millions): For the nine months ended March 31, As of March 31, 2019 2019 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Asia Manufacturing, agribusiness and services $ 53 $ 172 $ 28 $ 64 $ 2 Financial markets 35 40 7 43 1 Infrastructure and natural resources 61 129 35 69 — Telecom, media & technology, and venture investing 46 46 11 46 — Total Asia 195 387 81 222 3 Europe, Middle East and North Africa Manufacturing, agribusiness and services 131 153 63 138 3 Financial markets 1 1 1 1 — Infrastructure and natural resources 219 320 103 282 4 Telecom, media & technology, and venture investing 9 9 1 12 — Total Europe, Middle East and North Africa 360 483 168 433 7 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 227 256 85 219 5 Financial markets 12 60 7 30 1 Infrastructure and natural resources 338 384 176 345 9 Telecom, media & technology, and venture investing 28 28 18 28 — Total Sub-Saharan Africa, Latin America and Caribbean 605 728 286 622 15 Other Manufacturing, agribusiness and services — 15 — — — Total Other — 15 — — — Total $ 1,160 $ 1,613 $ 535 $ 1,277 $ 25 All impaired loans at March 31, 2019 had specific reserves. INTERNATIONAL FINANCE CORPORATION Page 45 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) For the year ended June 30, As of June 30, 2018 2018 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Asia Manufacturing, agribusiness and services $ 74 $ 177 $ 40 $ 86 $ 2 Financial markets — 2 — — — Infrastructure and natural resources 109 131 77 95 — Telecom, media & technology, and venture investing 46 46 10 46 — Total Asia 229 356 127 227 2 Europe, Middle East and North Africa Manufacturing, agribusiness and services 278 354 118 315 4 Financial markets 17 26 17 27 2 Infrastructure and natural resources 186 211 127 188 2 Telecom, media & technology, and venture investing 12 12 1 17 1 Total Europe, Middle East and North Africa 493 603 263 547 9 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 158 177 64 163 7 Financial markets 41 69 37 46 1 Infrastructure and natural resources 317 364 146 353 6 Telecom, media & technology, and venture investing 20 20 14 21 — Total Sub-Saharan Africa, Latin America and Caribbean 536 630 261 583 14 Other Manufacturing, agribusiness and services — 15 — — — Total Other — 15 — — — Total $ 1,258 $ 1,604 $ 651 $ 1,357 $ 25 All impaired loans at June 30, 2018 had specific reserves. Nonaccruing loans Loans on which the accrual of interest has been discontinued amounted to $1,229 million at March 31, 2019 ($1,377 million - June 30, 2018). The interest income on such loans for the three and nine months ended March 31, 2019 and 2018 is summarized as follows (US$ millions): Three months ended Nine months March 31, ended March 31, 2019 2018 2019 2018 Interest income not recognized on nonaccruing loans $ 33 $ 67 $ 104 $ 136 Interest income recognized on loans in nonaccrual status related to current and prior years, on a cash basis 13 8 39 31 INTERNATIONAL FINANCE CORPORATION Page 46 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) The recorded investment in nonaccruing loans at March 31, 2019 and June 30, 2018 is summarized by geographic region and industry sector as follows (US$ millions): March 31, 2019 Telecom, Total media & recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture non-accruing and services markets resources investing loans Asia $ 57 $ — $ 74 $ 46 $ 177 Europe, Middle East and North Africa 118 1 270 16 405 Sub-Saharan Africa, Latin America and Caribbean 358 18 289 28 693 Other — — — 2 2 Total disbursed loans $ 533 $ 19 $ 633 $ 92 $ 1,277* June 30, 2018 Telecom, Total media & recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture non-accruing and services markets resources investing loans Asia $ 71 $ — $ 123 $ 46 $ 240 Europe, Middle East and North Africa 257 35 236 20 548 Sub-Saharan Africa, Latin America and Caribbean 242 53 295 20 610 Other — — — 2 2 Total disbursed loans $ 570 $ 88 $ 654 $ 88 $ 1,400* * Includes $48 million reported as debt securities on the Balance Sheet as of March 31, 2019 ($23 million - June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 47 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) Past due loans An age analysis, based on contractual terms, of IFC’s loans at amortized cost by geographic region and industry sector follows (US$ millions): March 31, 2019 90 days 30-59 60-89 or days past days past greater Total past Total due due past due due Current loans Asia Manufacturing, agribusiness and services $ — $ — $ 40 $ 40 $ 1,747 $ 1,787 Financial markets — — — — 2,828 2,828 Infrastructure and natural resources — — 60 60 1,875 1,935 Telecom, media & technology, and venture investing — — 46 46 183 229 Total Asia — — 146 146 6,633 6,779 Europe, Middle East and North Africa Manufacturing, agribusiness and services 20 — 94 114 1,807 1,921 Financial markets — — 1 1 1,713 1,714 Infrastructure and natural resources — — 104 104 1,459 1,563 Telecom, media & technology, and venture investing — — — — 46 46 Total Europe, Middle East and North Africa 20 — 199 219 5,025 5,244 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 2 22 244 268 2,593 2,861 Financial markets — — 2 2 3,933 3,935 Infrastructure and natural resources — — 89 89 3,365 3,454 Telecom, media & technology, and venture investing — — 27 27 315 342 Total Sub-Saharan Africa, Latin America and Caribbean 2 22 362 386 10,206 10,592 Other Manufacturing, agribusiness and services 30 — — 30 587 617 Financial markets — — — — 1,008 1,008 Infrastructure and natural resources — — — — 194 194 Telecom, media & technology, and venture investing — — — — — — Total Other 30 — — 30 1,789 1,819 Total disbursed loans at amortized cost $ 52 $ 22 $ 707 $ 781 $ 23,653 $ 24,434 Unamortized deferred loan origination fees, net and other (124) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (2) Recorded investment in loans at amortized cost $ 24,308 At March 31, 2019, loans 90 days or greater past due still accruing were insignificant. INTERNATIONAL FINANCE CORPORATION Page 48 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) June 30, 2018 90 days 30-59 60-89 or days past days past greater Total past Total due due past due due Current loans Asia Manufacturing, agribusiness and services $ — $ — $ 54 $ 54 $ 1,790 $ 1,844 Financial markets — — — — 2,371 2,371 Infrastructure and natural resources — — 62 62 2,128 2,190 Telecom, media & technology, and venture investing — — 46 46 226 272 Total Asia — — 162 162 6,515 6,677 Europe, Middle East and North Africa Manufacturing, agribusiness and services — 14 184 198 2,049 2,247 Financial markets — — 2 2 1,797 1,799 Infrastructure and natural resources 34 — 146 180 1,339 1,519 Telecom, media & technology, and venture investing — — — — 45 45 Total Europe, Middle East and North Africa 34 14 332 380 5,230 5,610 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 14 5 150 169 2,734 2,903 Financial markets — 2 26 28 3,602 3,630 Infrastructure and natural resources — — 88 88 3,185 3,273 Telecom, media & technology, and venture investing — — 16 16 260 276 Total Sub-Saharan Africa, Latin America and Caribbean 14 7 280 301 9,781 10,082 Other Manufacturing, agribusiness and services — — — — 667 667 Financial markets — — — — 897 897 Infrastructure and natural resources — — — — 202 202 Total Other — — — — 1,766 1,766 Total disbursed loans at amortized cost $ 48 $ 21 $ 774 $ 843 $ 23,292 $ 24,135 Unamortized deferred loan origination fees, net and other (156) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (4) Recorded investment in loans at amortized cost $ 23,975 At June 30, 2018, loans 90 days or greater past due still accruing were insignificant. INTERNATIONAL FINANCE CORPORATION Page 49 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) Loan Credit Quality Indicators IFC utilizes a rating system to classify loans according to credit worthiness and risk. In FY17 Q3, IFC implemented a new rating system, replacing its previous rating system. A description of each credit rating and categorization in terms of the attributes of the borrower, the business environment in which the borrower operates or the loan itself under the new rating system follows: Credit Indicative Risk External Category Description Rating Rating CR-1 AAA, AA+, Very Strong An obligor rated CR-1 is the highest rating assigned by IFC. The obligor's ability to meet AA, AA- its financial obligations is very strong. An obligor rated CR-2 is slightly more susceptible to the negative effects of changes in CR-2 A+, A, A- Strong circumstances and economic conditions than obligors rated CR-1. The obligor's ability to meet its financial obligations remains strong. An obligor rated CR-3 exhibits an adequate financial profile, even though at a weaker level CR-3 BBB+ than ‘CR-1’ and ‘CR-2’. An obligor rated CR-4 exhibits an adequate financial profile. However, adverse economic CR-4 BBB conditions or changing circumstances are more likely to lead to a deterioration of the Adequate obligor’s ability to meet its financial obligations. An obligor rated CR-5, as the lowest of the investment grade ratings, exhibits an adequate CR-5 BBB- financial profile. However, adverse economic conditions and/or changing circumstances are more likely to lead to a weaker financial profile and a deterioration of the obligor’s ability to meet its financial obligations. An obligor rated CR-6, as the first non-investment grade rating, is less vulnerable to default CR-6 BB+ than other non-investment obligors. An obligor rated CR-7 can face major uncertainties. Exposure to negative business, CR-7 BB financial, or economic conditions could lead to the obligor's insufficient financial profile Moderate and a deterioration of the obligor’s ability to meet its financial obligations. An obligor rated CR-8 faces major ongoing uncertainties. Exposure to negative business, CR-8 BB- financial, or economic conditions could lead to the obligor's insufficient financial profile and a deterioration of the obligor’s ability to meet its financial obligations. An obligor rated CR-9 is less vulnerable to default than obligors rated 'CR-10’ or ‘CR-11'. CR-9 B+ Significantly negative business, financial, or economic conditions will likely weaken the obligor's financial profile and ability to meet its financial obligations. An obligor rated CR-10 is more vulnerable to default than obligors rated 'CR-9’ but the CR-10 B obligor still has the capacity to meet its financial obligations. Negative business, financial, Weak or economic conditions will likely weaken the obligor's financial profile and ability to meet its financial obligations. An obligor rated CR-11 is more vulnerable to default than obligors rated 'CR-9’ or ‘CR-10’. The obligor still has the capacity to meet its obligations but slightly negative business, CR-11 B- financial, or economic conditions are more likely to weaken the obligor's financial profile and ability to meet its financial obligations than a company rated CR-10. An obligor rated CR-12 faces significant challenges. While such obligors will likely have Very Weak/ some positive characteristics, these may be outweighed by large uncertainties or major CR-12 CCC+ Special exposures to adverse conditions. The obligor is dependent upon favorable business, Attention financial, and economic conditions to meet its financial obligations. An obligor rated CR-13 is currently vulnerable to default, and is dependent upon Very Weak / significantly favorable business, financial, and economic conditions to meet its financial CR-13 CCC obligations. In the event of negative business, financial, or economic conditions, the obligor Substandard is not likely to meet its financial obligations and rescheduling and/or restructuring is likely to be required. An obligor rated CR-14 is highly vulnerable to default. It is highly likely that a rescheduling Extremely and/or restructuring are required without which a default under IFC’s accounting definition CR-14 CCC- Weak / would ensue. In some cases, even though default has not occurred yet, cash flow may be Doubtful insufficient to service debt in full. An obligor rated CR-15 is currently extremely vulnerable to nonpayment and there are CR-15 Worse Imminent indications that the next payment will not be made before meeting IFC’s accounting than CCC- Default definition of default. and D /Default D An obligor rated D is in payment default according to IFC’s