Financial statement and independent auditor's report Social Fund for Development International Development Association (IDA) Second Additional Grant No. (H984-RY) for SFD Phase IV December 31, 2015 Social Fund for Development, IDA Second Additional Grant No. (H984-RY) for SFD Phase IV Contents Page INDEPENDENT AUDITOR'S REPORT ..........................................................................................0 STATEMENT OF SOURCES AND USES OF FUNDS...................................................................... 1 NOTES TO THE FINANCIAL STATEMENT ..................................................................................2 To: The Chairman and Board of Directors of Social Fund for Development Audit .Tax . Advisory Sana'a - Republic of Yemen Grant Thornton Yemen Algeria St. Sana'a - Republic of Yemen P.O. Box: 18045 Tel. + 967 1 465 024 / 5 Fax. + 967 1 465 026 www.gtyemen.com Report on the Financial Statement We have audited the accompanying statement of sources and uses of funds of the Social Fund for Development (SFD) relating to International Development Association (IDA) Second Additional Grant No. (H984-RY) for SFD Phase IV for the year ended December 31, 2015, and a summary of significant accounting policies and other explanatory notes (1-6) collectively referred as “Financial Statement”. Management's responsibility for the financial statement Management of SFD is responsible for the preparation and fair presentation of this Financial Statement in accordance with the cash receipts and disbursements basis of accounting described in Note (2) to the Financial Statement; this includes determining that the cash receipts and disbursements basis of accounting is an acceptable basis for the preparation of the Financial Statement in the circumstances, and for such internal control as management determines is necessary to enable the preparation of the Financial Statement that is free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on the Financial Statement based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Financial Statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Financial Statement. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the Financial Statement, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the Financial Statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, if any, made by management, as well as evaluating the overall presentation of the Financial Statement. We believe that the audit evidences we have obtained are sufficient and appropriate to provide a basis for our audit opinion. Chartered Accountants & Consultants License No. 742 Member of Grant Thornton International Social Fund for Development, IDA Second Additional Grant No. (H984-RY) for SFD Phase IV Notes to the Financial Statement For the year ended December 31, 2015, and for the period from August 31, 2014 to December 31, 2014 1. Background information The Social Fund for Development (SFD) is established under Yemeni Law No. (10) Of 1997. The SFD operates in the Republic of Yemen through its head office in Sana’a and nine branches in governorates of Aden, Hodeida, Mukalla, Taiz, Ibb, Amran, Dhamar, Sana’a and Hajja. SFD receives funds through loans, donations, subsidies and grants obtained from Yemeni and international governments and local and international agencies and financial institutions. The main objectives of SFD to contribute efficiently in the execution of government social and economic plans and programs through the empowerment of families, small projects, poor and low income people to get work and production opportunities through providing loans, facilities and services to help them implementing services or productivity projects. As well as the restraint of unemployment, fight against poverty and mitigate the side effects caused by the government's economic redemption programs on low- income people. These objectives are being achieved through the following three major programs:  Community development.  Capacity building.  Development of small and micro-enterprises. During the year 2009, a fourth program was established, that involves labour intensive work (LIW). SFD implements the following to achieve its objectives: 1. Provides direct or indirect finance to income-generating and services which are implemented by non-government organizations. 2. Provides the required finance for social development activities such as health care, education, environment and other services that are in line with the SFD objectives. 3. Assists local organizations to develop their abilities and enhance their efficiency in providing services. 4. Provides new opportunities for employment through special projects or assisting productive projects to enhance the standard of living of the poor in the rural and urban areas and to raise their levels of earnings. According to the agreement signed on August 31, 2014 between Yemeni Government and International Development Association (IDA), IDA agreed to grant the SFD, an amount of SDR 32,400,000 (equivalent to USD 50,000,000) under the Development Grant Agreement (DG Agreement) No. H984-RY to support the SFD Projects for the fourth stage. 2. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in this financial statement. 2 Social Fund for Development, IDA Second Additional Grant No. (H984-RY) for SFD Phase IV 2.1 Basis of preparation of financial statement 2.1.1 The financial statement is prepared according to the cash receipts and disbursements basis of accounting to record its transactions. On this basis, sources of funds are recognized when received and disbursements are recognized when paid. 2.1.2 This financial statement represents only the statement of utilization of the grants received from the IDA and the other income that relate to the IDA Second Additional Grant No. (H984-RY) for SFD Phase IV and excludes all other transactions, assets and liabilities of the SFD. 2.1.3 The financial statement was approved by the SFD Management on May 7, 2016. 