102842 International Bank for Reconstruction and Development Management’s Discussion & Analysis and Financial Statements June 30, 2010   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2010 Section 1: Introduction 3 Economic Environment 3 Financial Highlights 3 Income Allocation 4 Section 2: Basis of Reporting 4 Section 3: Lending and Other Development Activities 5 Lending 5 Other Development Activities 9 Section 4: Investment Activities 11 Liquid Asset Portfolio 11 Long-Term Income Portfolio 12 Section 5: Funding 12 Equity 13 Borrowings 14 Section 6: Risk Management 16 Financial Risk Management 16 Operational Risk Management 22 Section 7: Fair Value Analysis 22 Fair Value Balance Sheet 22 Fair Value Net Income 24 Section 8: Reported Basis Analysis 26 Reported Basis Balance Sheet 26 Reported Basis Operating Income 26 Section 9: Contractual Obligations 27 Section 10: Critical Accounting Policies and the Use of Estimates 28 Section 11: Governance and Control 29 General Governance 29 Audit Committee 29 Business Conduct 30 Auditor Independence 30 Internal Control 30 Glossary of Terms 32 LIST OF BOXES, TABLES AND FIGURES Boxes 1 Five-Year Summary of Selected Financial Data 2 2 Treatment of Overdue Payments 19 3 Eligibility Criteria for IBRD’s Investment Securities 20 Tables 1 Allocable Income 4 2 Lending Status at June 30, 2010 and 2009 5 3 Currently Available Loan Terms 7 4 Average Maturity Terms- IFL Fixed Spread Loans 7 5 Guarantee Exposure 10 6 Cash and Investment Assets held in Trust 10 7 Liquid Asset Portfolio and LTIP Returns and Average Balances 12 8 Subscribed Capital 13 9 Capital Subscriptions of DAC Members of OECD Countries — June 30, 2010 14 10 Funding Operations Indicators 15 11 Equity used in Equity-to-Loans Ratio 18 12 Credit Exposure, Net of Collateral Held, by Counterparty Rating 21 13 Condensed Balance Sheets at June 30, 2010 and 2009 23 14 Condensed Statements of Income for the years ended June 30, 2010 and 2009 25 15 Summary of Changes to Other Comprehensive Income (Fair Value Basis) 25 16 Reported Basis Operating Income 26 17 Net Noninterest Expense 27 18 Contractual Obligations 28 Figures 1 Commitments, Gross Disbursements, and Net Disbursements 5 2 Commitments by Region 5 3 IBRD Lending Commitments 6 4 Loan Portfolio 8 4a Loans Outstanding by Loan Product 8 4b Undisbursed Balances by Loan Product 8 4c Loans Outstanding by Currency 9 4d Loans Outstanding by Interest Rate Structure 9 5 Liquid Asset Portfolio Composition 12 6 Medium- and Long-term Funding Raised Excluding Derivatives by Currency 15 7 Effect of Derivatives on Interest Rate Structures on Borrowing Portfolio —June 30, 2010 15 8 Effect of Derivatives on Currency Composition on the Borrowing Portfolio—June 30, 2010 16 9 Equity-to-Loans Ratio 17 10 Top Eight Country Exposures at June 30, 2010 18 11 IBRD’s U.S. Dollar Funding Curve 24 12 Six-Month LIBOR Interest Rates U.S. Dollar 26 Throughout Management’s Discussion and Analysis, terms in boldface type are defined in the Glossary of Terms on page 32. The Management Discussion and Analysis contains forward looking statements which may be identified by such terms as “anticipates”, “believes”, “expects”, “intends” or words of similar meaning. Such statements involve a number of assumptions and estimates that are based on current expectations, which are subject to risks and uncertainties beyond IBRD’s control. Consequently, actual future results could differ materially from those currently anticipated. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT MANAGEMENT’S DISCUSSION AND ANALYSIS JUNE 30, 2010 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 1 Box 1: Five-Year Summary of Selected Financial Data As of or for the years ended June 30 In millions of U.S. dollars, except ratio and return data which are in percentages Lending (Discussed in Section 3) 2010 2009 2008 2007 2006 a Commitments 44,197 32,911 13,468 12,829 14,135 b Gross disbursements 28,855 18,565 10,490 11,055 11,883 b Net disbursements 17,230 8,345 (2,129) (6,193) (1,741) Reported Basis Income statement (Discussed in Section 8) c Operating income 800 572 2,271 1,659 1,740 Board of Governors-Approved Transfers (839) (738) (740) (957) (650) Net (loss) income (1,077) 3,114 1,491 (140) (2,389) Balance sheet (Discussed in Section 8) Total assets 283,010 275,420 233,311 207,601 211,982 Unrestricted cash and investments 36,514 38,284 23,103 22,258 24,929 Net loans outstanding 118,104 103,657 97,268 95,433 100,221 d Borrowings outstanding 128,577 110,040 87,402 87,460 95,491 Total equity 37,555 40,037 41,548 39,796 36,474 Performance Ratios (Discussed in Section 6) Net return on average earning assets Based on operating income 0.54 0.45 1.87 1.34 1.34 Based on net income (0.73) 2.38 1.23 (0.11) (1.84) Return on equity Based on operating income 2.21 1.53 5.96 4.64 5.05 Based on net income (2.88) 8.01 3.73 (0.37) (6.84) e Equity-to-Loans Ratio 29.37 34.28 37.62 35.05 32.96 Fair Value Basis Income statement (Discussed in Section 7) f Net (loss) income (870) (225) 1,135 900 640 Net (loss) income excluding Board of Governors- Approved Transfers (31) 513 1,875 1,857 1,290 Balance sheet (Discussed in Section 7) Total assets 282,842 273,681 234,435 208,312 212,865 Unrestricted cash and investments 36,514 38,284 23,103 22,258 24,929 Net loans outstanding 117,936 101,918 98,392 96,144 101,102 d Borrowings outstanding 128,563 110,022 89,946 89,484 95,258 Total equity 37,401 38,316 40,128 38,483 37,590 Performance Ratios (Discussed in Section 6) g Net return on average earning assets (0.02) 0.40 1.52 1.49 0.98 g Return on equity (0.08) 1.41 4.93 5.21 3.74 e Equity-to-Loans Ratio 29.97 35.00 36.71 34.47 32.44 a. Commitments include guarantee commitments and guarantee facilities. b. Amounts include transactions with the International Finance Corporation (IFC) and capitalized front-end fees. c. Operating income is defined as Income before fair value adjustment on non-trading portfolios, net and Board of Governors- Approved Transfers. d. Borrowings outstanding excludes derivatives. e. As defined by Table 11: Equity used in Equity-to-Loans Ratio. f. Fair value net income on a comprehensive basis comprises of net income (loss) on a reported basis, additional fair value adjustment relating to the loan portfolio, as well as the components of other comprehensive income as reported in the financial statements. g. Ratios exclude Board of Governors-Approved transfers. 2 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 1. INTRODUCTION On a reported basis, the borrowing and investment portfolios are carried at fair value, while the loan The International Bank for Reconstruction and portfolio is carried at amortized cost (except for Development (IBRD) is an international loans with embedded derivatives which are reported organization established in 1945 and is owned by its at fair value). Due to this asymmetry, for member countries. IBRD's main goals are promoting management reporting purposes, IBRD also sustainable economic development and reducing provides its financial statements on a fair value poverty in its developing member countries. It basis, as an indicator of the overall strength of the pursues these goals primarily by providing loans, institution. guarantees and related technical assistance for projects and programs for economic reform. IBRD's On a fair value basis, at June 30, 2010, IBRD’s loan ability to intermediate funds from international portfolio of $117,936 million was $168 million less capital markets for lending to its developing member than the reported basis, reflecting the fair value countries is an important element in achieving its adjustment for interest rates and the difference development goals. IBRD's financial objective is not between loan loss provision and the fair value to maximize profit, but to earn adequate income to adjustment for credit reflecting prevailing CDS ensure its financial strength and to sustain its spreads. development activities. Box 1 presents selected Investment Portfolio: Proceeds from debt issuances, financial data for the last five fiscal years. together with IBRD's equity, are used primarily to The financial strength of IBRD is based on the fund IBRD’s lending activities. IBRD also support it receives from its shareholders and on its maintains an investment portfolio primarily to financial policies and practices. Shareholder support provide liquidity to its operations. Funds awaiting for IBRD is reflected in the capital backing it has disbursement, as well as minimum liquidity received from its members and in the record of its balances, are held in this portfolio and managed borrowing members in meeting their debt-service against conservative benchmarks. obligations to it. IBRD's financial policies and IBRD’s liquid assets are held principally in highly practices have led it to build reserves, diversify its rated fixed income securities. As of June 30, 2010, funding sources, hold a large portfolio of liquid IBRD’s liquid asset portfolio totaled $34,454 investments, and limit a variety of risks, including million, a decrease of $2,308 million from June 30, credit, market and liquidity risks. 2009. Increases in loan disbursements, partially Economic Environment offset by proceeds from debt issuances contributed to this decline in the liquid asset portfolio. FY 2010 started with a continuation of the weak economic conditions associated with the global As of June 30, 2010, the Long-Term Income financial crisis from the prior year, followed by Portfolio (LTIP) totaled $1,179 million, an increase gradual recovery towards the end of the fiscal year. of $118 million over June 30, 2009. This increase However, the overall economic environment during primarily reflects higher mark-to-market gains the majority of FY 2010 was still characterized by during the year. low levels of market liquidity and continued higher Funding Activities: To raise funds, IBRD issues debt credit spreads, accounting for an increase in demand securities in a variety of currencies to both for IBRD's loans by its borrowing member institutional and retail investors. The debt securities countries. include a variety of fixed income products, including Financial Highlights global bonds, plain vanilla bonds and customized structured products in a variety of maturities and Lending Operations: IBRD's principal assets are its currencies. During FY 2010, IBRD issued bonds in loans to borrowing member countries. In response to 28 currencies, with 62% denominated in U.S. the global financial crisis, IBRD’s commitments dollars. As of June 30, 2010, IBRD’s borrowing have totaled $77,108 million over the past two fiscal portfolio, net of derivatives, totaled $119,775 years. million, an increase of $16,207 million over June 30, As of June 30, 2010, on a reported basis, IBRD’s 2009. IBRD’s net borrowing issuances (including loan portfolio totaled $118,104 million, an increase derivatives) for FY 2010 were $15,285 million, of $14,447 million over June 30, 2009. consistent with the higher lending needs. Commitments and net disbursements increased by Following IBRD’s spring meetings in April 2010, a $11,286 million and $8,885 million, respectively. In request for the first capital increase in 20 years was addition, IBRD experienced an improvement in the submitted to the Board of Governors of IBRD for overall credit quality of its loan portfolio over FY voting by September 10, 2010. This capital increase 2009, which resulted in a $79 million decrease in the includes both a general and a selective increase, the accumulated provision for loan losses. latter resulting in an increase in the voting power of IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 3 developing and transition countries. The approval of Table 1 reconciles reported net income to allocable the capital increase would result in a $86.2 billion income for FY 2010 and FY 2009. increase in subscribed capital, of which $5.1 billion Table 1: Allocable Income would be paid-in over a period of five years. In millions of U.S. dollars FY 2010 FY 2009 Operating Income: For FY 2010, IBRD’s operating Reported net (loss) income $(1,077) $ 3,114 income was $800 million, an increase of $228 Board of Governors Approved million over FY 2009. This was primarily due to the Transfers 839 738 lower provision for losses on loans, guarantees and Fair value adjustment on non- trading portfolios, net 1,038 (3,280) Deferred Drawdown Options (DDOs), partially Reported operating income 800 572 offset by lower net interest income. Allocations: Pension reserve 32 (25) Fair Value Net Income: For FY 2010, IBRD’s net Restricted retained earnings 12 (11) loss on a fair value basis was $870 million, an LTIP reserve (80) (36) increase of $645 million over the net loss in FY Allocable Income $ 764 $ 500 2009. This was primarily due to the $986 million decrease in the net fair value adjustment over FY On August 5, 2010, the Executive Directors 2009, partially offset by a $530 million net increase approved the above allocations, as well as the in changes in other comprehensive income. addition of $281 million of FY 2010 net income to Income Allocation the General Reserve. In addition, the Executive Directors recommended to IBRD’s Board of It is management's practice to recommend each year Governors, the following transfers from FY 2010 the allocation of net income to augment reserves and unallocated income: $383 million to the support developmental activities. International Development Association (IDA) and Income allocation and distribution decisions are $100 million to Surplus. based on allocable income. Management makes the following adjustments to reported net income to 2. BASIS OF REPORTING arrive at allocable income, with the approval of IBRD prepares its financial statements in conformity IBRD’s Executive Directors: with accounting principles generally accepted in the  The fair value adjustment on non-trading United States of America (U.S. GAAP), referred to portfolios is excluded since not all instruments in this document as the “reported basis”. are carried at fair value. IBRD reports all instruments in the  Board of Governors-Approved Transfers are investments, borrowings and asset/liability excluded as they represent distributions from management portfolios at fair value, with surplus or prior year’s income. changes in fair value reported in the statement of income. Loans are reported at amortized  The pension adjustment reflects the difference cost (except for loans with embedded between IBRD’s pension contributions and the derivatives which are reported at fair value). accounting expense. Management believes the allocation decision should be based on actual As discussed earlier, management believes this cash contribution to the pension plans, as the mixed measurement model creates an assets for these plans are held in irrevocable asymmetry such that reported net income does trusts. not capture the true economic income of IBRD. Therefore, management believes that the fair  Temporarily restricted income is excluded as value financial statements, which include the IBRD has no discretion about the use of such loan portfolio at fair value, are a better measure funds. of the financial strength of the institution.  LTIP adjustment reflects the difference between Additionally, when making decisions on the actual portfolio return and the draw amount. income allocation and distribution, Since LTIP is a long-term portfolio, management monitors the fair value balance management believes that the draw amount, sheet, the results from the stress test, and the reflecting the long-term expected average return equity-to-loans ratio1 as indicators of IBRD’s of the LTIP, should be used. financial health within an overall Strategic Capital Adequacy Framework. See Section 6 for further analysis on IBRD’s Strategic Capital Adequacy Framework. 1 The equity-to-loans ratio refers to the equity-to-loans, guarantees, DDOs and long-term investment asset ratio. 4 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 3. Lending and other Development Figure 2: Commitments by Region Activities 16,000 14,000 Lending In millions of U.S. dollars 12,000 All of IBRD's loans are made to, or guaranteed by, 10,000 countries that are members of IBRD. In addition, 8,000 IBRD may also make loans to IFC, an affiliated 6,000 organization, without any guarantee. IBRD does not 4,000 currently sell its loans, nor does management believe 2,000 there is a market for loans comparable to those made 0 by IBRD. FY06 FY07 FY08 FY09 FY10 From its establishment through June 30, 2010, Africa East Asia and Pacific Europe and Central Asia Latin America and the Caribbean IBRD’s approved loans, net of cancellations, totaled Middle East and North Africa South Asia $464,923 million to 137 borrowing member countries. A summary of cumulative lending is presented in Table 2. Under IBRD's Articles of Agreement (the Articles), as applied, the total amount outstanding of direct Table 2: Lending Status at June 30, 2010 and 2009 loans made by IBRD, including participation in In millions of U.S. dollars loans and callable guarantees may not exceed the 2010 2009 statutory lending limit. At June 30, 2010, a Cumulative approvals $464,923 $422,435 Cumulative repayments b 282,426 270,972 outstanding loans and callable guarantees totaled Loans outstanding 120,103 105,698 $120,112 million, equal to 55% of the statutory Undisbursed amounts 63,574 51,125 lending limit of $218,474 million. a. Net of cumulative cancellations of $65,944 million, as of June 30, 2010 ($64,477 million – June 30, 2009). Also, Lending Cycle cumulative amount excludes guarantees. b. Multicurrency pool loan repayments are included at The process of identifying and appraising a project, exchange rates in effect on the date of original disburse- and approving and disbursing a loan, often extends ment. All other amounts are based on U.S. dollar over several years. However, on numerous occasions equivalents at the time of repayment by borrowers. IBRD has shortened the preparation and approval During FY 2010, new loan commitments were cycle in response to emergency situations (such as $44,197 million (includes guarantees of $243 natural disasters) and crises (such as food, fuel and million), as compared to $32,911 million in FY 2009 global economic crises). IBRD acts prudently and (includes guarantees of $78 million), an increase of pays due regard to the prospects of repayment on its $11,286 million. This significant increase in loans. IBRD’s decisions to make loans are based demand was driven by the global economic crisis. upon, among other things, studies of a member Figure 1 presents the commitments, gross country's economic structure, including assessments disbursements, and net disbursements from FY 2006 of its resources and ability to generate sufficient to FY 2010. foreign exchange to meet debt-service obligations. With certain exceptions2, each loan must be Figure 1: Commitments, Gross Disbursements, and Net Disbursements approved by IBRD's Executive Directors. 50,000 Loan disbursements are subject to the fulfillment of In millions of U.S. dollars 40,000 requirements set out in the loan agreement. The loan 30,000 agreement requires borrowers (a) to submit 20,000 documentation establishing, to IBRD's satisfaction, that the expenditures financed with the proceeds of 10,000 loans are made in conformity with the applicable 0 lending agreements and (b) to maximize competition (10,000) in the procurement of goods and services by using, FY06 FY07 FY08 FY09 FY10 wherever possible, international competitive bidding Commitments Gross Disbursements Net Disbursements or, when it is not appropriate, other procedures that ensure maximum economy and efficiency. In addition, under pilot programs approved by the During the five year period from FY 2006 to FY Executive Directors, IBRD considers the use of 2010, the Latin America and the Caribbean region accounted for the largest share of commitments (See 2 Figure 2). For Adaptable Program Loans (APLs), the Board approves all first-phase APLs and delegates to Management the approval of subsequent phases subject to agreed procedures. Learning and Innovation Loans are loans of $5 million or less approved by Management. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 5 borrower country procurement, and environmental In FY 2010, new IBRD commitments to investment and social safeguard systems in selected operations lending and development policy lending were 53% where these systems are assessed by IBRD as being and 47%, respectively and consistent with FY 2009 equivalent to IBRD's systems and where the levels. borrower's policies and procedures, implementation Currently Available Loan Products practices, track record, fiduciary and safeguard risks and capacity are considered acceptable to IBRD. IBRD does not differentiate between the credit quality of member countries eligible for loans, with During implementation of IBRD-supported all member countries eligible for IBRD lending operations, experienced IBRD staff review progress, receiving the same pricing. monitor compliance with IBRD policies and assist in resolving any problems that may arise. The IBRD Flexible Loans Independent Evaluation Group, an IBRD unit whose As of June 30, 2010, IBRD Flexible Loan (IFL) director reports to the Executive Directors rather allows borrowers to customize the repayment terms than to the President, evaluates the extent to which (i.e., grace period, repayment period and operations have met their major objectives. amortization profile) to meet debt management or Lending Instruments project needs, and also includes options to manage the currency and/or interest rate risk over the life of IBRD lending generally falls into one of two the loan. Final maturity of an IFL can be up to 30 categories: investment or development policy years, provided that its weighted average maturity lending (previously referred to as adjustment does not exceed 18 years. lending). Investment lending3 is generally used to finance goods, works, and services in support of The IFL has the following two basic types of loan economic and social development projects and terms: variable-spread terms and fixed-spread terms. programs in a broad range of sectors. In contrast, The spread on IBRD’s IFLs has three components; development policy lending is generally provided in namely, a projected funding cost, a market risk exchange for commitments by borrowers to premium, and a Board-approved contractual spread. implement social, structural, and institutional Each type of loan may be denominated in the reforms. The majority of IBRD’s loans are for currency or currencies chosen by the borrower investment projects or programs. Figure 3 shows the provided that IBRD can efficiently intermediate in percentage of IBRD loans approved for investment that currency. Variable-spread terms have a variable and development policy lending over the past seven spread over LIBOR that is adjusted every six years. months and fixed-spread terms have a fixed spread over LIBOR that is fixed for the life of the loan. Figure 3: IBRD Lending Commitments Percent Table 3 summarizes the currently available loan 100% terms as of June 30, 2010. Management reviews the projected funding cost and the market risk premium 75% at least on a quarterly basis and resets these Investment variables as and when market conditions warrant. 50% 25% Development Policy 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 3 Investment lending loans include enclave loans which are made in exceptional cases to IDA qualifying member countries (who are not also eligible for IBRD financing) for projects generating foreign exchange and projects with appropriate foreign exchange-related credit enhancements. These loans carry the same terms and conditions as IBRD loans. As of June 30, 2010 and June 30, 2009, IBRD’s enclave loans totaled $29 million and $35 million, respectively. 6 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Table 3: Currently Available Loan Terms As of June 30, 2010 Basis Points IBRD Flexible Loan (IFL) Special Development Fixed Spread Terms Variable Spread Terms Policy Loans Final maturity 30 years 30 years 5 to 10 years Reference Market Rate Six-month LIBOR Six-month LIBOR Six-month LIBOR Spread Contractual lending spread 50 50 200 a Market risk premium 10-15 - - Weighted average Projected funding spread spread to LIBOR of debt Funding cost margin c - to LIBOR allocated to Variable Spread Term Loans Charges b Front-end fee 25 25 100 Late service charge on principal payments received after 30 days of due date 50 50 - Development Policy Loan Catastrophe Risk Deferred Drawdown Option Deferred Drawdown Option Reference Market Rate Six-month LIBOR Six-month LIBOR Contractual lending spread IFL variable or fixed spread in effect at the time of withdrawal Front-end fee 75 50 Renewal fee 50 25 a. For loans with an average maturity greater than 14 years, 15 basis points are charged. b. There are no waivers on interest and front-end fee under the current pricing terms. c. Projected funding spread to LIBOR is based on the average repayment maturity of the loan. For FY 2011, the Executive Directors approved a access an immediate source of funding to respond new pricing structure for fixed and variable IFLs4. rapidly in the aftermath of a natural disaster. Under As a result, IBRD restored the average loan maturity the DPL DDO, the borrower may defer limits for new loans and guarantees to the pre-2008 disbursement of a DPL for up to three years, level of 12 years. Borrowing members will have the renewable for an additional three years. The Cat option to extend the average loan maturity from 12 DDO has a revolving feature. The three-year years to 18 years by paying an annual premium of drawdown period may be renewed up to four times, 10 basis points to 20 basis points. The premium is a for a total maximum drawdown period of 15 years. component of the spread charge over LIBOR, and See Table 3 for currently available loan terms as of accounts for the cost of the incremental capital June 30, 2010. needed for the longer maturities. In line with the There were no new DPL DDOs and Cat DDOs maturity based pricing reform, the average maturity committed during FY 2010 (FY 2009 – $4,810 terms for IFL loans with a fixed spread have been million). As of June 30, 2010, the outstanding realigned. See Table 4. amounts relating to loans with a DDO totaled $2,050 Table 4: Average Maturity Terms—IFL Fixed Spread million ($1,773 million – June 30, 2009). Loans Average Maturity Prior to Average Maturity on and Special Development Policy Loans (SDPL) July 1, 2010 after July 1, 2010 Up to 10 years Up to 12 years SDPLs support structural and social reforms by Greater than 10 to 14 years Greater than 12 to 15 years credit worthy borrowers that are approaching a Greater than 14 to 18 years Greater than 15 to 18 years possible global financial crisis, or are already in a crisis and have extraordinary and urgent external Loans with a Deferred Drawdown Option financial needs. Borrowers seeking SDPLs must The Development Policy Loan Deferred Drawdown have a disbursing IMF-supported program in place, Option (DPL DDO) provides the borrower with the and be seeking IBRD lending as part of a flexibility to rapidly fund its financing requirements, coordinated international support package. for example, following a shortfall in resources due During FY 2010, IBRD lowered the minimum to adverse economic events such as downturns in contractual lending spread over LIBOR for SDPLs economic growth or unfavorable changes in from 400 basis points to 200 basis points. In commodity prices or terms of trade. The Catastrophe addition, IBRD made the SDPL repayment terms Risk DDO (Cat DDO) enables the borrower to more flexible by changing the 3- year grace period to a 3-5 year grace period, and changing the five 4 The new loan pricing will apply to IBRD loans and guarantees year final maturity to a 5-10 year final maturity. approved after June 30, 2010 (with the exception of a limited number of loans and guarantees proposals for FY 2010, whose consideration by the Board is deferred to early FY 2011). IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 7 In FY 2010, for the first time in over six years, Waivers applicable to the previously available loan IBRD made three new SDPL commitments, totaling products include a portion of interest on loans, a $1,840 million. portion of the commitment charge on undisbursed Local Currency Loan Facility Agreement with IFC balances and a portion of the front-end fee charged on all eligible loans and are approved annually by IBRD has a Local Currency Loan Facility the Executive Directors of IBRD. For FY 2010, the Agreement with IFC, which is capped at $300 approved waiver rates were: interest charges - 5 million, aimed at increasing the usability of local basis points for loans for which the invitation to currency paid-in capital. Under this agreement, negotiate was issued prior to July 31, 1998 and - 25 IBRD lends local currencies of its member basis points on loans issued thereafter but signed countries, funded from paid-in capital, to IFC. These prior to the effectiveness of new loan pricing currencies are subsequently used by IFC to finance introduced in September 2007; and commitment projects in those member countries. Loan charges - 50 basis points. For FY 2011, the commitments under this facility are subject to Executive Directors have approved the same waiver consents of the respective IBRD member countries rates as FY 2011 for all eligible borrowers with whose currency is involved. At June 30, 2010, loans eligible loans. outstanding equivalent to $50 million had been made under this facility. Figure 4 presents a breakdown of IBRD’s loan portfolio by loan product, undisbursed balances, Previously available loan products currency composition, and interest rate structure. In previous years, IBRD offered different loan See the Notes to the Financial Statements-Note D- products including variable spread loans (1993- Loans and Guarantees for more information. 2008), fixed spread loans (2000-2008), variable rate multicurrency pool loans (1982– 2001), variable rate single currency pool loans (1996-1998), and fixed rate single currency loans (1995-1999). Figure 4: Loan Portfolio In millions of U.S. dollars Figure 4a: Loans Outstanding by Loan Product June 30, 2010 June 30, 2009 Other Fixed Fixed-Rate Other Fixed Rate Loans a Rate Loans a Single Fixed-Rate 3% Variable- 3% Currency Variable- Single Spread Loans c Loans Spread Loans c Currency 48% 2% 42% Loans 1% Single Currency Pool Single Loans Currency Pool 1% Loans Variable-Rate *% Fixed-Spread Multicurrency Fixed-Spread Loans d Pool Loans Special Loans d 45% 4% Development 46% Variable-Rate Special Development Policy Loans b Multicurrency Policy Loans b 2% Pool Loans 2% 1% Total loans outstanding: $120,103 Total loans outstanding: $105,698 Figure 4b: Undisbursed Balances by Loan Product June 30, 2010 June 30, 2009 Special Development Variable- Policy Loans Variable- Spread Loans c 2% Spread Loans c Variable-Rate 56% 70% Multicurrency Variable-Rate Pool Loans Multicurrency *% Pool Loans *% Fixed-Spread Loans d Fixed-Spread Other Loans 28% Loans d *% 44% Total undisbursed balances: $63,574 Total undisbursed balances: $51,125 a. Includes loans issued prior to 1980, loans to IFC, and currency pool loans and U.S. dollar single currency pool loans converted to fixed rate equivalent of composite LIBOR + 100 basis points. b. Includes loans with non-standard terms. c. Includes IFL variable spread loans. d. Includes IFL fixed spread loans. * Denotes less than 0.5%. 