accounting definition of default. INTERNATIONAL FINANCE CORPORATION Page 50 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) A summary of IFC’s disbursed loans at amortized cost by credit quality indicator effective March 31, 2019 and June 30, 2018 respectively, as well as by industry sector and geographic region follows (US$ millions): Very Weak/ Extremely Imminent Very Special Very Weak/ Weak/ Default/ Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Total disbursed loans at amortized cost at March 31, 2019 $ 35 $1,026 $ 3,370 $ 9,107 $8,909 $ 293 $ 527 $ 257 $ 910 $24,434 Total disbursed loans at amortized cost at June 30, 2018 $ 35 $1,207 $ 3,457 $ 8,814 $8,299 $ 291 $ 402 $ 561 $ 1,069 $24,135 March 31, 2019 Very Weak/ Extremely Imminent Very Special Very Weak/ Weak/ Default/ Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Geographic Region Asia $ — $ 198 $ 1,493 $ 2,556 $2,303 $ 33 $ 27 $ 22 $ 147 $ 6,779 Europe, Middle East and North Africa — 349 453 1,664 2,160 135 115 25 343 5,244 Sub-Saharan Africa, Latin America and Caribbean — 477 1,169 3,637 4,169 125 385 210 420 10,592 Other 35 2 255 1,250 277 — — — — 1,819 Total geographic region $ 35 $1,026 $ 3,370 $ 9,107 $8,909 $ 293 $ 527 $ 257 $ 910 $24,434 March 31, 2019 Very Weak/ Extremely Imminent Very Special Very Weak/ Weak/ Default/ Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Industry Sector Manufacturing, agribusiness and services $ 35 $ 618 $ 1,201 $ 2,621 $1,912 $ 172 $ 233 $ 25 $ 369 $ 7,186 Financial markets — 23 1,741 4,955 2,708 45 3 1 9 9,485 Infrastructure and natural resources — 300 338 1,214 4,247 76 291 231 449 7,146 Telecom, media & technology, and venture investing — 85 90 317 42 — — — 83 617 Total industry sector $ 35 $1,026 $ 3,370 $ 9,107 $8,909 $ 293 $ 527 $ 257 $ 910 $24,434 INTERNATIONAL FINANCE CORPORATION Page 51 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LOANS AND GUARANTEES (continued) June 30, 2018 Very Weak/ Extremely Imminent Very Special Very Weak/ Weak/ Default/ Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Geographic Region Asia $ — $ 292 $ 1,248 $ 2,520 $2,320 $ 37 $ 19 $ 19 $ 222 $ 6,677 Europe, Middle East and North Africa — 405 707 1,663 2,055 34 17 285 444 5,610 Sub-Saharan Africa, Latin America and Caribbean — 510 725 3,969 3,632 220 366 257 403 10,082 Other 35 — 777 662 292 — — — — 1,766 Total geographic region $ 35 $1,207 $ 3,457 $ 8,814 $8,299 $ 291 $ 402 $ 561 $ 1,069 $24,135 June 30, 2018 Very Weak/ Extremely Imminent Very Special Very Weak/ Weak/ Default/ Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Industry Sector Manufacturing, agribusiness and services $ 35 $ 772 $ 1,238 $ 2,660 $2,037 $ 134 $ 88 $ 216 $ 481 $ 7,661 Financial markets — 29 1,879 4,632 2,048 23 28 16 42 8,697 Infrastructure and natural resources — 300 281 1,286 4,113 133 282 317 472 7,184 Telecom, media & technology, and venture investing — 106 59 236 101 1 4 12 74 593 Total industry sector $ 35 $1,207 $ 3,457 $ 8,814 $8,299 $ 291 $ 402 $ 561 $ 1,069 $24,135 Loan modifications, including past due amounts capitalized and written off, during the three and nine months ended March 31, 2019 considered troubled debt restructurings totaled $48 and $271 million ($51 million and $123 million - three and nine months ended March 31, 2018). There was one loan that defaulted during the nine months ended March 31, 2019 that had been modified in a troubled debt restructuring within 12 months prior to the date of default with an outstanding balance of $12 million (two loans defaulted during the nine months ended March 31, 2018, with an outstanding balance of $14 million). Guarantees IFC extends financial guarantee facilities to its clients to provide full or partial credit enhancement for their debt securities and trade obligations. Under the terms of IFC’s guarantees, IFC agrees to assume responsibility for the client’s financial obligations in the event of default by the client, where default is defined as failure to pay when payment is due. Guarantees entered into by IFC generally have maturities consistent with those of the loan portfolio. Guarantees signed at March 31, 2019 totaled $4,144 million ($4,809 million - June 30, 2018). Guarantees of $3,577 million that were outstanding (i.e., not called) at March 31, 2019 ($4,096 million - June 30, 2018), were not included in loans on IFC’s condensed consolidated balance sheet. The outstanding amount represents the maximum amount of undiscounted future payments that IFC could be required to make under these guarantees. INTERNATIONAL FINANCE CORPORATION Page 52 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE F - DEBT SECURITIES Income from debt securities, including realized gains and losses on debt securities and associated derivatives for the three and nine months ended March 31, 2019 and 2018 comprise the following (US$ millions): Three months ended Nine months ended March 31, March 31, 2019 2018 2019 2018 Interest income $ 93 $ 81 $ 277 $ 214 Dividends — — 4 1 Realized gains on debt securities and associated derivatives 1 75 3 68 Other-than-temporary impairments* (1) (5) (247) (30) Total income from debt securities, including realized gains on debt securities and associated derivatives $ 93 $ 151 $ 37 $ 253 * Includes impairments of available-for-sale debt securities of $238 million for the nine months ended March 31, 2019 ($0 for the three months ended March 31, 2019) to write down the cumulative foreign exchange losses due to significant currency depreciation, as IFC considers the foreign exchange losses associated with those debt securities as other-than-temporary. Debt securities accounted for as available-for-sale at March 31, 2019 and June 30, 2018 comprise (US$ millions): March 31, 2019 Foreign currency transaction Amortized Unrealized Unrealized (losses)/ cost gains losses gains Fair value Corporate debt securities $ 3,827 $ 91 $ (125) $ (113) $ 3,680 Preferred shares 117 83 (1) — 199 Asset-backed securities 720 — (30) (3) 687 Total $ 4,664 $ 174 $ (156) $ (116) $ 4,566 June 30, 2018 Foreign currency Amortized Unrealized Unrealized transaction cost gains losses losses Fair value Corporate debt securities $ 4,115 $ 81 $ (97) $ (138) $ 3,961 Preferred shares 144 66 (2) — 208 Asset-backed securities 833 — (31) (71) 731 Total $ 5,092 $ 147 $ (130) $ (209) $ 4,900 The following table shows the unrealized losses and fair value of debt securities at March 31, 2019 and June 30, 2018 by length of time that individual securities had been in a continuous loss position where the fair value of securities declined below their cost basis (US$ millions): March 31, 2019 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 592 $ (32) $ 810 $ (93) $ 1,402 $ (125) Preferred shares — — 17 (1) 17 (1) Asset-backed securities — — 97 (30) 97 (30) Total $ 592 $ (32) $ 924 $ (124) $ 1,516 $ (156) INTERNATIONAL FINANCE CORPORATION Page 53 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE F - DEBT SECURITIES (continued) June 30, 2018 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 1,116 $ (78) $ 308 $ (19) $ 1,424 $ (97) Preferred shares 18 (1) 1 (1) 19 (2) Asset-backed securities 125 (31) — — 125 (31) Total $ 1,259 $ (110) $ 309 $ (20) $ 1,568 $ (130) Corporate debt securities comprise investments in bonds and notes. Fair value associated with corporate debt securities is primarily attributable to movements in the credit default swap spread curve applicable to the issuer, and also impacted by movements in the risk-free rates and foreign currency exchange rates. Based upon IFC’s assessment of expected credit losses, IFC has determined that the issuer is expected to make all contractual principal and interest payments. Accordingly, IFC expects to recover the cost basis of these securities. Preferred shares comprise investments in preferred equity investments that are redeemable at the option of IFC or mandatorily redeemable by the issuer. Unrealized losses associated with preferred shares are primarily driven by changes in discount rates associated with changes in credit spreads or interest rates, minor changes in exchange rates and comparable market valuations in the applicable sector. Based upon IFC’s assessment of the expected credit losses, IFC expects to recover the cost basis of these securities. Nonaccruing debt securities Debt securities on which the accrual of interest has been discontinued amounted to $48 million at March 31, 2019 ($23 million - June 30, 2018). NOTE G - EQUITY INVESTMENTS AND ASSOCIATED DERIVATIVES Income from equity investments and associated derivatives for the three and nine months ended March 31, 2019 and 2018 comprises the following (US$ millions): Three months ended Nine months ended March 31, March 31, 2019 2018 2019 2018 Unrealized (losses) gains on equity investments and associated derivatives** $ 374 $ (6) $ (804) $ 31 Realized gains (losses) on equity investments and associated derivatives, net (11) 326 231 808 (Losses) gains on equity investments and associated derivatives, net 363 320 (573) 839 Dividends 24 49 124 188 Other-than-temporary impairments: Equity investments at cost less impairment — (35) — (172) Equity investments available-for-sale — (50) — (132) Total other-than-temporary impairments — (85) — (304) Custody, fees and other 1 —* 4 3 Total (loss) income from equity investments and associated derivatives $ 388 $ 284 $ (445) $ 726 * Less than $0.5 million. ** Including unrealized gains and losses related to equity securities still held at March 31, 2019 - net gains of $331 million and net losses of $666 million for the three and nine months ended March 31, 2019. Equity investments include several private equity funds that invest primarily in emerging markets across a range of sectors and that are accounted for at fair value under the Fair Value Option. The fair values of these funds have been determined using the net asset value of IFC’s ownership interest in partners’ capital as a practical expedient and totaled $4,152 million as of March 31, 2019 ($3,960 million - June 30, 2018). These investments cannot be redeemed. Instead distributions are received through the liquidation of the underlying assets of the funds. IFC estimates that the underlying assets of the funds will be liquidated over five to eight years. As of March 31, 2019, the maximum unfunded commitments subject to capital calls for these funds are $1,068 million ($1,334 million - June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 54 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE H - RETAINED EARNINGS DESIGNATIONS AND RELATED EXPENDITURES AND ACCUMULATED OTHER COMPREHENSIVE INCOME Designated retained earnings The components of designated retained earnings and related expenditures are summarized below (US$ millions): Creating SME Total Markets Performance Ventures designated Grants Advisory Advisory -based for IDA retained to IDA services Window grants countries earnings At June 30, 2017 $ — $ 99 $ — $ 8 $ 18 $ 125 Year ended June 30, 2018 Designations of retained earnings 80 40 85 — — 205 Reallocation of prior year designations — (49) 49 — — — Expenditures against designated retained earnings (80) (44) (12) (3) (1) (140) At June 30, 2018 $ — $ 46 $ 122 $ 5 $ 17 $ 190 Nine months ended March 31, 2019 Designations of retained earnings 115 45 70 — — 230 Expenditures against designated retained earnings — (13) (14) (2) (1) (30) At March 31, 2019 $ 115 $ 78 $ 178 $ 3 $ 16 $ 390 On August 9, 2018, the Board of Directors approved a designation of $70 million of IFC’s retained earnings for IFC’s Creating Markets Advisory Window (CMAW), $45 million of IFC’s retained earnings for advisory services, and a designation of up to $115 million of IFC’s retained earnings for grants to IDA. The transfer of funds to IDA are subject to certain conditions, including capping transfers during a fiscal year at IFC’s Net Income, if any, for the nine months ended March 31 of that fiscal year. On October 12, 2018, the Board of Governors noted with approval the designations approved by the Board of Directors. IFC recognizes designation of retained earnings for advisory services and CMAW when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. Accumulated other comprehensive income (loss) The components of accumulated other comprehensive income (loss) at March 31, 2019 and June 30, 2018 are summarized as follows (US$ millions): March 31, June 30, 2019 2018 