2.2 Functional and presentation currency The financial statement is presented in US Dollars in accordance with the donor's currency. 2.3 Foreign currency transaction The SFD records the transactions of the donor in US Dollars. Transactions in non-US Dollars currencies are recorded at the rates of exchange prevailing on the dates of the transactions. Fund balances denominated in non-US Dollars currencies are translated at the rates prevailing at the year end. Gains and losses arising on exchange are reported in the statement of sources and uses of funds. The unrealized profit and loss arising from changes in foreign currency exchange rate are not the receipts or cash payments, but the effect of changes in exchange rate on cash held in foreign currency is reported in the Statement of Sources and Uses of Funds as to settle the cash at the beginning and the end of the period and present the amount separately from cash receipts and payments and includes the differences, if any 2.4 Bank's interest Interest on banks current account and deposits are recognized when received. 2.5 Fixed Assets Fixed Assets procured are expensed on the date of payment for the purchase and when sold it is recognized as resources. 2.6 Government contribution Government Contribution are recorded and added to the fund account at Central Bank of Yemen when confirmed by the Ministry of Finance. 2.7 Project expenditures (sub-grants) SFD’s management preforms and implements some of its projects (Community Contracting, Pay against Work, Works Directly Implemented) which categorized under the main programs (Community Development & Labour Intensive Works) either directly as pay against work and works directly implemented or through forming community committees to implement the community contracting projects under SFD’s management supervision on these projects. SFD opens a sub-bank account for each project and feeds these accounts through the main banks accounts of SFD and all amounts transferred to those sub-accounts are recognized as expenses directly in the SFD records at the same date of transfer. These amounts paid as an advance in order to start implementing the projects and then the remaining amounts will be paid as per the progress reports according to the approved budget. SFD’s management keeps separate monitoring records to follow-up the clearance of these amounts and record the retrieved amounts after the completion of the implementation of these projects, if any, as refund of expenditure disbursed earlier in the statement of sources and uses of funds. Note (5.1) illustrate the total amounts under use in the bank accounts until the date of the financial statement. 3 Social Fund for Development, IDA Second Additional Grant No. (H984-RY) for SFD Phase IV 3. Funds received According to the agreement signed on August 31, 2014 between Yemeni Government and International Development Association (IDA), IDA agreed to grant the SFD, an amount of SDR 32,400,000 (equivalent to USD 50,000,000) under the Development Grant Agreement (DG Agreement) No. H984-RY to support the SFD Projects for the fourth stage: During the year ended December 31, 2015, SFD received the following amounts: Date of receipt USD Fund received - For the year ended December 31, 2015 - For the period ended December 31, 2014 5,000,000 Accumulated balance up to December 31, 2015 5,000,000 4. Operating costs This item consists of the following for the year/ period ended December 31: 2015 2014 USD USD Rent 97,268 - Health insurance 79,111 - Security 71,316 - Life insurance 67,658 - Consultancy services 64,421 - Salaries and related costs 55,831 - Branches expenses 41,670 - Property and fixed assets 23,277 - Travel costs 22,086 - Legal services and law firm 18,000 - Utilities 12,969 - Maintenance 7,208 - Cleaners and cleaning 1,955 - Fuel 1,935 - Other expenses 704 - 565,409 - 5. The uses of funds (project expenditures) The details of the project expenditures, according to the disbursements categories and main programs of SFD, are as follows: Small and Micro- Community Capacity Enterprises Labor Operating Fixed Development Building Development Intensive Costs Assets Total USD USD USD USD USD USD USD Works and goods 212,747 - - 44,377 - - 257,124 Consultancy services and training 88,556 51,889 3,000 - - - 143,445 Operating costs - - - - 565,409 - 565,409 Fixed assets - - - - - 1,018 1,018 For the year ended December 31, 2015 301,303 51,889 3,000 44,377 565,409 1,018 966,996 For the period ended December 31, 2014 39,933 - - - - - 39,933 Accumulated balance up to December 31, 2015 341,236 51,889 3,000 44,377 565,409 1,018 1,006,929 4 Social Fund for Development, IDA Second Additional Grant No. (H984-RY) for SFD Phase IV 5.1 Project expenditures (sub-grants) The table below illustrate the total amounts under the use in the bank accounts for the sub-projects. 2015 2014 USD USD Balance at beginning of the Jan. 1/ August 31 39,840 - Paid during the year/ period 78,507 39,840 Used during the year/ period (115,758) - Balance at December 31, 2,589 39,840 6. Fund balance at end of the year/ period This item consists of the following as at December 31: 2015 2014 USD USD Cooperative and Agricultural Credit Bank (Account No. 1004934970) 4,283,348 4,960,067 4,283,348 4,960,067 5