8 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Figure 4: Loan Portfolio (Continued) In millions of U.S. dollars Figure 4c: Loans Outstanding by Currency June 30, 2010 June 30, 2009 Other Other 2% Japanese Yen 2% Japanese Yen 2% 2% Pounds Pounds Sterling Sterling *% *% U.S. Dollars Euro U.S. Dollars Euro 79% 18% 78% 17% Total loans outstanding: $120,103 Total loans outstanding: $105,698 * Denotes less than 0.5%. Figure 4d: Loans Outstanding by Interest Rate Structure June 30, 2010 June 30, 2009 Fixed 25% Fixed 22% Variable Variable 78% 75% Total loans outstanding: $120,103 Total loans outstanding: $105,698 Other Development Activities with respect to projects or programs that do not IBRD offers derivatives, guarantees, and/or grants to generate foreign currency revenues. These local its borrowing member countries as well as affiliated currency loans carry fixed spread terms. The balance and non-affiliated organizations to help meet their of such loans outstanding at June 30, 2010 was development needs or to carry out their development $1,611 million ($418 million – June 30, 2009). mandates. IBRD also provides technical assistance, Affiliated Organizations: To assist IDA with its advisory and other services to support poverty asset/liability management strategy, IBRD executed reduction. The section below discusses these a number of currency forward transactions with products in more detail. IDA. Concurrently, IBRD entered into offsetting transactions with market counterparties. IBRD Derivatives charges an intermediation fee for these currency IBRD offers derivative products to its borrower forward transactions. countries, affiliated and non-affiliated organizations as part of its financial intermediation services. Non-affiliated Organizations: IBRD and the International Finance Facility for Immunisation Borrowers: IBRD is able to respond to borrowers' (IFFIm), a AAA-rated non-affiliated organization, needs for access to better risk management tools, by with whom IBRD has a master derivatives offering them derivative instruments; these include agreement and a treasury management contract, have currency and interest rate swaps, and interest rate entered into a number of currency swaps and caps and collars. IBRD passes through its market interest rate swaps. Concurrently, IBRD entered cost of the instrument to the borrower, and charges a into offsetting swap transactions with market transaction fee comparable to the conversion fee counterparties. IBRD charges an intermediation fee charged on the fixed-spread loans. These for these interest rate swaps and currency swaps. instruments may be executed either under a master IBRD has applied all its normal commercial credit derivatives agreement, which substantially conforms risk policies to these transactions. to industry standards, or under individually negotiated transactions. Further details on derivatives for clients are provided in the Notes to Financial Statements-Note In addition, IBRD also offers its borrowers products D-Loans and Guarantees, and Note F-Derivatives to convert their IBRD loans into their domestic Instruments. currencies to reduce their foreign currency exposure IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 9 Guarantees Table 5: Guarantee Exposure In millions of U.S. dollars IBRD offers guarantees on loans from private At June 30, investors for projects in countries eligible to borrow 2010 2009 a from IBRD. These guarantees can also be offered on Partial risk $ 202 $ 233 Partial credit 143 122 securities issued by entities eligible for IBRD loans, Policy based 50 50 and in exceptional cases offered in countries only Other instruments 1,214 1,256 eligible to borrow from IDA. IBRD applies the same Total $1,609 $1,661 country creditworthiness and project evaluation a. Includes enclave guarantees totaling $13 million (June criteria to guarantees as it applies to loans. Each 30, 2009: $16 million). guarantee requires the counter-guarantee of the member government. Other Activities IBRD generally provides the following types of In addition to its financial operations, IBRD is also guarantees: involved in the following other activities: Partial risk guarantees: These cover debt-service Consultation: IBRD provides technical assistance to defaults on loans that result from non-performance its member countries, both in connection with, and of government obligations. independently of, lending operations. There is a growing demand from borrowers for strategic Partial credit guarantees: These are used for public advice, knowledge transfer, and capacity building. sector projects when there is a need to extend loan Such assistance includes assigning qualified maturities and guarantee specified interest or professionals to survey developmental opportunities principal payments on loans to the government or its in member countries, analyzing their fiscal, agencies. economic and developmental environment, assisting Policy-based guarantees: When partial credit member countries in devising coordinated guarantees are used in support of agreed structural, development programs, appraising projects suitable institutional and social policies and reforms, they are for investment and assisting member countries in considered policy-based guarantees. Eligibility for improving their asset and liability management IBRD development policy lending is a necessary techniques. condition for eligibility for policy-based guarantees. Research and Training: To assist its developing Enclave guarantees: These partial risk guarantees member countries, IBRD through the World Bank are offered in exceptional cases to IDA qualifying Institute and its partners, provides courses and other member countries (who are not also eligible for training activities related to economic policy IBRD financing) for projects generating foreign development and administration for governments exchange and projects with appropriate foreign and organizations that work closely with IBRD. exchange-related credit enhancements. Fees and Trust Fund Administration: IBRD, alone or jointly charges pertaining to enclave guarantees are higher with IDA, administers on behalf of donors, funds than those charged for non-enclave guarantees. restricted for specific uses. These funds are held in Other Instruments: As discussed in Other Activities trust and are not included in the assets of IBRD. below, IBRD has also committed to pay donor Table 6 summarizes the cash and investment assets shortfalls associated with the Advance Market held in trust by IBRD as administrator and trustee. Commitment (AMC) for Vaccines against Table 6: Cash and Investment Assets held in Trust Pneumococcal Diseases. In millions of U.S dollars Total fiduciary assets At June 30, IBRD's exposure at June 30, 2010 on its guarantees 2010 2009 (measured by discounting each guaranteed amount IBRD-executed $ 559 $ 466 from its first call date) is detailed in Table 5. For Recipient-executed 1,388 1,365 additional information see the Notes to Financial Financial intermediary funds 12,509 11,156 a Execution not yet assigned 3,404 2,823 Statements-Note D-Loans and Guarantees. Total $17,860 $15,810 Grants a. These represent assets held in trust for which the IBRD also supports development activities by agreement as to use and the type of execution is to be making grants to various recipients through the finalized jointly by the donors and IBRD. Development Grant Facility and through During the fiscal year ended June 30, 2010, IBRD, mechanisms such as Board of Governors-approved as an executing agency, disbursed $246 million transfers. ($209 million—June 30, 2009) of trust fund program funds. For additional information, see the Notes to 10 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Financial Statements-Note I-Management of 4. INVESTMENT ACTIVITIES External Funds and Other Services. IBRD manages its investments in two portfolios: a Investment Management: IBRD offers investment liquid asset portfolio and a long-term income management services to several types of external portfolio (LTIP), both of which are designated as institutions, including central banks of member trading portfolios. countries. One objective of providing the services to central banks is to assist them in developing The returns and average balances of IBRD’s portfolio management skills. These managed funds investment portfolios in FY 2010 compared with FY are not included in the assets of IBRD. 2009 are presented in Table 7. These returns exclude investment assets funding certain other At June 30, 2010, the assets managed under these postretirement benefit plans. The lower returns in agreements had a value of $20,418 million ($20,054 FY 2010 are primarily due to lower interest income million—June 30, 2009). These funds are not and lower returns from LTIP equity securities. included in the assets of IBRD. For additional information, see the Notes to Financial Statements- Liquid Asset Portfolio Note I-Management of External Funds and Other The objective of the liquid asset portfolio is to Services. ensure the availability of sufficient cash flows to Externally Financed Outputs (EFOs): IBRD offers meet all of IBRD's financial commitments, and in donors the ability to contribute to IBRD’s projects doing so protect the principal amount of these and programs. Contributions received must be investments. In addition, IBRD seeks to achieve a utilized for the purposes specified by the donors and reasonable return on the liquid asset portfolio using are therefore considered restricted until applied by prudent asset and risk management techniques. The IBRD for the donor-specified purposes. General Investment Authorization for IBRD approved by the Executive Directors provides the The Global Emerging Markets Local Currency Bond basic authority under which the liquid assets of Program (GEMLOC): GEMLOC represents an IBRD can be invested. Further, all investment initiative by IBRD and IFC to facilitate the activities are conducted in accordance with a more development of emerging market financial sector detailed set of Investment Guidelines. The and enhance financial stability through market-based Investment Guidelines are approved by the Chief incentives. IBRD has entered into a co-branding Financial Officer (CFO) and implemented by the and cooperation agreement with an asset Treasurer. These Investment Guidelines set out management firm for the GEMLOC program under detailed trading and operational rules including which IBRD earns a fee that is required to be used providing criteria for eligible instruments for solely to provide technical assistance in support of investment, establishing risk parameters relative to local currency bond market development in benchmarks, such as an overall stop-loss limit and emerging market economies. This revenue is duration deviation, specifying concentration limits considered restricted until spent for the specified on counterparties and instrument classes, as well as purposes. establishing clear lines of responsibility for risk Global Public Goods (of which the AMC for monitoring and compliance. Vaccines against Pneumococcal Diseases is a part): IBRD's liquid assets are held principally in highly- AMC is a multi-lateral initiative to accelerate the rated fixed income securities. These securities creation of a market and sustainable production include obligations of governments and other capacity for pneumococcal vaccines for developing official entities, time deposits and other countries. IBRD is providing a financial platform unconditional obligations of banks and financial for the AMC by holding donor pledged assets as an institutions. Additionally, IBRD holds currency and intermediary agent and passing them on to the GAVI interest rate swaps (including currency forward Alliance when the conditions of the AMC are met. contracts), asset-backed securities (including In addition, should a donor fail to pay or delay in mortgage-backed securities), and futures, options paying any amounts coming due, IBRD has and swaptions contracts. For options, IBRD only committed to paying from its own funds any invests in exchange-traded options. IBRD does not amounts due and payable by the donor, to the extent write uncovered option contracts as part of its there is a shortfall in total donor funds received. For investment portfolio strategy. further details on AMC see the notes to Financial Statements-Note I-Management of External Funds and Other Services. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 11 Table 7: Liquid Asset Portfolio and LTIP Returns and Average Balances In millions of U.S. dollars Average Balances Financial Return (%) FY 2010 FY 2009 FY 2010 FY 2009 IBRD overall portfolio $33,746 $29,994 1.06 1.73 Liquid asset portfolio Stable 20,139 19,127 0.96 2.03 Operational 12,432 10,416 0.37 1.02 a LTIP 1,175 451 10.01 12.10 a. LTIP was implemented in November 2008. The FY 2009 return for LTIP is annualized. Figure 5: Liquid Asset Portfolio Composition In millions of U.S. dollars June 30, 2010 June 30, 2009 Stable Stable Portf olio Portf olio 59% 53% Operational Operational Portf olio Portf olio 41% 47% Total: $34,454 Total: $36,762 Under IBRD's liquidity management guidelines, At June 30, 2010, the aggregate size of the IBRD’s aggregate liquid asset holdings are kept at or above a liquid asset portfolio was $34,454 million, reflecting specified prudential minimum in order to safeguard a decrease of $2,308 million from June 30, 2009. against cash flow interruptions. This minimum is IBRD's liquid asset portfolio is largely composed of equal to the highest consecutive six months of assets denominated in or hedged into U.S. dollars expected debt service obligations plus one-half of with net exposure to short-term interest rates. The approved net loan disbursements (if positive) as debt funding these liquid assets has similar currency projected for the relevant fiscal year. The FY 2011 and duration profiles. This is a direct consequence prudential minimum liquidity level has been set at of IBRD's exchange rate and interest rate risk $21 billion, an increase of $1 billion from that set management policies (see Section 6- Risk for FY 2010. In general, the size of the liquid asset Management), combined with appropriate portfolio should not exceed 150% of the prudential investment benchmarks. In addition to monitoring minimum liquidity level. From time to time, IBRD gross investment returns compared to their may, however, hold liquid assets over the specified benchmarks, IBRD also monitors overall investment maximum level to provide flexibility in timing its earnings net of funding costs (see Section 8- borrowing transactions and to meet working capital Reported Basis Analysis). needs. At June 30, 2010 the liquid asset portfolio was 172% of the prudential minimum liquidity level Long-Term Income Portfolio (LTIP) primarily due to pre-funding of anticipated large loan disbursements in FY 2011. As of June 30, During FY 2009, IBRD funded the LTIP with an 2010, liquid assets were held in two sub-portfolios: initial investment of $1 billion. The objective of the stable and operational, each with different risk LTIP program is to increase IBRD’s income over profiles and performance benchmarks. the long-term by investing part of its capital in a diversified portfolio of risk assets, including listed The stable portfolio is principally an investment equity securities. LTIP is intended to be a long-term portfolio holding the prudential minimum level of multicurrency portfolio, swapped back into U.S. liquidity, which is set at the beginning of each fiscal dollars. As of June 30, 2010 and June 30, 2009, the year. market value of the portfolio was $1,179 million and $1,061 million, respectively. The operational portfolio provides working capital for IBRD's day-to-day cash flow requirements. Figure 5 represents IBRD's liquid asset portfolio size and structure at the end of FY 2010 and FY 2009, excluding investment assets associated with certain postretirement benefit plans. 12 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 5. FUNDING million was available for lending and $1,182 million was not available for lending (see Table 8). IBRD’s lending and investment activities, as well as general operations are funded by equity and Table 8: Subscribed Capital proceeds from debt issuance. In millions of U.S. dollars FY 2010 Equity: IBRD’s equity is primarily comprised of Paid in U.S dollars $ 3,352 paid-in capital and retained earnings. Paid in national currencies 8,140 Total paid-in capital 11,492 Borrowings: IBRD issues securities to institutional Callable capital 178,451 and retail investors around the world, both through Total subscribed capital $189,943 global offerings and by way of bond issues designed to meet the needs of specific markets or types of investors. These funds are then used to provide The terms of payment of IBRD's capital and the lending to member countries. restrictions on its use that are derived from the Equity Articles and from resolutions of IBRD's Board of Governors are as follows: IBRD's equity base plays a critical role in securing its financial objectives. It enables IBRD to absorb Paid-in Capital risk through the use of its own resources and thereby (i) $3,352 million of IBRD's capital was initially protects shareholders from a possible call on callable paid in gold or U.S. dollars, or was converted capital. The adequacy of IBRD's equity capital is from the currency of the subscribing members judged on the basis of its ability to generate future into U.S. dollars or U.S. dollar-denominated net income sufficient to absorb potential risks and notes. With the exception of $10 million in U.S. support normal loan growth, without reliance on dollar-denominated notes, which may be additional shareholder capital. encashed for administrative expenses only, this amount may, under the Articles, be freely used Shareholder support for IBRD is reflected in the by IBRD in its operations. capital backing it receives from its members. The Executive Directors have recommended to the Board (ii) $8,140 million of IBRD's capital was paid in the of Governors a general increase in IBRD’s capital as national currencies of the subscribing members. part of a package of measures aimed at enhancing Under the Articles this amount is subject to IBRD’s financial capacity following its response to maintenance of value obligations and may be the global economic crisis. The Executive Directors used for funding loans only with the consent of have also recommended to the Board of Governors a the member whose currency is involved, or used selective capital increase aimed at enhancing the for administrative expenses without the need for voice and participation of developing and transition consent of the member whose currency is countries (DTC). Approval of the increases would involved. In addition, these national currencies result in an increase in subscribed capital of $86.2 may be used by IBRD following a decision by billion, of which $5.1 billion would be paid-in over the Executive Directors to invest or lend in that a five year period. The proposed capital increases, currency, or swap the national currency into including share an allocation for new members, another currency for investment or lending would increase IBRD’s authorized capital to $278.4 purposes, provided it has the consent of the billion. member whose currency is involved. At June 30, 2010, $5,931 million of this amount was The $86.2 billion capital increase is comprised as being used in IBRD's lending and investment follows: operations, including $50 million under the 1. A general capital increase of $58.4 billion, of local currency loan facility agreement with IFC. which $3.5 billion would be paid-in. Under the Board of Governors resolutions relating to the proposed General and Selective 2. A selective capital increase of $27.8 billion, of Capital Increases, each subscription to shares is which $1.6 billion would be paid-in. The conditioned upon the free and immediate use of selective capital increase will result in a shift of national currency paid-in capital. IBRD will the voting power to DTCs by 3.13%, bringing accomplish this by converting members' paid-in their share to 47.19% of total voting power. capital in national currencies into U.S. dollars. At June 30, 2010, the authorized capital of IBRD By subscribing to shares, members will provide was $190,811 million, of which $189,943 million their irrevocable consent for the use of their had been subscribed. Of the subscribed capital, national currencies. $11,492 million had been paid-in and $178,451 million was callable. Of the paid-in capital, $10,310 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 13 Callable Capital portion of this balance. The General Counsel of the (iii) $151,955 million of IBRD's capital may, under U.S. Treasury has rendered an opinion that the entire the Articles, be called only when required to uncalled portion of the U.S. subscription is an meet obligations of IBRD for funds borrowed or obligation backed by the full faith and credit of the on loans guaranteed by it. This amount is thus United States, notwithstanding that congressional not available for use by IBRD in making loans. appropriations have not been obtained with respect Payment on any such call may be made, at the to certain portions of the subscription. For a further option of the particular member, either in gold, discussion of capital stock, restricted currencies, in U.S. dollars or in the currency required to maintenance of value and membership refer to the discharge the obligations of IBRD for which the Notes to Financial Statements-Note A-Summary of call is made. Significant Accounting and Related Policies and Note B-Capital Stock, Restricted Currencies, (iv) $26,496 million of IBRD's capital is to be called Maintenance of Value and Membership. only when required to meet obligations of IBRD Table 9: Capital Subscriptions of DAC Members of for funds borrowed or on loans guaranteed by it, OECD Countries — June 30, 2010 pursuant to resolutions of IBRD's Board of In millions of U.S. dollars Governors (though such conditions are not a Total Capital Uncalled Portion required by the Articles). Of this amount, 10% Member Country Subscription of Subscription would be payable in gold or U.S. dollars and United States $ 31,965 $ 29,966 90% in the national currencies of the Japan 15,321 14,377 subscribing members. While these resolutions Germany 8,734 8,191 are not legally binding on future Boards of France 8,372 7,851 United Kingdom 8,372 7,832 Governors, they do record an understanding Canada 5,404 5,069 among members that this amount will not be Italy 5,404 5,069 called for use by IBRD in its lending activities Netherlands 4,283 4,018 or for administrative purposes. Belgium 3,496 3,281 Spain 3,377 3,171 No call has ever been made on IBRD's callable Switzerland 3,210 3,012 capital. Any calls on unpaid subscriptions are Australia 2,951 2,770 Korea 1,908 1,794 required to be uniform, but the obligations of the Sweden 1,806 1,696 members of IBRD to make payment on such calls Denmark 1,623 1,525 are independent of each other. If the amount Austria 1,335 1,254 received on a call is insufficient to meet the Norway 1,204 1,132 Finland 1,033 971 obligations of IBRD for which the call is made, New Zealand 873 821 IBRD has the right and is bound to make further Portugal 659 620 calls until the amounts received are sufficient to Ireland 636 599 meet such obligations. However, no member may be Greece 203 189 Luxembourg 199 190 required on any such call or calls to pay more than Total $112,368 $105,398 the unpaid balance of its capital subscription. At June 30, 2010, $105,398 million (59%) of the a. See details regarding the capital subscriptions of all members of IBRD at June 30, 2010 in the Financial uncalled capital was callable from the member Statements-Statement of Subscriptions to Capital countries of IBRD that are also members of the Stock and Voting Power. Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Borrowings Development (OECD). Table 9 sets out the capital subscriptions of those countries and the callable Funding amounts. IBRD raises funds by offering its securities to The United States is IBRD's largest shareholder. institutional and retail investors around the world. Under the Bretton Woods Agreements Act and other Under its Articles, as applied, IBRD may borrow U.S. legislation, the Secretary of the U.S. Treasury only with the approval of the member in whose is permitted to pay up to $7,663 million of the markets the funds are raised and the member in uncalled portion of the subscription of the United whose currency the borrowing is denominated, and States, if it were called by IBRD, without any only if each such member agrees that the proceeds requirement of further congressional action. The may be exchanged for the currency of any other balance of the uncalled portion of the U.S. member without restriction. IBRD issues medium- subscription, $22,303 million, has been authorized and long-term funding, as well as short-term funding by the U.S. Congress but not appropriated. Further action by the U.S. Congress would be required to enable the Secretary of the Treasury to pay any 14 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 In FY 2010, medium- and long-term debt raised future lending activities. IBRD determines its directly in financial markets by IBRD amounted to funding requirements based on a 3-year rolling $34,039 million compared to $44,331 million in FY horizon and funds one third of the projected amount 2009 (See Table 10). in the current fiscal year. Table 10: Funding Operations Indicators FY 2010 FY 2009 IBRD’s short-term funding consists primarily of Medium- and long-term funding discount notes. As of June 30, 2010, discount notes raised (USD million) a $34,039 $44,331 totaled $17,693 million, an increase of $13,913 Average maturity (years) 3.71 3.16 million over June 30, 2009. The average balance for Number of transactions 385 374 Number of currencies 28 19 the year was $10,126 million, with average a. Average maturity to first call date. maturities of approximately three months. All discount notes are issued in U.S. dollars. The Medium- and long-term funding raised excluding discount note program was used to a greater extent derivatives by currency for FY 2010, as compared to in FY 2010 to more efficiently manage IBRD’s FY 2009, is shown in Figure 6. liquidity in an environment of uncertain loan Figure 6: Medium- and Long-term Funding Raised disbursement timing. The strategy was to take Excluding Derivatives by Currency advantage of significantly lower short-term funding In millions of U.S. dollars equivalent rates to initially raise liquidity and then replace the FY 2010 discount note funding with longer term bond funding once the actual timing of the disbursements Brazilian Real 4% was more certain. New Zealand Dollar IBRD strategically repurchases or calls its debt to U.S. Dollar 3% 62% reduce the cost of borrowings, reduce exposure to Australian Dollar re-funding needs in a particular year, or to meet 15% other operational or strategic needs. During FY Others 2010, IBRD repurchased or called $5,483 million of 16% its outstanding borrowings for a realized gain of $66 million. During FY 2009, IBRD repurchased or FY 2009 called $2,902 million of its outstanding borrowings for a realized gain of $46 million. South Af rican Rand 6% Use of Derivatives Euro U.S. Dollar 71% Generally, new medium- and long- term funding is 9% initially swapped into variable-rate U.S. dollars, Others with conversion to other currencies or fixed-rate 14% funding being carried out subsequently in accordance with loan funding requirements. (See Figure 7) Funding raised in any given year is used for IBRD's Figure 8 illustrates the effect of derivatives on the general operations, including loan disbursements, currency composition of IBRD’s borrowings replacement of maturing debt and prefunding for portfolio at June 30, 2010. Figure 7: Effect of Derivatives on Interest Rate Structure of the Borrowing Portfolio—June 30, 2010 Borrowing Portfolio Excluding Derivativesa Borrowing Portfolio Including Derivativesa Variable Fixed Fixed Variable 26% 74% 27% 73% a. Excludes discount notes. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 15 Figure 8: Effect of Derivatives on Currency Composition on the Borrowing Portfolio—June 30, 2010 Borrowings Excluding Derivatives Borrowings Including Derivatives Euro 9% U.S. Dollar 56% Euro U.S. Dollar Japanese Yen 15% 82% 10% Others Japanese Yen 25% 2% Others 1% Interest rate swaps and currency swaps are also the management policies under which market used for asset/liability management purposes to and commercial credit risks faced by IBRD are match the pool of liabilities as closely as possible to measured, reported and managed. Such policies the interest rate and currency characteristics of are ratified by the CFO. The Subcommittee liquid assets and loans. IBRD does not enter into also monitors compliance with policies derivatives for speculative purposes. governing commercial credit exposure and currency management. Specific areas of activity The weighted average cost of IBRD’s borrowing include reviewing and endorsing guidelines for portfolio, excluding the effects of its derivatives, limiting balance sheet and market risks, the use was 3.46% and 4.15% as of June 30, 2010 and June of derivative instruments, investing activities, 30, 2009, respectively. A more detailed analysis of and monitoring matches between assets and borrowings outstanding is provided in the Notes to their funding. In addition, the Subcommittee Financial Statements- Note E-Borrowings. periodically reviews and approves the projected 6. RISK MANAGEMENT funding cost and risk premium of IBRD’s IFLs with fixed spread terms. The Subcommittee IBRD’s assumes both financial and operational risks meets quarterly to formally review current and as part of its business activities. On an annual basis, proposed business strategy and risk management prepares an integrated risk monitoring limits/policies, along with business results and report for the Executive Directors to provide an financial risk profile to facilitate alignment holistic picture of risk management activities within between business and risk management. IBRD.  The Credit Risk Subcommittee monitors the Financial Risk Management measurement and reporting of country credit Financial risk management is a key part of IBRD’s risk and reviews the impact on the provision for overall risk management activities. The risk losses on loans, guarantees and DDOs of any management governance structure supports senior changes in exposure, risk ratings of borrowing management in their oversight function, particularly member countries, or movements between the in the coordination of different aspects of risk accrual and nonaccrual portfolios at least management, and in connection with risks that run quarterly and, if necessary, adjustments are across functional areas. made to the provision. In addition, the Audit Committee receives a report from management Governance at least twice a year on the accumulated For financial risk management, there is a Finance provision for losses on loans, guarantees and Committee chaired by the CFO. The Finance DDOs. Committee makes recommendations and, where  The Finance Initiatives Subcommittee reviews appropriate, takes decisions in the areas of financial the financial and organizational implications of policy, the adequacy and allocation of risk capital, implementing new initiatives that may impact and oversight of financial reporting. There are three IBRD. Subcommittees that report to the Finance Committee. These are: the Strategy, Performance Market, liquidity and counterparty credit risks in and Risk Subcommittee, the Credit Risk IBRD's financial operations are identified, measured Subcommittee and the Finance Initiatives and monitored by the Corporate Finance Subcommittee. Department, which reports to the Vice-President, Corporate Finance and Risk Management. This unit  The Strategy, Performance and Risk is independent from IBRD's operational business Subcommittee develops, approves and monitors units. The Corporate Finance Department works 16 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 with IBRD's financial managers, who are of the credit shock events used in the stress testing responsible for the day-to-day management of these framework is an estimate of the amount of the loan risks, to establish and document processes that portfolio that could enter nonaccrual status in the facilitate, control and monitor risk. These processes next three years at an appropriate confidence level. are built on a foundation of initial identification and The equity-to-loans ratio is guided by the Strategic measurement of risks by each of the business units. Capital Adequacy Framework with a target risk Under the direction of the Finance Committee, coverage range for of 23 to 27 percent. As policies and procedures for measuring and managing presented in Figure 9, IBRD's equity-to-loans ratio such risks are formulated, approved and decreased during FY 2010, on both a reported basis communicated throughout IBRD. Senior managers and a fair value basis. The decrease in the equity-to- represented on the Committee are responsible for loans ratio on a reported basis to 29.37% at June 30, maintaining sound credit assessments, addressing 2010 from 34.28% at June 30, 2009 was due transaction and product risk issues, providing an primarily to the increase in lending. Table 11 independent review function and monitoring the presents the composition of this measure at June 30, loans, investments and borrowings portfolios. 