Net unrealized losses on available-for-sale debt securities $ (98) $ (192) Net unrealized gains on available-for-sale equity investments — 1,402 Net unrealized gains on borrowings at fair value under the fair value option due to changes in instrument-specific credit risk 149 — Unrecognized net actuarial losses and unrecognized prior service costs on benefit plans (921) (946) Total accumulated other comprehensive (loss) income $ (870) $ 264 INTERNATIONAL FINANCE CORPORATION Page 55 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE I - NET UNREALIZED GAINS AND LOSSES ON NON-TRADING FINANCIAL INSTRUMENTS ACCOUNTED FOR AT FAIR VALUE Net unrealized gains and losses on non-trading financial instruments accounted for at fair value for the three and nine months ended March 31, 2019 and 2018 comprise (US$ millions): Three months ended Nine months March 31, ended March 31, 2019 2018 2019 2018 Unrealized gains and losses on loans, debt securities and associated derivatives: Unrealized gains (losses) on loans and associated derivatives $ (70) $ 100 $ (93) $ 116 Unrealized gains (losses) on debt securities and associated derivatives 46 (31) 60 49 Total net unrealized gains (losses) on loans, debt securities and associated derivatives (24) 69 (33) 165 Unrealized gains and losses on borrowings from market, IDA and associated derivatives: Unrealized gains and losses on market borrowings accounted for at fair value: Credit spread component* — (160) — (225) Interest rate, foreign exchange and other components (488) 552 (586) 796 Total unrealized gains (losses) on market borrowings (488) 392 (586) 571 Unrealized gains (losses) on derivatives associated with market borrowings 586 (475) 572 (691) Unrealized gains (losses) on borrowings from IDA accounted for at fair value (9) 11 (18) 18 Total net unrealized gains (losses) on borrowings from market, IDA and associated derivatives 89 (72) (32) (102) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value $ 65 $ (3) $ (65) $ 63 * As discussed in Note A, “Summary of significant accounting and related policies”, effective July 1, 2018, the portion of the change in fair value of borrowings under the FVO resulting from the change of IFC’s own credit risk is recorded in other comprehensive income. In prior periods, these amounts were recognized in net income. Market borrowings economically hedged with financial instruments, including derivatives, accounted for at fair value with changes therein reported in earnings are accounted for at fair value under the Fair Value Option. Differences arise between the movement in the fair value of market borrowings and the fair value of the associated derivatives primarily due to the different credit characteristics. The change in fair value includes the impact of changes in IFC’s own credit spread. As credit spreads widen, unrealized gains occur and when such credit spreads narrow, unrealized losses occur (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but they do not alter the timing of the cash flows on the market borrowings. Changes in fair value resulting from changes in IFC’s own credit risk were estimated by incorporating the IFC’s current credit spreads observable in the bond markets into the relevant valuation technique used to value each liability as described in Note K. INTERNATIONAL FINANCE CORPORATION Page 56 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE J - DERIVATIVES As discussed in Note A, “Summary of significant accounting and related policies”, IFC enters into transactions in various derivative instruments for financial risk management purposes in connection with its principal business activities, including lending, investing in debt securities, equity investments, client risk management, borrowing, liquid asset management and asset and liability management. None of these derivative instruments are designated as hedging instruments under ASC Topic 815. Note A describes IFC’s risk management and use of derivative instruments. The fair value of derivative instrument assets and liabilities by risk type at March 31, 2019 and June 30, 2018 is summarized as follows (US$ millions): March 31, June 30, Condensed Consolidated Balance Sheet location 2019 2018 Derivative assets Interest rate $ 345 $ 318 Foreign exchange 195 483 Interest rate and currency 2,008 1,773 Equity and other 149 235 Total derivative assets $ 2,697 $ 2,809 Derivative liabilities Interest rate $ 805 $ 1,153 Foreign exchange 75 88 Interest rate and currency 3,307 3,037 Equity and other 9 11 Total derivative liabilities $ 4,196 $ 4,289 INTERNATIONAL FINANCE CORPORATION Page 57 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE J - DERIVATIVES (continued) The effect of derivative instrument contracts on the condensed consolidated statement of operations for the three and nine months ended March 31, 2019 and 2018 is summarized as follows (US$ millions): Three months ended Nine months March 31, ended March 31, Derivative risk category Condensed Consolidated Statement of Operations location 2019 2018 2019 2018 Interest rate Income from loans and guarantees, including realized gains and $ 1 $ (1) $ — $ (1) losses on loans and associated derivatives Income from debt securities, including realized gains and losses on debt securities and associated derivatives 1 1 3 — Income (losses) from liquid asset trading activities (31) 17 (71) 3 Charges on borrowings (21) 39 (40) 102 Other income 4 (6) 18 (7) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 221 (290) 406 (387) Foreign exchange Income from liquid asset trading activities 71 80 215 168 Foreign currency transaction gains and losses on non-trading activities (91) (56) (249) (156) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value — — (1) (1) Interest rate Income from loans and guarantees, including realized gains and and currency losses on loans and associated derivatives (18) (26) (55) (119) Income from debt securities, including realized gains and losses on debt securities and associated derivatives (2) (16) (1) (32) Income from liquid asset trading activities 62 29 176 89 Charges on borrowings 117 200 411 566 Foreign currency transaction gains and losses on non-trading activities 145 (190) (293) (624) Other Income — — 1 — Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 277 (78) 66 (131) Equity Income (loss) from equity investments and associated derivatives (44) 17 (79) (19) Income from loans and guarantees, including realized gains and losses on loans and associated derivatives 39 — 39 — Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (1) 28 (5) 11 Total $ 730 $ (252) $ 541 $ (538) The income related to each derivative risk category includes realized and unrealized gains and losses. At March 31, 2019, the outstanding volume, measured by US$ equivalent notional, of interest rate contracts was $52,534 million ($57,960 million at June 30, 2018), foreign exchange contracts was $19,545 million ($21,279 million at June 30, 2018) and interest rate and currency contracts was $42,874 million ($38,267 million at June 30, 2018). At March 31, 2019, there were 200 equity contracts related to IFC’s loan and equity investment portfolio and no other derivative contract recognized as derivatives assets or liabilities under ASC Topic 815 (353 equity risk and other contracts at June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 58 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS Many of IFC’s financial instruments are not actively traded in any market. Accordingly, estimates and present value calculations of future cash flows are used to estimate the fair values. Determining future cash flows for fair value estimation is subjective and imprecise, and minor changes in assumptions or methodologies may materially affect the estimated values. The excess or deficit resulting from the difference between the carrying amounts and the fair values presented does not necessarily reflect the values which will ultimately be realized, since IFC generally holds loans, borrowings and other financial instruments with contractual maturities with the aim of realizing their contractual cash flows. The estimated fair values as of March 31, 2019 and June 30, 2018 reflect multiple factors such as interest rates, credit risk, foreign currency exchange rates and commodity prices. Reasonable comparability of fair values among financial institutions is not likely because of the wide range of permitted valuation techniques and numerous estimates that must be made in the absence of secondary market prices. This lack of objective pricing standard in the market introduces a greater degree of subjectivity and volatility to these derived or estimated fair values. Therefore, while disclosure of estimated fair values of financial instruments is required, readers are cautioned in using these data for purposes of evaluating the financial condition of IFC. The fair values of the individual financial instruments do not represent the fair value of IFC taken as a whole. All of IFC’s financial instruments in its liquid assets portfolio are managed according to an investment authority approved by the Board of Directors and investment guidelines approved by IFC’s Corporate Risk Committee (CRC), a subcommittee of IFC’s Management Team. Third party independent vendor prices are used to price the vast majority of the liquid assets. The vendor prices are evaluated by IFC’s Treasury department and IFC’s Corporate and Portfolio Risk Management department maintains oversight for the pricing of liquid assets. IFC’s regional and industry departments are primarily responsible for fair valuing IFC’s investment portfolio (equity investments, debt securities, loan investments and related derivatives). IFC’s Portfolio Valuation Unit, in Risk & Financial Sustainability, and Portfolio Review Unit, in Finance and Accounting, provide oversight over the fair valuation process by monitoring and reviewing the fair values of IFC’s investment portfolio. A Portfolio Committee, a committee of IFC’s management team, was established effective FY18 Q1 with responsibilities that include oversight of portfolio valuations. IFC’s borrowings are fair valued by the Quantitative Analysis and Modeling Group in IFC’s Treasury department under the oversight of the Corporate Portfolio and Risk Management department. The methodologies used and key assumptions made to estimate fair values as of March 31, 2019, and June 30, 2018, are summarized below. Liquid assets - The primary pricing source for the liquid assets is valuations obtained from external pricing services (vendor prices). The most liquid securities in the liquid asset portfolio are exchange traded futures, options, and US Treasuries. For exchange traded futures and options, exchange quoted prices are obtained and these are classified as Level 1 in accordance with ASC 820. Liquid assets valued using quoted market prices are also classified as Level 1. Securities valued using vendor prices for which there is evidence of high market trade activity may also be classified as Level 1. US Treasuries are valued using index prices and also classified as Level 1. The remaining liquid assets valued using vendor prices are classified as Level 2 or Level 3 based on the results of IFC’s evaluation of the vendor’s pricing methodologies and individual security facts and circumstances. Most vendor prices use some form of matrix pricing methodology to derive the inputs for projecting cash flows or to derive prices. When vendor prices are not available, liquid assets are valued internally by IFC using yield-pricing approach or comparables model approach and these are classified as Level 2 or Level 3 depending on the degree that the inputs are observable in the market. The critical factors in valuing liquid assets in both Level 2 and Level 3 are the estimation of cash flows and yield. Other significant inputs for valuing corporate securities, quasi-government securities and sovereign or sovereign-guaranteed securities include reported trades, broker/dealer quotes, benchmark securities, option adjusted spread curve, volatilities, and other reference data. In addition to these inputs, valuation models for securitized or collateralized securities use collateral performance inputs, such as weighted average coupon rate, weighted average maturity, conditional prepayment rate, constant default rate, vintage, and credit