2010 and 2009, respectively. The $427 million Country credit risk, the primary risk faced by IBRD, increase in usable capital was primarily due to the is identified, measured and monitored by the Credit consent received during FY 2010 from three Risk Department, led by the Chief Credit Officer member countries for the unrestricted use of their who reports to the Vice-President, Corporate national currency paid-in capital. (See Section 5 - Finance and Risk Management. This unit is Funding). independent from IBRD's operational business units. Figure 9: Equity-to-Loans Ratio Moreover, in order to further protect the independence of the unit, individual country credit 40.0% risk ratings are not shared with the Executive Reported Basis 37.5% Directors and are not made public. In addition to continuously reviewing the creditworthiness of 35.0% IBRD’s borrowers, this department is responsible for assessing loan portfolio risk, determining the 32.5% Fair Value Basis adequacy of provisions for losses on loans and 30.0% guarantees, and monitoring borrowers that are vulnerable to crises in the near term. These reviews 27.5% are taken into account in determining IBRD's overall 25.0% country programs and lending operations and are Jun-07 Jun-08 Jun-09 Jun-10 used to assess the adequacy of IBRD's income- generating capacity and risk-bearing capital. Risk-Bearing Capacity In addition, to reduce the interest rate sensitivity of IBRD’s operating income, IBRD has in place the IBRD uses its risk bearing capacity as a key equity extension duration strategy for its usable indicator for financial risk management. The risk- equity. This strategy has been successful in partially bearing capacity is the adequacy of IBRD’s capital offsetting the decline in the net interest margin on to absorb credit shocks from its loan portfolio and loans. still be able to lend for development purposes without the need for additional shareholder support. IBRD undertakes specific risk management This is intended both to protect shareholders and activities for credit and market risk, which are IBRD’s credit rating, and reduce borrowing costs discussed below. The major inherent financial risk and corresponding lending rates for borrowers. The to IBRD is country credit risk, or loan portfolio risk. Executive Directors monitor IBRD's risk-bearing capacity based on a variety of metrics, including a Credit Risk framework of stress testing and the equity-to-loans IBRD faces two types of credit risk: country credit ratio. risk and commercial credit risk. Country credit risk The framework of stress testing provides a basis for is the risk of loss due to a country not meeting its evaluating whether IBRD has sufficient financial contractual obligations and commercial credit risk is capacity to be able to (i) absorb the income loss due the risk of loss due to a counterparty not honoring its to a credit shock, and (ii) generate sufficient income contractual obligation. to support loan growth in the following years. One IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 17 Table 11: Equity used in Equity-to-Loans Ratio In millions of U.S. dollars June 30, 2010 June 30, 2009 Usable capital Paid-in capital $11,492 $11,491 Restricted paid-in capital (1,332) (1,848) Net payable for maintenance of value 150 240 Total usable capital 10,310 9,883 Special reserve 293 293 a General reserve 25,951 25,670 b Cumulative translation adjustment (189) 457 c Other adjustments (259) 25 d Equity used in Equity-to-Loans Ratio (usable equity) $36,106 $36,328 Fair value adjustments 685 151 Equity used in Equity-to-Loans Ratio-fair value basis $36,791 $36,479 Loans outstanding, present value of guarantees, effective but undisbursed DDOs and LTIP assets, net of relevant accumulated provisions (including DDOs) and deferred loan income $122,943 $105,985 Fair value of loans outstanding, present value of guarantees, effective but undisbursed DDOs and LTIP assets, net of accumulated provision (including DDOs) $122,773 $104,232 Equity-to-Loans Ratio-reported basis 29.37% 34.28% Equity-to-Loans Ratio-fair value basis 29.97% 35.00% a. The June 30, 2010 amount includes proposed transfers to the General Reserve out of FY 2010 net income. b. Excluding cumulative translation amounts associated with the fair value adjustment on non-trading portfolios, net. c. Other adjustments comprises the underfunded status of IBRD’s pension plans and the cumulative income earned on LTIP assets adjusted by the draw amount. d. Before the effects of fair value adjustment on non-trading portfolios, net and Board of Governors-Approved Transfers. Country Credit Risk depicted in Figure 10, IBRD's largest exposure (including the present value of guarantees) to a In keeping with standard practice, probable losses single borrowing country was $12.9 billion at June inherent in the loan portfolio due to country credit 30, 2010. risk are covered by the accumulated provision for losses on loans, guarantees and DDOs, while For FY 2011, the Single Borrower Limit was unexpected losses due to country credit risk are increased from $16.5 billion to $17.5 billion for intended to be covered by equity. India. Portfolio concentration risk, which arises when a Figure 10: Top Eight Country Exposures at June 30, 2010 small group of borrowers account for a large share In billions of U.S. dollars of loans outstanding, is a key concern for IBRD and 18 is carefully managed, in part, through an exposure Exposure Limit ($16.5 billion) 16 limit for loans outstanding plus the present value of 14 guarantees and the undisbursed portion of DDOs that have become effective to a single borrowing 12 country. Under the current guidelines, IBRD's 10 exposure to a single borrowing country is restricted 8 to the lower of an Equitable Access Limit or the 6 Single Borrower Limit. The Equitable Access Limit 4 is equal to 10% of IBRD's subscribed capital, 2 reserves and unallocated surplus. The Single 0 Borrower Limit is established by assessing its Argentina China Indonesia India Colombia Mexico Turkey Brazil impact on the overall portfolio risk relative to risk- bearing capacity, as measured by the level of usable equity. The Single Borrower Limit is determined by the Executive Directors each year at Since the current exposure data presented are at a the time they consider the adequacy of IBRD's point in time, evaluating these exposures relative to reserves and the allocation of its net income from the limit requires consideration of the repayment the preceding fiscal year. For FY 2010, the Single profiles of existing loans, as well as disbursement Borrower Limit was $16.5 billion and the Equitable profiles and projected new loans and guarantees. Access Limit at June 30, 2010 was $21.8 billion. As 18 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Box 2: Treatment of Overdue Payments Where the borrower is the member country, no new loans to the member country, or to any other borrower in the country, will be presented to the Board of Executive Directors for approval, nor will any previously approved loan be signed, until payments for all amounts 30 days overdue or longer have been received. Where the borrower is not the member country, no new loans to that borrower will be signed or approved. In either case, the borrower will lose its eligibility for any waiver of interest charges in effect Overdue by at that time for loans signed before May 16, 2007, and those loans signed between May 16, 2007 and September 27, 2007 if the 30 days borrowers elected not to convert the terms of their loans to the pricing terms effective September 27, 2007. For loans with the pricing terms applicable from May 16, 2007, an overdue interest penalty will be charged at a rate of 50 basis points on the overdue principal. In addition, if an overdue amount remains unpaid for a period of 30 days, then the borrower shall pay a higher interest rate (LIBOR + fixed spread) plus 50 basis points on the overdue principal amount until the overdue amount if fully paid. In addition to the provisions cited above for payments overdue by 30 days, to avoid proceeding further on the notification process leading to suspension of disbursements, the country as borrower or guarantor and all borrowers in the country must pay not only Overdue by all payments overdue by 30 days or more, but also all payments due regardless of the number of days since they have fallen 45 days due. Where the borrower is not the member country, no new loans to, or guaranteed by, the member country, will be signed or approved. Additionally, all borrowers in the country will lose eligibility for any waivers of interest in effect at the time. In addition to the suspension of approval for new loans and signing of previously approved loans, disbursements on all loans to or guaranteed by the member country are suspended until all overdue amounts have been paid. This policy applies even when Overdue by the borrower is not the member country. Under exceptional circumstances, disbursements could be made to a member country 60 days upon approval by the Executive Directors. All loans made to or guaranteed by a member of IBRD are placed in nonaccrual status, unless IBRD determines that the overdue Overdue by amount will be collected in the immediate future. Unpaid interest and other charges not yet paid on loans outstanding are more than six deducted from the income of the current period. To the extent that these payments are received, they are included in income. At months the time of arrears clearance, a decision is made on the restoration of accrual status on a case by case basis; in certain cases that decision may be deferred until after a suitable period of payment performance has passed. Under certain circumstances, IBRD would be able to acceptable structural adjustment program, adopting a continue to lend to a borrower that was reaching the financing plan to clear all arrears to IBRD and other single borrower exposure limit by entering into an multilateral creditors, and continuing to service their arrangement that would prevent its net exposure obligations to IBRD and other multilateral creditors from exceeding the limit. Any such arrangement on time. would need to be approved in advance by IBRD's It is IBRD's practice not to reschedule interest or Executive Directors. As of June 30, 2010 IBRD had principal payments on its loans or participate in debt entered into one such arrangement with China. As of rescheduling agreements with respect to its loans. this date, China had not reached the single borrower During FY 1996 and FY 2002, exceptions were exposure limit and therefore, activation of this made to that practice with regard to Bosnia and arrangement was not required. Herzegovina (BiH) and Serbia and Montenegro, Overdue and Non-performing Loans formerly the Federal Republic of Yugoslavia, based When a borrower fails to make payment on any on criteria approved by the Executive Directors in principal, interest or other charges due to IBRD, connection with the financial assistance package for IBRD has an option to suspend disbursements BiH in 1996. See the Notes to Financial Statements- immediately on all loans. IBRD's current policy Note A-Summary of Significant Accounting and however, is to exercise this option through a Related Policies, for additional information. graduated approach as summarized in Box 2. These Commercial Credit Risk policies also apply to those member countries who are eligible to borrow from both IBRD and IDA, and The effective management of credit risk is vital to whose payments on IDA credits may become the success of IBRD's funding, investment and asset/ overdue. liability management activities. The monitoring and managing of these risks is a continuous process due See Notes to Financial Statements-Note D-Loans to changing market environments. and Guarantees for a summary of countries with loans or guarantees in nonaccrual status at June 30, In the normal course of its business, IBRD utilizes 2010. various derivatives and foreign exchange financial instruments to meet the financial needs of its Treatment of Protracted Arrears borrowers and to manage its exposure to fluctuations In 1991, the Executive Directors adopted a policy to in interest and currency rates. assist members with protracted arrears to IBRD to IBRD migrates the counterparty credit risk arising mobilize sufficient resources to clear their arrears from investments and derivatives through its credit and to support a sustainable growth-oriented approval process, the use of collateral agreements adjustment program over the medium term. This and risk limits, and monitoring procedures. The policy is conditional on members agreeing to credit approval process involves evaluating implement certain requirements including an counterparty and security-specific creditworthiness, IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 19 assigning credit limits, and determining the risk repledge collateral received in the form of liquid profile of specific transactions. Credit limits are investment securities in connection with swap calculated and monitored taking into consideration agreements, the cash proceeds are subsequently current market values, estimates of potential future invested in money market and other liquid financial movements in those values, and collateral instruments under terms substantially equivalent to agreements with counterparties. If there is a those set forth in IBRD’s Investment Guidelines, collateral agreement with the counterparty to reduce and are included under Investments - Trading on the credit risk, then the amount of collateral obtained is Balance Sheet. based on the credit rating of the counterparty. For the contractual value, notional amounts and Collateral held includes cash and highly liquid related credit risk exposure amounts by instrument, investment securities. see the Notes to Financial Statements-Note F- For derivative products, IBRD uses the estimated Derivative Instruments. replacement cost of the derivative as the measure of Table 12 provides details of IBRD's estimated credit credit risk exposure. While the contractual principal exposure on its investments and swaps portfolios, amount of derivatives is the most commonly used net of collateral held, by counterparty rating volume measure in the derivative markets, it is not a category. measure of credit or market risk. The decrease in credit exposure reflects a decrease For all securities, IBRD limits trading to a list of in the size of the IBRD investment program due to a authorized dealers and counterparties. Credit risk is decrease in liquidity held and a relatively smaller controlled through application of eligibility criteria decrease in IBRD’s net swap exposure. As the (See Box 3) and volume limits for transactions with global financial crisis eased, a decision was taken to individual counterparties and through the use of return to lower levels of liquidity, though these mark-to-market collateral arrangements for swap levels continued to be well above the prudential transactions. As a result of these mark-to-market minimum. Decreases in the portfolio size are collateral arrangements, IBRD's residual commercial reflected largely in the decrease in holdings of credit risk is concentrated in investments in debt sovereign and sovereign-guaranteed securities. In instruments issued by sovereign governments, addition, the credit quality of the portfolio has agencies, banks and corporate entities. improved due to a continued preference for highly With respect to futures and options, IBRD generally rated securities and counterparts across all categories closes out most open positions prior to expiration. of IBRD’s investments. After the effects of Futures are settled on a daily basis. exposure netting arrangements across multiple transactions with a single counterpart, the net credit Under the mark-to-market collateral arrangements, exposure from swaps increased from $8,339 million when IBRD is in a net receivable position higher at June 30, 2009 to $10,985 million at June 30, than the agreed upon collateral threshold allocated to 2010. The swap credit exposure of $10,985 million the counterparty, counterparties are required to post is offset by collateral of $10,158 million resulting in collateral with IBRD. Where IBRD is permitted to a net swap exposure of $827 million. Box 3: Eligibility Criteria for IBRD’s Investment Securities Instrument Securities Description IBRD may only invest in obligations issued or unconditionally guaranteed by governments of member countries with a minimum credit rating of AA-. However, if government obligations are denominated in Sovereigns the national currency of the issuer, no rating is required. IBRD may only invest in obligations issued by an agency or instrumentality of a government of a member country, a multilateral organization or any other official entity other than the government of a Agencies member country, with a minimum credit rating of AA-. IBRD may only invest in securities with a AAA credit rating. Corporates and asset-backed securities IBRD may only invest in time deposits issued or guaranteed by financial institutions, whose senior debt Time depositsa securities are rated at least A-. IBRD may invest in any marketable equity security provided that the security is included in the Russell 3000 Index or MSCI World, ex-US Index, or similar indices, as well as any other securities or financial instruments (including commingled or mutual funds and Exchange Traded Funds) that are typically Equity securities in the LTIP portfolio used by asset management firms or other financial institutions in portfolios that seek to track all or part of these indices. a..Time deposits include certificates of deposit, bankers’ acceptances and other obligations issued or unconditionally guaranteed by banks or other financial institutions 20 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Table 12: Credit Exposure, Net of Collateral Held, by Counterparty Ratinga In millions of U.S. dollars At June 30, 2010 At June 30, 2009 Investments Total Exposure Total Exposure Agencies, ABS, on on Counterparty Corporates and Net Swap Investments % of Investments Rating Sovereigns Time Deposits Exposure and Swaps Total and Swaps % of Total AAA $ 7,561 $ 6,160 $ 93 $13,814 38% $ 8,709 21% AA 5,818 10,039 586 16,443 46 25,642 63 A 713 4,944 148 5,805 16 6,692 16 BBB - 4 - 4 * 4 * BB - 7 - 7 * - - Total $14,092 $21,154 $827 $36,073 100% $41,047 100% a. Excludes (a) $685 million of equity securities for the LTIP portfolio and (b) exposures due to swaps executed with IBRD clients including (i) borrowing member countries ($376 million swap exposure) and (ii) IDA intermediation ($47 million). Swaps for IFFIm have no current exposure. * Denotes less than 0.5%. Market Risk adequacy of the risk premium given future IBRD is exposed to changes in interest and expectations about IBRD’s funding levels. exchange rates and uses various strategies to keep its Interest Rate Lag Risk exposure to market risk at a minimal level. The borrowing cost pass-through formulation Interest Rate Risk incorporated in the lending rates charged on IBRD's cost pass-through pool loan products (currency pool There are four main sources of interest rate risk to loans) poses an additional interest rate lag risk. This IBRD. The first is the interest rate sensitivity of the risk exists as the cost pass-through formulation is income earned from funding a portion of IBRD done with a six-month lag. Since IBRD is unable to assets with equity. The second is refinancing risk for economically hedge this risk, this product has been fixed spread loans. The third is the interest rate lag unavailable since FY 2001. associated with the net spread between the rate IBRD earns on its assets and the cost of borrowings, Debt Overhang Risk which fund those assets. The fourth area of risk is This risk arises because the cost pass-through debt overhang in borrowings funding multicurrency currency pool products have traditionally been loan pools. funded with a large share of medium- and long-term Equity Earnings Risk fixed-rate debt, to provide the borrowers with a reasonably stable interest basis. As the outstanding The increase in the volume of loans with interest balance in this closed pool product declines, the rates linked to LIBOR has increased the sensitivity amount of debt allocated to the multicurrency debt of IBRD's operating income to changes in market pool is expected to exceed the balance of the interest rates. multicurrency loan pool by the end of FY 2012. To As of June 30, 2010, 73% of the loan portfolio was manage this risk, IBRD executed forward-starting linked to variable interest rates, therefore, income swaps from FY 2000 to change the interest rate from equity invested in these variable interest rate characteristics of the overfunded debt from fixed to loans is very sensitive to nominal interest rates. As variable. a result, operating income has become more As of June 30, 2010, the debt overhang was within vulnerable to short-term interest rates. To hedge this management’s expected parameters. Should the risk, IBRD has engaged in an equity duration amount of debt overhang remain at the currently extension strategy which employs interest rate swaps projected levels, IBRD does not anticipate executing to increase the duration of equity from three months additional forward-starting swaps. to approximately four years. This strategy seeks to increase the stability of operating income by taking Other Interest Rate Risks a greater exposure to long-term interest rates. Interest rate risk on non-cost pass-through products, Refinancing Risk which accounted for 50% of the loan portfolio at June 30, 2010 (52% at June 30, 2009), is managed Refinancing risk for the funding of fixed-spread by using interest rate swaps to closely align the loans relates to the potential impact of any future rate sensitivity characteristics of the loan portfolio deterioration in the Bank's funding spread, since with those of their underlying funding, except for loans are not funded to their final maturities. IBRD the component of the loan portfolio affected by charges an associated risk premium and IBRD’s equity duration extension strategy. management carries out periodic reviews of the IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 21 The interest rate risk on IBRD's liquid asset Operational Risk Management  portfolio, which includes the risk that the value of Operational risk is the potential for loss resulting assets in the liquid portfolio will fluctuate due to from inadequate or failed internal processes or changes in market interest rates, is managed within systems, human factors, or external events, and specified duration-mismatch limits and is further includes business disruption and system failure, limited by stop-loss limits. transaction processing failures and failures in Interest rate risk also arises from a variety of other execution of legal, fiduciary and agency factors, including differences in the timing between responsibilities. IBRD, like all financial institutions, the contractual maturity or repricing of IBRD's is exposed to many types of operational risks. assets, liabilities and derivative financial IBRD attempts to mitigate operational risk by instruments. On variable rate assets and liabilities, maintaining a system of internal control that is IBRD is exposed to timing mismatches between the designed to keep that risk at appropriate levels in re-set dates on its variable rate receivables and view of the financial strength of IBRD and the payables. To mitigate its exposure to these timing characteristics of the activities and markets in which mismatches, IBRD has executed some overlay IBRD operates. In addition, IBRD conducts periodic interest rate swaps. risk assessments to identify and prioritize risk and Exchange Rate Risk take appropriate actions. IBRD holds its assets and liabilities primarily in The primary responsibility for the management of U.S. dollars, euro and Japanese yen. However, the operational risk resides with business units. For reported levels of its assets, liabilities, income and IBRD's financial operations, IBRD's managers are expenses in the financial statements are affected by responsible for identifying operational risks and exchange rate movements in all the currencies in establishing, maintaining and monitoring which IBRD transacts compared to IBRD's reporting appropriate internal control in their respective areas currency, the U.S. dollar. using an operational risk management framework. In order to minimize exchange rate risk in a This framework requires each business unit to multicurrency environment, IBRD matches its document operational risks and controls and assess borrowing obligations in any one currency (after the magnitude of risks. An independent unit supports swap activities) with assets in the same currency, as this process by undertaking periodic reviews. prescribed by the Articles. In addition, IBRD's The processes and procedures by which IBRD policy is to minimize the exchange rate sensitivity of manages its risk profile continually evolve as its its equity-to-loans ratio. It carries out this policy by activities change in response to market, credit, undertaking currency conversions periodically to product, operational and other developments. The align the currency composition of its equity to that Executive Directors, particularly the Audit of its outstanding loans. This policy is designed to Committee members, periodically review trends in minimize the impact of exchange rate fluctuations IBRD's risk profiles and performance, as well as any on the equity-to-loans ratio, thereby preserving significant developments in risk management IBRD's ability to better absorb unexpected losses policies and controls. from arrears of loan repayments regardless of the market environment. 7. FAIR VALUE ANALYSIS Liquidity Risk Fair Value Balance Sheet Liquidity risk arises in the general funding of IBRD’s total assets on a fair value basis increased IBRD's activities and in the management of its by $9,161 million during the fiscal year. Most of financial positions. It includes the risk of being this increase was attributable to the loan portfolio’s unable to fund its portfolio of assets at appropriate growth in FY 2010. maturities and rates and the risk of being unable to liquidate a position in a timely manner at a The Condensed Fair Value Balance Sheets in Table reasonable price. For a discussion on how liquidity 13 present IBRD’s estimates of the fair value of its is managed, refer to Section 4- Investment financial assets and liabilities, taking into account Activities. interest rate, currency and credit risks. As non- financial assets and liabilities are not reflected at fair value, IBRD’s equity is not intended to reflect fair value. The Condensed Fair Value Balance Sheets is presented with a reconciliation to the reported basis. 22 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Table 13: Condensed Balance Sheets at June 30, 2010 and 2009 In millions of U.S. dollars June 30, 2010 June 30, 2009 Reported Fair Value Reported Fair Value Basis Adjustments Basis Basis Adjustments Basis Due from banks $ 1,803 $ 1,803 $ 3,044 $ 3,044 Investments 36,301 36,301 41,045 41,045 Receivable from derivatives 121,626 121,626 123,065 123,065 Net loans outstanding 118,104 $(168) 117,936 103,657 $(1,739) 101,918 Other assets 5,176 5,176 4,609 4,609 Total assets $283,010 $(168) $282,842 $275,420 $(1,739) $273,681 a a Borrowings $128,577 $ (14) $128,563 $110,040 $ (18) $110,022 Payable for derivatives 110,418 110,418 115,642 115,642 Other liabilities 6,460 6,460 9,701 9,701 Total liabilities 245,455 (14) 245,441 235,383 (18) 235,365 Paid in capital stock 11,492 11,492 11,491 11,491 Retained earnings and other equity 26,063 (154) 25,909 28,546 (1,721) 26,825 Total equity 37,555 37,401 40,037 38,316 Total liabilities and equity $283,010 $(168) $282,842 $275,420 $(1,739) $273,681 a. Includes transition adjustment on adoption of a new U.S. GAAP guidance on derivatives and hedging on July 1, 2000. Loan Portfolio exceeding 150% of the prudential minimum, as of June 30, 2010. At June 30, 2010, 79% (FY 2009: 78%) of IBRD’s loan portfolio was denominated in U.S. dollars, and At June 30, 2010, on a fair value basis, the net asset 17% (FY 2009: 18%) was denominated in euros. In value of the investment portfolio decreased by addition, 75% (FY 2009: 78%) of the loans carried $2,096 million as compared to June 30, 2009 (See variable interest rate terms and the remaining carried Notes to Financial Statements-Note C-Investments). fixed interest rate terms. See Figure 4 for the This decrease was primarily due to $17,150 million currency composition and interest rate structure of of net cash outflows for loan disbursements, IBRD’s loan portfolio. partially offset by net cash inflows from financing activities of $14,547 million, as well as net mark-to- In FY 2010, borrowing member countries exhibited market gains of $126 million. a preference for IFLs with variable spread terms versus those with fixed spread terms, since the Borrowing Portfolio spreads for the latter were higher. As a result, for FY The currency composition of IBRD’s borrowing 2010, 82% (FY 2009: 39%) of the loan portfolio excluding derivatives as of June 30, 2010 commitments carried variable spreads and the is illustrated in Figure 8 with 56% (FY 2009: 46%) remaining carried fixed spreads. of the portfolio denominated in U.S. dollars, 10% On a fair value basis, the loan portfolio increased by (FY 2009: 13%) denominated in Japanese yen and $16,018 million compared with June 30, 2009, 9% (FY 2009: 13%) denominated in euro. After primarily reflecting the increase in demand for including derivatives, 82% (FY 2009: 82%) of the IBRD’s loan products. This increase comprises net portfolio is denominated in U.S. dollars and 15% disbursements of $17,230 million consistent with the (FY 2009: 15%) is denominated in euros. higher demand, and a positive fair value adjustment As of June 30, 2010, after including derivatives, of $1,562 million primarily due to the downward 73% (FY 2009: 72%) of IBRD’s borrowing shift in the yield curves of all major currencies portfolio (excluding discount notes) is variable and during the year. The increase was partially offset by the remaining is fixed (See Figure 7). Derivatives currency translation losses of $2,807 million are used to manage the repricing risk between primarily due to the depreciation of the euro against IBRD’s loan and borrowing portfolios. the U.S. dollar in FY 2010. IBRD increased its borrowing activity to fund the Investments Portfolio increase in lending activity for FY 2010, as well as As part of IBRD’s financial risk management, IBRD in anticipation of higher loan disbursements in FY primarily holds short-term U.S. dollar fixed income 2011. The borrowing portfolio, net of derivatives, securities, as well as other securities swapped into increased by $16,207 million, as compared to June U.S. dollars. The portfolio has an average duration 30, 2009 (See Notes to Financial Statements-Note E- of less than three months. In anticipation of large Borrowings). This was primarily due to net loan disbursements in FY 2011, IBRD’s funding borrowing issuances (including derivatives) of program has resulted in the liquidity portfolio $15,285 million, consistent with the higher lending IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 23 volumes, and unrealized losses of $2,157 million have the effect of extending the duration of IBRD’s primarily resulting from the decline of the U.S. equity. dollar yield curve (see Figure 11) as well as the During FY 2009, IBRD experienced net unrealized tightening of IBRD’s credit spreads. This was gains of $3,280 million on the non-trading portfolios partially offset by currency translation gains of primarily due to unrealized gains from the $2,114 million, as a result of the depreciation of the derivatives held in the asset/liability management euro against the U.S. dollar in FY 2010. portfolio from the equity duration extension strategy Fair Value Net Income reflecting the decrease in interest rates and unrealized gains on the borrowing portfolio Fair value net income on a comprehensive basis (including derivatives) reflecting the widening of comprises net income on a reported basis, the IBRD’s credit spreads. additional fair value adjustments relating to the loan portfolio, as well as the components of other Figure 11: IBRD’s U.S. Dollar Funding Curve comprehensive income as reported in the financial statements. Table 14 provides a reconciliation from 7 operating income on a reported basis to net income 6 on a fair value basis. 5 The net loss on a fair value basis was $870 million, Percent 4 compared to $225 million in FY 2009. This was 3 primarily due to the following factors: 6/30/2010 2 6/30/2009 Board of Governors Approved Transfers 1 6/30/2008 Board of Governors-Approved Transfers were 6/30/2007 0 higher by $101 million over the same period last 10Y 15Y 20Y 30Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 3M 6M year due to higher transfers to IDA of $201 million, partially offset by lower transfers to various trust Fair Value Adjustment on Loans funds of $100 million. The fair value adjustment on loans for FY 2010 was Fair Value Adjustment on Non-Trading Portfolios, a positive $1,562 million (including the reversal of net the release of provision for losses on loans and guarantees of $32 million), compared to negative The fair value adjustment on non-trading portfolios, $1,454 million (including the reversal of the net, consists of the fair value adjustments on the provision for losses on loans and guarantees of $284 borrowing portfolio (including derivatives), all other million) during FY 2009. This adjustment reflects derivatives other than those in the investment changes in both interest rates and credit risk. The portfolio, and the fair value adjustment on loans positive fair value adjustment during FY 2010 was with embedded derivatives. primarily driven by the downward shift in the yield During FY 2010, IBRD experienced net unrealized curves of all major currencies. In contrast, for FY losses of $1,038 million, compared with net 2009, the negative fair value adjustment was unrealized gains of $3,280 million in FY 2009. The primarily driven by the widening of CDS spreads. net unrealized losses of $1,038 million were Changes to Other Comprehensive Income primarily due to $2,157 million of unrealized losses on the borrowing portfolio (including derivatives), During FY 2010, IBRD experienced a loss of $1,355 partially offset by $1,097 million of unrealized gains million (see Table 15) primarily due to the from the derivatives held in the asset/liability following factors: management portfolio5. The unrealized losses on Unrecognized net actuarial losses on benefits plans: the borrowing portfolio were primarily due to the $724 million of unrecognized net actuarial losses, decline of the U.S. dollar yield curve (See Figure primarily due to the decrease in the discount rates 11), as well as the tightening of IBRD’s credit used to determine the projected benefit obligation, spreads. The unrealized gains from the derivatives partially offset by higher actual returns on plan held in the asset/liability management portfolio were assets compared to expected returns. primarily due to gains from the interest rate swaps due to lower interest rates (See Figure 11) related to the equity duration extension strategy. These swaps 5 The derivatives held in the asset/liability management portfolio are presented in IBRD’s balance sheet under ‘Derivative Assets’ – Others and ‘Derivative Liabilities’ - Others. 24 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 Table 14: Condensed Statements of Income for the years ended June 30, 2010 and 2009 In millions of U.S. dollars June 30, 2010 June 30, 2009 Fair Value Fair Value Reported Comprehensive Reported Comprehensive a a Basis Adjustments Basis Basis Adjustments Basis Income from loans $ 2,493 $ 2,493 $3,835 $3,835 b Income from investments, net 367 367 603 603 Other income 1,248 1,248 599 599 Total income 4,108 4,108 5,037 5,037 Borrowing expenses 1,750 1,750 2,739 2,739 Administrative expenses including contributions to special programs 1,589 1,589 1,441 1,441 Release of provision for losses on loans, guarantees and DDOs (32) $ 32 – 284 $ (284) – Other Expenses 1 1 1 1 Total expenses 3,308 32 3,340 4,465 284 4,181 Operating income 800 (32) 768 572 284 856 Board of Governors-Approved Transfers (839) (839) (738) (738) Fair value adjustment on non-trading portfolios, net (1,038) (1,038) 3,280 3,280 Fair value adjustment on loans 1,594 1,594 (1,738) (1,738) Changes to other comprehensive income (1,355) (1,355) (1,885) (1,885) Net (Loss) Income $(1,077) $ 207 $ (870) $3,114 $(3,339) $ (225) a. Comprehensive basis comprises net income on a reported basis, the components of other comprehensive income as reported in the financial statements, and the fair value adjustments. b. Unrealized gains (losses) on derivatives in the investments trading portfolio are included in income from investments, net. Currency translation adjustments: $636 million Table 15: Summary of Changes to Other Comprehensive Income (Fair Value Basis) negative currency translation adjustments, primarily In millions of U.S. dollars due to the depreciation of the euro (13%), slightly FY 2010 FY 2009 Variance offset by the appreciation of the Japanese yen (8 %) Unrecognized net against the U.S. dollar in FY 2010. Table 15 actuarial losses on provides a summary of currency translation benefit plans $ (724) $ (1,581) $ 857 Unrecognized prior adjustments by portfolio. The loan portfolio Service credit on contributed negative $2,807 million. The total benefit plans, net 6 – 6 percentage of loans denominated in currencies other Derivatives and hedging a than the U.S. dollar at June 30, 2010 was 21%, of transition adjustment (1) 22 (23) which the euro and the Japanese yen accounted for Currency translation adjustments (636) (326) (310) approximately 81% and 10%, respectively (See Of which: Figure 4c). The borrowing portfolio accounted for a Loans (2,807) (1,657) positive adjustment of $2,114 million. The total Borrowings 2,114 887 percentage of borrowings, including derivatives, Net other assets and liabilities 57 444 denominated in currencies other than the U.S. dollar at June 30, 2010 was 18%, of which the euro and the Total $(1,355) $(1,885) $530 Japanese yen accounted for approximately 83% and a. Transition adjustment on adoption of a new U.S. GAAP 11%, respectively (See Figure 8). guidance on derivatives and hedging on July 1, 2000. During FY 2009, IBRD experienced a loss of $1,855 Currency translation adjustments: $326 million million primarily (see Table 15) due to the negative currency translation adjustments, primarily following factors: due to the depreciation of the euro (11%), slightly Unrecognized net actuarial losses on benefits plans: offset by the appreciation of the Japanese yen (13%) $1,581 million unrecognized net actuarial losses, against the U.S. dollar. primarily due to lower actual returns on plan assets compared to expected returns, partially offset by actuarial gains due to the increase in the discount rates used to determine the projected benefit obligation. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 25 8. REPORTED BASIS ANALYSIS provision for losses on loans, guarantees and DDOs was as a result of the improvements in Reported Basis Balance Sheet the credit quality of the loan portfolio over the In IBRD’s balance sheet on a reported basis, prior year. borrowing and investment portfolios are carried at Net Interest income: The $99 million reduction fair value, while the loan portfolio is carried at in net interest income was primarily due to the amortized cost (except for a loan with embedded $779 million decrease in equity savings as a derivatives which is reported at fair value). result of the lower short-term interest rate Net loans outstanding on a reported basis increased environment, in particular U.S. dollar six month by $14,447 million in FY 2010. This was primarily LIBOR (See Figure 12). This lower interest due to net disbursements of $17,230 million which rate environment also contributed to a $737 were driven by the increase in demand for IBRD’s million increase in interest income primarily loans and a decrease in the accumulated provision due to the equity duration extension portfolio, for loan losses of $79 million, partially offset by as IBRD is a variable interest rate payer and a currency translation losses of $2,846 million. fixed interest rate receiver for this portfolio. See Table 13 for IBRD’s condensed reported basis Figure 12: Six-Month LIBOR Interest Rates U.S. Dollar balance sheet with a reconciliation to fair value 5.0 basis. FY 2009 4.0 FY 2010 Reported Basis Operating Income IBRD's operating income on a reported basis is 3.0 broadly comprised of income from interest-earning Percent assets (net of funding cost) and the equity duration 2.0 extension swap portfolio, less the provision for losses on loans, guarantees and DDOs and 1.0 administrative expenses. In FY 2010, IBRD’s operating income was higher primarily due to the 0.0 $316 million decrease in the provision for losses on Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun loans, guarantees and DDOs. Table 16 shows a breakdown of operating income, net of funding costs, on a reported basis. The major variances from Investment income: The $124 million increase year-to-year are explained below. in investment income, net of funding costs, was primarily due to mark-to-market gains from the FY 2010 versus FY 2009 tightening of credit spreads. The increase of $228 million in operating income is LTIP income: There was a $57 million increase explained by the following factors. in income from LTIP. IBRD implemented Provision for losses on loans, guarantees and LTIP during the second quarter of FY 2009. DDOs: The $316 million decrease in the Table 16: Reported Basis Operating Income In millions of U.S. dollars FY 2010 vs FY 2009 vs FY 2010 FY 2009 FY 2008 FY 2009 FY 2008 Interest income, net of funding costs Interest margin $ 444 $ 501 $ 549 $ (57) $ (48) Equity savings 324 1,103 1,608 (779) (505) Other interest Income 983 246 10 737 236 Net interest income 1,751 1,850 2,167 (99) (317) Other loan income 33 46 340 (13) (294) Provision for losses on loans, guarantees and DDOs –decrease (increase) 32 (284) 684 316 (968) Investment income (loss), net of funding costs 110 (14) 49 124 (63) LTIP Income 118 61 - 57 61 Net non-interest expense (1,244) (1,087) (969) (157) (118) Operating Income – Reported Basis $ 800 $ 572 $2,271 $ 228 $(1,699) 26 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 FY 2009 versus FY 2008 FY 2010 versus FY 2009 The decrease of $1,699 million in operating income Net noninterest expense increased by $157 million is explained by the following factors. primarily due to a $93 million increase in pension and other post retirement benefits resulting from Provision for losses on loans, guarantees and lower gains from pension assets and a $43 million DDOs: The $968 million increase in the increase in staff costs, consistent with inflation. provision reflects the impact of changes in the credit quality of the accrual portfolio during FY FY 2009 versus FY 2008 2009, compared with the impact of positive Net noninterest expense increased by $118 million developments in the nonaccrual portfolio in FY primarily due to a $77 million increase in pension 2008. and other post retirement benefits due to an increase Net Interest income: The $317 million reduction in in interest and service cost, and a $51 million net interest income was primarily due to a $505 increase in staff costs, consistent with inflation. million decrease in equity savings as a result of the 9. CONTRACTUAL OBLIGATIONS lower in short-term interest rate environment, in particular U.S. dollar six month LIBOR (See Figure In the normal course of business, IBRD enters into 12). This lower interest rate environment also various contractual obligations that may require contributed to a $236 million increase in interest future payments. Table 18 summarizes IBRD's income primarily due to the equity duration extension significant contractual obligations, by remaining portfolio, as IBRD is a variable interest rate payer maturity, at June 30, 2010. and a fixed interest rate receiver for this portfolio. Debt includes all borrowings (excluding derivatives) Other loan income: The $294 million decrease at fair value. See Notes to Financial Statements- in other loan income includes $269 million Note E- Borrowings for additional information on associated with Liberia’s and Cote d’Ivoire’s the borrowing portfolio. clearance of all overdue interest and charges to IBRD in FY 2008. Operating lease expenditures primarily represent future cash payments for real estate-related Investment income: The $63 million decrease in obligations and equipment. Other long-term investment income, net of funding costs was liabilities include accrued liabilities for staff primarily due to the widening of credit spreads compensation and benefits. Operating leases, reflecting the impact of the global economic crisis. contractual purchases and capital expenditures, and other long term obligations include amounts which Net Noninterest Expense will be shared with IDA, IFC and MIGA in The main components of net noninterest expense are accordance with cost sharing and service presented in Table 17. arrangements (additional information can be found in the Notes to Financial Statements-Note H – Transactions with Affiliated Organizations). Table 17: Net Noninterest Expense In millions of U.S. dollars FY 2010 vs FY 2009 vs FY 2010 FY 2009 FY 2008 FY 2009 FY 2008 Administrative expenses Staff costs $ 632 $ 589 $ 538 $ 43 $ 51 Operational travel 116 108 110 8 (2) Consultant fees 143 131 116 12 15 Pension and other postretirement benefits 158 65 (12) 93 77 Communications and IT 84 82 80 2 2 Contractual services 94 94 83 - 11 Equipment and buildings 161 149 138 12 11 Other Expenses 33 26 29 7 (3) Total administrative expenses 1,421 1,244 1,082 177 162 Contribution to special programs 168 197 176 (29) 21 Service fee revenues (311) (295) (272) (16) (23) Externally funded outputs income (24) (28) (11) 4 (17) Net other income (10) (31) (6) 21 (25) Total Net Noninterest Expense $1,244 $1,087 $ 969 $157 $118 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 27 Table 18: Contractual Obligations In millions of U.S. dollars Less than 1 More than Total year 1-3 years 4-5 years 5 years Borrowings (at fair value) $128,577 $33,959 $29,790 $22,693 $42,135 Operating leases 626 69 121 104 332 Contractual purchases and capital expenditures 74 50 24 - - Other long-term liabilities 424 95 73 87 169 Total $129,701 $34,173 $30,008 $22,884 $42,636 Table 18 excludes the following obligations The determination of a borrower's risk rating is presented in IBRD's balance sheet: undisbursed based on both quantitative and qualitative analyses loans; payable for currency and interest rate of various factors, which include political risk, swaps; payable for investment securities purchased, external debt and liquidity, fiscal policy and public cash received under agency arrangements, and debt burden, balance of payments risks, economic payable for transfers approved by the Board of structure and growth prospects, monetary and Governors. exchange rate policy, financial sector risks and corporate sector debt and other vulnerabilities. 10. CRITICAL ACCOUNTING POLICIES IBRD periodically reviews such factors and AND THE USE OF ESTIMATES reassesses the adequacy of the accumulated Note A of IBRD’s financial statements contains a provision, accordingly. Actual losses may differ summary of IBRD’s significant accounting policies. from expected losses due to unforeseen changes in These policies, as well as estimates made by any of the factors that affect borrowers' management, are integral to the presentation of creditworthiness. IBRD’s financial condition. While all of these The accumulated provision for loan losses is policies require a certain level of management separately reported in the balance sheet as a judgment and estimates, this section discusses the deduction from IBRD's total loans. The accumulated significant accounting policies that require provision for losses on guarantees and DDOs is management to make judgments that are difficult, included in other liabilities. Increases or decreases in complex or subjective, and relate to matters that are the accumulated provision for losses on loans, inherently uncertain. guarantees and DDOs is reported in the Statement of Provision for Losses on Loans, Guarantees and Income as provision for losses on loans, guarantees DDOs and DDOs. IBRD's accumulated provision for losses on loans, Additional information on IBRD's provisioning guarantees and DDOs reflects the probable losses policy and the status of nonaccrual loans can be inherent in its nonaccrual and accrual portfolios. found in the Notes to Financial Statements-Note A- There are several steps required to determine the Summary of Significant Accounting and Related appropriate level of provisions for each portfolio. policies and Note D-Loans and Guarantees. First, the total loan portfolio is segregated into the Fair Value of Financial Instruments accrual and nonaccrual portfolios. In both portfolios, the exposure for each country (defined as loans When possible, fair values are determined by quoted outstanding plus the present value of guarantees and market prices for the same or similar instruments. If the effective but undisbursed DDOs) is then quoted market prices are not available, then fair assigned a credit risk rating. With respect to loans in values are based on discounted cash flow models the accrual portfolio, these loans are grouped using market estimates of cash flows and discount according to the assigned risk rating. Loans in the rates. Some financial assets and liabilities use non-accrual portfolio are individually assigned the valuation techniques which require significant highest risk rating. Each risk rating is mapped to an unobservable inputs. These inputs require expected default frequency using IBRD's credit management to make assumptions and judgments. migration matrix. The provision required is All the financial models used for input to IBRD's calculated by multiplying the outstanding exposure financial statements are subject to both internal and by the expected default frequency (probability of periodic external verification and review by default to IBRD) and by the assumed severity of the qualified personnel. These models use market loss given default. For loans that are carried at fair sourced inputs, such as interest rates, exchange rates value, the credit risk assessment is incorporated in and volatilities and may incorporate unobservable the determination of fair value. inputs. Selection of these inputs may involve some judgment. Imprecision in estimating these factors, 28 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 and changes in assumptions, can impact net income • Audit Committee and IBRD's financial position as reported in the • Budget Committee financial statements. • Personnel Committee IBRD believes its estimates of fair value are • Ethics Committee reasonable given its processes for obtaining external • Committee on Governance and prices and parameters, ensuring that valuation Administrative Matters models are reviewed and validated both internally and externally, and applying its approach The Executive Directors and their Committees consistently from period to period. function in continuous session at the principal offices of IBRD, as business requires. Each Pension and Other Postretirement Benefits Committee's terms of reference establishes its IBRD participates, along with IFC and Multilateral respective roles and responsibilities. As Committees Investment Guarantee Agency (MIGA), in pension do not vote on issues, their role is primarily to serve and postretirement benefit plans that cover the full Board of Executive Directors in discharging substantially all of their staff members. All costs, its responsibilities. assets and liabilities associated with the plans are The Executive Directors are required to consider allocated between IBRD, IFC and MIGA based proposals made by the President on IBRD’s loans upon their employees' respective participation in the and guarantees, and other policies that impact plans. Costs allocated to IBRD are subsequently IBRD's general operations. The Executive Directors shared between IBRD and IDA based on an agreed are also responsible for presenting to the Board of cost sharing ratio. The underlying actuarial Governors, at the Annual Meetings, an audit of assumptions used to determine the projected benefit accounts, an administrative budget, and an annual obligations, accumulated benefit obligations and report on operations and policies as well as other funded status associated with these plans are based matters. on financial market interest rates, past experience, and management's best estimate of future benefit Senior Management Changes changes and economic conditions. For further Effective June 1, 2010, Sri Mulyani Indrawati was details, refer to Notes to Financial Statements-Note J appointed as Managing Director of IBRD. -Pension and Other Postretirement Benefits. Effective June 30, 2010, Juan Jose Daboub and 11. GOVERNANCE AND CONTROL Graeme Wheeler, retired as Managing Directors of IBRD. General Governance Audit Committee IBRD's decision-making structure consists of the Board of Governors, the Executive Directors (the Membership Board) and the President and staff. The Board of The Audit Committee consists of eight Executive Governors is the highest decision-making authority. Directors. Membership on the Committee is Governors are appointed by their member determined by the Executive Directors, based upon governments for a five year term which is nominations by the Chairman of the Board, renewable. The Board of Governors may delegate following informal consultation with the Executive authority to the Board to exercise any of its powers, Directors. with the exception of certain powers enumerated in IBRD's Articles. Key Responsibilities Board Membership The Audit Committee is appointed by the Board to assist it in the oversight and assessment of IBRD's In accordance with its Articles, members of IBRD's finances and accounting, including the effectiveness Executive Directors are appointed or elected by their of financial policies, the integrity of financial member governments. Currently the Board is statements, the system of internal control regarding composed of 24 Executive Directors with elections finance, accounting and ethics (including fraud and being held every two years. These Executive corruption), and financial and operational risks. The Directors are neither officers nor staff of IBRD. The Audit Committee also has the responsibility for President is the only management member of the reviewing the performance and recommending to the Board of Executive Directors, serving as a non- Board the appointment of the external auditor, as voting member and as Chairman of the Board. well as monitoring the independence of the auditor. The Executive Directors have established several The Audit Committee participates in oversight of the Committees including: internal audit function and reviews the annual internal audit plan. In the execution of its role, the • Committee on Development Effectiveness Committee discusses with management, the external IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 29 auditors, and the internal auditors, financial issues The World Bank’s Staff Rules clarify and codify and policies which have a bearing on the institution's the obligations of staff in reporting suspected fraud, financial position and risk-bearing capacity. The corruption or other misconduct that may threaten the Committee also reviews with the external auditor the operations or governance of the Bank Group. financial statements prior to their publication and Additionally, these rules offer protection from recommends the annual audited financial statements retaliation. Strengthened whistleblower protections for approval to the Executive Directors. The Audit have also been implemented recently. Committee updated its terms of reference in July Auditor Independence 2009. The appointment of the external auditor of IBRD is Executive Sessions governed by a set of Board-approved principles. Key Under the Committee's terms of reference, members features of those principles include: of the Committee may convene in executive session • Prohibition of the external auditor from the at any time, without management present. It meets provision of all non audit-related services. separately in executive session with the external and internal auditors. • All audit-related services must be pre- approved on a case-by-case basis by the Access to Resources and to Management Board of Executive Directors, upon recom- Throughout the year, the Audit Committee receives mendation of the Audit Committee. a large volume of information, which supports the • Mandatory rebidding of the external audit execution of its duties. The Audit Committee meets contract every five years, with a limitation both formally and informally throughout the year to of two consecutive terms and mandatory discuss relevant matters. Executive Directors have rotation thereafter. complete access to management. The Audit External auditors are appointed to a five-year term Committee reviews and discusses with management of service. This is subject to annual reappointment topics contemplated in their Terms of Reference. based on the recommendation of the Audit The Audit Committee has the capacity, under Committee and approval of a resolution by the exceptional circumstances, to obtain advice and Executive Directors. assistance from outside legal, accounting or other Communication between the external auditor and the advisors as deemed appropriate. Audit Committee is ongoing, as frequently as is Business Conduct deemed necessary by either party. The Audit Staff members’ ethical obligations to the institution Committee meets periodically with the external are embodied in its core values and principles of auditor, and individual members of the Audit staff employment. In support of this commitment, Committee have independent access to the external the institution has in place a code of conduct, auditor. IBRD's auditors also follow the entitled Living our Values (the Code). The Code communication requirements with audit committees applies to all staff worldwide and is available on set out under U.S. generally accepted auditing IBRD’s website, www.worldbank.org. standards. In addition to the Code, Staff and Administrative Internal Control Manuals, guidance for staff is also provided through Internal Control Over Financial Reporting programs, training materials, and other resources. Management makes an annual assertion whether, as Managers are responsible for ensuring that internal of June 30 of each fiscal year, its system of internal systems, policies, and procedures are consistently control over its external financial reporting has met aligned with the World Bank’s business conduct the criteria for effective internal control over framework. external financial reporting as described in The World Bank has both an Ethics HelpLine and a Committee of Sponsoring Organizations of the Fraud and Corruption hotline. A third-party service Treadway Commission (COSO). Concurrently, offers numerous methods of world wide IBRD's external auditors provide an attestation communication. Reporting channels include: report on whether management's assertion regarding phone, mail, email, anonymously, or through the effectiveness of internal control over external confidential submission through a website. financial reporting is fairly stated in all material respects. IBRD has in place procedures for the receipt, retention and handling of recommendations and For each fiscal year, management performs an concerns relating to business conduct identified evaluation of internal control over external financial during accounting, internal control and auditing reporting for the purpose of determining if there are processes. any changes made in internal control during the 30 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 fiscal year covered by the report that materially affect, or would be reasonably likely to materially affect IBRD's internal control over external financial reporting. As of June 30, 2010 no such changes had occurred. Disclosure Control and Procedures Disclosure control and procedures are those processes which are designed to ensure that information required to be disclosed is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure by IBRD. Management has undertaken an evaluation of the effectiveness of such controls and procedures. Based on that evaluation, the President and the Chief Financial Officer have concluded that these controls and procedures were effective as of June 30, 2010. IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 31 GLOSSARY OF TERMS Interest Margin: The spread between loan returns and debt cost. Asset-backed Securities: Asset-backed securities are instruments whose cash flow is based on the cash flows of Interest Rate Swaps: Interest rate swaps are agreements a pool of underlying assets managed by a trust. involving the exchange of periodic interest payments of differing character, based on an underlying notional COSO: Committee of Sponsoring Organizations of the principal amount for a specified time. Treadway Commission. COSO was formed in 1985 to sponsor the National Commission on Fraudulent Financial LIBOR: London interbank offered rate. Reporting, an independent private-sector initiative which Maintenance of Value: Agreements with members studied the causal factors that can lead to fraudulent provide for the maintenance of the value, from the time of financial reporting. In 1992, COSO issued its Internal subscription, of certain restricted currencies. Additional Control-Integrated Framework, which provided a common payments to (or from) IBRD are required in the event the definition of internal control and guidance on judging its par value of the currency is reduced (or increased) to a effectiveness. significant extent. Credit Default Swaps (CDS): A derivatives contract that Net Disbursements: Loan disbursements net of repay- provides protection against deteriorating credit quality and ments and prepayments. would allow one party to receive payment in the event of a Options: Options are contracts that allow the holder of the default or specified credit event by a third party. option the right, but not the obligation, to purchase or sell Currency Swaps (including Currency Forward a financial instrument at a specified price within a Contracts): Currency swaps are agreements between two specified period of time from or to the seller of the option. parties to exchange cash flows denominated in different The purchaser of an option pays a premium at the outset to currencies at one or more certain times in the future. The the seller of the option, who then bears the risk of an cash flows are based on a predetermined formula unfavorable change in the price of the financial instrument reflecting rates of interest and an exchange of principal. underlying the option. Duration: Duration provides an indication of the interest Repurchase and Resale Agreements and Securities rate sensitivity of a fixed income security to changes in its Loans: Repurchase agreements are contracts under which underlying yield. a party sells securities and simultaneously agrees to Equity-to-Loans Ratio: This ratio is the sum of usable repurchase the same securities at a specified future date at capital plus the special and general reserves, cumulative a fixed price. The reverse of this transaction is called a translation adjustment (excluding amounts associated with resale agreement. A resale agreement involves the fair value adjustment on non-trading portfolios, net), the purchase of securities with a simultaneous agreement to proposed transfer from unallocated net income to general sell back the same securities at a stated price on a stated reserves (where there are firm estimates available), date. Securities loans are contracts under which securities underfunded status of IBRD’s pension plans and the are lent for a specified period of time at a fixed price. cumulative income earned on LTIP assets adjusted by the Return on Equity: This return is computed as net income fixed draw down amount divided by the sum of loans divided by the average equity balance during the year. outstanding, the present value of guarantees, effective but Risk-bearing Capacity: The ability to absorb risks in the undisbursed DDOs, net of the accumulated provision for balance sheet while continuing normal operations without losses on loans, effective and undisbursed DDOs and having to call on callable capital. guarantees, deferred loan income and Long-Term Income Portfolio assets. Strategic Capital Adequacy Framework: Evaluates IBRD’s capital adequacy as measured by stress test and Equity Savings: Interest cost saved by deploying equity appropriate long term equity-to-loan target range. This instead of debt to fund loans. target equity-to-loans range provides a background Forward Starting Swaps: A forward starting swap is an framework in the context of annual net income allocation agreement under which the cash flow exchanges of the decisions, as well as in the assessment of the initiatives for underlying interest rate swaps would begin to take effect the use of capital. The capital adequacy framework has from a specified future date. been approved by the Executive Directors. Futures: Futures are contracts for delivery of securities or Statutory Lending Limit: Under IBRD's Articles, as money market instruments in which the seller agrees to applied, the total amount outstanding of loans, make delivery at a specified future date of a specified participations in loans, and callable guarantees may not instrument at a specified price or yield. Futures contracts exceed the sum of subscribed capital, reserves and surplus. are traded on U.S. and international regulated exchanges. Swaptions: A swaption is an option which gives the Government and Agency Obligations: These obligations holder the right to enter into an Interest Rate Swap or include marketable bonds, notes and other obligations Currency Swap at a future date. issued by governments. Time Deposits: Time deposits include certificates of Hedging: Hedging is a risk management technique of deposit, bankers' acceptances, and other obligations issued entering into offsetting commitments to eliminate or or unconditionally guaranteed by banks and other financial minimize the impact of adverse movements in value or institutions. cash flow of the underlying instrument or economic condition. World Bank: Refers collectively to IBRD and IDA in this document. 32 IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2010 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS JUNE 30, 2010 Management’s Report Regarding Effectiveness of Internal Control Over External Financial Reporting 34 Independent Auditors’ Report on Management’s Assertion Regarding Effectiveness of Internal Control Over Financial Reporting 36 Independent Auditors’ Report 37 Balance Sheet 38 Statement of Income 40 Statement of Comprehensive Income 41 Statement of Changes in Retained Earnings 41 Statement of Cash Flows 42 Summary Statement of Loans 44 Statement of Subscriptions to Capital Stock and Voting Power 47 Notes to Financial Statements 51 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 33 MANAGEMENT’S REPORT REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING 34 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 35 INDEPENDENT AUDITORS’ REPORT ON MANAGEMENT’S ASSERTION REGARDING EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING 36 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 INDEPENDENT AUDITORS’ REPORT IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 37 BALANCE SHEET June 30, 2010 and June 30, 2009 Expressed in millions of U.S. dollars 2010 2009 Assets Due from Banks Unrestricted currencies $ 1,581 $ 2,380 Currencies subject to restrictions—Note B 222 664 1,803 3,044 Investments-Trading (including securities transferred under repurchase or securities lending agreements of $204 million—June 30, 2010; $30 million— June 30, 2009)—Note C 36,012 41,012 Securities Purchased Under Resale Agreements—Note C 289 33 Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Subscribed Capital 1,123 1,202 Derivative Assets Investments—Notes C and F 13,249 18,467 Client operations—Notes F and H 17,633 19,559 Borrowings—Notes E and F 87,457 82,793 Others—Note F 3,287 2,246 121,626 123,065 Receivable to Maintain Value of Currency Holdings on Account of Subscribed Capital 171 176 Other Receivables Receivable from investment securities traded—Note C 47 95 Accrued income on loans 764 889 811 984 Loans Outstanding (Summary Statement of Loans, Notes D and H) Total loans 183,677 156,823 Less undisbursed balance 63,574 51,125 Loans outstanding (including loans at fair value of $109—June 30, 2010; $78 million—-June 30, 2009) 120,103 105,698 Less: Accumulated provision for loan losses 1,553 1,632 Deferred loan income 446 409 Net loans outstanding 118,104 103,657 Other Assets Assets under retirement benefits plans—Note J — 325 Premises and equipment (net) 635 625 Miscellaneous—Note H 2,436 1,297 3,071 2,247 Total assets $283,010 $275,420 38 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 2010 2009 Liabilities Borrowings—Note E $128,577 $110,040 Securities Sold Under Repurchase Agreements, Securities Lent under Securities Lending Agreements, and Payable for Cash Collateral Received—Note C 998 2,323 Derivative Liabilities Investments—Notes C and F 13,360 18,923 Client operations—Notes F and H 17,623 19,551 Borrowings—Notes E and F 78,655 76,321 Others—Note F 780 847 110,418 115,642 Payable to Maintain Value of Currency Holdings on Account of Subscribed Capital 8 57 Other Liabilities Payable for investment securities purchased—Note C 307 2,457 Accrued charges on borrowings 1,190 1,495 Liabilities under retirement benefits plans—Note J 1,164 662 Accounts payable and miscellaneous liabilities—Notes D and H 2,793 2,707 5,454 7,321 Total liabilities 245,455 235,383 Equity Capital Stock (Statement of Subscriptions to Capital Stock and Voting Power, Note B) Authorized capital 1,581,724 shares—June 30, 2010, and June 30, 2009) Subscribed capital 1,574,526 shares—June 30, 2010, 1,574,315 shares— June 30, 2009) 189,943 189,918 Less uncalled portion of subscriptions 178,451 178,427 Paid-in capital 11,492 11,491 Deferred Amounts to Maintain Value of Currency Holdings—Note B 313 359 Retained Earnings (Statement of Changes in Retained Earnings, Note G) 28,793 29,870 Accumulated Other Comprehensive Loss—Note K (3,043) (1,683) Total equity 37,555 40,037 Total liabilities and equity $283,010 $275,420 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 39 STATEMENT OF INCOME For the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008 Expressed in millions of U.S. dollars 2010 2009 2008 Income Loans—Note D Interest $ 2,460 $3,789 $5,426 Commitment charges 33 46 71 Investments, net—Trading—Notes C and F Interest 241 625 1,140 Net gains (losses) 126 (22) (74) Other interest income—Note F 905 245 10 Other—Notes H and I 343 354 290 Total income 4,108 5,037 6,863 Expenses Borrowings—Note E Interest 1,697 2,664 3,934 Amortization of issuance costs 53 75 83 Administrative—Notes H, I, and J 1,421 1,244 1,082 Contributions to special programs 168 197 176 Provision for losses on loans, deferred drawdown options, and guarantees, (decrease) increase—Note D (32) 284 (684) Other 1 1 1 Total expenses 3,308 4,465 4,592 Income before fair value adjustment on non-trading portfolios, net and Board of Governors-approved transfers 800 572 2,271 Fair value adjustment on non-trading portfolios, net—Notes D, E, F and L (1,038) 3,280 (40) Board of Governors-approved transfers—Note G (839) (738) (740) Net (loss) income $(1,077) $3,114 $1,491 The Notes to Financial Statements are an integral part of these Statements. 40 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 STATEMENT OF COMPREHENSIVE INCOME For the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008 Expressed in millions of U.S. dollars 2010 2009 2008 Net (loss) income $(1,077) $3,114 $ 1,491 Other comprehensive (loss) income—Note K Reclassification to net income: Derivatives and hedging transition adjustment (5) 11 (20) Net actuarial losses on benefit plans (724) (1,581) (1,021) Prior service credit on benefit plans, net 6 — 1 Currency translation adjustments (637) (366) 792 Total other comprehensive loss (1,360) (1,936) (248) Comprehensive (loss) income $(2,437) $1,178 $ 1,243 STATEMENT OF CHANGES IN RETAINED EARNINGS For the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008 Expressed in millions of U.S. dollars 2010 2009 2008 Retained earnings at beginning of the fiscal year $29,870 $29,322 $27,831 Adjustments to beginning balance: Cumulative effect of adoption of Fair Value Option—Note E — (2,566) — Net (loss) income for the fiscal year (1,077) 3,114 1,491 Retained earnings at end of the fiscal year $28,793 $29,870 $29,322 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 41 STATEMENT OF CASH FLOWS For the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008 Expressed in millions of U.S. dollars 2010 2009 2008 Cash flows from investing activities Loans Disbursements $(28,775) $(18,529) $(10,478) Principal repayments 10,488 9,988 10,960 Principal prepayments 1,137 232 1,659 Loan origination fees received 32 24 6 Other investing activities, net (73) (74) — Net cash (used in) provided by investing activities (17,191) (8,359) 2,147 Cash flows from financing activities Medium and long-term borrowings New issues 31,696 39,092 15,526 Retirements (26,703) (18,653) (23,799) Net short-term borrowings 8,880 1,543 3,229 Net derivatives-Borrowings 102 133 1,767 Net derivatives-Other assets/liabilities 17 (1) 51 Capital subscriptions 1 5 — Net capital transactions 554 77 94 Net cash provided by (used in) financing activities 14,547 22,196 (3,132) Cash flows from operating activities Net (loss) income (1,077) 3,114 1,491 Adjustment to reconcile net (loss) income to net cash provided by (used in) operating activities Fair value adjustment on non-trading portfolios, net 1,038 (3,280) 40 Depreciation and amortization 879 920 1,046 Provision for losses on loans and guarantees, (decrease) increase (32) 284 (684) Changes in: Investments-Trading 4,388 (16,367) (1,339) Net investment securities traded/purchased-Trading (2,144) 2,286 (567) Net derivatives-Investments 277 832 (556) Net securities purchased/sold under resale/repurchase agreements and payable for cash collateral received (1,580) 561 1,851 Accrued income on loans 101 143 312 Miscellaneous assets 426 837 587 Payable for Board of Governors-approved transfers — — (70) Accrued charges on borrowings (285) (227) (410) Accounts payable and miscellaneous liabilities (152) (675) (689) Net cash provided by (used in) operating activities 1,839 (11,572) 1,012 Effect of exchange rate changes on unrestricted cash 6 (7) 9 Net (decrease) increase in unrestricted cash (799) 2,258 36 Unrestricted cash at beginning of the fiscal year 2,380 122 86 Unrestricted cash at end of the fiscal year $ 1,581 $ 2,380 $ 122 42 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Expressed in millions of U.S. dollars 2010 2009 2008 Supplemental disclosure (Decrease) increase in ending balances resulting from exchange rate fluctuations Loans outstanding $(2,846) $(1,689) $ 3,374 Investments-Trading (611) (569) 821 Borrowings (89) (3,611) 5,090 Derivatives-Investments 622 828 (619) Derivatives-Borrowings 1,983 (2,900) (2,891) Capitalized loan origination fees included in total loans 80 36 12 Interest paid on borrowings 960 2,528 4,025 The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 43 SUMMARY STATEMENT OF LOANS June 30, 2010 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage of but not yet balance of Loans total loans a b Borrower or guarantor Total loans effective effective loans outstanding outstanding Albania $ 50 $ - $ 27 $ 23 0.02% Algeria 20 - 11 9 0.01 Argentina 8,748 1,245 2,214 5,289 4.40 Armenia 141 21 47 73 0.06 Azerbaijan 1,802 172 1,368 262 0.22 Barbados 47 - 29 18 0.01 Belarus 515 43 204 268 0.22 Belize 14 - - 14 0.01 Bolivia, Plurinational State of - - - * * Bosnia and Herzegovina 543 126 20 397 0.33 Botswana 372 136 234 2 * Brazil 17,146 2,280 3,551 11,315 9.42 Bulgaria 1,548 - 281 1,267 1.05 Cameroon 27 - - 27 0.02 Chile 278 3 75 200 0.17 China 19,195 1,414 4,904 12,877 10.72 Colombia 8,129 - 885 7,244 6.03 Costa Rica 732 500 162 70 0.06 Côte d'Ivoire 18 - - 18 0.01 Croatia 2,014 32 604 1,378 1.15 Dominica 1 - - 1 * Dominican Republic 965 30 202 733 0.61 Ecuador 503 - 15 488 0.41 Egypt, Arab Republic of 5,401 1,355 1,515 2,531 2.11 El Salvador 1,059 250 266 543 0.45 Estonia 13 - - 13 0.01 Gabon 41 - 23 18 0.01 Georgia 275 - 156 119 0.10 Grenada 16 5 1 10 0.01 Guatemala 1,708 115 212 1,381 1.15 Hungary 1,264 1,229 - 35 0.03 India 18,885 1,438 6,692 10,755 8.95 Indonesia 12,421 1,985 2,821 7,615 6.34 Iran, Islamic Republic of 1,045 - 191 854 0.71 Iraq 250 - - 250 0.21 Jamaica 685 - 96 589 0.49 Jordan 1,201 - 165 1,036 0.86 Kazakhstan 3,934 1,017 2,306 611 0.51 Korea, Republic of 1,078 - - 1,078 0.90 C Kosovo 299 - - 299 0.25 Latvia 395 - 122 273 0.23 Lebanon 409 - 96 313 0.26 Lesotho 2 - - 2 * Lithuania 22 - - 22 0.02 Macedonia, former Yugoslav Republic of 446 11 169 266 0.22 Malaysia 17 - - 17 0.01 Mauritius 329 20 116 193 0.16 Mexico 14,151 3,378 311 10,462 8.71 Moldova 98 - - 98 0.08 Montenegro 257 - 38 219 0.18 Morocco 3,006 487 246 2,273 1.89 Namibia 7 7 - - - Nigeria 67 - - 67 0.06 Pakistan 1,956 - 240 1,716 1.43 Panama 579 40 114 425 0.35 44 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Expressed in millions of U.S. dollars Loans approved Undisbursed Percentage of but not yet balance of Loans total loans a b Borrower or guarantor Total loans effective effective loans outstanding outstanding Papua New Guinea $ 144 $ - $ - $ 144 0.12% Paraguay 435 - 172 263 0.22 Peru 4,241 160 1,233 2,848 2.37 Philippines 3,778 280 1,137 2,361 1.97 Poland 5,228 1,229 193 3,806 3.17 Romania 3,376 - 617 2,759 2.30 Russian Federation 3,437 - 555 2,882 2.40 Serbia 2,198 - 527 1,671 1.39 Seychelles 8 - - 8 0.01 Slovak Republic 172 - - 172 0.14 Slovenia 9 - - 9 0.01 South Africa 3,769 - 3,741 28 0.02 St. Kitts and Nevis 11 - - 11 0.01 St. Lucia 23 4 1 18 0.01 St. Vincent and the Grenadines 9 - 5 4 * Swaziland 5 - - 5 * Thailand 156 79 1 76 0.06 Trinidad and Tobago 22 - 2 20 0.02 Tunisia 1,667 88 376 1,203 1.00 Turkey 13,806 1,357 2,263 10,186 8.48 Turkmenistan 12 - - 12 0.01 Ukraine 4,368 60 1,091 3,217 2.68 Uruguay 1,190 - 118 1,072 0.89 Uzbekistan 282 - 17 265 0.22 Vietnam 700 200 - 500 0.42 Zimbabwe 457 - - 457 0.38 d Subtotal $183,627 $20,796 $42,778 $120,053 99.96% e International Finance Corporation 50 - - 50 0.04 Total-June 30, 2010 $183,677 $20,796 $42,778 $120,103 100.00 % Total-June 30, 2009 $156,823 $21,558 $29,567 $105,698 *Indicates amount less than $0.5 million or less than 0.005 percent. NOTES a. Loans totaling $11,235 million ($8,567 million —June 30, 2009) have been approved by IBRD, but the related agreements have not been signed. Loan agreements totaling $9,561 million ($12,991 million—June 30, 2009) have been signed, but the loans do not become effective and disbursements thereunder do not start until the borrowers and guarantors, if any, take certain actions and furnish certain documents to IBRD. b. Of the undisbursed balance, IBRD has entered into irrevocable commitments to disburse $189 million ($362 million-June 30, 2009). c. Relates to Kosovo’s assumption of its portion of the loans formerly undertaken by Serbia with IBRD. This was effected through a Loan Assumption Agreement effective August 24, 2009. d. May differ from the sum of individual figures shown due to rounding. e. Loans outstanding to the International Finance Corporation (IFC) have a weighted average interest rate of 3.96% and a weighted average maturity of 4.21 years.These loans are not eligible for IBRD’s interest waivers. The Notes to Financial Statements are an integral part of these Statements. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 45 SUMMARY STATEMENT OF LOANS June 30, 2010 Expressed in millions of U.S. dollars This page intentionally left blank. 46 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER June 30, 2010 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Number Percentage of Total Amounts subject of Percentage a a, b Member Shares total amounts paid in to call votes of total Afghanistan 300 0.02% $ 36.2 $ 3.6 $ 32.6 550 0.03% Albania 830 0.05 100.1 3.6 96.5 1,080 0.07 Algeria 9,252 0.59 1,116.1 67.1 1,049.0 9,502 0.59 Angola 2,676 0.17 322.8 17.5 305.4 2,926 0.18 Antigua and Barbuda 520 0.03 62.7 1.3 61.5 770 0.05 Argentina 17,911 1.14 2,160.7 132.2 2,028.4 18,161 1.12 Armenia 1,139 0.07 137.4 5.9 131.5 1,389 0.09 Australia 24,464 1.55 2,951.2 181.8 2,769.5 24,714 1.52 Austria 11,063 0.70 1,334.6 80.7 1,253.9 11,313 0.70 Azerbaijan 1,646 0.10 198.6 9.7 188.8 1,896 0.12 Bahamas, The 1,071 0.07 129.2 5.4 123.8 1,321 0.08 Bahrain 1,103 0.07 133.1 5.7 127.4 1,353 0.08 Bangladesh 4,854 0.31 585.6 33.9 551.6 5,104 0.31 Barbados 948 0.06 114.4 4.5 109.9 1,198 0.07 Belarus 3,323 0.21 400.9 22.3 378.5 3,573 0.22 Belgium 28,983 1.84 3,496.4 215.8 3,280.6 29,233 1.80 Belize 586 0.04 70.7 1.8 68.9 836 0.05 Benin 868 0.06 104.7 3.9 100.8 1,118 0.07 Bhutan 479 0.03 57.8 1.0 56.8 729 0.04 Bolivia, Plurinational State of 1,785 0.11 215.3 10.8 204.5 2,035 0.13 Bosnia and Herzegovina 549 0.04 66.2 5.8 60.4 799 0.05 Botswana 615 0.04 74.2 2.0 72.2 865 0.05 Brazil 33,287 2.11 4,015.6 245.5 3,770.1 33,537 2.07 Brunei Darussalam 2,373 0.15 286.3 15.2 271.1 2,623 0.16 Bulgaria 5,215 0.33 629.1 36.5 592.6 5,465 0.34 Burkina Faso 868 0.06 104.7 3.9 100.8 1,118 0.07 Burundi 716 0.05 86.4 3.0 83.4 966 0.06 Cambodia 214 0.01 25.8 2.6 23.2 464 0.03 Cameroon 1,527 0.10 184.2 9.0 175.2 1,777 0.11 Canada 44,795 2.84 5,403.8 334.9 5,068.9 45,045 2.78 Cape Verde 508 0.03 61.3 1.2 60.1 758 0.05 Central African Republic 862 0.05 104.0 3.9 100.1 1,112 0.07 Chad 862 0.05 104.0 3.9 100.1 1,112 0.07 Chile 6,931 0.44 836.1 49.6 786.6 7,181 0.44 China 44,799 2.85 5,404.3 335.0 5,069.3 45,049 2.78 Colombia 6,352 0.40 766.3 45.2 721.1 6,602 0.41 Comoros 282 0.02 34.0 0.3 33.7 532 0.03 Congo, Democratic Republic of 2,643 0.17 318.8 25.4 293.5 2,893 0.18 Congo, Republic of 927 0.06 111.8 4.3 107.5 1,177 0.07 Costa Rica 233 0.01 28.1 1.9 26.2 483 0.03 Côte d’Ivoire 2,516 0.16 303.5 16.4 287.1 2,766 0.17 Croatia 2,293 0.15 276.6 17.3 259.3 2,543 0.16 Cyprus 1,461 0.09 176.2 8.4 167.9 1,711 0.11 Czech Republic 6,308 0.40 761.0 45.9 715.0 6,558 0.40 Denmark 13,451 0.85 1,622.7 97.8 1,524.9 13,701 0.85 Djibouti 559 0.04 67.4 1.6 65.9 809 0.05 Dominica 504 0.03 60.8 1.1 59.7 754 0.05 Dominican Republic 2,092 0.13 252.4 13.1 239.3 2,342 0.14 Ecuador 2,771 0.18 334.3 18.2 316.1 3,021 0.19 Egypt, Arab Republic of 7,108 0.45 857.5 50.9 806.6 7,358 0.45 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 47 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2010 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Number Percentage of Total Amounts subject of Percentage a a, b Member Shares total amounts paid in to call votes of total El Salvador 141 0.01% $ 17.0 $ 1.7 $ 15.3 391 0.02% Equatorial Guinea 715 0.05 86.3 2.7 83.5 965 0.06 Eritrea 593 0.04 71.5 1.8 69.7 843 0.05 Estonia 923 0.06 111.3 4.3 107.1 1,173 0.07 Ethiopia 978 0.06 118.0 4.7 113.3 1,228 0.08 Fiji 987 0.06 119.1 4.8 114.3 1,237 0.08 Finland 8,560 0.54 1,032.6 61.9 970.8 8,810 0.54 France 69,397 4.41 8,371.7 520.4 7,851.3 69,647 4.30 Gabon 987 0.06 119.1 5.1 113.9 1,237 0.08 Gambia, The 543 0.03 65.5 1.5 64.0 793 0.05 Georgia 1,584 0.10 191.1 9.3 181.8 1,834 0.11 Germany 72,399 4.60 8,733.9 542.9 8,190.9 72,649 4.48 Ghana 1,525 0.10 184.0 12.7 171.2 1,775 0.11 Greece 1,684 0.11 203.1 14.1 189.1 1,934 0.12 Grenada 531 0.03 64.1 1.4 62.7 781 0.05 Guatemala 2,001 0.13 241.4 12.4 229.0 2,251 0.14 Guinea 1,292 0.08 155.9 7.1 148.8 1,542 0.10 Guinea-Bissau 540 0.03 65.1 1.4 63.7 790 0.05 Guyana 1,058 0.07 127.6 5.3 122.3 1,308 0.08 Haiti 1,067 0.07 128.7 5.4 123.3 1,317 0.08 Honduras 641 0.04 77.3 2.3 75.0 891 0.05 Hungary 8,050 0.51 971.1 58.0 913.1 8,300 0.51 Iceland 1,258 0.08 151.8 6.8 144.9 1,508 0.09 India 44,795 2.84 5,403.8 333.7 5,070.1 45,045 2.78 Indonesia 14,981 0.95 1,807.2 110.3 1,697.0 15,231 0.94 Iran, Islamic Republic of 23,686 1.50 2,857.4 175.8 2,681.5 23,936 1.48 Iraq 2,808 0.18 338.7 27.1 311.6 3,058 0.19 Ireland 5,271 0.34 635.9 37.1 598.8 5,521 0.34 Israel 4,750 0.30 573.0 33.2 539.8 5,000 0.31 Italy 44,795 2.84 5,403.8 334.8 5,069.0 45,045 2.78 Jamaica 2,578 0.16 311.0 16.8 294.2 2,828 0.17 Japan 127,000 8.07 15,320.6 944.0 14,376.7 127,250 7.85 Jordan 1,388 0.09 167.4 7.8 159.6 1,638 0.10 Kazakhstan 2,985 0.19 360.1 19.8 340.3 3,235 0.20 Kenya 2,461 0.16 296.9 15.9 281.0 2,711 0.17 Kiribati 465 0.03 56.1 0.9 55.2 715 0.04 Korea, Republic of 15,817 1.00 1,908.1 114.5 1,793.5 16,067 0.99 Kosovo, Republic of 966 0.06 116.5 5.2 111.4 1,216 0.07 Kuwait 13,280 0.84 1,602.0 97.4 1,504.6 13,530 0.83 Kyrgyz Republic 1,107 0.07 133.5 5.7 127.9 1,357 0.08 Lao People’s Democratic Republic 178 0.01 21.5 1.5 20.0 428 0.03 Latvia 1,384 0.09 167.0 7.8 159.2 1,634 0.10 Lebanon 340 0.02 41.0 1.1 39.9 590 0.04 Lesotho 663 0.04 80.0 2.3 77.6 913 0.06 Liberia 463 0.03 55.9 2.6 53.3 713 0.04 Libya 7,840 0.50 945.8 57.0 888.8 8,090 0.50 Lithuania 1,507 0.10 181.8 8.7 173.1 1,757 0.11 Luxembourg 1,652 0.11 199.3 9.8 189.5 1,902 0.12 Macedonia, former Yugoslav Republic of 427 0.03 51.5 3.2 48.3 677 0.04 Madagascar 1,422 0.09 171.5 8.1 163.5 1,672 0.10 Malawi 1,094 0.07 132.0 5.6 126.4 1,344 0.08 48 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER June 30, 2010 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Number Percentage of Total Amounts subject of Percentage a a, b Member Shares total amounts paid in to call votes of total Malaysia 8,244 0.52% $ 994.5 $ 59.5 $ 935.0 8,494 0.52% Maldives 469 0.03 56.6 0.9 55.7 719 0.04 Mali 1,162 0.07 140.2 6.1 134.1 1,412 0.09 Malta 1,074 0.07 129.6 5.4 124.1 1,324 0.08 Marshall Islands 469 0.03 56.6 0.9 55.7 719 0.04 Mauritania 900 0.06 108.6 4.1 104.4 1,150 0.07 Mauritius 1,242 0.08 149.8 6.7 143.1 1,492 0.09 Mexico 18,804 1.19 2,268.4 139.0 2,129.4 19,054 1.18 Micronesia, Federated States of 479 0.03 57.8 1.0 56.8 729 0.04 Moldova 1,368 0.09 165.0 7.6 157.4 1,618 0.10 Mongolia 466 0.03 56.2 2.3 53.9 716 0.04 Montenegro 688 0.04 83.0 3.2 79.8 938 0.06 Morocco 4,973 0.32 599.9 34.8 565.1 5,223 0.32 Mozambique 930 0.06 112.2 4.8 107.4 1,180 0.07 Myanmar 2,484 0.16 299.7 16.1 283.6 2,734 0.17 Namibia 1,523 0.10 183.7 8.8 174.9 1,773 0.11 Nepal 968 0.06 116.8 4.6 112.1 1,218 0.08 Netherlands 35,503 2.26 4,282.9 264.8 4,018.1 35,753 2.21 New Zealand 7,236 0.46 872.9 51.9 821.0 7,486 0.46 Nicaragua 608 0.04 73.3 2.1 71.3 858 0.05 Niger 852 0.05 102.8 3.8 99.0 1,102 0.07 Nigeria 12,655 0.80 1,526.6 92.7 1,433.9 12,905 0.80 Norway 9,982 0.63 1,204.2 72.6 1,131.6 10,232 0.63 Oman 1,561 0.10 188.3 9.1 179.2 1,811 0.11 Pakistan 9,339 0.59 1,126.6 67.8 1,058.9 9,589 0.59 Palau 16 * 1.9 0.2 1.8 266 0.02 Panama 385 0.02 46.4 3.2 43.2 635 0.04 Papua New Guinea 1,294 0.08 156.1 7.1 149.0 1,544 0.10 Paraguay 1,229 0.08 148.3 6.6 141.6 1,479 0.09 Peru 5,331 0.34 643.1 37.5 605.6 5,581 0.34 Philippines 6,844 0.43 825.6 48.9 776.7 7,094 0.44 Poland 10,908 0.69 1,315.9 79.6 1,236.3 11,158 0.69 Portugal 5,460 0.35 658.7 38.5 620.2 5,710 0.35 Qatar 1,096 0.07 132.2 9.0 123.3 1,346 0.08 Romania 4,011 0.25 483.9 30.5 453.4 4,261 0.26 Russian Federation 44,795 2.85 5,403.8 333.9 5,070.0 45,045 2.78 Rwanda 1,046 0.07 126.2 5.2 120.9 1,296 0.08 St. Kitts and Nevis 275 0.02 33.2 0.3 32.9 525 0.03 St. Lucia 552 0.04 66.6 1.5 65.1 802 0.05 St. Vincent and the Grenadines 278 0.02 33.5 0.3 33.2 528 0.03 Samoa 531 0.03 64.1 1.4 62.7 781 0.05 San Marino 595 0.04 71.8 2.5 69.3 845 0.05 São Tomé and Principe 495 0.03 59.7 1.1 58.6 745 0.05 Saudi Arabia 44,795 2.84 5,403.8 335.0 5,068.9 45,045 2.78 Senegal 2,072 0.13 250.0 13.0 237.0 2,322 0.14 Serbia 2,846 0.18 343.3 21.5 321.9 3,096 0.19 Seychelles 263 0.02 31.7 0.2 31.6 513 0.03 Sierra Leone 718 0.05 86.6 3.0 83.6 968 0.06 Singapore 320 0.02 38.6 3.9 34.7 570 0.04 Slovak Republic 3,216 0.20 388.0 23.0 365.0 3,466 0.21 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 49 STATEMENT OF SUBSCRIPTIONS TO CAPITAL STOCK AND VOTING POWER (continued) June 30, 2010 Expressed in millions of U.S. dollars Subscriptions Voting Power Amounts Number Percentage of Total Amounts subject of Percentage a a, b Member Shares total amounts paid in to call votes of total Slovenia 1,261 0.08% $ 152.1 $ 9.5 $ 142.6 1,511 0.09% Solomon Islands 513 0.03 61.9 1.2 60.7 763 0.05 Somalia 552 0.04 66.6 3.3 63.3 802 0.05 South Africa 13,462 0.86 1,624.0 98.8 1,525.2 13,712 0.85 Spain 27,997 1.78 3,377.4 206.8 3,170.6 28,247 1.74 Sri Lanka 3,817 0.24 460.5 26.1 434.3 4,067 0.25 Sudan 850 0.05 102.5 7.2 95.3 1,100 0.07 Suriname 412 0.03 49.7 2.0 47.7 662 0.04 Swaziland 440 0.03 53.1 2.0 51.1 690 0.04 Sweden 14,974 0.95 1,806.4 110.2 1,696.2 15,224 0.94 Switzerland 26,606 1.69 3,209.6 197.2 3,012.4 26,856 1.66 Syrian Arab Republic 2,202 0.14 265.6 14.0 251.7 2,452 0.15 Tajikistan 1,060 0.07 127.9 5.3 122.5 1,310 0.08 Tanzania 1,295 0.08 156.2 10.0 146.2 1,545 0.10 Thailand 6,349 0.40 765.9 45.2 720.7 6,599 0.41 Timor-Leste 517 0.03 62.4 1.9 60.4 767 0.05 Togo 1,105 0.07 133.3 5.7 127.6 1,355 0.08 Tonga 494 0.03 59.6 1.1 58.5 744 0.05 Trinidad and Tobago 2,664 0.17 321.4 17.6 303.7 2,914 0.18 Tunisia 719 0.05 86.7 5.7 81.1 969 0.06 Turkey 8,328 0.53 1,004.6 59.8 944.8 8,578 0.53 Turkmenistan 526 0.03 63.5 2.9 60.5 776 0.05 c Tuvalu 211 0.01 25.5 1.5 23.9 461 0.03 Uganda 617 0.04 74.4 4.4 70.1 867 0.05 Ukraine 10,908 0.69 1,315.9 79.3 1,236.6 11,158 0.69 United Arab Emirates 2,385 0.15 287.7 22.6 265.1 2,635 0.16 United Kingdom 69,397 4.41 8,371.7 539.5 7,832.2 69,647 4.30 United States 264,969 16.83 31,964.5 1,998.4 29,966.2 265,219 16.36 Uruguay 2,812 0.18 339.2 18.6 320.7 3,062 0.19 Uzbekistan 2,493 0.16 300.7 16.1 284.7 2,743 0.17 Vanuatu 586 0.04 70.7 1.8 68.9 836 0.05 Venezuela, República Bolivariana de 20,361 1.29 2,456.2 150.8 2,305.5 20,611 1.27 Vietnam 968 0.06 116.8 8.1 108.7 1,218 0.08 Yemen, Republic of 2,212 0.14 266.8 14.0 252.8 2,462 0.15 Zambia 2,810 0.18 339.0 20.0 319.0 3,060 0.19 Zimbabwe 3,325 0.21% 401.1 22.4 378.7 3,575 0.22% b Total-June 30, 2010 1,574,526 100.00% $189,943 $11,492 $178,451 1,621,276 100.00% Total-June 30, 2009 1,574,315 $189,918 $11,491 $178,427 1,620,815 * Indicates amounts less than 0.005 percent. NOTES a. See Notes to Financial Statements, Note B—Capital Stock, Restricted Currencies, Maintenance of Value, and Membership. b. May differ from the sum of individual figures shown due to rounding. c. Tuvalu became the 187th member of IBRD on June 24, 2010. The Notes to Financial Statements are an integral part of these Statements. 50 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 NOTES TO FINANCIAL STATEMENTS PURPOSE AND AFFILIATED instruments, the determination of the adequacy of ORGANIZATIONS the accumulated provision for losses on loans, deferred drawdown options (DDOs), and guarantees, The International Bank for Reconstruction and the determination of net periodic cost from pension Development (IBRD) is an international and other postretirement benefits plans, and the organization which commenced operations in 1946. present value of benefit obligations. The principal purpose of IBRD is to promote sustainable economic development and reduce Certain reclassifications of the prior years’ poverty in its member countries, primarily by information have been made to conform with the providing loans, guarantees and related technical current year’s presentation. assistance for specific projects and for programs of On August 5, 2010, the Executive Directors economic reform in developing member countries. approved these financial statements for issue. The activities of IBRD are complemented by those of three affiliated organizations, the International Translation of Currencies: IBRD’s financial Development Association (IDA), the International statements are expressed in terms of U.S. dollars for Finance Corporation (IFC), and the Multilateral the purpose of summarizing IBRD’s financial Investment Guarantee Agency (MIGA). Each of position and the results of its operations for the these organizations is legally and financially convenience of its members and other interested independent from IBRD, with separate assets and parties. liabilities, and IBRD is not liable for their respective obligations. Transactions with these affiliated IBRD is an international organization which organizations are disclosed in the notes that follow. conducts its operations in the currencies of all of its IDA’s main goal is to reduce poverty through members. IBRD’s resources are derived from its promoting sustainable economic development in the capital, borrowings, and accumulated earnings in less developed countries who are members of IDA, those various currencies. IBRD has a number of by extending grants, development credits, general policies aimed at minimizing exchange rate guarantees and related technical assistance. IFC’s risk in a multicurrency environment. IBRD matches purpose is to encourage the growth of productive its borrowing obligations in any one currency (after private enterprises in its member countries through swaps) with assets in the same currency, as loans and equity investments in such enterprises prescribed by its Articles of Agreement. In addition, without a member’s guarantee. MIGA was IBRD periodically undertakes currency conversions established to encourage the flow of investments for to more closely match the currencies underlying its productive purposes between member countries and, Equity with those of the net loans outstanding. in particular, to developing member countries by Assets and liabilities are translated at market providing guarantees against noncommercial risks exchange rates in effect at the end of the accounting for foreign investment in its developing member period. Income and expenses are translated at either countries. the market exchange rates in effect on the dates on IBRD is immune from taxation pursuant to Article which they are recognized or at an average of the VII, Section 9, Immunities from Taxation, of IBRD’s market exchange rates in effect during each month. Articles of Agreement. Translation adjustments are reflected in Accumulated Other Comprehensive Income. NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES Valuation of Capital Stock: In the Articles of Agreement, the capital stock of IBRD is expressed IBRD’s financial statements are prepared in in terms of “U.S. dollars of the weight and fineness conformity with the accounting principles generally in effect on July 1, 1944” (1944 dollars). Following accepted in the United States of America (U.S. the abolition of gold as a common denominator of GAAP). the monetary system and the repeal of the provision The preparation of financial statements in of the U.S. law defining the par value of the U.S. conformity with U.S. GAAP requires management dollar in terms of gold, the pre-existing basis for to make estimates and assumptions that affect the translating 1944 dollars into current dollars or into reported amounts of assets and liabilities and any other currency was eliminated. The Executive disclosure of contingent assets and liabilities at the Directors of IBRD have decided, until such time as date of the financial statements and the reported the relevant provisions of the Articles of Agreement amounts of income and expenses during the are amended, that the words “U.S. dollars of the reporting period. Actual results could differ from weight and fineness in effect on July 1, 1944” in these estimates. Significant judgments have been Article II, Section 2(a) of the Articles of Agreement used in the valuation of certain financial of IBRD are interpreted to mean the Special Drawing Right (SDR) introduced by the IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 51 International Monetary Fund, as valued in terms of of such commissions to the Special Reserve was U.S. dollars immediately before the introduction of discontinued in 1964 with respect to subsequent the basket method of valuing the SDR on July 1, loans and no further additions are being made to it. 1974, such value being $1.20635 for one SDR (1974 The General Reserve consists of earnings from prior SDR). fiscal years which, in the judgment of the Executive Maintenance of Value: Article II, Section 9 of Directors, should be retained in IBRD’s operations. the Articles of Agreement provides for maintenance The Pension Reserve consists of the difference of the value (MOV), at the time of subscription, of between the cumulative actual funding of the Staff restricted currencies (see Note B—Capital Stock, Retirement Plan (SRP) and other postretirement Restricted Currencies, Maintenance of Value, and benefits plans, and the cumulative accounting Membership). Maintenance of value amounts are income or expense for these plans, from prior fiscal determined by measuring the foreign exchange value years. This Pension Reserve is reduced when of a member’s national currency against the standard pension accounting expenses exceed the actual of value of IBRD capital based on the 1974 SDR. funding of these plans. Members are required to make payments to IBRD if their currencies depreciate significantly relative to Surplus consists of earnings from prior fiscal years the standard of value. Furthermore, the Executive which are retained by IBRD until a further decision Directors have adopted a policy of reimbursing is made on their disposition or the conditions of members whose national currencies appreciate transfer for specified uses have been met. significantly in terms of the standard of value. The Cumulative Fair Value Adjustments consist of The net receivable or payable MOV amounts the effects associated with the application of relating to restricted currencies out on loan, Financial Accounting Standards Board’s (FASB’s) invested, swapped, or loaned to the member by derivatives and hedging guidance relating to prior IBRD or through IFC, and amounts that have been years. This amount includes the cumulative effect of reclassified from receivables for those countries that the adoption of this guidance, the reclassification have been in arrears for two years or more, are and amortization of the transition adjustments, and included as a component of Equity under Deferred the unrealized gains or losses on non-trading Amounts to Maintain Value of Currency Holdings. derivatives. For restricted currencies used in IBRD’s lending and Restricted Retained Earnings consist of investing operations, these MOV amounts are shown contributions or income from prior years which are as a component of Equity since MOV becomes restricted as to the purpose. effective only as such currencies are repaid to IBRD. Unallocated Net Income (Loss) consists of the Transfers Approved by the Board of current fiscal year’s net income (loss) adjusted for Governors: In accordance with IBRD’s Articles of Board of Governors-approved transfers. Agreement, as interpreted by the Executive Directors, the Board of Governors may exercise its Loans: All of IBRD’s loans are made to or reserved power to approve transfers to other entities guaranteed by members, except loans to IFC. The for development purposes. These transfers, referred majority of IBRD’s loans have repayment to as “Board of Governors-approved transfers”, are obligations based on specific currencies. IBRD also reported as expenses when incurred, upon approval. holds multicurrency loans which have repayment obligations in various currencies determined on the Retained Earnings: Retained Earnings consist of basis of a currency pooling system. allocated amounts (Special Reserve, General Reserve, Pension Reserve, Surplus, Cumulative Fair Loans are carried at amortized cost except those Value Adjustments and Restricted Retained which contain embedded derivatives that require Earnings) and Unallocated Net Income (Loss). bifurcation, which IBRD has elected to measure at fair value. The Special Reserve consists of loan commissions set aside pursuant to Article IV, Section 6 of the Any loan origination fees incorporated in a loan’s Articles of Agreement, which are to be held in liquid terms are deferred and recognized over the life of the assets. These assets may be used only for the loan as an adjustment of yield. However, purpose of meeting liabilities of IBRD on its incremental direct costs associated with originating borrowings and guarantees in the event of defaults loans are expensed as incurred, as such amounts are on loans made, participated in, or guaranteed by considered insignificant. The unamortized balance IBRD. The Special Reserve assets are included of loan origination fees is included as a reduction of under Investments— Trading, and comprise Loans Outstanding on the balance sheet, and the obligations of the United States Government, its loan origination fee amortization is included in agencies, and other official entities. The allocation 52 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Interest under Income from Loans on the Statement though the member’s eligibility for new loans may of Income. have been restored. In such instances, a decision on the restoration of accrual status is made on a case- It is IBRD’s practice not to reschedule interest or by-case basis after a suitable period of payment principal payments on its loans or participate in debt performance has passed from the time of arrears rescheduling agreements with respect to its loans. clearance. Exceptions were made to this practice during fiscal years 1996 and 2002 with regard to Bosnia and Guarantees: Financial guarantees are Herzegovina (BiH) and Serbia and Montenegro commitments issued by IBRD to guarantee payment (SaM), formerly the Federal Republic of performance to a third party. Yugoslavia, respectively, in connection with their Guarantees are regarded as outstanding when the succession to membership of the former Socialist underlying financial obligation of the debtor is Federal Republic of Yugoslavia (SFRY). These incurred, and called when a guaranteed party exceptions were based on criteria approved by the demands payment under the guarantee. IBRD would Executive Directors in fiscal year 1996 which limit be required to perform under its guarantees if the eligibility for such treatment to a country: (a) that payments guaranteed were not made by the debtor has emerged from a current or former member of and the guaranteed party called the guarantee by IBRD; (b) that is assuming responsibility for a share demanding payment from IBRD in accordance with of the debt of such member; (c) that, because of a the terms of the guarantee. In the event that a major armed conflict in its territory involving guarantee of a member country is called, IBRD has extensive destruction of physical assets, has limited the contractual right to require payment from the creditworthiness for servicing the debt it is member country that has provided the counter assuming; and (d) for which rescheduling/ guarantee to IBRD on demand, or as IBRD may refinancing would result in a significant otherwise direct. improvement in its repayment capacity, if IBRD records the fair value of the obligation to appropriate supporting measures are taken. This stand ready, and a corresponding asset in the treatment was based on a precedent established in financial statements. 