enhancements. INTERNATIONAL FINANCE CORPORATION Page 59 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Loans and debt securities - Loans and debt securities in IFC’s investment portfolio that do not have available market prices are primarily valued using discounted cash flow approaches. All loans measured at fair value are classified as Level 3. Certain loans contain embedded conversion and/or income participation features. If not bifurcated as standalone derivatives, these features are considered in determining the loans’ fair value based on the quoted market prices or other calculated values of the equity investments into which the loans are convertible and the discounted cash flows of the income participation features. The valuation techniques and significant unobservable inputs for loans and debt securities classified as Level 3 as of March 31, 2019 and June 30, 2018 are presented below: March 31, 2019 Fair value Weighted (US$ average Valuation technique millions) Significant inputs Range (%) (%) Debt securities – preferred Discounted cash flows $ 94 Discount rate 6.6 - 30.0 13.6 shares Relative valuations 94 Valuation multiples* Recent transactions 217 Other techniques 13 Total preferred shares 418 Credit default swap Loans and other debt securities Discounted cash flows 2,262 spreads 0.6 - 10.2 2.9 Expected recovery rates 35.0 - 85.0 50.0 Recent transactions 1,386 Other techniques 694 Total loans and other debt securities 4,342 Total $ 4,760 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/sales ratio, the range and weighted average are not provided. June 30, 2018 Fair value Weighted (US$ average Valuation technique millions) Significant inputs Range (%) (%) Debt securities – preferred Discounted cash flows $ 112 Discount rate 10.2 – 30.0 15.2 shares Relative valuations 71 Valuation multiples* Recent transactions 192 Other techniques 8 Total preferred shares 383 Credit default swap Loans and other debt securities Discounted cash flows 2,203 spreads 0.6 – 6.9 2.2 Expected recovery rates 35.0 – 50.0 44.8 Recent transactions 1,715 Other techniques 408 Total loans and other debt securities 4,326 Total $ 4,709 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/sales ratio, the range and weighted average are not provided. INTERNATIONAL FINANCE CORPORATION Page 60 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Borrowings - Fair values derived by using quoted prices in active markets are classified as Level 1. Fair values derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate are classified as Level 2. The significant inputs used in valuing borrowings classified as Level 2 are presented below: Classes Significant Inputs Structured bonds Foreign exchange rate and inter-bank yield curves, IFC’s credit curve and swaption volatility matrix, foreign exchange rate volatility, equity spot price, volatility and dividend yield. Unstructured bonds Inter-bank yield curve and IFC’s credit curve. As of March 31, 2019, IFC had bond issuances with a total fair value of $120 million classified as level 3 in Kazakhstan tenge and Uzbekistan sum where the significant unobservable inputs were yield curve data. As of March 31, 2019, the weighted average effective interest rate on medium and long-term borrowings carried at amortized cost was 6.7% and the effective interest rate on short-term borrowings carried at amortized cost was 2.5%. Derivative instruments - The various classes of derivative instruments include interest rate contracts, foreign exchange contracts, interest rate and currency contracts, equity contracts and other derivative contracts. Certain over the counter derivatives in the liquid asset portfolio priced in-house are classified as Level 2, while certain over the counter derivatives priced using external manager prices are classified as Level 3. Fair values for derivative instruments are derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate. The significant inputs used in valuing the various classes of derivative instruments classified as Level 2 and significant unobservable inputs for derivative instruments classified as Level 3 as of March 31, 2019 and June 30, 2018 are presented below: Level 2 derivatives Significant Inputs Interest rate Inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. Foreign exchange Foreign exchange rate, inter-bank yield curves and foreign exchange basis curve. Interest rate and currency Foreign exchange rate, inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. March 31, 2019 Fair value Weighted (US$ average Level 3 derivatives Type millions) Significant inputs Range (%) (%) Equity related derivatives Fixed strike price options $ 28 Volatilities 28.1 - 35.4 29.1 Variable strike price options 111 Contractual strike price* Other 1 Interest rate and currency Yield curve points, swap assets Vanilla swaps 18 exchange rates Interest rate and currency Yield curve points, swap liabilities Vanilla swaps (5) exchange rates Total $ 153 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. INTERNATIONAL FINANCE CORPORATION Page 61 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) June 30, 2018 Fair value Weighted (US$ average Level 3 derivatives Type millions) Significant inputs Range (%) (%) Equity related derivatives Fixed strike price options $ 21 Volatilities 11.6 – 35.4 20.1 Variable strike price options 202 Contractual strike price* Other 1 Interest rate and currency Yield curve points, swap assets Vanilla swaps 8 exchange rates Interest rate and currency Yield curve points, swap liabilities Vanilla swaps (7) exchange rates Total $ 225 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. Equity investments - Equity investments valued using quoted prices in active markets are classified as Level 1. Equity investments classified as Level 2 were valued using quoted prices in inactive markets. The valuation techniques and significant unobservable inputs for equity investments classified as Level 3 as of March 31, 2019 and June 30, 2018 are presented below: March 31, 2019 Fair value (US$ Weighted Sector Valuation technique millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 983 Cost of equity (%) 10.6 - 24.9 14.9 Institutions Asset growth rate (%) (24.0) - 87.0 12.5 Return on assets (%) (12.6) - 9.8 1.5 Perpetual growth rate (%) 2.3 - 15.0 5.1 Relative valuations 86 Valuation multiples** Listed price (adjusted) 16 Discount for lock-up (%) 13.0 - 50.0 18.3 Recent transactions 705 Other techniques 779 Associated options**** 20 Total banking and other financial institutions 2,589 Funds Recent transactions 47 Other techniques —* Total funds 47 Weighted average Others Discounted cash flows 1,867 cost of capital (%) 8.7 - 22.7 11.9 Cost of equity (%) 9.8 - 26.3 12.7 Relative valuations 720 Valuation multiples** Listed price (adjusted) —* Discount for lock-up (%) *** 10.0 Recent transactions 798 Other techniques 251 Associated options**** 64 Total others 3,700 Total $ 6,336 * Less than $0.5 million. ** In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/earnings before interest, taxes, depreciation, and amortization ratio, the range and weighted average are not provided. *** No range is provided as all of the projects that use this valuation technique are with the same institution and have the same lock-up discount percentage. **** Fair values for associated options are derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate. INTERNATIONAL FINANCE CORPORATION Page 62 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) June 30, 2018 Fair value (US$ Weighted Sector Valuation technique millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 473 Cost of equity (%) 10.1 – 25.0 14.7 Institutions Asset growth rate (%) (23.2) – 125.0 14.1 Return on assets (%) (1.3) – 5.2 2.6 Perpetual growth rate (%) 3.0 – 14.0 5.3 Relative valuations — Discount for lock-up (%) 0.0 – 50.0 7.2 Listed price (adjusted) 713 Recent transactions 67 Other techniques 73 Total banking and other financial institutions 1,326 Funds Recent transactions 83 Total funds 83 Weighted average Others Discounted cash flows 1,098 cost of capital (%) 8.0 – 21.9 12.1 Cost of equity (%) 12.1 – 18.5 15.6 Relative valuations 272 Valuation multiples* Listed price (adjusted) 3 Discount for lock-up (%) ** 4.5 Recent transactions 141 Other techniques 174 Total others 1,688 Total $ 3,097 *In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/earnings before interest, taxes, depreciation, and amortization ratio, the range and weighted average are not provided. ** No range is provided as all of the projects that use this valuation technique are with the same institution and have the same lock-up discount percentage. INTERNATIONAL FINANCE CORPORATION Page 63 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Fair value of assets and liabilities Estimated fair values of IFC’s financial assets and liabilities and off-balance sheet financial instruments at March 31, 2019 and June 30, 2018 are summarized below (US$ millions): March 31, 2019 June 30, 2018 Carrying Fair Carrying Fair amount value amount value Financial assets Cash and due from banks, time deposits, trading securities and securities purchased under resale agreements and receivable for cash collateral pledged $ 48,351 $ 48,351 $ 45,303 $ 45,303 Investments: Loans at amortized cost, net of reserves against losses 23,141 24,429 22,682 23,975 Loans accounted for at fair value under the Fair Value Option 1,024 1,024 927 927 Total loans 24,165 25,453 23,609 24,902 Equity investments at cost less impairment — — 2,710 4,251 Equity investments accounted for at fair value as available-for-sale — — 3,528 3,528 Equity investments accounted for at fair value 13,425* 13,410 6,794 6,794 Total equity investments 13,425 13,410 13,032 14,573 Debt securities accounted for at fair value as available-for-sale 4,566 4,566 4,900 4,900 Debt securities accounted for at fair value under the Fair Value Option 1,485 1,485 723 723 Total debt securities 6,051 6,051 5,623 5,623 Total investments 43,641 44,914 42,264 45,098 Derivative assets: Borrowings-related 538 538 437 437 Liquid asset portfolio-related and other 309 309 693 693 Investment-related 1,554 1,554 1,437 1,437 Client risk management-related 296 296 242 242 Total derivative assets 2,697 2,697 2,809 2,809 Other investment-related financial assets** — 8 — 83 Financial liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 8,127 $ 8,127 $ 6,364 $ 6,364 Market, IBRD, IDA and other borrowings outstanding 53,492 53,485 53,095 53,078 Derivative liabilities: Borrowings-related 3,571 3,571 3,659 3,659 Liquid asset portfolio-related and other 141 141 232 232 Investment-related 166 166 169 169 Client risk management-related 318 318 229 229 Total derivative liabilities 4,196 4,196 4,289 4,289 * For $15 million of equity investments primarily accounted for under the cost recovery method, no fair value measurement is provided since the recovery of invested capital is uncertain. ** Through June 30, 2018, Other investment-related financial assets comprise standalone options and warrants that did not meet the definition of a derivative. Effective July 1, 2018, these equity-related financial instruments are measured at fair value with unrealized gains and losses recognized in earnings in accordance with ASU 2016-01 and included in “Equity investments” on the condensed consolidated balance sheets. The fair value of loan commitments amounted to $34 million at March 31, 2019 ($40 million - June 30, 2018). Fair values of loan commitments are based on present value of loan commitment fees. INTERNATIONAL FINANCE CORPORATION Page 64 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Fair value hierarchy The following tables provide information as of March 31, 2019 and June 30, 2018, about IFC’s financial assets and financial liabilities measured at fair value on a recurring basis. As required by ASC 820, financial assets and financial liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement (US$ millions): March 31, 2019 Level 1 Level 2 Level 3 Total Trading securities: Asset-backed securities $ — $ 4,416 $ — $ 4,416 Corporate debt securities 2,322 3,383 — 5,705 Government and agency obligations 13,190 3,550 17 16,757 Money market funds 136 — — 136 Total trading securities 15,648* 11,349 17 27,014 Loans — 1 994 995 Loans measured at net asset value*** 29 Total Loans (Outstanding principal balance $1,112) — 1 994 1,024 