1975 after Bangladesh became independent from Pakistan. IBRD does not believe that any borrowers Guarantee fee income received is deferred and with loans in nonaccrual status currently meet these amortized over the life of the guarantee. eligibility criteria. IBRD records a contingent liability for the probable When modifications are made to the terms of losses related to guarantees outstanding. This existing loans, IBRD performs an evaluation to provision, as well as the unamortized balance of the determine the required accounting treatment, deferred guarantee fee income, and the unamortized including whether the modifications would result in balance of the obligation to stand ready, are included the affected loans being accounted for as new loans, in Accounts payable and miscellaneous liabilities on or as a continuation of the existing loans. the Balance Sheet. It is the policy of IBRD to place in nonaccrual status Accumulated Provision for Losses on Loans, all loans made to or guaranteed by a member of DDOs, and Guarantees: Delays in receiving loan IBRD if principal, interest, or other charges with payments result in present value losses to IBRD respect to any such loan are overdue by more than since it does not charge fees or additional interest on six months, unless IBRD management determines any overdue interest or loan charges. These present that the overdue amount will be collected in the value losses are equal to the difference between the immediate future. In addition, if development credits present value of payments of interest and charges made by IDA to a member government are placed in made according to the related loan's contractual nonaccrual status, all loans made to or guaranteed by terms and the present value of its expected future that member government will also be placed in cash flows. IBRD has not written off any of its nonaccrual status by IBRD. On the date a member’s loans. loans are placed into nonaccrual status, unpaid interest and other charges accrued on loans Management determines the appropriate level of outstanding to the member are deducted from the accumulated provisions for losses on loans, DDOs income of the current period. Interest and other and guarantees, which reflects the probable losses charges on nonaccruing loans are included in inherent in its nonaccrual and accrual portfolios. income only to the extent that payments have been There are several steps required to determine the received by IBRD. If collectibility risk is considered appropriate level of provisions for each portfolio. to be particularly high at the time of arrears First, the total loan portfolio is segregated into the clearance, the member’s loans may not accrual and nonaccrual portfolios. In both portfolios, automatically emerge from nonaccrual status, even the exposure for each country (defined as loans IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 53 outstanding, DDOs and the present value of that it has been transferred under securities lending guarantees) is then assigned a credit risk rating. agreements in return for cash. IBRD does not With respect to countries with loans in the accrual currently offset the fair value amounts recognized portfolio, these loans are grouped according to the for derivative instruments that have been executed assigned borrower risk rating. Each risk rating is with the same counterparty under master netting mapped to an expected default frequency using agreements; as a result, the fair value amounts IBRD's credit migration matrix. The provision recognized for the obligation to return cash required is calculated by multiplying the outstanding collateral received from counterparties are not offset exposure, by the expected default frequency with the fair value amounts recognized for these (probability of default to IBRD) and by the assumed derivative instruments. The presentation of IBRD’s severity of the loss given default. derivative instruments is in line with the manner in which these instruments are settled. The determination of borrowers' ratings is based on both quantitative and qualitative analyses of various Securities Purchased Under Resale factors. IBRD periodically reviews these factors and Agreements, Securities Lent Under Securities reassesses the adequacy of the accumulated Lending Agreements and Securities Sold provision for losses on loans, DDOs, and guarantees Under Repurchase Agreements and Payable accordingly. Adjustments to the accumulated for Cash Collateral Received: Securities provision are recorded as a charge or addition to purchased under resale agreements, securities lent income. under securities lending agreements, and securities For loans that are reported at fair value the sold under repurchase agreements are recorded at provisions for losses on loans is included in the fair face value which approximates fair value. IBRD value amount of these loans, as the determination of receives securities purchased under resale the fair values takes credit risk into consideration. agreements, monitors the fair value of the securities and, if necessary, closes out transactions and enters Statement of Cash Flows: For the purpose of into new repriced transactions. The securities IBRD's Statement of Cash Flows, cash is defined as transferred to counterparties under the repurchase the amount of unrestricted currencies Due from and security lending arrangements and the securities Banks. transferred to IBRD under the resale agreements Investments: Investment securities are classified have not met the accounting criteria for treatment as based on management’s intention on the date of a sale. Therefore, securities transferred under purchase, their nature, and IBRD’s policies repurchase agreements and security lending governing the level and use of such investments. arrangements are retained as assets on IBRD's Throughout the years ended June 30, 2010 and June Balance Sheet, and securities received under resale 30, 2009, all investment securities were held in a agreements are not recorded on IBRD's Balance trading portfolio. Investment securities and related Sheet. financial instruments held in IBRD’s trading Nonnegotiable, Noninterest-bearing Demand portfolio are carried and reported at fair value. The Obligations on Account of Subscribed Capital: first-in first-out (FIFO) method is used to determine Payments on some of these instruments are due to the cost of securities sold in computing the realized IBRD upon demand and are thus carried and gains and losses on these instruments. Unrealized reported at face value as assets on the Balance Sheet. gains and losses for investment securities and related Others are due to IBRD on demand but only after financial instruments held in the trading portfolio are the Bank’s callable subscribed capital has been included in income. Derivative instruments are used entirely called pursuant to Article IV, Section 2 (a) in liquidity management to manage interest rate and of the Articles of Agreement. These are carried and currency risks. These derivatives are carried at fair reported at face value as a reduction to equity. All value. From time to time, IBRD enters into forward demand obligations are held in bank accounts which contracts for the sale or purchase of investment bear IBRD’s name. securities; these transactions are recorded at the time of commitment. Premises and Equipment: Premises and IBRD may require collateral in the form of approved equipment, including leasehold improvements, are liquid securities from individual counterparties or carried at cost less accumulated depreciation and cash in order to mitigate its credit exposure to these amortization. IBRD computes depreciation and counterparties. For collateral received in the form of amortization using the straight-line method over the cash from counterparties, IBRD records the cash and estimated useful lives of the owned assets, which a corresponding obligation to return the cash. range between two and fifty years. For leasehold Collateral received in the form of liquid securities is improvements, depreciation and amortization is only recorded on IBRD's Balance Sheet to the extent computed over the lesser of the remaining term of 54 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 the leased facility or the estimated economic life of incorporate unobservable inputs. Selection of these the improvement. inputs may involve some judgment. To ensure that the valuations are appropriate where internally- Maintenance and repairs are charged to expense as developed models are used, IBRD has various incurred, while major improvements are capitalized controls in place, which include both internal and and amortized over the estimated useful life. periodic external verification and review. Borrowings: To ensure funds are available for As of June 30, 2010 and June 30, 2009, IBRD had lending and liquidity purposes, IBRD borrows in the no financial assets or liabilities measured at fair worldwide capital markets offering its securities to value on a non-recurring basis. private and governmental buyers. IBRD issues debt instruments of varying maturities denominated in Fair Value Hierarchy various currencies with both fixed and variable Financial instruments are categorized based on the interest rates. priority of the inputs to the valuation technique. The Effective July 1, 2008, IBRD fair values all its fair value hierarchy gives the highest priority to financial instruments in the borrowing portfolio with quoted prices in active markets for identical assets or the changes in fair values accounted for through the liabilities (Level 1), the next highest priority to Statement of Income. Prior to July 1, 2008, IBRD observable market-based inputs or inputs that are only applied fair value measurement to certain corroborated by market data (Level 2) and the qualifying debt instruments in its borrowings lowest priority to unobservable inputs that are not portfolio which were hybrid financial instruments, corroborated by market data (Level 3). with the changes in fair value reported in Statement Financial assets and liabilities recorded at fair value of Income. All other borrowings were reported on on the Balance Sheet are categorized based on the the Balance Sheet at amortized cost. Issuance costs inputs to the valuation techniques as follows: associated with a bond offering were deferred and amortized over the period during which the bond Level 1: Financial assets and liabilities whose values was outstanding. are based on unadjusted quoted prices for identical assets or liabilities in active IBRD uses derivatives in its borrowing and liability markets. management activities. In the borrowing portfolio, derivatives are used to modify the interest rate Level 2: Financial assets and liabilities whose values and/or currency characteristics of the borrowing are based on quoted prices for similar assets portfolio, and are carried at fair value (see Note F— or liabilities in active markets; quoted Derivative Instruments). The interest component of prices for identical or similar assets or these derivatives is recognized as an adjustment to liabilities in markets that are not active; or the borrowing cost over the life of the derivative pricing models for which all significant contract and included in Interest under Borrowing inputs are observable, either directly or Expenses on the Statement of Income. indirectly for substantially the full term of the asset or liability. For presentation purposes amortization of discounts Level 3: Financial assets and liabilities whose values and premiums is included in Interest under are based on prices or valuation techniques Borrowing Expenses on the Statement of Income. that require inputs that are both Accounting for Derivatives: IBRD has elected unobservable and significant to the overall not to designate any hedging relationships for fair value measurement. accounting purposes. Rather, all derivative IBRD’s policy is to recognize transfers in and instruments are marked to fair value on the Balance transfers out of levels as of the end of the reporting Sheet, with changes in fair values accounted for period in which they occur. through the Statement of Income. Accounting for Grant Expenses: IBRD Valuation of Financial Instruments: IBRD has recognizes an expense for grants, such as an established and documented process for Contributions to Special Programs, and Board of determining fair values. Fair value is based upon Governors-approved transfers, when incurred. quoted market prices for the same or similar securities, where available. Financial instruments for Donor Receivables: Donors’ conditional promises which quoted market prices are not readily available to give are not recognized until the conditions to are valued based on discounted cash flow models. which they are subject are substantially met and the These models primarily use market-based or promise to give is considered unconditional. independently-sourced market parameters such as Donors’ unconditional promises to give are yield curves, interest rates, volatilities, foreign recognized upon receipt as income, unless the donor exchange rates and credit curves, and may specifies a third party beneficiary. In those cases IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 55 IBRD is deemed to be acting as an intermediary This guidance amends existing guidance for agent and assets held on behalf of the specified consolidation of variable interest entities and is beneficiaries are recognized with corresponding effective for IBRD’s interim and annual reporting liabilities. If the contributions that IBRD receives periods beginning July 1, 2010. IBRD does not can only be used for purposes specified by the expect the impact of this ASU to be significant. donor, the proceeds are considered restricted until In January 2010, FASB issued ASU 2010-06, Fair applied by IBRD for the donor-specified purposes. Value Measurements and Disclosures: Improving Donors’ promises to give which are expected to be Disclosures about Fair Value Measurements (Topic collected within one year are recorded at face value, 820). The ASU requires new disclosures about while promises expected to be collected over a transfers in and out of Levels 1 and 2 fair value period greater than one year are recorded initially at measurements, and is effective for interim and fair value, with subsequent measurement on an annual periods beginning after December 15, 2009. amortized cost basis. For the existing Level 3 roll-forward reconciliation, Accounting and Reporting Developments separate presentation of information about In June 2009, the Financial Accounting Standards purchases, sales, issuances, and settlements (on a Board (FASB) issued Statement of Financial gross basis for each class of instrument) will be Accounting Standards (FAS) No. 168, the FASB required, effective for fiscal years beginning after Accounting Standards Codification™ and the December 15, 2010 and for interim periods within Hierarchy of Generally Accepted Accounting those fiscal years. As permitted, IBRD has early Principles (FAS 168), which establishes the FASB adopted the Level 3 roll-forward reconciliation Accounting Standards Codification (the ASC or requirements. IBRD’s adoption of the requirements Codification) as the single source of authoritative is reflected in the additional disclosures under Notes U.S. GAAP. FAS 168 later became Accounting C—Investments, D—Loans and Guarantees, E— Standards Update (ASU) 2009-1. The Codification Borrowings, and F—Derivative Instruments. was effective July 1, 2009 and did not change In March 2010, FASB issued ASU 2010-11, existing U.S. GAAP, but changed the structure of Derivatives and Hedging (Topic 815): Scope and all references to authoritative accounting Exception Related to Embedded Credit Derivatives, guidance. effective first fiscal quarter beginning after June 15, In December 2008, FASB issued FASB Staff 2010. The ASU clarifies the scope exception related Position (FSP) FAS 132(R)-1, Employers’ to embedded credit derivatives by narrowing it to Disclosures about Postretirement Benefit Plan apply to those embedded credit derivatives where Assets, now included in ASC 715-20, which requires the transfer of credit risk is only in the form of additional disclosures about assets of a defined subordination of one financial instrument to another, benefit pension or other postretirement plan. This with all other embedded credit derivatives required guidance is applicable to IBRD’s annual financial to be analyzed for potential bifurcation and separate statements for the fiscal year ending June 30, 2010 accounting. IBRD does not currently have any embedded credit derivatives. and has resulted in additional disclosures (see Note J—Pension and Other Postretirement Benefits). In March 2010, the Patient Protection and Affordable Care Act (the PPACA) and the Health In June 2009, FASB issued Statement of Financial Care and Education Reconciliation Act of 2010 Accounting Standards No. 166, Accounting for (HCERA), became law (collectively, the "Act"). The Transfers of Financial Assets—an amendment of Act seeks to reform the U.S. health care system and FASB Statement No.140 (FAS 166), which was later its various provisions will become effective over the codified as ASU 2009-16. This standard addresses next eight years. While the Act has no impact on the information that a reporting entity provides in its IBRD as of June 30, 2010, IBRD is currently financial reports about transfers of financial assets evaluating its potential future implications. including; the effects of a transfer on its financial position, financial performance, and cash flows, and In July 2010, the Dodd-Frank Wall Street Reform a transferor’s continuing involvement in transferred and Consumer Protection Act (the "Dodd-Frank assets. This ASU is effective for IBRD’s interim and Act") became law in the United States. The Act annual reporting periods beginning July 1, 2010. seeks to reform the U.S. financial regulatory system IBRD does not expect the impact of this ASU to be by introducing new regulators and extending significant. regulation over new markets, entities, and activities. While the Act has no impact on IBRD as of June 30, In June 2009, FASB also issued Statement of 2010, IBRD is currently evaluating its potential Financial Accounting Standards No. 167, future implications. Amendments to FASB Interpretation No.46(R) (FAS 167), which was later codified as ASU 2009-17. 56 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 NOTE B—CAPITAL STOCK, RESTRICTED Net deferred MOV payable relates to restricted CURRENCIES, MAINTENANCE OF VALUE, currencies invested, swapped, or loaned to members AND MEMBERSHIP by IBRD or through IFC. These amounts become payable by IBRD on the same terms as other MOV Capital Stock: At June 30, 2010, IBRD’s capital obligations on cash receipt of the settlement from comprised 1,581,724 authorized shares (1,581,724 these instruments. MOV receivable in arrears shares—June 30, 2009), of which 1,574,526 shares represents receivables for countries that have (1,574,315 shares—June 30, 2009) had been amounts outstanding for two years or more. subscribed. Each share has a par value of 0.1 million Although these amounts are used to reduce equity, 1974 SDRs, valued at the rate of $1.20635 per 1974 IBRD still considers these MOV in arrears as SDR. Of the subscribed capital, $11,492 million obligations due from the members concerned. ($11,491 million—June 30, 2009) has been paid in, Deferred demand obligations relate to notes that are and the remaining $178,451 million ($178,427 due on demand only after IBRD's callable capital million—June 30, 2009) is subject to call only when has been entirely called pursuant to Article IV, required to meet the obligations of IBRD created by Section 2 (a) of the Articles of Agreement. borrowing or guaranteeing loans. NOTE C—INVESTMENTS Under IBRD’s Articles of Agreement, in the event a member withdraws from IBRD, the withdrawing As part of its overall portfolio management strategy, member is entitled to receive the value of its shares IBRD invests in government and agency obligations, payable to the extent the member does not have any time deposits, listed equity securities, corporate and outstanding obligations to IBRD. IBRD’s Articles asset-backed securities, repurchase agreements, of Agreement also state that the former member has securities loans, resale agreements and related continuing obligations to IBRD after withdrawal. financial derivatives including futures, currency Specifically, the former member remains fully liable swaps (including currency forward contracts), for its entire capital subscription, including both the interest rate swaps, options and swaptions. IBRD previously paid-in portion and the callable portion, manages its investments in two portfolios: a liquid so long as any part of the loans or guarantees asset portfolio and a long-term income portfolio contracted before it ceased to be a member are (LTIP), both of which are designated as trading outstanding. portfolios. Membership: On June 24, 2010, Tuvalu became the A summary of IBRD’s trading portfolio at June 30, 187th member of IBRD. 2010 and June 30, 2009, is as follows: Currencies Subject to Restrictions: A portion of In millions of U.S. dollars 2010 2009 capital subscriptions paid in to IBRD has been paid Carrying Carrying in the national currencies of the members. These Value Value amounts, referred to as restricted currencies, are Investments—Trading usable by IBRD in its lending and investing Equity securities $ 665 $ 640 operations, only with the consent of the respective Government and agency obligations 14,340 21,234 members, and for administrative expenses. Time deposits 17,121 15,201 Asset-backed securities 3,886 3,937 Deferred Amounts To Maintain the Value of Total $36,012 $41,012 Currency Holdings The following table summarizes the deferred amounts to maintain the value of currency holdings classified as a component of equity: In millions of U.S. dollars Payable (Receivable) 2010 2009 Net Deferred MOV payable $576 $660 MOV receivable in arrears (133) (171) Deferred demand obligations (130) (130) Net payable $313 $359 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 57 The following table summarizes the currency composition of IBRD’s trading portfolio at June 30, 2010 and June 30, 2009: In millions of U.S. dollars equivalent 2010 2009 Average Average Repricing Repricing a a Currency Carrying Value (years) Carrying Value (years) Euro $ 7,997 1.09 $ 7,630 1.03 Japanese yen 4,410 1.69 11,905 0.69 U.S. dollars 21,185 0.85 18,995 0.83 Others 2,420 0.86 2,482 0.87 Total $36,012 1.01 $41,012 0.83 a. Equity securities are not subject to repricing. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. IBRD manages its investments on a net portfolio basis. The following table summarizes IBRD’s net portfolio position as of June 30, 2010 and June 30, 2009: In millions of U.S. dollars Carrying Value 2010 2009 Investments—Trading $36,012 $41,012 Securities purchased under resale agreements 289 33 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received (998) (2,323) Derivative assets Currency forward contracts 5,976 11,946 Currency swaps 7,187 6,438 Interest rate swaps 86 83 Total 13,249 18,467 Derivative liabilities Currency forward contracts (5,943) (12,096) Currency swaps (7,207) (6,702) Interest rate swaps (210) (125) Total (13,360) (18,923) a Cash held in investment portfolio 1,182 2,306 Receivable from investment securities traded 47 95 Payable for investment securities purchased (307) (2,457) Net Investment Portfolio $36,114 $38,210 a. This amount is included in Unrestricted Currencies under Due from Banks on the Balance Sheet. The following table summarizes the currency composition of IBRD’s net investment portfolio at June 30, 2010 and June 30 2009: In millions of U.S. dollars equivalent 2010 2009 Average Average Repricing Repricing a a Currency Carrying Value (years) Carrying Value (years) U.S. dollars $32,367 0.44 $35,013 0.25 Others 3,747 0.18 3,197 0.54 Total $36,114 0.36 $38,210 0.27 a. Equity securities are not subject to repricing. The average repricing represents the remaining period to the contractual repricing or maturity date, whichever is earlier. This indicates the average length of time for which interest rates are fixed. As of June 30, 2010, there were no short sales included in Payable for investment securities purchased on the Balance Sheet ($2 million as of June 30, 2009). For the fiscal year ended June 30, 2010, IBRD had included $100 million of unrealized losses in income (unrealized losses of $64 million—June 30, 2009 and unrealized gains of $99 million—June 30, 2008). 58 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Fair Value Disclosures The following tables present IBRD’s fair value hierarchy for investment assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and June 30, 2009: In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2010 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Equity securities $ 665 $ — $— $ 665 Government and agency obligations 1,480 12,860 — 14,340 Time deposits 2,153 14,968 — 17,121 Asset-backed securities — 3,868 18 3,886 Total Investments – Trading $4,298 $31,696 $18 $36,012 Securities purchased under resale agreements 39 250 — 289 Derivative assets-Investments Currency forward contracts — 5,976 — 5,976 Currency swaps — 7,187 — 7,187 Interest rate swaps — 86 — 86 Total Derivative assets-Investments — 13,249 — 13,249 Total Assets $4,337 $45,195 $18 $49,550 Liabilities: Securities sold under repurchase agreements and a securities lent under security lending agreements $53 $ 151 $— $ 204 Derivative liabilities-Investments Currency forward contracts — 5,943 — 5,943 Currency swaps — 7,207 — 7,207 Interest rate swaps — 210 — 210 Total Derivative liabilities-Investments — 13,360 — 13,360 Total Liabilities $53 $13,511 $— $13,564 a. Excludes $794 million relating to payable for cash collateral received. In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2009 Level 1 Level 2 Level 3 Total Assets: Investments – Trading Equity securities $ 640 $ — $ — $ 640 Government and agency obligations 1,635 19,599 — 21,234 Time deposits 802 14,399 — 15,201 Asset-backed securities — 3,828 109 3,937 Total Investments – Trading 3,077 37,826 109 41,012 Securities Purchased Under Resale Agreements 33 — — 33 Derivative Assets - Investments — 18,467 — 18,467 Total Assets $3,110 $56,293 $109 $59,512 Liabilities: Securities Sold Under Repurchase Agreements and a Securities Lent Under Security Lending Agreements $31 $ — $— $ 31 Derivative Liabilities – Investments — 18,923 — 18,923 Total Liabilities $31 $18,923 $— $18,954 a. Excludes $2,292 million relating to payable for cash collateral received. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 59 The following tables provide a summary of changes in the The table below provides the details of all inter-level fair value of IBRD’s Level 3 Investments – Trading assets transfers for the fiscal year ended June 30, 2010: during the fiscal year ended June 30, 2010 and June 30, 2009: In millions of U.S. dollars Level 2 Level 3 In millions of U.S. dollars Investments-Trading June 30, 2010 Transfers (out of) into $(24) $24 Investments – Trading Transfers into (out of) 94 (94) Asset Government backed and Agency $70 $(70) Securities Obligations Total Beginning of the fiscal Valuation Methods and Assumptions year $109 $— $109 Total Summarized below are the techniques applied in realized/unrealized gains or (losses) in: determining the fair values of investments. Net income 10 — 10 Investment securities: Purchases 22 — 22 Where available, quoted market prices are used to Sales/Settlements (53) — (53) determine the fair value of trading securities. Examples Transfers in (out), net (70) — (70) include some government securities, mutual funds, futures End of the fiscal year $ 18 $— $ 18 and exchange-traded equity securities. For instruments for which market quotations are not available, fair values are determined using model-based valuation techniques, In millions of U.S. dollars whether internally-generated or vendor-supplied, that June 30, 2009 includes the standard discounted cash flow method using Investments – Trading market observable inputs such as yield curves, credit Asset Government spreads, and prepayment speeds. Unless quoted prices are backed and Agency Securities Obligations Total available, money market instruments are reported at face value which approximates fair value. Beginning of the fiscal year $ 14 $ 26 $ 40 Securities Purchased under Resale Agreements and Total Securities Sold under Agreements to Repurchase realized/unrealized (losses) gains in: Securities purchased under resale agreements and securities Net income (11) 5 (6) sold under agreements to repurchase, are reported at face Purchases 5 — 5 value which approximates fair value. Sales/Settlements (21) — (21) Commercial Credit Risk Transfers in (out), net 122 (31) 91 End of the fiscal year $109 $— $109 For the purpose of risk management, IBRD is party to a variety of financial transactions, certain of which involve elements of credit risk. Credit risk exposure represents the The following table provides information on the unrealized maximum potential loss due to possible nonperformance by gains or losses included in income for the fiscal years ended obligors and counterparties under the terms of the contracts. June 30, 2010 and June 30, 2009, relating to IBRD’s Level For all securities, IBRD limits trading to a list of authorized 3 Investments – Trading still held at June 30, 2010 and dealers and counterparties. June 30, 2009, as well as where those amounts are included in the Statement of Income. Swap Agreements: Credit risk is initiated through the application of eligibility criteria and volume limits for In millions of U.S. dollars transactions with individual counterparties and through the Fiscal Year Ended June 30, use of mark-to-market collateral arrangements for swap transactions. IBRD may require collateral in the form of Unrealized Gains 2010 2009 cash or other approved liquid securities from individual Statement of Income Line counterparties in order to mitigate its credit exposure. Investments, net – Trading $3 $5 IBRD has entered into master derivatives agreements which contain legally enforceable close-out netting provisions. These agreements may further reduce the gross credit risk exposure related to the swaps. Credit risk with financial assets subject to a master derivatives arrangement is further reduced under these agreements to the extent that payments 60 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 and receipts with the counterparty are netted at settlement. Securities Lending: IBRD may engage in securities The reduction in exposure as a result of these netting lending and repurchases, against adequate collateral, as well provisions can vary due to the impact of changes in market as securities borrowing and reverse repurchases (resales) of conditions on existing and new transactions. The extent of government and agency obligations, and corporate and the reduction in exposure may therefore change asset-backed securities. Transfers of securities by IBRD to substantially within a short period of time following the counterparties are not accounted for as sales as the balance sheet date. accounting criteria for the treatment as a sale have not been met. These securities must be available to meet IBRD's The following is a summary of the collateral received by obligation to counterparties. IBRD as of June 30, 2010 and June 30, 2009. In millions of U.S. dollars June 30, 2010 June 30, 2009 Collateral received Cash $794 $2,292 Securities 9,764 5,405 Total collateral received $10,558 $7,697 Collateral permitted to be repledged $10,558 $7,697 Amount of collateral repledged — — The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities: In millions of U.S. dollars June 30, June 30, 2010 2009 Financial Statement Presentation Securities transferred under repurchase $204 $30 Included under Investments-Trading on the Balance Sheet or securities lending agreements Included under Securities Sold Under Repurchase Liabilities relating to securities Agreements, Securities Lent Under Securities Lending transferred under repurchase or $204 $31 Agreements, and Payable for Cash Collateral Received, on securities lending agreements the Balance Sheet. IBRD receives collateral in connection with resale accounting criteria for treatment as a sale have not been agreements as well as swap agreements. This collateral met. As of June 30, 2010, IBRD had received securities serves to mitigate IBRD's exposure to credit risk. with a fair value of $291 million ($34 million—June 30, 2009). None of these securities had been transferred under In the case of resale agreements, IBRD receives collateral repurchase or security lending agreements as of that date in the form of liquid securities and is permitted to repledge (Nil—June 30, 2009). these securities. While these transactions are legally considered to be true purchases and sales, the securities received are not recorded on IBRD’s Balance Sheet as the IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 61 NOTE D—LOANS AND GUARANTEES and fixed spread terms. At June 30, 2010 loans with variable spread terms and fixed spread terms, (including IBRD’s loan portfolio includes loans with multicurrency special development policy loans), were available for new terms, single currency pool terms, variable spread terms commitments under the IBRD Flexible Loan (IFL). A summary of IBRD’s outstanding loans by currency and by interest rate characteristics (fixed or variable) at June 30, 2010 and June 30, 2009 follows: In millions of U.S. dollars equivalent 2010 Euro Japanese yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total a Multicurrency terms Amount $ 636 $ 592 $724 $ 670 $ 539 $ 820 $221 $ 159 $ 2,120 $ 2,241 $ 4,361 Weighted average b rate (%) 3.36 5.67 3.28 5.64 3.65 6.40 3.44 5.64 3.42 5.93 4.71 Average Maturity (years) 2.14 1.98 2.17 2.02 2.07 1.17 2.63 2.02 2.18 1.70 1.93 Single currency pool terms Amount $ — $ 254 $ — $ — $ 1,546 $ 105 $ — $ — $ 1,546 $ 359 $ 1,905 Weighted average b rate (%) — 2.93 — — 3.50 3.46 — — 3.50 3.08 3.42 Average Maturity (years) — 1.46 — — 1.62 1.33 — — 1.62 1.42 1.59 Variable-spread terms Amount $ 67 $ 7,947 $ — $ 181 $ 1,338 $50,479 $ — $ 42 $ 1,405 $58,649 $ 60,054 Weighted average b rate (%) 4.47 1.17 — 0.78 5.77 0.81 — 1.05 5.71 0.85 0.97 Average Maturity (years) 1.34 11.02 — 3.45 1.38 7.88 — 11.22 1.37 8.30 8.13 c Fixed-spread terms Amount $3,438 $ 7,699 $ 23 $ 354 $21,245 $19,414 $602 $1,008 $25,308 $28,475 $ 53,783 Weighted average b rate (%) 4.85 1.56 2.28 0.97 4.43 1.01 7.71 4.31 4.56 1.28 2.82 Average maturity (years) 8.19 8.80 6.63 8.92 8.25 8.80 11.38 14.21 8.31 8.99 8.67 Loans Outstanding Amount $4,141 $16,492 $747 $1,205 $24,668 $70,818 $823 $1,209 $30,379 $89,724 $120,103 Weighted average b rate (%) 4.61 1.54 3.25 3.54 4.42 0.93 6.56 4.38 4.48 1.12 1.97 Average Maturity (years) 7.15 9.51 2.30 4.26 7.32 8.05 9.03 12.50 7.22 8.32 8.05 Loans Outstanding $120,103 Less accumulated provision for loan losses and deferred loan income 1,999 Net loans outstanding $118,104 Note: For footnotes see the following page. 62 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 In millions of U.S. dollars equivalent 2009 Euro Japanese yen U.S. dollars Others Loans Outstanding Fixed Variable Fixed Variable Fixed Variable Fixed Variable Fixed Variable Total a Multicurrency terms Amount $ 577 $1,442 $527 $1,324 $ 431 $ 1,326 $169 $ 299 $1,704 $ 4,391 $ 6,095 Weighted average b rate (%) 4.18 6.41 4.09 6.41 4.52 6.59 4.05 6.41 4.23 6.47 5.84 Average Maturity (years) 2.73 2.15 2.75 2.16 2.58 1.66 3.48 2.17 2.77 2.01 2.22 Single currency pool terms Amount $ — $481 $ — $2 $1,700 $885 $ — $— $1,700 $ 1,368 $ 3,068 Weighted average b rate (%) — 5.91 — 1.23 3.85 6.10 — — 3.85 6.03 4.82 Average Maturity (years) — 1.66 — 0.55 1.96 1.58 — — 1.96 1.61 1.80 Variable-spread terms Amount $ 125 $5,047 $ — $ 168 $2,196 $40,504 $ — $47 $2,321 $45,766 $48,087 Weighted average b rate (%) 4.63 1.90 — 0.97 5.89 1.91 — 1.41 5.82 1.90 2.09 Average Maturity (years) 1.61 6.51 — 3.83 1.63 5.33 — 12.13 1.63 5.46 5.28 d Fixed-spread terms Amount $3,464 $8,171 $ 21 $ 300 $13,339 $21,693 $468 $992 $17,292 $31,156 $48,448 Weighted average b rate (%) 5.04 2.44 2.29 1.30 4.35 2.04 7.58 4.98 4.58 2.23 3.07 Average maturity (years) 8.72 9.22 7.51 9.78 7.48 8.42 12.23 15.04 7.86 8.85 8.50 Loans Outstanding Amount $4,166 $15,141 $548 $1,794 $17,666 $64,408 $637 $1,338 $23,017 $82,681 $105,698 Weighted average b rate (%) 4.91 2.75 4.03 5.04 4.50 2.11 6.66 5.17 4.62 2.34 2.84 Average Maturity (years) 7.68 7.41 2.94 3.59 6.10 6.24 9.96 12.06 6.42 6.49 6.48 Loans Outstanding $105,698 Less accumulated provision for loan losses and deferred loan income 2,041 Net loans outstanding $103,657 a. Includes loans issued prior to 1980, and loans to IFC, in addition to multicurrency pool loans. Variable rates for multicurrency loans are based on the weighted average cost of allocated debt. b. Excludes effects of any waivers of loan interest. c. Includes loans at fair value of $109 million. d. Includes loans at fair value of $78 million. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 63 The maturity structure of IBRD’s loans at June 30, 2010 and June 30, 2009 is as follows: In millions of U.S. dollars 2010 July 1, 2010 through July 1, 2011 through July 1, 2015 through Terms/Rate Type June 30, 2011 June 30, 2015 June 30, 2020 Thereafter Total Multicurrency terms Fixed $ 782 $ 1,166 $ 99 $ 73 $ 2,120 Variable 920 1,262 59 — 2,241 Single currency pool terms Fixed 578 958 10 — 1,546 Variable 158 197 4 — 359 Variable-spread terms Fixed 639 765 1 — 1,405 Variable 4,860 18,762 15,114 19,913 58,649 a Fixed-spread terms Fixed 1,421 6,897 9,190 7,800 25,308 Variable 1,592 7,603 9,058 10,222 28,475 All Loans Fixed 3,420 9,786 9,300 7,873 30,379 Variable 7,530 27,824 24,235 30,135 89,724 Total loans outstanding $10,950 $37,610 $33,535 $38,008 $120,103 a. Includes loans at fair value of $109 million. In millions of U.S. dollars 2009 July 1, 2009 through July 1, 2010 through July 1, 2014 through Terms/Rate Type June 30, 2010 June 30, 2014 June 30, 2019 Thereafter Total Multicurrency terms Fixed $ 488 $ 997 $ 133 $ 86 $ 1,704 Variable 1,519 2,625 247 — 4,391 Single currency pool terms Fixed 582 1,037 81 — 1,700 Variable 544 804 20 — 1,368 Variable-spread terms Fixed 897 1,406 18 — 2,321 Variable 4,789 19,898 15,199 5,880 45,766 a Fixed-spread terms Fixed 1,025 4,740 7,199 4,328 17,292 Variable 1,092 9,148 10,293 10,623 31,156 All Loans Fixed 2,992 8,180 7,431 4,414 23,017 Variable 7,944 32,475 25,759 16,503 82,681 Total loans outstanding $10,936 $40,655 $33,190 $20,917 $105,698 a. Includes loans at fair value of $78 million. 64 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Waivers of Loan Charges Overdue Amounts IBRD provides waivers on eligible loans, which At June 30, 2010, there were no principal or interest include a portion of interest on loans, a portion of amounts on loans in accrual status, which were the commitment charge on undisbursed balances and overdue by more than three months. The following a portion of the front-end fee charged on all eligible tables provide a summary of selected financial loans. Waivers are approved annually by the information related to loans in nonaccrual status as Executive Directors of IBRD. of and for the fiscal years ended June 30, 2010, June The reduction in net income for the fiscal years 30, 2009 and June 30, 2008: ended June 30, 2010, June 30, 2009 and June 30, In millions of U.S. dollars 2008 resulting from waivers of loan charges, is 2010 2009 summarized below: Recorded investment in nonaccrual a loans $457 $460 In millions of U.S. dollars Accumulated provision for loan losses 2010 2009 2008 on nonaccrual loans 229 230 Average recorded investment in Interest waivers $163 $166 $165 nonaccrual loans for the fiscal year 462 459 Commitment charge waivers 64 89 122 Overdue amounts of nonaccrual loans: 631 565 Front-end fee waivers 20 13 9 Principal 384 352 Total $247 $268 $296 Interest and charges 247 213 a. A loan loss provision has been recorded against each of the loans in the nonaccrual portfolio. Guarantees In millions of U.S. dollars Guarantees of $1,726 million were outstanding at 2010 2009 2008 June 30, 2010 ($1,713 million—June 30, 2009). Interest income not recognized as This amount represents the maximum potential a result of loans being in amount of undiscounted future payments that IBRD nonaccrual status $35 $34 $16 could be required to make under these guarantees, and is not included in the Balance Sheet. These During the fiscal years ended June 30, 2010, June guarantees have original maturities ranging between 30, 2009, and June 30, 2008 no interest income was 1 and 20 years, and expire in decreasing amounts recognized on loans in nonaccrual status. through 2029. Information relating to the sole borrowing member At June 30, 2010, liabilities related to IBRD's with loans or guarantees in nonaccrual status at June obligations under guarantees of $32 million ($29 30, 2010 follows: million—June 30, 2009), have been included in In millions of U.S. dollars Accounts payable and miscellaneous liabilities on Principal, the Balance Sheet. These include the accumulated Interest and provision for guarantee losses of $3 million ($5 Principal Charges Nonaccrual million—June 30, 2009). Borrower outstanding overdue since During the fiscal years ended June 30, 2010 and Zimbabwe $457 $631 October 2000 June 30, 2009, no guarantees provided by IBRD were called. During the fiscal years ended June 30, 2010 and June 30, 2009 there were no loans placed into nonaccrual status or restored to accrual status. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 65 Accumulated Provision for Losses on Loans, IBRD has always eventually collected all contractual DDOs, and Guarantees principal and interest on its loans. However, IBRD suffers losses resulting from the difference between Country Credit Risk: This risk includes potential the discounted present value of payments for interest losses arising from protracted arrears on payments and charges according to the related loan’s from borrowers for loans, guarantees or related contractual terms and the actual cash flows. Certain derivatives. IBRD manages country credit risk borrowers have found it difficult to make timely through individual country exposure limits payments for protracted periods, resulting in their according to creditworthiness. These exposure limits loans being placed in nonaccrual status. Several are tied to performance on macroeconomic and borrowers have emerged from nonaccrual status structural policies. In addition, IBRD establishes after a period of time by bringing up-to-date all absolute limits on the share of outstanding loans to principal payments and all overdue service any individual borrower. The country credit risk is payments, including interest and other charges. To further managed by financial incentives such as loan recognize the probable losses inherent in its loan and terms that give borrowers self-interest in IBRD’s guarantee portfolio, IBRD maintains an accumulated continued strong intermediation capacity. provision for losses on loans, DDOs, and guarantees. Changes to the accumulated provision for losses on loans, DDOs, and guarantees for the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008 are summarized below: In millions of U.S. dollars June 30, 2010 June 30, 2009 June 30, 2008 Accumulated provision for losses on loans, DDOs, and guarantees, beginning of the fiscal year $1,642 $1,376 $1,942 Net (decrease) increase in provision (32) 284 (684) Translation adjustment (34) (18) 118 Accumulated provision for losses on loans, DDOs, and guarantees, end of the fiscal year $1,576 $1,642 $1,376 Composed of: Accumulated provision for loan losses $1,553 $1,632 $1,370 Accumulated provision for DDOs 20 5 — Accumulated provision for guarantee losses 3 5 6 Total $1,576 $1,642 $1,376 Reported as Follows Balance Sheet Statement of Income Accumulated Provision for Losses on: Loans Accumulated provision for loan losses Provision for losses on loans and guarantees Deferred drawdown Accounts payable and miscellaneous liabilities Provision for losses on loans and guarantees options Guarantees Accounts payable and miscellaneous liabilities Provision for losses on loans and guarantees Segment Reporting For the fiscal year ended June 30, 2010, loans to one country generated in excess of 10 percent of loan Based on an evaluation of IBRD’s operations, income; this amounted to $264 million. Loan management has determined that IBRD has only one income comprises interest, commitment fees, loan reportable segment since IBRD does not manage its origination fees and prepayment premia, net of operations by allocating resources based on a waivers. determination of the contribution to net income from individual borrowers. 66 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The following table presents IBRD’s loan income and associated outstanding loan balances, by geographic region, as of and for the fiscal years ended June 30, 2010 and June 30, 2009: In millions of U.S. dollars 2010 2009 Region Loan Income Loans Outstanding Loan Income Loans Outstanding Africa $ 11 $ 826 $ 25 $ 997 East Asia and Pacific 551 24,668 855 23,574 Europe and Central Asia 565 30,602 1,061 28,057 Latin America and the Caribbean 1,070 43,017 1,317 35,880 Middle East and North Africa 171 8,469 291 7,435 South Asia 123 12,471 284 9,704 a Other 2 50 2 51 Total $2,493 $120,103 $3,835 $105,698 a. Represents loans to IFC, an affiliated organization. Fair Value Disclosures The table below presents the fair value of all IBRD’s loans along with their respective carrying amounts The only loan carried at fair value is classified as as of June 30, 2010 and June 30, 2009: level 3. The following table provides a summary of changes in the fair value of IBRD’s Level 3 loan In millions of U.S. dollars during the fiscal year ended June 30, 2010 and June 2010 2009 Carrying Fair Carrying Fair 30, 2009: Value Value Value Value Net Loans In millions of U.S. dollars Outstanding $118,104 $117,936 $103,657 $101,918 2010 2009 Beginning of the fiscal year $ 78 $102 Total realized/unrealized Valuation Methods and Assumptions gains or (losses) in: All of IBRD’s loans are made to or guaranteed by Net income 23 (8) countries that are members of IBRD, except for Other comprehensive income 8 (16) those loans made to IFC. IBRD does not currently sell its loans. End of the fiscal year $109 $ 78 As of June 30, 2010 and June 30, 2009, carrying value includes one loan with an embedded The following table reflects the fair value derivative, which is fair valued on a matrix basis adjustment on the loan and provides information on against the related bond. All other loans are carried the unrealized gains or losses, relating to IBRD’s at amortized cost. The fair value of these loans is Level 3 loan, included in income, for the fiscal years calculated using a discounted cash flow method. ended June 30, 2010, June 30, 2009, and June 30, This method incorporates Credit Default Swap 2008. spreads for each borrower. Basis adjustments are applied to market recovery levels to reflect IBRD’s In millions of U.S. dollars Fiscal Year Ended recovery experience. June 30, Unrealized Gains (Losses) 2010 2009 2008 Statement of Income Line Fair value adjustment on non-trading portfolios, net $15 $(14) $* * Indicates amount less than $0.5 million IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 67 NOTE E—BORROWINGS The maturity structure of IBRD’s borrowings outstanding at June 30, 2010 and June 30, 2009 is as IBRD issues unsubordinated and unsecured fixed follows: and variable rate debt in a range of currencies. Some In millions of U.S. dollars of these debt instruments are callable. Variable rates Period June 30, 2010 June 30, 2009 may be based on, for example, exchange rates, Less than1 year $ 33,959 $ 31,250 interest rates or equity indices. Between 1 - 2 years 17,097 16,503 Interest expense relating to the debt instruments 2 - 3 years 12,693 11,746 carried at fair value is being measured on an 3 - 4 years 10,903 5,864 4 - 5 years 11,790 4,876 effective yield basis and is reported as part of the Thereafter 42,135 39,801 Borrowings expenses in the Statement of Income. $128,577 $110,040 Commencing July 1, 2008, IBRD elected to fair value all debt instruments in the borrowings IBRD’s borrowings have original maturities ranging portfolio, with changes in fair value reported in from 16 days to 40 years, with the final maturity earnings. As a result of the initial adoption of the being in 2040. fair value option, IBRD recorded a transition adjustment of $2,566 million as a decrease to the Fair Value Disclosures opening balance of retained earnings. After the IBRD’s fair value hierarchy for borrowings initial election, the option is exercised at the measured at fair value on a recurring basis as of June inception of a financial assets or a financial liability 30, 2010 and June 30, 2009 is as follows: and is irrevocable. The objective of making this election is to report the entire portfolio on the same In millions of U.S. dollars measurement basis, thereby eliminating the previous June 30, 2010 June 30, 2009 mixed-attribute approach and better reflecting the Level 1 $ — $ — overall economic position and result of the portfolio. Level 2 116,490 98,969 Level 3 12,087 11,071 The following table provides a summary of the $128,577 $110,040 interest rate characteristics of IBRD’s borrowings at June 30, 2010 and June 30, 2009: In millions of U.S. dollars The following table provides a summary of changes June 30, WAC a June 30, WAC a in the fair value of IBRD’s Level 3 borrowings 2010 (%) 2009 (%) during the fiscal years ended June 30, 2010 and June Fixed $ 96,874 3.85 $ 79,456 4.92 30, 2009: Variable 28,012 2.12 29,461 2.07 b In millions of U.S. dollars Borrowings 124,886 3.46% 108,917 4.15% Fair value 2010 2009 adjustment 3,691 1,123 Borrowings Beginning of the fiscal year $11,071 $11,378 at fair value $128,577 $110,040 Total realized/unrealized (gains) or losses in: a. WAC refers to weighted average cost. Net income 393 (979) b. At amortized cost, net of issuance cost. Other comprehensive income 663 646 At June 30, 2010, the currency composition of debt Issuances 1,536 395 in IBRD’s borrowings portfolio before derivatives Settlements (912) (749) was as follows: Transfers (out) in, net (664) 380 June 30, 2010 June 30, 2009 U.S. dollar 56.4% 47.0% End of the fiscal year $12,087 $11,071 Euros 8.6 13.6 Japanese yen 9.5 10.5 Others 25.5 28.9 100.0% 100.0% 68 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The following table provides information on the financial effects on the fair value of the debt issued unrealized gains or losses included in income for the and outstanding as of June 30, 2010 were net fiscal years ended June 30, 2010 and June 30, 2009, unrealized losses of $994 million, determined using relating to IBRD’s Level 3 borrowings still held at observable changes in IBRD's credit spreads. June 30, 2010 and June 30, 2009, as well as where During the fiscal year ended June 30, 2009, IBRD those amounts are included in the Statement of experienced deterioration in its credit spreads as a Income. result of the financial crisis. The estimated financial effects on the fair value of the debt issued and In millions of U.S. dollars outstanding as of June 30, 2009 were net unrealized Fiscal Year Ended June 30, gains of $2,852 million, determined using observable changes in IBRD's credit spreads . Unrealized (Losses) Gains 2010 2009 Statement of Income Line Valuation Methods and Assumptions Fair value adjustment on Techniques applied in determining the fair values of non-trading portfolios, net $(347) $1,126 debt instruments are summarized below. Discount notes and vanilla bonds The following table provides information on the unrealized gains or losses included in income for the Discount notes and vanilla bonds are valued using fiscal years ended June 30, 2010 and June 30, 2009, the standard discounted cash flow method which relating to IBRD’s borrowings held at June 30, relies on market observable inputs such as yield 2010, June 30, 2009, June 30, 2008, as well as curves, foreign exchange rates, basis spreads and where those amounts are included in the Statement funding spreads. of Income. Structured bonds In millions of U.S. dollars Structured bonds issued by IBRD have coupon or Fiscal Year Ended June 30, repayment terms linked to the level or the performance of interest rates, foreign exchange Unrealized (Losses) Gains 2010 2009 2008 rates, equity indices or commodities. The fair value Statement of Income Line of the structured bonds is derived using the Fair value adjustment on discounted cash flow method based on estimated non-trading portfolios, net $(3,024) $(1,068) $1,042 future pay-offs determined by applicable models and computation of embedded optionality such as caps, floors and calls. A wide range of industry standard The table below provides the details of all inter-level models such as one factor Hull-White, Libor Market transfers for the fiscal year ended June 30, 2010: Model and Black-Scholes are used depending on the specific structure. These models incorporate market In millions of U.S. dollars Level 2 Level 3 observable inputs, such as yield curves, foreign exchange rates, basis spreads, funding spreads, Borrowings swaption volatilities, equity index volatilities and Transfers into (out of) $778 $(778) equity indices. Transfers (out of) into (114) 114 The following table summarizes IBRD’s borrowings $664 $(664) portfolio after derivatives as of June 30, 2010 and June 30, 2009. Presented below is the difference between the In millions of U.S. dollars aggregate fair value and aggregate contractual June 30, 2010 June 30, 2009 principal balance of long-term borrowings: Borrowings $128,577 $110,040 In millions of U.S. dollars Currency swaps, net (6,237) (4,183) Principal Interest rate swaps, net (2,565) (2,289) Amount Due $119,775 $103,568 Fair Value Upon Maturity Difference June 30, 2010 $128,577 $126,160 $2,417 June 30, 2009 $110,040 $110,095 $(55) IBRD uses derivative contracts to manage the repricing risk between its loans and borrowings. For During the fiscal year ended June 30, 2010, IBRD details regarding Currency swaps and Interest rate experienced improvements in its credit spreads as a swaps, see Note F – Derivative Instruments. result of improved market conditions. The estimated IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 69 NOTE F— DERIVATIVE INSTRUMENTS IBRD uses derivative instruments in its investments and borrowings portfolios, and for asset/liability management purposes. It also offers derivatives intermediation services to clients and concurrently enters into offsetting transactions with market counterparties. The following table summarizes IBRD’s use of derivatives in its various financial portfolios: Portfolio Derivative instruments used Purpose / Risk being managed Risk management purposes: Currency swaps, interest rate Investments swaps, currency forwards, Manage currency and interest rate risk in the portfolio options and futures Currency swaps, Interest rate Borrowings Manage repricing risks between loans and borrowings swaps, Structured swaps Other Currency swaps, Interest rate Manage currency risk as well as extend the duration of IBRD’s assets/liabilities swaps equity Other purposes: Client operations Currency swaps, Interest rate Assist clients in managing their interest rate and currency risks swaps Under client operations, derivative intermediation changes in fair value have been recognized in net services are provided to the following: income. While IBRD believes that its hedging strategies achieve its objectives, the application of Borrowing Countries: Currency and interest rate qualifying hedging criteria for accounting purposes swap transactions are executed between IBRD and would not appropriately reflect IBRD’s risk its borrowers under master derivatives agreements. management strategies. Non-Affiliated Organizations: IBRD has a master Upon adoption of this guidance in the fiscal year derivatives agreement with the International Finance 2001, $500 million was reported in other Facility for Immunisation (IFFIm), a AAA-rated comprehensive income representing the difference organization, under which several transactions have between the carrying value and the fair value of been executed. those derivatives that were hedging a cash flow Affiliated Organizations: Derivative contracts are exposure prior to adoption. This amount is being executed between IBRD and IDA, under an reclassified into earnings in the same period or agreement allowing IBRD to intermediate derivative periods in which the hedged forecasted transactions contracts on behalf of IDA. affect earnings. IBRD has entered into interest rate swaps in Any gains or losses on those borrowings for which a connection with its equity duration strategy. The net fair value exposure was being hedged prior to interest income from these swaps is included under adoption of the guidance were recorded in income at Other Interest Income in the Statement of Income. the time of implementation, and were offset by the fair value adjustments on the related derivative On July 1, 2000, IBRD adopted FASB’s guidance instruments. The fair value adjustments on those on derivatives and hedging. This guidance requires bonds are being amortized into earnings over the that derivative instruments be recorded on the remaining lives of the related bonds, through the balance sheet at fair value. IBRD has elected not to Fair value adjustment on non-trading portfolios, net designate any qualifying hedging relationships for in the Statement of Income. accounting purposes. Rather, all derivative instruments have been marked to fair value and all 70 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The following tables provide information on the fair value amounts and the location of the derivative instruments on the Balance Sheet, as well as notional amounts and credit risk exposures of those derivative instruments as of June 30, 2010 and June 30, 2009: Fair value amounts of derivative instruments on the Balance Sheet: In millions of U.S. dollars Derivative assets at Fair Value Derivative liabilities at Fair Value Balance Sheet June 30, June 30, Balance Sheet June 30, June 30, Location 2010 2009 Location 2010 2009 Derivatives not designated as hedging instruments Receivable from Receivable from Options and Futures – investment investment Investment – Trading securities traded $ — $ 1 securities traded $ 1 $ — Derivative assets at Derivative liabilities Interest rate swaps Fair Value 7,894 5,579 at Fair Value 3,080 1,911 Currency swaps (including currency forward contracts and Derivative assets at Derivative liabilities structured swaps) Fair Value 113,732 117,486 at Fair Value 107,338 113,731 Total Derivatives $121,626 $123,066 $110,419 $115,642 Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars June 30, 2010 June 30, 2009 Type of contract Investments—Trading Interest rate swaps and swaptions Notional principal $ 6,641 $ 9,389 Credit exposure 86 83 Currency swaps (including currency forward contracts) Credit exposure 427 345 a Exchange traded Options and Futures Notional long position 1,686 636 Notional short position 35 65 Client operations Interest rate swaps Notional principal 15,821 5,588 Credit exposure 467 120 Currency swaps Credit exposure 721 989 Borrowing portfolio Interest rate swaps Notional principal 115,110 93,930 Credit exposure 4,857 3,692 Currency swaps Credit exposure 10,494 9,038 Other derivatives Interest rate swaps Notional principal 36,296 33,800 Credit exposure 2,830 1,609 Currency swaps Credit exposure 142 90 a. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All outstanding options and future contracts as of June 30, 2010 and June 30, 2009 are interest rate contracts IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 71 IBRD is not required to post collateral under its counterparties due to its AAA credit rating. If the derivative agreements as long as it maintains a AAA credit-risk related contingent features underlying these credit rating. The aggregate fair value of all derivative agreements were triggered to the extent that IBRD instruments with credit-risk related contingent features would be required to post collateral as of June 30, that are in a liability position on June 30, 2010 is $266 2010, the amount of collateral that would need to be million. IBRD has not posted any collateral with these posted would be $22 million. Amount of gains and losses on non-trading derivatives and their location on the Statement of Income during the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008 is as follows: In millions of U.S. dollars Fiscal Year ended June 30 Income Statement Location Gains (Losses) 2010 2009 2008 Derivatives not designated as hedging instruments, and not held in a trading a portfolio Fair value adjustment on non- Interest rate swaps trading portfolios, net $1,322 $2,143 $ 424 Currency swaps (including currency forward contracts and structured Fair value adjustment on non- swaps) trading portfolios, net 649 2,219 (1,506) Total $1,971 $4,362 $(1,082) a. For alternative disclosures about trading derivatives see the following table All of the instruments in IBRD's investment In millions of U.S. dollars portfolio are held for trading purposes. Within the Fiscal Year ended June 30 a Investments, net-trading , investment portfolio, IBRD holds highly rated fixed Statement of Income Line gains (losses) income securities, listed equity securities as well as 2010 2009 2008 derivatives. Type of instrument The following table provides information on the Fixed income $ 55 $(68) $(74) location and amount of gains and losses on the Equity 71 46 — Investments – trading portfolio and their location on $126 $(22) $(74) the Statement of Income during the fiscal years ended June 30, 2010 and June 30, 2009: a. Amounts associated with each type of instrument includes realized and unrealized gains and losses on both derivative instruments and non-derivative instruments 72 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Fair Value Disclosures IBRD’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and June 30, 2009 is as follows: In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2010 Level 1 Level 2 Level 3 Total Derivative Assets: Investments Currency forward contracts $— $ 5,976 $ — $ 5,976 Currency swaps — 7,187 — 7,187 Interest rate swaps — 86 — 86 — 13,249 13,249 Client operations Currency swaps — 17,205 — 17,205 Interest rate swaps — 428 — 428 17,633 17,633 Borrowings Currency swaps — 69,347 13,320 82,667 Interest rate swaps — 4,781 9 4,790 74,128 13,329 87,457 Other assets / liabilities Currency swaps — 697 — 697 Interest rate swaps — 2,590 — 2,590 — 3,287 — 3,287 Total derivative assets at fair value $— $108,297 $13,329 $121,626 Derivative Liabilities: Investments Currency forward contracts $— $ 5,943 $ — $ 5,943 Currency swaps — 7,207 — 7,207 Interest rate swaps — 210 — 210 — 13,360 — 13,360 Client operations Currency swaps — 17,203 — 17,203 Interest rate swaps — 420 — 420 — 17,623 — 17,623 Borrowings Currency swaps — 63,823 12,606 76,429 Interest rate swaps — 2,208 18 2,226 — 66,031 12,624 78,655 Other assets / liabilities Currency swaps — 556 — 556 Interest rate swaps — 224 — 224 — 780 — 780 Total liabilities at fair value $— $97,794 $12,624 $110,418 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 73 In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2009 Level 1 Level 2 Level 3 Total Derivative Assets: Investments $— $ 18,467 $ — $ 18,467 Client Operations — 19,559 — 19,559 Borrowings — 68,281 14,512 82,793 Other assets / liabilities — 2,246 — 2,246 Total derivative assets at fair value $— 108,533 $14,512 $123,065 Derivative Liabilities: Investments — 18,923 — 18,923 Client Operations — 19,551 — 19,551 Borrowings — 61,808 14,513 76,321 Other assets / liabilities — 847 — 847 Total derivative liabilities at fair value $— $101,129 $14,513 $115,642 The following tables provide a summary of changes 2009, relating to IBRD’s Level 3 derivatives, net in the fair value of IBRD’s Level 3 derivatives, net still held at June 30, 2010, and June 30, 2009 as well during the fiscal years ended June 30, 2010 and June as where those amounts are included in the 30, 2009: Statement of Income, are presented in the following In millions of U.S. dollars table: Fiscal Year Ended June 30,2010 In millions of U.S. dollars Interest Fiscal Year Ended Currency Rate June 30, Swaps Swaps Total Unrealized (Losses) Gains 2010 2009 Statement of Income Line Beginning of the fiscal Fair value adjustment on year $18 $(19) $(1) non-trading portfolios, net $(24) $(480) Total realized/unrealized gains or (losses) in: The table below provides the details of all inter-level Net income (1) 15 14 transfers during the fiscal year ended June 30, 2010: Other comprehensive income 673 — 673 In millions of U.S. dollars Issuances (2) 1 (1) Level 2 Level 3 Sales/Settlements (4) — (4) Derivatives, net Transfers in (out), net 30 (6) 24 Transfers (out of) into $(24) $24 End of the fiscal year $714 $(9) $705 Valuation Methods and Assumptions In millions of U.S. dollars Fiscal Year Ended Derivative contracts include currency forward June 30,2009 contracts, currency swaps and interest rate swaps. Beginning of the fiscal year $(246) Currency swaps and interest rate swaps are either Total realized/unrealized gains or plain vanilla or structured. Currency forward (losses) in: contracts and plain vanilla currency and interest rate Net income (216) swaps are valued using the standard discounted cash Other comprehensive income 546 flow methods using market observable inputs such Issuances 46 as yield curves, foreign exchange rates, basis Sales/Settlements 194 spreads and funding spreads. For structured currency Transfers out, net (325) and interest rate swaps, which primarily consist of End of the fiscal year $ (1) callable swaps linked to interest rates, foreign exchange rates, and equity indices, valuation models and inputs similar to the ones applicable to Unrealized gains or losses included in income for structured bonds valuation are used. the fiscal years ended June 30, 2010 and June 30, 74 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 NOTE G—RETAINED EARNINGS, ALLOCATIONS AND TRANSFERS The changes in the components of Retained Earnings for each of the fiscal periods from June 30, 2007 to June 30, 2010, are summarized below: In millions of US dollars Cumulative Unallocated Restricted Special General Pension Fair Value LTIP Net Income Retained Reserve Reserve Reserve Surplus Adjustments Reserve (Loss) Earnings Total As of June 30, 2007 $293 $23,948 $1,087 $ 43 $ 1,643 — $ 817 — $27,831 a Net income allocation — 911 51 97 (843) — (216) — — Board of Governors- approved transfers b funded from Surplus — — — (140) — — 140 — — Net income for the year — — — — — 1,491 — 1,491 As of June 30, 2008 $293 $24,859 $1,138 $— $800 — $ 2,232 — $29,322 Adjustment to beginning balance: Cumulative effect of adoption of Fair Value Option – Note E — — — — (2,566) — — — (2,566) a Net income allocation — 811 117 750 (39) — (1,649) $10 — Board of Governors- approved transfers b funded from Surplus — — — (155) — — 155 — — Net income for the year — — — — — — 3,114 — 3,114 As of June 30, 2009 $293 $25,670 $1,255 $595 $(1,805) — $ 3,852 $10 $29,870 a Net income allocation — — 25 — 3,280 $36 (3,352) 11 — Board of Governors- approved transfers b funded from Surplus — — — (338) — — 338 — — Net loss for the year (1,077) (1,077) As of June 30, 2010 $293 $25,670 $1,280 $257 $1,475 $36 $ (239) $21 $28,793 a. Amounts retained as Surplus from net income allocation are approved by the Board of Governors. b. A concurrent transfer is made from Surplus to Unallocated Net Income (Loss) for all transfers reported on the Statement of Income and authorized to be funded from Surplus. IBRD makes net income allocation decisions on the On August 5, 2009, the Executive Directors basis of reported net income, adjusted to exclude the approved the allocation of $25 million from the net fair value adjustment on non-trading portfolios, net, income earned in the fiscal year ended June 30, 2009 restricted income, LTIP adjustment, and Board of to the Pension Reserve. Governors-Approved Transfers, and after On October 7, 2009, IBRD’s Board of Governors considering the allocation to the pension reserve. approved the immediate transfer of $784 million to On July 10, 2009, IBRD’s Board of Governors the International Development Association (IDA), of approved the immediate transfer of $55 million from which $501 million was from the net income earned Surplus to the Trust Fund for Gaza and West Bank. in the fiscal year ended June 30, 2009 and $283 million was from Surplus. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 75 Transfers approved during the fiscal years ended June 30, 2010, June 30, 2009 and June 30, 2008, are included in the following table. In millions of U.S. dollars Fiscal Years Ended June 30, Transfers funded from: 2010 2009 2008 Unallocated Net Income: International Development Association $501 $583 $600 Surplus: International Development Association 283 — — Trust Fund for Gaza and West Bank 55 — 55 Food Price Crisis Response Trust Fund — 115 85 Kosovo Sustainable Development Trust Fund — 40 — 338 155 140 Total $839 $738 $740 There were no amounts payable for the transfers approved by the Board of Governors at June 30, 2010 and June 30, 2009. NOTE H—TRANSACTIONS WITH AFFILIATED ORGANIZATIONS IBRD transacts with affiliated organizations by providing loans, administrative and derivative intermediation services, as well as through its pension and other postretirement benefit plans. At June 30, 2010 and June 30, 2009, IBRD had the following (payables to) receivables from its affiliated organizations. In millions of U.S. dollars 2010 a Derivative Transactions Pension and Other Administrative Postretirement Loans Services Receivable Payable Benefits Total IDA $— $357 $4,144 $(4,087) $(1,088) $(674) IFC 50 25 — — (86) (11) MIGA — 3 — — (4) (1) $50 $385 $4,144 $(4,087) $(1,178) $(686) In millions of U.S. dollars 2009 a Derivative Transactions Pension and Other Administrative Postretirement Loans Services Receivable Payable Benefits Total IDA $— $316 $5,527 $(5,902) $(1,109) $(1,168) IFC 51 22 — — (61) 12 MIGA — 3 — — (3) — $51 $341 $5,527 $(5,902) $(1,173) $(1,156) a. For details on derivative transactions relating to the swap intermediation services provided by IBRD to IDA see Note F— Derivative Instruments The (payables) receivables balances to (from) these affiliated organizations are reported in the Balance Sheet as follows: Receivables / Payables related to: Reported as: Loans Loans outstanding Receivable for Administrative Services Other Assets – Miscellaneous Receivables (payables) for Derivative Transactions Derivative Assets/Liabilities – Client operations Payable for Pension and Other Postretirement Benefits Accounts payable and miscellaneous liabilities Loans rate of 3.96%. This loan is not eligible for interest waivers. IBRD has a Local Currency Loan Facility Agreement with IFC which is capped at $300 million. At June 30, 2010, the loan balance under this facility amounted to $50 million at an interest 76 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Administrative expenses example, activity preparation, analytical and advisory activities and project-related activities, For the fiscal year ended June 30, 2010, IBRD’s including procurement of goods and services. administrative expenses are net of the share of expenses allocated to IDA of $1,150 million ($975 In some trust funds, execution is split between million—June 30, 2009, and $888 million—June 30, Recipient-executed and IBRD-executed portions. 