Equity investments: Banking and other financial institutions 1,619 57 2,589 4,265 Funds 23 46 47 116 Others 1,152 25 3,700 4,877 Equity investments measured at net asset value*** 4,152 Total equity investments 2,794 128 6,336 13,410 Debt securities: Corporate debt securities 599 1,161 2,536 4,296 Preferred shares — — 418 418 Asset-backed securities — — 812 812 Other debt securities — — — — Debt securities measured at net asset value*** 525 Total debt securities 599 1,161 3,766 6,051 Derivative assets: Interest rate — 345 — 345 Foreign exchange — 195 — 195 Interest rate and currency — 1,990 18 2,008 Equity and other — — 149 149 Total derivative assets — 2,530 167 2,697 Total assets at fair value $ 19,041 $ 15,169 $ 11,280 $ 50,196 Borrowings: Structured bonds 142 $ 6,683 — $ 6,825 Unstructured bonds 33,861 9,184 120 43,165 Total borrowings (outstanding principal balance $54,020**) 34,003 15,867 120 49,990 Derivative liabilities: Interest rate — 805 — 805 Foreign exchange — 75 — 75 Interest rate and currency — 3,302 5 3,307 Equity and other — — 9 9 Total derivative liabilities — 4,182 14 4,196 Total liabilities at fair value $ 34,003 $ 20,049 $ 134 $ 54,186 * Includes securities priced at par plus accrued interest, which approximates fair value. ** Includes discount notes (not under the short-term Discount Note Program), with original maturities greater than one year, with principal due at maturity of $5,473 million, with a fair value of $2,011 million as of March 31, 2019. ***In accordance with ASC 820, investments that are measured at fair value using net asset value per share have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in condensed consolidated balance sheet. Note: For the nine months ended March 31, 2019: Trading securities with fair value of $205 million transferred from level 1 to level 2 and $2,037 million from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $62 million transferred from level 1 to level 2 and $116 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $1,436 million transferred from level 1 to level 2, while bonds with a fair value of $802 million were transferred from level 2 to level 1 due to change in quality of market price information. INTERNATIONAL FINANCE CORPORATION Page 65 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) June 30, 2018 Level 1 Level 2 Level 3 Total Trading securities: Asset-backed securities $ — $ 7,192 $ — $ 7,192 Corporate debt securities 1,566 6,672 — 8,238 Government and agency obligations 9,514 3,869 18 13,401 Money market funds 78 — — 78 Total trading securities 11,158* 17,733 18 28,909 Loans — 2 894 896 Loans measured at net asset value*** 31 Total Loans (Outstanding principal balance $1,037) — 2 894 927 Equity investments: Banking and other financial institutions 1,596 254 1,326 3,176 Funds 30 15 83 128 Others 1,313 57 1,688 3,058 Equity investments measured at net asset value*** 3,960 Total equity investments 2,939 326 3,097 10,322 Debt securities: Corporate debt securities 621 672 2,590 3,883 Preferred shares — — 383 383 Asset-backed securities — — 840 840 Other debt securities — — 2 2 Debt securities measured at net asset value*** 515 Total debt securities 621 672 3,815 5,623 Derivative assets: Interest rate — 318 — 318 Foreign exchange — 483 — 483 Interest rate and currency — 1,765 8 1,773 Equity and other — — 235 235 Total derivative assets — 2,566 243 2,809 Total assets at fair value $ 14,718 $ 21,299 $ 8,067 $ 48,590 Borrowings: Structured bonds 36 $ 6,103 — $ 6,139 Unstructured bonds 36,042 7,994 46 44,082 Total borrowings (outstanding principal balance $54,692**) 36,078 14,097 46 50,221 Derivative liabilities: Interest rate — 1,153 — 1,153 Foreign exchange — 88 — 88 Interest rate and currency — 3,030 7 3,037 Equity and other — — 11 11 Total derivative liabilities — 4,271 18 4,289 Total liabilities at fair value $ 36,078 $ 18,368 $ 64 $ 54,510 * Includes securities priced at par plus accrued interest, which approximates fair value. ** Includes discount notes (not under the short-term Discount Note Program), with original maturities greater than one year, with principal due at maturity of $5,281 million, with a fair value of $1,940 million as of June 30, 2018. ***In accordance with ASC 820, investments that are measured at fair value using net asset value per share have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in condensed consolidated balance sheet. Note: For the year ended June 30, 2018: Trading securities with fair value of $2,950 million transferred from level 1 to level 2 and $0 from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $158 million transferred from level 1 to level 2 and $34 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $1,072 million transferred from level 1 to level 2, while bonds with a fair value of $300 million were transferred from level 2 to level 1 due to change in quality of market price information. INTERNATIONAL FINANCE CORPORATION Page 66 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) The following tables present the changes in the carrying value of IFC’s Level 3 financial assets and financial liabilities for the three and nine months ended March 31, 2019 and 2018 (US$ millions). IFC’s policy is to recognize transfers in and transfers out at the beginning of the reporting period. Three months ended March 31, 2019 Net unrealized Net gains and losses gains/ (realized and unrealized) losses included in included in net income Purchases, related to Balance Other issuances, Transfers Balance assets / as of comprehen sales, Transfers out of as of liabilities January Net sive settlements into Level 3 March 31, held at 1, 2019 Income income and others Level 3 (*) (**) 2019 period end Trading securities: Asset-backed securities $ — $ — $ — $ — $ — $ — $ — $ — Corporate debt securities — — — — — — — — Government and agency obligations 17 — — — — — 17 — Total trading securities 17 — — — — — 17 — Loans 959 25 — 10 — — 994 11 Equity investments: Banking and other financial institutions 2,939 8 — (33) 5 (330) 2,589 (8) Funds 94 — — 3 — (50) 47 — Others 3,773 39 — (112) — — 3,700 6 Total equity investments 6,806 47 — (142) 5 (380) 6,336 (2) Debt securities: Corporate debt securities 2,028 11 41 10 666 (220) 2,536 17 Preferred shares 398 3 8 9 — — 418 2 Asset-backed securities 734 4 (11) 5 80 — 812 5 Other debt securities 2 (2) — — — — — (1) Total debt securities 3,162 16 38 24 746 (220) 3,766 23 Derivative assets: Interest rate and currency 25 (5) — 1 — (3) 18 (3) Equity and other 194 (6) — (39) — — 149 (45) Total derivative assets 219 (11) — (38) — (3) 167 (48) Total assets at fair value $ 11,163 $ 77 $ 38 $ (146) $ 751 $ (603) $ 11,280 $ (16) Borrowings: Structured bonds $ — $ — $ — $ — $ — $ — $ — $ — Unstructured bonds (57) (2) — (61) — — (120) (2) Total borrowings (57) (2) — (61) — — (120) (2) Derivative liabilities: Interest rate — — — — — — — — Interest rate and currency (11) — — — — 6 (5) 1 Equity and other (9) — — — — — (9) — Total derivative liabilities (20) — — — — 6 (14) 1 Total liabilities at fair value $ (77) $ (2) $ — $ (61) $ — $ 6 $ (134) $ (1) (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of March 31, 2019. (**) Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of January 1, 2019 beginning balance as of March 31, 2019. INTERNATIONAL FINANCE CORPORATION Page 67 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Nine months ended March 31, 2019 Net Net gains and losses unrealized (realized and gains/ unrealized) included losses in included in net Adoption income of new Purchases, related to Balance accounti Other issuances, Transfers Transfer Balance assets / as of ng comprehe sales, into s out of as of liabilities June 30 pronounc Net nsive settlements Level 3 Level 3 March held at 2018 ements Income income and others (*) (**) 31, 2019 period end Trading securities: Asset-backed securities $ — $ — $ — $ — $ — $ — $ — $ — $ — Corporate debt securities — — — — — — — — — Government and agency obligations 18 — (1) — — — — 17 (1) Total trading securities 18 — (1) — — — — 17 (1) Loans 894 — 11 — 90 — (1) 994 7 Equity investments: Banking and other financial institutions 1,326 1,985 (133) — (35) 74 (628) 2,589 (69) Funds 83 — 3 — 11 — (50) 47 1 Others 1,688 2,219 (114) — (90) — (3) 3,700 (202) Total equity investments 3,097 4,204 (244) — (114) 74 (681) 6,336 (270) Debt securities: Corporate debt securities 2,590 — (11) (73) 480 1,092 (1,542) 2,536 4 Preferred shares 383 — 44 18 (27) — — 418 42 Asset-backed securities 840 — (8) (51) 11 80 (60) 812 7 Other debt securities 2 — (2) — — — — — (1) Total debt securities 3,815 — 23 (106) 464 1,172 (1,602) 3,766 52 Derivative assets: Interest rate and currency 8 — 9 — 4 — (3) 18 12 Equity and other 235 — (47) — (39) — — 149 (33) Total derivative assets 243 — (38) — (35) — (3) 167 (21) Total assets at fair value $ 8,067 $ 4,204 $ (249) $ (106) $ 405 $ 1,246 $(2,287) $11,280 $ (233) Borrowings: Structured bonds $ — — $ — $ — $ — $ — $ — $ — $ — Unstructured bonds (46) — 4 — (83) — 5 (120) 4 Total borrowings (46) — 4 — (83) — 5 (120) 4 Derivative liabilities: Interest rate — — — — — — — — — Interest rate and currency (7) — (4) — — — 6 (5) (3) Equity and other (11) — 2 — — — — (9) 2 Total derivative liabilities (18) — (2) — — — 6 (14) (1) Total liabilities at fair value $ (64) — $ 2 $ — $ (83) $ — $ 11 $ (134) $ 3 (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of March 31, 2019. (**) Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of July 1, 2018 beginning balance as of March 31, 2019. INTERNATIONAL FINANCE CORPORATION Page 68 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Three months ended March 31, 2018 Net unrealized Net gains and losses gains/ (realized and unrealized) losses included in included in net income Purchases, related to Balance Other issuances, Transfers Balance assets / as of comprehen sales, Transfers out of as of liabilities January Net sive settlements into Level 3 March 31, held at 1, 2018 Income income and others Level 3 (*) (**) 2018 period end Trading securities: Asset-backed securities $ — $ — $ — $ — $ — $ — $ — $ — Corporate debt securities — — — — — — — Government and agency obligations 18 — — — — — 18 — Total trading securities 18 — — — — — 18 — Loans 909 (9) — 23 — — 923 (7) Equity investments: Banking and other 1,365 18 315 34 10 (72) 1,670 (55) financial institutions Funds 107 8 — 94 — — 209 8 Others 1,724 (75) 8 51 — (4) 1,704 (77) Total equity investments 3,196 (49) 323 179 10 (76) 3,583 (124) Debt securities: Corporate debt securities 2,815 10 (5) 52 260 (349) 2,783 (3) Preferred shares 407 1 6 (8) — — 406 3 Asset-backed securities 854 1 (8) 11 — — 858 1 Other debt securities 2 — — — — — 2 — Total debt securities 4,078 12 (7) 55 260 (349) 4,049 1 Derivative assets: Interest rate and currency 9 (4) — — — — 5 — Equity and other 180 45 — — — — 225 45 Total derivative assets 189 41 — — — — 230 45 Total assets at fair value $ 8,390 $ (5) $ 316 $ 257 $ 270 $ (425) $ 8,803 $ (85) Borrowings: Structured bonds $ — $ — $ — $ — $ — $ — $ — $ — Unstructured bonds (24) — — — — — (24) 1 Total borrowings (24) — — — — — (24) 1 Derivative liabilities: Interest rate — — — — — — — — Interest rate and currency (2) 3 — — — (2) (1) (2) Equity and other (11) — — (1) — — (12) — Total derivative liabilities (13) 3 — (1) — (2) (13) (2) Total liabilities at fair value $ (37) $ 3 $ — $ (1) $ — $ (2) $ (37) $ (1) (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of March 31, 2018. (**)Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of January 1, 2018 beginning balance as of March 31, 2018. INTERNATIONAL FINANCE CORPORATION Page 69 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Nine months ended March 31, 2018 Net unrealized Net gains and losses gains/ (realized and unrealized) losses included in included in net income Purchases, related to Other issuances, Transfers Balance assets / Balance comprehen sales, Transfers out of as of liabilities as of July Net sive settlements into Level 3 March 31, held at 1, 2017 Income income and others Level 3 (*) (**) 2018 period end Trading securities: Asset-backed securities $ — $ — $ — $ 2 $ — $ (2) $ — $ — Corporate debt securities — — — — — — — — Government and agency obligations 19 (1) — — — — 18 (1) Total trading securities 19 (1) — 2 — (2) 18 (1) Loans 928 (26) — 21 — — 923 (18) Equity investments: Banking and other financial institutions 