2008). The allocation of expenses between IBRD Decisions on assignment of funding resources and IDA is based on an agreed cost sharing formula, between the two types of execution may be made on and amounts are settled quarterly. an ongoing basis; therefore the execution of a portion of these available resources may not yet be Other income assigned. For the fiscal years ended June 30, 2010, June 30, IBRD also acts as financial intermediary to provide 2009 and June 30, 2008, the amount of fee revenue specific administrative or financial services with a associated with services provided to affiliated limited fiduciary or operational role. These organizations is included in Other Income on the arrangements include, for example, administration Statement of Income, as follows: of debt service trust funds, financial intermediation In millions of U.S. dollars and other more specialized limited funds 2010 2009 2008 management roles. Funds are held and disbursed in Fees charged to IFC $68 $69 $56 Fees charged to MIGA 8 8 8 accordance with instructions from donors or, in some cases, external governance structure or body For Pension and Other Post Retirement Benefits operating on behalf of donors. related disclosures see Note J—Pension and Other During the fiscal year ended June 30, 2010, IBRD Post Retirement Benefits. recognized $55 million ($49 million—June 30, 2009 NOTE I—MANAGEMENT OF EXTERNAL and $45 million—June 30, 2008) as revenue for FUNDS AND OTHER SERVICES administration of trust funds operations. This revenue has been recorded as Other Income. Trust Funds Revenue collected by trust funds from donor IBRD, alone or jointly with one or more of its contributions but not yet earned by IBRD totaling affiliated organizations, administers on behalf of $65 million at June 30, 2010 ($61 million—June 30, donors, including members, their agencies and other 2009) is included in Other Assets (Miscellaneous) entities, funds restricted for specific uses in and in Accounts payable and miscellaneous accordance with administration agreements with liabilities, correspondingly, on the Balance Sheet. donors. Specified uses could include, for example, Investment Management Services co-financing of IBRD lending projects, debt reduction operations, technical assistance including IBRD offers treasury and investment management feasibility studies and project preparation, global services to affiliated and non-affiliated and regional programs, and research and training organizations. Under these arrangements, IBRD is programs. These funds are held in trust with IBRD responsible for managing investment account assets and/or IDA, and are held in a separate investment on behalf of these institutions, and in return receives portfolio which is not commingled with IBRD a quarterly fee based on the average value of the and/or IDA funds, neither are they included in the portfolios. assets of IBRD. In addition, IBRD offers asset management and Trust fund execution may be carried out in one of technical advisory services to central banks of two ways: Recipient-executed or IBRD-executed. member countries, under the Reserves Advisory and Management Program, for capacity building and Recipient-executed trust funds involve activities other development purposes and receives a fee for carried out by a recipient third-party “executing these services. agency”. IBRD enters into agreements with and disburses funds to those recipients, who then The fee income from all of these investment exercise spending authority to meet the objectives management activities in the amount of $20 million and comply with terms stipulated in the agreements. ($18 million —June 30, 2009) is included in Other Income on the Statement of Income. IBRD-executed trust funds involve IBRD execution of activities as described in relevant administration Other Services agreements with donors which define the terms and Donors to the Advance Market Commitment for conditions for use of the funds. Spending authority Pneumococcal Vaccines Initiative (AMC) have is exercised by IBRD, under the terms of the provided IBRD with commitments to give $1.5 administration agreements. The executing agency billion over a ten year period, with the GAVI services provided by IBRD vary and include for IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 77 Alliance (GAVI) as the named beneficiary. Some of recorded for the non-contingent and contingent these grants are payable on specified due dates and obligations arising from IBRD’s obligation to pay in are classified as unconditional while others are the event of a donor default are included in Note payable on demand when needed and are classified D—Loans and Guarantees. as conditional for accounting purposes. As of June NOTE J—PENSION AND OTHER 30, 2010, the unconditional assets comprise $258 POSTRETIREMENT BENEFITS million in cash and investments, and receivables at a net carrying value of $459 million (as of June 30, IBRD, IFC and MIGA participate in a defined 2009—$212 million and $550 million, respectively). benefit SRP, a Retired Staff Benefits Plan (RSBP) These assets along with the corresponding liabilities and a Post-Employment Benefits Plan (PEBP) that are included in IBRD’s Balance Sheet. The assets cover substantially all of their staff members. will be drawn down by GAVI in accordance with the terms of the AMC which require that the funds The SRP provides pension benefits and includes a be used to make payments for qualifying vaccines. cash balance plan. The RSBP provides certain health In addition, should a donor fail to pay, IBRD has and life insurance benefits to eligible retirees. The committed to pay the shortfall. For this commitment, PEBP provides certain pension benefits IBRD charges an annual 30 basis point premium on administered outside the SRP. outstanding grant payments not yet paid by AMC IBRD uses a June 30 measurement date for its donors. IBRD also charges an annual service fee pension and other postretirement benefit plans. based on the related administrative and financial management costs incurred to support the program. The amounts presented below reflect IBRD’s IBRD is entitled to collect fees charged from respective share of the costs, assets and liabilities of investment income earned on AMC - related the plans. investment assets, to the extent earnings have All costs, assets and liabilities associated with these accumulated. Should fees charged exceed plans are allocated between IBRD, IFC, and MIGA investment income earned, one donor has agreed to based upon their employees’ respective participation pay IBRD up to $13 million of any deficit, of which in the plans. Costs allocated to IBRD are then shared $2 million has been paid as of June 30, 2010. between IBRD and IDA based on an agreed cost Donor Receivables are reported in Other Assets sharing ratio. IDA, IFC and MIGA reimburse IBRD (Miscellaneous), with the corresponding payables for their proportionate share of any contributions reflected in Accounts payable and miscellaneous made to these plans by IBRD. Contributions to these liabilities. Fee income recognized from these plans are calculated as a percentage of salary. arrangements is included in Other Income. Amounts The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for IBRD and IDA for the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008: In millions of U.S. dollars SRP RSBP PEBP 2010 2009 2008 2010 2009 2008 2010 2009 2008 Benefit Cost Service cost $221 $ 264 $ 258 $43 $ 44 $ 38 $15 $15 $14 Interest cost 655 697 611 99 104 82 27 28 15 Expected return on plan assets (757) (948) (943) (91) (115) (112) — — — Amortization of prior 7 7 7 (2) (2) (2) * * * service cost (credit) Amortization of unrecognized 68 — — 29 21 4 11 20 3 net loss Net periodic pension cost $194 $ 20 $ (67) $78 $52 $ 10 $53 $64 $32 (income) of which: IBRD’s share $ 94 $ 10 $ (32) $38 $ 25 $ 5 $26 $31 $15 IDA’s share $100 $ 10 $ (35) $40 $ 27 $ 5 $27 $33 $17 * Indicates amount less than $0.5 million IDA’s share of the net periodic pension cost (income) is included as a payable to/receivable from IDA in Accounts payable and miscellaneous liabilities on the Balance Sheet (see Note H—Transactions with Affiliated Organizations). The expenses for the SRP, RSBP and PEBP are included in Administrative Expenses. 78 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The following table summarizes the projected benefit obligations, fair value of plan assets, and funded status associated with the SRP, RSBP, and PEBP for IBRD and IDA for the fiscal years ended June 30, 2010, and June 30, 2009. Since the assets for the PEBP are not held in an irrevocable trust separate from the assets of IBRD, they do not qualify for off-balance sheet accounting and are therefore included in IBRD's investment portfolio. The assets of the PEBP are invested in fixed income instruments. In millions of U.S. dollars SRP RSBP PEBP 2010 2009 2010 2009 2010 2009 Projected Benefit Obligations Beginning of year $ 9,608 $10,561 $1,433 $1,558 $395 $ 436 Service cost 221 264 43 44 15 15 Interest cost 655 697 99 104 27 28 Participant contributions 76 74 13 13 1 * Retiree drug subsidy received n.a. n.a. 1 1 n.a. n.a. Plan amendment — 5 — — — 1 Benefits paid (457) (445) (49) (54) (18) (19) Actuarial loss (gain) 1,146 (1,549) 201 (233) 30 (66) End of year 11,249 9,607 1,741 1,433 450 395 Fair value of plan assets Beginning of year 9,932 12,414 1,166 1,396 Participant contributions 76 74 13 13 Actual return on assets 1,254 (2,162) 140 (244) Employer contributions 145 51 56 55 Benefits paid (457) (445) (49) (54) End of year 10,950 9,932 1,326 1,166 a Funded status $ (299) $ 325 $ (415) $ (267) $(450) $(395) Accumulated Benefit Obligations $ 9,502 $ 8,003 $1,741 $1,433 $ 415 $ 356 * Indicates amount less than $0.5 million a. Positive funded status is reflected in Assets under retirement benefits plans; negative funded status is included in Liabilities under retirement benefits plans, on the Balance Sheet Pension and other postretirement benefits attributable to IDA of $1,088 million ($1,109 million—June 30, 2009) is included in Accounts payable and miscellaneous liabilities on the Balance Sheet (see Note H—Transactions with Affiliated Organizations). The following tables present the amounts included in Accumulated Other Comprehensive Income relating to Pension and Other Postretirement Benefits. Amounts included in Accumulated Other Comprehensive Loss at June 30, 2010: In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $2,445 $617 $157 $3,219 Prior service cost (credit) 35 (*) 2 37 Net amount recognized in Accumulated Other Comprehensive Loss $2,480 $617 $159 $3,256 * Indicates amount less than $0.5 million Amounts included in Accumulated Other Comprehensive Loss at June 30, 2009: In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $1,863 $495 $137 $2,495 Prior service cost (credit) 42 (2) 3 43 Net amount recognized in Accumulated Other Comprehensive Loss $1,905 $493 $140 $2,538 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 79 The estimated amounts that will be amortized from Accumulated Other Comprehensive Income (Loss) into net periodic benefit cost in the fiscal year ending June 30, 2011 are as follows: In millions of U.S. dollars SRP RSBP PEBP Total Net actuarial loss $117 $37 $12 $166 Prior service cost (credit) 7 (*) * 7 Amount estimated to be amortized into net periodic benefit cost $124 $37 $12 $173 * Indicates amount less than $0.5 million Assumptions bond yield, and risk premium/spread (as The actuarial assumptions used are based on appropriate). Other asset class returns are derived financial market interest rates, past experience, and from their relationship to equity and bond markets. management’s best estimate of future benefit The expected long-term rate of return for the RSBP changes and economic conditions. Changes in these is computed using procedures similar to those used assumptions will impact future benefit costs and for the SRP. The discount rate used in determining obligations. the benefit obligation is selected by reference to the year-end AAA and AA corporate bonds. The expected long-term rate of return for the SRP assets is a weighted average of the expected long- Actuarial gains and losses occur when actual results term (10 years or more) returns for the various asset are different from expected results. Amortization of classes, weighted by the portfolio allocation. Asset these unrecognized gains and losses will be included class returns are developed using a forward-looking in income if, at the beginning of the fiscal year, they building block approach and are not strictly based on exceed 10 percent of the greater of the projected historical returns. Equity returns are generally benefit obligation or the market-related value of plan developed as the sum of expected inflation, expected assets. If required, the unrecognized gains and losses real earnings growth and expected long-term are amortized over the expected average remaining dividend yield. Bond returns are generally service lives of the employee group. developed as the sum of expected inflation, real The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs for the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008: Weighted average assumptions used to determine projected benefit obligation In percent SRP RSBP PEBP 2010 2009 2008 2010 2009 2008 2010 2009 2008 Discount rate 5.75 7.00 6.75 6.00 7.00 6.75 5.75 7.00 6.75 Rate of compensation increase 6.20 6.70 7.00 6.20 6.70 7.00 Health care growth rates - at end of fiscal year 7.00 7.00 7.25 Ultimate health care growth rate 4.25 4.75 5.50 Year in which ultimate rate is reached 2022 2017 2016 Weighted average assumptions used to determine net periodic pension cost In percent SRP RSBP PEBP 2010 2009 2008 2010 2009 2008 2010 2009 2008 Discount rate 7.00 6.75 6.25 7.00 6.75 6.25 7.00 6.75 6.25 Expected return on plan assets 7.75 7.75 7.75 7.75 8.25 8.25 Rate of compensation increase 6.70 7.00 6.50 6.70 7.00 6.50 Health care growth rates - at end of fiscal year 7.00 7.25 6.80 Ultimate health care growth rate 4.75 5.50 4.75 Year in which ultimate rate is reached 2017 2016 2012 80 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The medical cost trend rate can significantly affect the reported postretirement benefit income or costs and benefit obligations for the RSBP. The following table shows the effects of a one-percentage-point change in the assumed healthcare cost trend rate: In millions of U.S. dollars One percentage point One percentage point increase decrease Effect on total service and interest cost $ 33 $ (25) Effect on postretirement benefit obligation $338 $(266) Investment Strategy relatively long investment horizons of the SRP and The investment policies establish the framework for RSBP of approximately 10 years, and the relatively investment of the plan assets based on long-term modest liquidity needs over the short-term to pay investment objectives and the trade-offs inherent in benefits and meet other cash requirements, the focus seeking higher investment returns while also of the investment strategy is on generating managing risk. A key component of the investment sustainable long-term investment returns through policy is to establish a strategic asset allocation various assets classes and strategies including representing the policy portfolio (neutral mix of equity, quasi-equity, private equity and real estate. assets) around which the plans are invested. The The strategic asset allocation is derived using a mix strategic asset allocations for the plans are reviewed of quantitative analysis that incorporates expected in detail and reset about every three to five years, returns and volatilities by asset class as well as with an annual review of key assumptions. correlations across the asset classes, and qualitative The key long-term objective is to target and secure considerations such as desired liquidity needs of the asset performance that is reasonable in relation to plans. The strategic asset allocation is comprised of the growth rate of the underlying liabilities and the a diversified portfolio drawn from among fixed- assumed sponsor contribution rates. This is income, equity, real return and absolute return particularly so in the case of the SRP, which has strategies. liabilities that can be projected with a reasonable level of confidence based on the actuarial The target asset allocations for the SRP and RSBP assumptions. A portion of the SRP portfolio is were approved in October 2007 and February 2009, dedicated to partially hedging the real interest rate respectively. risk inherent in the plan liabilities using US Treasury Inflation-Protected Securities (TIPS). Given the The following table presents the actual and target asset allocation at June 30, 2010 and June 30, 2009 by asset category for the SRP and RSRP. In percent SRP RSBP Target % of Plan Assets Target % of Plan Assets Allocation Allocation Asset Class 2010 (%) 2010 2009 2010 (%) 2010 2009 Fixed Income 26.0 40.6 37.0 31.5 35.7 34.0 Listed Equity 14.0 15.5 16.0 24.0 22.6 23.0 Private Equity 15.0 19.8 17.3 22.0 25.6 23.0 Hedge Funds & Active Overlay 25.0 13.3 18.4 16.5 10.4 14.0 Real Estate 12.5 7.4 7.5 6.0 5.7 6.0 Timber 2.5 0.6 0.4 n.a n.a n.a Infrastructure 2.5 1.0 0.7 n.a n.a n.a Commodities 2.5 1.8 2.7 n.a n.a n.a Total 100.0 100.0 100.0 100.0 100.0 100.0 Concentrations of Risk in Plan Assets Risk management practices The assets of the SRP and RSBP are diversified Risk management is an integral part of managing the across a variety of asset classes. Investment in these assets of the plans. Liability driven management asset classes are further diversified across funds, and asset diversification are central to the overall managers, strategies, geographies and sectors to investment strategy and risk management approach limit the impact of any individual investment. for the SRP. The surplus volatility risk (defined as Despite such level of diversification, equity market annualized deviation of asset returns relative to that risk remains the primary source of the plan overall of liabilities) is considered the primary indicator of return volatility. the SRP overall investment risk in the asset IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 81 allocation process. The investment risk is regularly reasonable price. The level of illiquid asset classes monitored at the absolute level, as well as at the appropriate in the portfolio also takes into account relative levels with respect to policy benchmarks projected liquidity requirements. and in the case of the SRP, to the liabilities. Credit risk is initiated through the application of the Risk management for different asset classes is eligibility criteria and concentration limits for tailored to their specific characteristics and is an transactions with individual issues. Counterparty integral part of external manager due diligence. In risk exposure on over-the-counter derivatives is addition, monitoring of performance (both manager mitigated through the use of master netting and asset class) against benchmarks and compliance arrangements and collateral. The Plan manages its with investment guidelines are carried out as part of liquidity risk primarily by investing a portion of the the risk monitoring process. asset base in securities that are either very liquid or can be liquidated at a fairly short notice and at a Fair Value Measurements and Disclosures All plan assets are measured at fair value on recurring basis. The following table presents the fair value hierarchy of major categories of plans assets as of June 30, 2010. In millions of U.S. dollars Fair Value Measurements on a Recurring Basis SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt Securities Time deposits $ — $ 172 $ — $ 172 $ — $ 18 $ — $ 18 Securities purchased under resale agreements 227 — — 227 34 — — 34 Government and agency securities 2,725 209 — 2,934 120 183 — 303 Corporate and convertible bonds — 458 4 462 — 100 * 100 Asset backed securities — 119 50 169 — 6 2 8 Mortgage backed securities — 682 23 705 — 17 1 18 Total Debt Securities 2,952 1,640 77 4,669 154 324 3 481 Equity securities Stocks 1,146 — — 1,146 149 — — 149 Mutual funds 49 — — 49 6 — — 6 Real estate investment trusts (REITS) 175 — — 175 1 — — 1 Total Equity Securities 1,370 — — 1,370 156 — — 156 Commingled funds — 554 — 554 — 139 — 139 Private equity — — 2,177 2,177 — — 340 340 Real estate (including infrastructure and timber) — — 729 729 — — 74 74 Hedge funds — 1,144 416 1,560 — 94 44 138 Derivative assets / liabilities 4 (4) — * * 7 — 7 Short sales — (9) — (9) — — — — a Other assets / liabilities , net — — — (100) — — — (9) Total Assets $4,326 $3,325 $3,399 $10,950 $310 $564 $461 $1,326 a. Includes receivables and payables carried at amounts that approximate fair value. * Indicates amount less than $0.5 million Valuation methods and assumptions major category of plan assets. It is important to note that the investment amounts in the asset categories In December 2009, FASB issued ASU 2009-12, shown in the table above may be different from the Investments in Certain Entities that Calculate Net asset category allocation shown in the Investment Asset Value per Share (or its Equivalent). The ASU Strategy section of the note. Asset classes in the reduces complexity and improves consistency and table above are grouped by the characteristics of the comparability in the application of Fair Value investments held. The asset class break-down in the Measurement and Disclosure guidance. The ASU is Investment Strategy section is based on applicable for investors who report investments that management’s view of the economic exposures after utilize net asset value (NAV) for fair value and is considering the impact of derivatives and certain therefore applicable for IBRD’s pension plans. trading strategies. The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each 82 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 Debt securities discounted future cash flows and trading multiples of comparable public securities. Debt securities include time deposits, U.S. treasuries and agencies, debt obligations of foreign Real estate governments and debt obligations in corporations of Real estate includes several funds which invest in domestic and foreign issuers. Fixed income also core real estate as well as non-core type of real includes investments in asset backed securities such estate investments such as debt, value add, and as collateralized mortgage obligations and mortgage opportunistic equity investments. Real estate backed securities. These securities are valued by investments do not have a readily determinable fair independent pricing vendors at quoted market prices market value and are reported at NAV provided by for the same or similar securities, where available. the fund managers, and reviewed by management, If quoted market prices are not available, fair values taking into consideration the latest audited financial are based on discounted cash flow models using statements of the funds. The valuations of market-based parameters such as yield curves, underlying investments are based on income and/or interest rates, volatilities, foreign exchange rates and cost approaches or comparable sales approach, and credit curves. Some debt securities are valued using taking into account discount and capitalization rates, techniques which require significant unobservable financial conditions, local market conditions among inputs. The selection of these inputs may involve others. some judgment. Plan management believes its estimates of fair value are reasonable given its Hedge fund investments processes for obtaining securities prices from multiple independent third-party vendors, ensuring Hedge fund investments include those seeking to that valuation models are reviewed and validated, maximize absolute returns using a broad range of and applying its approach consistently from period strategies to enhance returns and provide additional to period. Unless quoted prices are available, money diversification. Hedge Funds include investments in market instruments and securities purchased under equity, event driven, fixed income, multi strategy resale agreements are reported at face value which and macro relative value strategies. These approximates fair value. investments do not have a readily determinable fair market value and are reported at NAVs provided by Equity securities external managers or fund administrators (based on the valuations of underlying investments) on a Equity securities (including REITS) are invested in monthly basis, and reviewed by management, taking companies in various industries and countries. into consideration the latest audited financial Investments in public equity listed on securities statements of the funds. exchanges are valued at the last reported sale price on the last business day of the fiscal year. Investments in hedge funds and commingled funds can typically be redeemed at NAV within the near Commingled funds term while investments in private equity and real Commingled funds are typically common or estate are inherently long term and illiquid in nature collective trusts reported at NAV as provided by the with a quarter lag in reporting by the fund managers. investment manager or sponsor of the fund based on For the June 30, 2010 reporting of those asset valuation of underlying investments, and reviewed classes with a reporting lag, management estimates by management. are based on the latest available information taking into account underlying market fundamentals and Private equity significant events through the balance sheet date. Private equity includes investments primarily in Investment in derivatives leveraged buyouts, distressed investments and venture capital funds across North America, Europe Investment in derivatives such as equity or bond and Asia in a variety of sectors. A large number of futures, swaps, options and currency forwards are these funds are in the investment phase of their life used to achieve a variety of objectives that include cycle. Private Equity investments do not have a hedging interest rates and currency risks, gaining readily determinable fair market value and are desired market exposure of a security, an index or reported at NAV provided by the fund managers, currency exposure and rebalancing the portfolio. and reviewed by management, taking into Over-the-counter derivatives are reported using consideration the latest audited financial statements valuations based on discounted cash flow methods of the funds. The underlying investments are valued incorporating market observable inputs. using inputs such as cost, operating results, IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 83 The following tables present a reconciliation of Level 3 assets held during the year ended June 30, 2010. A large number of hedge fund investments that are redeemable within 90 days of the period end were transferred out of Level 3 into Level 2 following additional guidance provided by the accounting standard setters. In millions of US dollars SRP: Fair Value Measurements Using Significant Unobservable Inputs Corporate and Asset- Mortgage- Convertible backed backed Private Hedge Debt Securities Securities Equity Real Estate Funds Total Beginning of the fiscal year $5 $32 $ 167 $1,715 $605 $ 1,704 $ 4,228 Actual return on plan assets: Relating to assets still held at the reporting date 1 6 19 268 (17) 315 592 Relating to assets sold during the period * 4 1 124 12 44 185 Purchases, issuance and settlements, net (1) 12 (16) 70 129 (604) (410) Transfers in (out) (1) (4) (148) — — (1,043) (1,196) Balance at end of fiscal year $4 $50 $ 23 $2,177 $729 $ 416 $ 3,399 * Indicates amount less than $0.5 million In millions of US dollars RSBP: Fair Value Measurements Using Significant Unobservable Inputs Corporate and Asset- Mortgage- Convertible backed backed Private Hedge Debt Securities Securities Equity Real Estate Funds Total Beginning of the fiscal year $* $4 $9 $269 $61 $159 $502 Actual return on plan assets: Relating to assets still held at the reporting date — (*) 1 42 (4) 11 50 Relating to assets sold during the period — 1 — 15 1 4 21 Purchases, issuance and settlements, net — (3) (1) 14 16 (56) (30) Transfers in (out) * * (8) — — (74) (82) Balance at end of fiscal year $* $2 $1 $340 $74 $44 $461 * Indicates amount less than $0.5 million Estimated Future Benefits Payments The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation at June 30, 2010: In millions of U.S. dollars SRP RSBP PEBP Before Medicare Part D Subsidy Medicare Part D Subsidy July 1, 2010 - June 30, 2011 $536 $49 $1 $28 July 1, 2011 - June 30, 2012 566 54 1 30 July 1, 2012 - June 30, 2013 592 60 2 31 July 1, 2013 - June 30, 2014 617 67 2 33 July 1, 2014 - June 30, 2015 643 73 2 35 July 1, 2015 - June 30, 2020 3,523 476 13 205 Expected Contributions NOTE K—COMPREHENSIVE INCOME IBRD’s contribution to the SRP and RSBP varies Comprehensive income consists of net income and from year to year, as determined by the Pension other gains and losses affecting equity that, under Finance Committee, which bases its judgment on the U.S. GAAP, are excluded from net income. results of annual actuarial valuations of the assets Comprehensive income (loss) comprises the and liabilities of the SRP and RSBP. The best cumulative effects of a change in accounting estimate of the amount of contributions expected to principle related to the implementation of FASB’s be paid to the SRP and RSBP for IBRD and IDA derivatives and hedging guidance, currency during the fiscal year beginning July 1, 2010 is $154 translation adjustments, pension-related items, and million and $68 million, respectively. net income. These items are presented in the Statement of Comprehensive Income. 84 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 The following tables present the changes in Accumulated Other Comprehensive Income for the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008: In millions of U.S. dollars 2010 Cumulative Unrecognized Total Effect of Unrecognized Prior Service Accumulated Cumulative Change in Net Actuarial (Costs) Other Translation Accounting Losses on Credits on Comprehensive a a Adjustment Principle Reclassification Benefit Plans Benefit Plans Loss Balance, beginning of the fiscal year $ 860 $500 $(505) $(2,495) $(43) $(1,683) Changes from period activity (637) — (5) (724) 6 (1,360) Balance, end of the fiscal year $223 $500 $(510) $(3,219) $(37) $(3,043) a. The Cumulative effect of change in accounting principle and subsequent reclassification to net income relates to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000. In millions of U.S. dollars 2009 Cumulative Total Effect of Unrecognized Unrecognized Accumulated Cumulative Change in Net Actuarial Prior Service Other Translation Accounting Losses on Costs on Comprehensive a a Adjustment Principle Reclassification Benefit Plans Benefit Plans Income (Loss) Balance, beginning of the fiscal year $1,226 $500 $(516) $ (914) $(43) $ 253 Changes from period activity (366) — 11 (1,581) (*) (1,936) Balance, end of the fiscal year $ 860 $500 $(505) $(2,495) $(43) $(1,683) a. The Cumulative effect of change in accounting principle and subsequent reclassification to net income relates to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000. * Indicates amount less than $0.5 million In millions of U.S. dollars 2008 Cumulative Unrecognized Unrecognized Total Effect of Net Actuarial Prior Service Accumulated Cumulative Change in Gains (Costs) Credit Other Translation Accounting (Losses) on on Benefit Comprehensive a a Adjustment Principle Reclassification Benefit Plans Plans Income (Loss) Balance, beginning of the fiscal year $ 434 $500 $(496) $ 107 $(44) $ 501 Changes from period activity 792 — (20) (1,021) 1 (248) Balance, end of the fiscal year $1,226 $500 $(516) $ (914) $(43) $ 253 a. The Cumulative effect of change in accounting principle and subsequent reclassification to net income relates to the adoption of FASB’s guidance on derivatives and hedging on July 1, 2000. IBRD FINANCIAL STATEMENTS: JUNE 30, 2010 85 NOTE L—OTHER FAIR VALUE DISCLOSURES The table below presents IBRD’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts as of June 30, 2010 and June 30, 2009. In millions of U.S. dollars 2010 2009 Carrying Value Fair Value Carrying Value Fair Value Due from Banks $ 1,803 $ 1,803 $ 3,044 $ 3,044 Investments 36,301 36,301 41,045 41,045 Net Loans Outstanding 118,104 117,936 103,657 101,918 Derivative Assets Investments 13,249 13,249 18,467 18,467 Client operations 17,633 17,633 19,559 19,559 Borrowings 87,457 87,457 82,793 82,793 Other Asset/Liability 3,287 3,287 2,246 2,246 a a Borrowings 128,577 128,563 110,040 110,022 Derivative Liabilities Investments 13,360 13,360 18,923 18,923 Client operations 17,623 17,623 19,551 19,551 Borrowings 78,655 78,655 76,321 76,321 Other Asset/Liability 780 780 847 847 a. Includes $14 million relating to transition adjustment on adoption of a new accounting standard on derivatives and hedging on July 1, 2000 ($18 million — June 30, 2009). Valuation Methods and Assumptions Borrowings – Notes A and E For valuation methods and assumptions of the Derivative assets and liabilities – Notes A, C, E and F following items see: Due from Banks Investments – Notes A and C The carrying amount of unrestricted and restricted Loans – Notes A and D currencies is considered a reasonable estimate of the fair value of these positions. Fair Value Adjustment on Non-Trading Portfolios, Net The following table reflects the components of the fair value adjustment on non-trading portfolios, net for the fiscal years ended June 30, 2010, June 30, 2009, and June 30, 2008. In millions of U.S. dollars 2010 2009 2008 Fair value adjustments— (losses) gains: Borrowings—Note E $(3,024) $(1,068) $ 1,042 Non-trading derivatives—Note F 1,971 4,362 (1,082) Loan—Note D 15 (14) * Total $(1,038) $ 3,280 $ (40) * Indicates amount less than $0.5 million 86 IBRD FINANCIAL STATEMENTS: JUNE 30, 2010