980 138 297 263 162 (170) 1,670 21 Funds 88 20 — 101 — — 209 19 Others 2,042 (75) 5 (50) 9 (227) 1,704 (122) Total equity investments 3,110 83 302 314 171 (397) 3,583 (82) Debt securities: Corporate debt securities 2,458 (16) 119 530 449 (757) 2,783 4 Preferred shares 391 (14) 18 11 — — 406 14 Asset-backed securities 524 5 (13) 342 — — 858 13 Other debt securities 2 — — — — — 2 — Total debt securities 3,375 (25) 124 883 449 (757) 4,049 31 Derivative assets: Interest rate and currency 7 (4) — 2 1 (1) 5 2 Equity and other 234 (9) — — — — 225 (9) Total derivative assets 241 (13) — 2 1 (1) 230 (7) Total assets at fair value $ 7,673 $ 18 $ 426 $ 1,222 $ 621 $ (1,157) $ 8,803 $ (77) Borrowings: Structured bonds $ — $ — $ — $ — $ — $ — $ — $ — Unstructured bonds (26) 2 — — — — (24) 2 Total borrowings (26) 2 — — — — (24) 2 Derivative liabilities: Interest rate — — — — — — — — Interest rate and currency (3) 2 — — — — (1) — Equity and other (13) 1 — — — — (12) 1 Total derivative liabilities (16) 3 — — — — (13) 1 Total liabilities at fair value $ (42) $ 5 $ — $ — $ — $ — $ (37) $ 3 (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of March 31, 2018. (**) Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of July 1, 2017 beginning balance as of March 31, 2018. INTERNATIONAL FINANCE CORPORATION Page 70 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) The following tables present gross purchases, sales, issuances and settlements related to the changes in the carrying value of IFC’s Level 3 financial assets and financial liabilities for the three and nine months ended March 31, 2019 and 2018 (US$ millions). Three months ended March 31, 2019 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ — $ — $ — $ — $ — Corporate debt securities — — — — — Government and agency obligations — — — — — Total trading securities — — — — — Loans — — 48 (38) 10 Equity investments: Banking and other financial institutions 49 (100) — 18 (33) Funds 19 — — (16) 3 Others 24 (98) — (38) (112) Total equity investments 92 (198) — (36) (142) Debt securities: Corporate debt securities 136 (30) — (96) 10 Preferred shares 11 — — (2) 9 Asset-backed securities 14 — — (9) 5 Total debt securities 161 (30) — (107) 24 Derivative assets: Interest rate and currency — — 1 — 1 Equity and other — — — (39) (39) Total derivative assets — — 1 (39) (38) Total assets at fair value $ 253 $ (228) $ 49 $ (220) $ (146) Borrowings: Structured Bonds $ — $ — $ — $ — $ — Unstructured Bonds — — (61) — (61) Total Borrowings — — (61) — (61) Derivative liabilities: Interest rate — — — — — Interest rate and currency — — — — — Equity and other — — — — — Total derivative liabilities — — — — — Total liabilities at fair value $ — $ — $ (61) $ — $ (61) INTERNATIONAL FINANCE CORPORATION Page 71 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Nine months ended March 31, 2019 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ — $ — $ — $ — $ — Corporate debt securities — — — — — Government and agency obligations — — — — — Total trading securities — — — — — Loans — — 240 (150) 90 Equity investments: Banking and other financial institutions 102 (135) — (2) (35) Funds 43 — — (32) 11 Others 142 (215) — (17) (90) Total equity investments 287 (350) — (51) (114) Debt securities: Corporate debt securities 647 (31) — (136) 480 Preferred shares 18 (5) — (40) (27) Asset-backed securities 39 — — (28) 11 Total debt securities 704 (36) — (204) 464 Derivative assets: Interest rate and currency — — 4 — 4 Equity and other — — — (39) (39) Total derivative assets — — 4 (39) (35) Total assets at fair value $ 991 $ (386) $ 244 $ (444) $ 405 Borrowings: Structured Bonds $ — $ — $ — $ — $ — Unstructured Bonds — — (83) — (83) Total Borrowings — — (83) — (83) Derivative liabilities: Interest rate — — — — — Interest rate and currency — — — — — Equity and other — — — — — Total derivative liabilities — — — — — Total liabilities at fair value $ — $ — $ (83) $ — $ (83) INTERNATIONAL FINANCE CORPORATION Page 72 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Three months ended March 31, 2018 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ — $ — $ — $ — $ — Corporate debt securities — — — — — Government and agency obligations — — — — — Total trading securities — — — — — Loans — — 57 (34) 23 Equity investments: Banking and other financial institutions 22 (104) — 116 34 Funds 100 — — (6) 94 Others 69 (4) — (14) 51 Total equity investments 191 (108) — 96 179 Debt securities: Corporate debt securities 184 (1) — (131) 52 Preferred shares 3 (2) — (9) (8) Asset-backed securities 9 — — 2 11 Total debt securities 196 (3) — (138) 55 Derivative assets: Interest rate and currency — — — — — Equity and other — — — — — Total derivative assets — — — — — Total assets at fair value $ 387 $ (111) $ 57 $ (76) $ 257 Borrowings: Structured Bonds $ — $ — $ — $ — $ — Unstructured Bonds — — — — — Total Borrowings — — — — — Derivative liabilities: Interest rate — — — — — Interest rate and currency — — — — — Equity and other — — — (1) (1) Total derivative liabilities — — — (1) (1) Total liabilities at fair value $ — $ — $ — $ (1) $ (1) INTERNATIONAL FINANCE CORPORATION Page 73 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE K - FAIR VALUE MEASUREMENTS (continued) Nine months ended March 31, 2018 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ 2 $ — $ — $ — $ 2 Corporate debt securities — — — — — Government and agency obligations — — — — — Total trading securities 2 — — — 2 Loans — — 134 (113) 21 Equity investments: Banking and other financial institutions 62 (169) — 370 263 Funds 153 (2) — (50) 101 Others 132 (168) — (14) (50) Total equity investments 347 (339) — 306 314 Debt securities: Corporate debt securities 1,016 (1) — (485) 530 Preferred shares 21 (1) — (9) 11 Asset-backed securities 293 — — 49 342 Total debt securities 1,330 (2) — (445) 883 Derivative assets: Interest rate and currency 2 — — — 2 Equity and other — — — — — Total derivative assets 2 — — — 2 Total assets at fair value $ 1,681 $ (341) $ 134 $ (252) $ 1,222 Borrowings: Structured Bonds $ — $ — $ — $ — $ — Unstructured Bonds — — — — — Total Borrowings — — — — — Derivative liabilities: Interest rate — — — — — Interest rate and currency — — — — — Equity and other — — — — — Total derivative liabilities — — — — — Total liabilities at fair value $ — $ — $ — $ — $ — Gains and losses (realized and unrealized) from trading securities, loans, equity investments and debt securities included in net income for the period are reported on the condensed consolidated statements of operations in income from liquid asset trading activities, Income from Loans and guarantees, including realized gains and losses on loans and associated derivatives, income from equity investments and associated derivatives, income from debt securities and realized gains and losses on debt securities and associated derivatives and net unrealized gains and losses on non-trading financial instruments accounted for at fair value. INTERNATIONAL FINANCE CORPORATION Page 74 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE L - SEGMENT REPORTING For management purposes, IFC’s business comprises three segments: investment services, treasury services and advisory services. The investment services segment consists primarily of lending and investing in debt and equity securities. The investment services segment also includes AMC, which is not separately disclosed due to its immaterial impact. Further information about the impact of AMC on IFC’s condensed consolidated balance sheets and statements of operations can be found in Note B. Operationally, the treasury services segment consists of the borrowing, liquid asset management, asset and liability management and client risk management activities. Advisory services provide consultation services to governments and the private sector. Consistent with internal reporting, net income or expense from asset and liability management and client risk management activities in support of investment services is allocated from the treasury segment to the investment services segment. The performance of investment services, treasury services and advisory services is assessed by senior management on the basis of net income for each segment, return on assets, and return on capital employed. Advisory services are primarily assessed based on the level and adequacy of its funding sources (See Note N). IFC’s management reporting system and policies are used to determine revenues and expenses attributable to each segment. Consistent with internal reporting, administrative expenses are allocated to each segment based largely upon personnel costs and segment headcounts. Transactions between segments are immaterial and, thus, are not a factor in reconciling to the consolidated data. The assets of the investment, treasury, and advisory services segments are detailed in Notes C, D, and N, respectively. An analysis of IFC’s major components of income and expense by business segment for the three and nine months ended March 31, 2019 and 2018, is provided below (US$ millions): Three months ended March 31, 2019 Investment Treasury Advisory services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 503 $ — $ — $ 503 Provision for losses on loans, guarantees, accrued interest and other receivables (21) — — (21) Income from equity investments and associated derivatives 388 — — 388 Income from debt securities, including and realized gains and losses on debt securities and associated derivatives 93 — — 93 Income from liquid asset trading activities — 343 — 343 Charges on borrowings (195) (218) — (413) Advisory services income — — 81 81 Service fees and other income 81 — — 81 Administrative expenses (328) (11) (38) (377) Advisory services expenses — — (86) (86) Expense from pension and other postretirement benefit plans (1) —* (1) (2) Other expenses (7) — — (7) Foreign currency transaction gains and losses on non-trading activities 7 — — 7 Income (loss) before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA 520 114 (44) 590 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (24) 89 — 65 Net income (loss) $ 496 $ 203 $ (44) $ 655 * Less than $0.5 million. INTERNATIONAL FINANCE CORPORATION Page 75 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE L - SEGMENT REPORTING (continued) Nine months ended March 31, 2019 Investment Treasury Advisory services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,351 $ — $ — $ 1,351 Provision for losses on loans, guarantees, accrued interest and other receivables (72) — — (72) Loss from equity investments and associated derivatives (445) — — (445) Income from debt securities, including and realized gains and losses on debt securities and associated derivatives 37 — — 37 Income from liquid asset trading activities — 905 — 905 Charges on borrowings (544) (623) — (1,167) Advisory services income — — 225 225 Service fees and other income 199 — — 199 Administrative expenses (912) (29) (97) (1,038) Advisory services expenses — — (249) (249) Expense from pension and other postretirement benefit plans (3) —* (2) (5) Other expenses (22) — — (22) Foreign currency transaction gains and losses on non-trading activities 132 22 — 154 (Loss) income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA (279) 275 (123) (127) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (33) (32) — (65) Net (loss) income $ (312) $ 243 $ (123) $ (192) * Less than $0.5 million. INTERNATIONAL FINANCE CORPORATION Page 76 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE L - SEGMENT REPORTING (continued) Three months ended March 31, 2018 Investment Treasury Advisory services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 341 $ — $ — $ 341 Release of provision for losses on loans, guarantees, accrued interest and other receivables 10 — — 10 Income from equity investments and associated derivatives 284 — — 284 Income from debt securities, including and realized gains and losses on debt securities and associated derivatives 151 — — 151 Income from liquid asset trading activities — 227 — 227 Charges on borrowings (118) (147) — (265) Advisory services income — — 73 73 Service fees and other income 70 — — 70 Administrative expenses (213) (7) (16) (236) Advisory services expenses — — (85) (85) Expense from pension and other postretirement benefit plans (41) (3) (17) (61) Other expenses (8) — — (8) Foreign currency transaction gains and losses on non-trading activities 1 16 — 17 Income (loss) before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA 477 86 (45) 518 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 69 (72) — (3) Net income (loss) $ 546 $ 14 $ (45) $ 515 INTERNATIONAL FINANCE CORPORATION Page 77 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE L - SEGMENT REPORTING (continued) Nine months ended March 31, 2018 Investment Treasury Advisory services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 999 $ — $ — $ 999 Provision for losses on loans, guarantees, accrued interest and other receivables (82) — — (82) Income from equity investments and associated derivatives 726 — — 726 Income from debt securities, including and realized gains and losses on debt securities and associated derivatives 253 — — 253 Income from liquid asset trading activities — 594 — 594 Charges on borrowings (308) (410) — (718) Advisory services income — — 206 206 Service fees and other income 194 — — 194 Administrative expenses (692) (16) (47) (755) Advisory services expenses — — (232) (232) Expense from pension and other postretirement benefit plans (128) (8) (47) (183) Other expenses (26) — — (26) Foreign currency transaction gains and losses on non-trading activities (92) 3 — (89) Income (loss) before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA 844 163 (120) 887 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 165 (102) — 63 Net income (loss) $ 1,009 $ 61 $ (120) $ 950 NOTE M - VARIABLE INTEREST ENTITIES Significant variable interests IFC has identified investments in 222 VIEs which are not consolidated by IFC but in which it is deemed to hold significant variable interests at March 31, 2019 (215 investments - June 30, 2018). The majority of these VIEs do not involve securitizations or other types of structured financing. IFC is usually the minority investor in these VIEs. These VIEs are mainly: (a) investment funds, where the general partner or fund manager does not have substantive equity at risk, which IFC does not consolidate because it does not have the power to direct the activities of the VIEs that most significantly impact their economic performance and (b) entities whose total equity investment is considered insufficient to permit such entity to finance its activities without additional subordinated financial support or whose activities are so narrowly defined by contracts that equity investors are considered to lack decision making ability, which IFC does not consolidate because it does not have the power to control the activities that most significantly impact their economic performance. IFC’s involvement with these VIEs includes investments in equity interests and senior or subordinated interests, guarantees and risk management arrangements. IFC’s interests in these VIEs are recorded on IFC’s condensed consolidated balance sheet primarily in equity investments, loans, debt securities, and other liabilities, as appropriate. Based on the most recent available data of these VIEs, the balance sheet size, including committed funding, in which IFC is deemed to hold significant variable interests, totaled $34,750 million at March 31, 2019 ($36,579 million - June 30, 2018). IFC’s maximum exposure to loss as a result of its investments in these VIEs, comprising both carrying value of investments and amounts committed but not yet disbursed, was $5,644 million at March 31, 2019 ($5,603 million - June 30, 2018). IFC transacted with a VIE, of which IFC is the primary beneficiary, to construct an office building at 2100 K Street on land owned by IFC adjacent to its current office premise. IFC commenced occupying the building in March 2019. The building and land, totaling $122 million are included in "Receivables and other assets" on IFC's condensed consolidated balance sheet. INTERNATIONAL FINANCE CORPORATION Page 78 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE M - VARIABLE INTEREST ENTITIES (continued) The industry sector and geographical regional analysis of IFC’s maximum exposures as a result of its investment in these VIEs at March 31, 2019 and June 30, 2018 is as follows (US$ millions): March 31, 2019 Equity Debt Risk Loans investments securities Guarantees management Total Asia Manufacturing, agribusiness and services $ 204 $ 30 $ 23 $ — $ — $ 257 Financial markets 105 107 3 — — 215 Infrastructure and natural resources 557 106 15 — 7 685 Telecom, media & technology, and venture investing 6 287 — — — 293 Total Asia 872 530 41 — 7 1,450 Europe, Middle East and North Africa Manufacturing, agribusiness and services 278 58 — — — 336 Financial markets 112 5 135 — — 252 Infrastructure and natural resources 577 138 4 — 48 767 Telecom, media & technology, and venture investing — 97 12 — — 109 Total Europe, Middle East and North Africa 967 298 151 — 48 1,464 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 119 140 16 5 — 280 Financial markets 115 60 30 — — 205 Infrastructure and natural resources 831 224 — — 45 1,100 Telecom, media & technology, and venture investing 33 214 — — 5 252 Total Sub-Saharan Africa, Latin America and Caribbean 1,098 638 46 5 50 1,837 Other Manufacturing, agribusiness and services — 10 — — — 10 Financial markets 494 57 79 — 7 637 Infrastructure and natural resources 194 — — — — 194 Telecom, media & technology, and venture investing — 52 — — — 52 Total Other 688 119 79 — 7 893 Maximum exposure to VIEs $ 3,625 $ 1,585 $ 317 $ 5 $ 112 $ 5,644 of which: Carrying value 2,897 1,249 316 — 73 4,535 Committed but not disbursed 728 336 1 5 39 1,109 INTERNATIONAL FINANCE CORPORATION Page 79 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE M - VARIABLE INTEREST ENTITIES (continued) June 30, 2018 Equity Debt Risk Loans investments securities Guarantees management Total Asia Manufacturing, agribusiness and services $ 183 $ 14 $ 65 $ — $ — $ 262 Financial markets 135 7 2 — — 144 Infrastructure and natural resources 817 134 29 — 6 986 Telecom, media & technology, and venture investing 6 283 — — — 289 Total Asia 1,141 438 96 — 6 1,681 Europe, Middle East and North Africa Manufacturing, agribusiness and services 214 38 108 — — 360 Financial markets 4 — 182 — — 186 Infrastructure and natural resources 627 145 4 — 25 801 Telecom, media & technology, and venture investing — 111 12 — — 123 Total Europe, Middle East and North Africa 845 294 306 — 25 1,470 Sub-Saharan Africa, Latin America and Caribbean Manufacturing, agribusiness and services 128 125 30 5 — 288 Financial markets 17 32 34 — — 83 Infrastructure and natural resources 904 147 13 — 46 1,110 Telecom, media & technology, and venture investing 37 203 11 — 6 257 Total Sub-Saharan Africa, Latin America and Caribbean 1,086 507 88 5 52 1,738 Other Manufacturing, agribusiness and services — 37 — — — 37 Financial markets 147 78 226 — 8 459 Infrastructure and natural resources 203 1 — — — 204 Telecom, media & technology, and venture investing — 14 — — — 14 Total Other 350 130 226 — 8 714 Maximum exposure to VIEs $ 3,422 $ 1,369 $ 716 $ 5 $ 91 $ 5,603 of which: Carrying value 2,761 1,025 648 — 54 4,488 Committed but not disbursed 661 344 68 5 37 1,115 INTERNATIONAL FINANCE CORPORATION Page 80 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE N - ADVISORY SERVICES IFC provides advisory services to government and private sector clients. IFC's advisory services to governments on investment climate and financial sector development are delivered in partnership with IBRD through WBG Global Practices. IFC funds this business line by a combination of cash received from government and other donors and IFC’s operations via retained earnings and operating budget allocations as well as fees received from the recipients of the services. IFC administers donor funds through trust funds. Donor funds are restricted for purposes specified in agreements with the donors. Donor funds under administration and IFC’s funding can be commingled in accordance with administration agreements with donors. The commingled funds are held in a separate liquid asset investment portfolio managed by IBRD, which is not commingled with IFC’s other liquid assets and is reported at fair value in other assets. Donor funds are refundable until expended for their designated purpose. As of March 31, 2019, other assets include undisbursed donor funds of $627 million ($511 million - June 30, 2018) and IFC’s advisory services funding of $240 million ($234 million - June 30, 2018). Included in other liabilities as of March 31, 2019 is $627 million ($511 million - June 30, 2018) of refundable undisbursed donor funds. NOTE O - PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in a Staff Retirement Plan (SRP), a Retired Staff Benefits Plan and Trust (RSBP) and a Post- Employment Benefits Plan (PEBP) that cover substantially all of their staff members. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost- sharing ratio. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP allocated to IFC for the three and nine months ended March 31, 2019 and 2018 (US$ millions). The components of net periodic pension cost, other than the service cost component, are included in “Pension and other postretirement benefit plans” in the condensed consolidated statement of operations. From the quarter ended September 30, 2018, the service costs are included in “Administrative expenses”. Three months ended March 31, 2019 2018 SRP RSBP PEBP Total SRP RSBP PEBP Total Benefit cost Service cost $ 41 $ 9 $ 9 $ 59 $ 40 $ 9 $ 8 $ 57 Other components: Interest cost 43 7 6 56 37 6 5 48 Expected return on plan assets (53) (9) — (62) (46) (8) — (54) Amortization of unrecognized prior service cost —* 1 —* 1 —* —* —* —* Amortization of unrecognized net actuarial losses 1 — 6 7 5 — 5 10 Subtotal (9) (1) 12 2 (4) (2) 10 4 Net periodic pension cost $ 32 $ 8 $ 21 $ 61 $ 36 $ 7 $ 18 $ 61 * Less than $0.5 million. INTERNATIONAL FINANCE CORPORATION Page 81 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE O - PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) Nine months ended March 31, 2019 2018 SRP RSBP PEBP Total SRP RSBP PEBP Total Benefit cost Service cost $ 125 $ 27 $ 26 $ 178 $ 121 $ 28 $ 23 $ 172 Other components: Interest cost 127 20 18 165 109 18 15 142 Expected return on plan assets (158) (27) — (185) (139) (24) — (163) Amortization of unrecognized prior service cost 1 2 1 4 1 2 1 4 Amortization of unrecognized net actuarial losses 4 — 17 21 13 — 15 28 Sub total (26) (5) 36 5 (16) (4) 31 11 Net periodic pension cost $ 99 $ 22 $ 62 $ 183 $ 105 $ 24 $ 54 $ 183 NOTE P - OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL IFC does not present derivative assets and liabilities or amounts due or owed under resale, repurchase and securities lending transactions related to contracts entered into with the same counterparty under a legally enforceable netting agreement on a net basis on its condensed consolidated balance sheet. The following table provides the gross and net positions of IFC’s derivative contracts, resale, repurchase and securities lending agreements considering amounts and collateral held or pledged in accordance with enforceable counterparty credit support and netting agreements described below (US$ millions). The gross and net positions include derivative assets of $370 million and derivative liabilities of $63 million as of March 31, 2019, related to derivative contracts that are not subject to counterparty credit support or netting agreements. Collateral amounts are included only to the extent of the related net derivative fair values or net resale, repurchase and securities lending agreements amounts. March 31, 2019 Gross amounts not offset in Gross amount of the condensed consolidated Assets assets presented balance sheet in the condensed consolidated Financial Collateral Net amount balance sheet instruments received Derivative assets $ 3,343* $ 1,922 $ 315*** $ 1,106 Resale agreements — — — — Total assets $ 3,343 $ 1,922 $ 315 $ 1,106 March 31, 2019 Gross amounts not offset in Gross amount of the consolidated balance Liabilities liabilities sheet presented in the Cash Net amount consolidated Financial Collateral balance sheet instruments pledged Derivative liabilities $ 4,799** $ 1,922 $ 2,119 $ 758 Repurchase and securities lending agreements 7,824 7,824 — — Total liabilities $ 12,623 $ 9,746 $ 2,119 $ 758 INTERNATIONAL FINANCE CORPORATION Page 82 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE P - OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL (continued) June 30, 2018 Gross amount of Gross amounts not offset in assets presented the condensed consolidated Assets in the condensed balance sheet consolidated Financial Collateral Net amount balance sheet instruments received Derivative assets $ 3,450* $ 1,948 $ 432*** $ 1,070 Resale agreements — — — — Total assets $ 3,450 $ 1,948 $ 432 $ 1,070 June 30, 2018 Gross amounts not offset in the consolidated balance Liabilities Gross amount of sheet liabilities presented in the Cash Net amount consolidated Financial Collateral balance sheet instruments pledged Derivative liabilities $ 4,724** $ 1,948 $ 1,819 $ 957 Repurchase and securities lending agreements 6,129 6,129 — — Total liabilities $ 10,853 $ 8,077 $ 1,819 $ 957 * Includes accrued income of $646 million and $641 million as of March 31, 2019 and June 30, 2018 respectively. ** Includes accrued charges of $603 million and $435 million as of March 31, 2019 and June 30, 2018 respectively. *** Includes cash collateral of $286 million and $210 million as of March 31, 2019 and June 30, 2018 respectively. The remaining amounts of collateral received consist of off-balance-sheet US Treasury securities reported in the above table at fair value. IFC’s derivative contracts with market counterparties are entered into under standardized master agreements published by the International Swaps and Derivatives Association (“ISDA” Agreements). ISDA Agreements provide for a single lump sum settlement amount upon the early termination of transactions following a default or termination event whereby amounts payable by the non-defaulting party to the other party may be applied to reduce any amounts that the other party owes the non-defaulting party. This setoff effectively reduces any amount payable by the non-defaulting party to the defaulting party. IFC’s ISDA Agreements are appended by a Credit Support Annex (“CSA”) that provides for the receipt, and in some cases, posting, of collateral in the form of cash, U.S. Treasury securities or U.K. gilts to reduce mark-to market exposure among derivative market counterparties. IFC recognizes cash collateral received and a corresponding liability on its balance sheet for the obligation to return it. Securities received as collateral are not recognized on IFC’s condensed consolidated balance sheet. As of March 31, 2019, $2,120 million of cash collateral was posted under CSAs ($1,987 million June 30, 2018). IFC recognizes a receivable on its balance sheet for its rights to cash collateral posted. In accordance with the CSAs, IFC may rehypothecate securities received as collateral, subject to the obligation to return such collateral and any related distributions received. In the event of a counterparty default, IFC may exercise certain rights and remedies, including the right to set off any amounts payable by the counterparty against any collateral held by IFC and the right to liquidate any collateral held. As of March 31, 2019, IFC had $302 million ($236 million at June 30, 2018) of outstanding obligations to return cash collateral under CSAs. The estimated fair value of all securities received and held as collateral under CSAs as of March 31, 2019, all of which may be rehypothecated was $30 million ($231 million - June 30, 2018). As of March 31, 2019, $0 of such collateral was rehypothecated under securities lending agreements ($8 million - June 30, 2018). Collateral posted by IFC in connection with repurchase agreements approximates the amounts classified as Securities sold under repurchase agreements. At March 31, 2019, trading securities with a carrying amount (fair value) of $200 million ($202 million - June 30, 2018) were pledged in connection with borrowings under a short-term discount note program, the carrying amount of which was $2,674 million ($2,262 million - June 30, 2018). INTERNATIONAL FINANCE CORPORATION Page 83 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE P - OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL (continued) Under certain CSA’s IFC is not required to pledge collateral unless its credit rating is downgraded from its current AAA/Aaa. The aggregate fair value of derivatives containing such a credit risk-linked contingent feature in a net liability position was $24 million at March 31, 2019 ($61 million at June 30, 2018). At March 31, 2019, IFC had no collateral posted under these agreements. If IFC’s credit rating were to be downgraded from its current AAA/Aaa to AA+/Aa1 or below, then collateral in the amount of $0 would be required to be posted against net liability positions with counterparties at March 31, 2019 ($0 at June 30, 2018). IFC’s resale, repurchase and securities lending transactions are entered into with counterparties under industry standard master netting agreements which generally provide the right to offset amounts owed one another with respect to multiple transactions under such master netting agreement and liquidate the purchased or borrowed securities in the event of counterparty default. The estimated fair value of all securities received and held as collateral under these master netting agreements as of March 31, 2019, was $0 ($0 - June 30, 2018). The following table presents an analysis of IFC’s repurchase and securities lending transactions by (1) class of collateral pledged and (2) their remaining contractual maturity as of March 31, 2019 and June 30, 2018 (US$ millions): Remaining Contractual Maturity of the Agreements - March 31, 2019 Overnight Greater and Up to 30 30-90 than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ — $ 6,471 $ 1,105 $ 270 $ 7,846 Agency securities — — — — — Municipal securities and other — — — — — Total Repurchase agreements — 6,471 1,105 270 7,846 Securities lending transactions U.S. Treasury securities $ — $ — $ — $ — $ — Total Securities lending transactions — — — — — Total Repurchase agreements and Securities lending transactions $ — $ 6,471 $ 1,105 $ 270 $ 7,846* As of March 31, 2019, IFC has no repurchase-to-maturity transactions outstanding. * Includes accrued interest. Remaining Contractual Maturity of the Agreements - June 30, 2018 Overnight Greater and Up to 30 30-90 than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ — $ 6,128 $ — $ — $ 6,128 Agency securities — — — — — Municipal securities and other — — — — — Total Repurchase agreements — 6,128 — — 6,128 Securities lending transactions U.S. Treasury securities $ 8 $ — $ — $ — $ 8 Total Securities lending transactions 8 — — — 8 Total Repurchase agreements and Securities lending transactions $ 8 $ 6,128 $ — $ — $ 6,136* As of June 30, 2018, IFC has no repurchase-to-maturity transactions outstanding. * Includes accrued interest. INTERNATIONAL FINANCE CORPORATION Page 84 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE Q - RELATED PARTY TRANSACTIONS IFC transacts with affiliated organizations by providing grants to IDA, receiving loans, participating in shared service arrangements, as well as through cost sharing of IBRD’s sponsored pension and other postretirement plans. As part of the IDA 18 Replenishment, a $2.5 billion IDA 18 IFC-MIGA Private Sector Window (PSW) has been created to mobilize private sector investment in IDA-only and IDA-eligible fragile and conflict-affected states. Under the fee arrangement for the PSW, IDA will receive a fee for transactions executed under this window and will reimburse IFC and MIGA for the related costs incurred in administering transactions below. IDA PSW transactions (in US$ millions) Net Asset/ (Liability) Balance Sheet Facility USD Notional position Description Location Local Currency swaps with IDA to support local currency Derivative assets/ currency 37 2 denominated loans liabilities Net Asset/ (Liability) Balance Sheet Facility Commitments position Description Location Blended Payables and other Finance 19 (*) Funding for IFC's PSW equity investments liabilities Blended Guarantee from IDA that shares the first loss to support IFC's Off-balance sheet Finance 50 - Small Loan Guarantee Program in PSW eligible countries item * Less than $0.5 million. During the quarter ended September 30, 2014, IFC issued an amortizing, non-interest bearing promissory note, maturing September 15, 2039, to IDA (the Note) in exchange for $1,179 million. The Note requires payments totaling $1,318 million, resulting in an effective interest rate of 1.84%. With IFC’s consent, IDA may redeem the Note after September 2, 2019, upon an adverse change in its financial condition or outlook. The amount due to IDA upon such redemption is equal to the present value of the all unpaid amounts discounted at the effective interest rate. IDA may transfer the Note; however, its redemption right is not transferrable. IFC has elected the Fair Value Option for the Note. IFC has investments where IFC has significant influence, direct equity investments representing 20 percent or more ownership but in which IFC does not have significant influence, and equity interests in private equity funds. However, IFC’s transactions with its investment affiliates are limited to IFC’s equity and debt investments and disclosed in other footnotes. NOTE R - SUBSEQUENT EVENTS The fair value of IFC’s listed equity investments is based on market prices of such investments as of March 31, 2019. Changes in market prices subsequent to March 31, 2019 will be reported in the period in which such change occurs. On April 13, 2019, Tuvalu became the 185th member country of IFC with paid-in capital of $1 million. NOTE S - CONTINGENCIES In the normal course of its business, IFC is from time to time named as a defendant or co-defendant in various legal actions on different grounds in various jurisdictions. Although there can be no assurances, based on the information currently available, IFC’s Management does not believe the outcome of any of the various existing legal actions will have a material adverse effect on IFC’s financial position, results of operations or cash flows. Page 85 INDEPENDENT AUDITORS’ REVIEW REPORT President and Board of Directors International Finance Corporation: We have reviewed the accompanying condensed consolidated balance sheet of the International Finance Corporation and its subsidiaries (“IFC”) as of March 31, 2019, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three-month and nine-month periods ended March 31, 2019, and the related condensed consolidated statements of changes in capital and cash flows for the nine-month period ended March 31, 2019 (the "interim financial information"). The condensed consolidated statements of operations and comprehensive income (loss) for the three- and nine-month periods ended March 31, 2018 and the condensed consolidated statements of changes in capital and cash flows for the nine-month period ended March 31, 2018, were reviewed by other auditors whose report dated May 8, 2018, stated that based on their review, they were not aware of any material modifications that should be made to those statements in order for them to be in accordance with accounting principles generally accepted in the United States of America. The consolidated balance sheet of IFC as of June 30, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in capital, and cash flows for the year then ended (not presented herein), were audited by other auditors whose report dated August 9, 2018, expressed an unmodified opinion on those statements. Management’s Responsibility for the Interim Financial Information IFC’s management is responsible for the preparation and fair presentation of the interim financial information in accordance with accounting principles generally accepted in the United States of America; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of interim financial information in accordance with accounting principles generally accepted in the United States of America. Auditors’ Responsibility Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial information. Accordingly, we do not express such an opinion. Conclusion Based on our review, we are not aware of any material modifications that should be made to the interim financial information as of March 31, 2019 and for the three-month and nine-month periods ended March 31, 2019, referred to above for it to be in accordance with accounting principles generally accepted in the United States of America. May 14, 2019