CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES LOAN NUMBER 8024-AZ Special-Purpose Financial Statements and Independent Auditors' Report For the Year Ended December 31, 2015 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1-2 SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015: Special-purpose balance sheet 3 Statement of summary of sources and uses of funds 4-5 Statement of uses of funds by project components 6-7 Statement of designated account 8 Statement of expenditure and summary sheet withdrawal schedule 9 Notes to the special-purpose financial statements 10-15 BAKER TILLY AZERBAIJAN Audit, Tax and Consulting Demirchi Tower, 16th floor Khojaly Avenue, 37 AZ1025, Baku Azerbaijan T:+ 994 (12) 404 7 666 F:+ 994 (12) 404 7 667 office@bakertilly.az www.bakertilly.az INDEPENDENT AUDITORS' REPORT To the Management of the Project Implementation Unit of the Capital Markets Modernization Project implemented by the State Committee for Securities of the Republic of Azerbaijan: We have audited the accompanying Special-Purpose Financial Statements of the Capital Markets Modernization Project implemented by the State Comnittee for Securities of the Republic of Azerbaijan (the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2015 and the Statement of Summary of Sources and Uses of Funds, the Statement of Uses of Funds by Project Components, the Statement of Designated Account and the Statement of Expenditure and Summary Sheet Withdrawal Schedule ("SOE and SSWS") for the year then ended, and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "Special-Purpose Financial Statements") financed under the International Bank for Reconstruction and Development (the "IBRD") through loan agreement number 8024-AZ (the "Loan Agreement") and the Government of the Swiss Confederation ("SECO") through Grant Agreement. Management's Responsibility for the Special-Purpose Financial Statements Management is responsible for the preparation and fair presentation of these Special-Purpose Financial Statements in accordance with International Public Sector Accounting Standard ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants ("IFAC-PSC") and relevant provisions of the financing agreements as described in Note 2 to the Special-Purpose Financial Statements and for such internal control as management determines is necessary to enable the preparation of the Special-Purpose Financial Statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these Special-Purpose Financial Statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Special-Purpose Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in these Special-Purpose Financial Statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the Special-Purpose Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the Special-Purpose Financial Statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control, An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Special-Purpose Financial Statements. An independent member of Baker Tilly International BAKERTILLY AZERBAIJAN We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the Special-Purpose Financial Statements present fairly, in all material respects, the Special-Purpose Balance Sheet of the Project as at December 31, 2015, the cash receipts and disbursements on behalf of the Project and transactions passed through the Project's Designated Account for the year then ended in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant provisions of the loan agreement as described in Note 2 of the Special-Purpose Financial Statements. In addition, with respect to the SOE and SSWS, all payments reported are eligible for financing under the respective loan agreement and adequate documentation have been maintained to support the claims for withdrawal. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 1 to the accompanying Special-Purpose Financial Statements. The original completion date of the Project was December 31, 2015. As a result of negotiations between the Ministry of Finance of the Republic of Azerbaijan and the IBRD the completion date of the Project has been prolonged to July 1, 2016. Without qualifying our opinion, we also draw attention to Note 9 to the Special-Purpose Financial Statements. According to the decree of the President of the Republic of Azerbaijan on February 3, 2016 upon the establishment of Financial Markets Monitoring Board public legal entity, the State Committee for Securities ceases its operations and the functions of the State Committee for Securities are transferred to the new established public legal entity. Restriction on Distribution These Special-Purpose Financial Statements and Auditors' Report thereon are intended solely for the information and use of the Project Implementation Unit, the Government of the Republic of Azerbaijan, the IBRD and SECO, and are not intended to be and should not be used by anyone other than these specified parties. April 5, 2016 Baku, the Republic of Azerbaijan CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES SPECIAL-PURPOSE BALANCE SHEET AS AT DECEMBER 31, 2015 (Amounts expressed in the United States Dollars unless otherwise indicated) Notes December 31, December 31, 2015 2014 ASSETS AND CUMULATIVE USES OF FUNDS Cash at bank 3 176,626 255,698 Cumulative uses of funds I 1,949,018 7,044,158 Accumulated exchange rate differences 665 103 TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 12,126,309 7,299,959 SOURCES OF FUNDS Cumulative IBRD Funds 8,961,453 5,133,101 Cumulative SECO Funds 1,600,000 1,280,901 Cumulative Government Funds 1,533,585 854,686 Cumulative Other Receipts 1,271 1,271 Front-end-Fee 30,000 30,000 TOTAL SOURCES OF FUNDS 12,126,309 7,299,959 Approved and signeti-n belhalf of the Project Implementation Unit: Bakhtiyar A&izo# Azulla Huseyikov PIU Direct4_ Head of Financial Division April 5, 2016 April 5, 2016 Baku, the Republcbf0A7prbaijan Baku, the Republic of Azerbaijan The notes on pages 10- 15 form an integral part of these Special-Purpose Financial Statements. 1 -3 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31,2015 (Amounts expressed in the United States Dollars unless otherwise indicated) December 31, December 31, Cumulative 2015 2014 to date December 31, OPENING BALANCE 2015 IBRD Designated Account 255,559 235,195 Project Account 139 14 TOTAL OPENING BALANCE 255,698 235,209 ADD: FUNDS RECEIVED IBRD Loan Number 8024-AZ Designated Account advances - - 450,000 SOE and SSWS replenishment 328,784 201,845 789,952 Direct payments 3,499,568 963,825 7,721,501 Front-end fee - - 30,000 Subtotal IBRD Loan funds 3,828,352 1,165,670 8,991,453 SECO Grant Number TF011975 Direct payments 319,099 1,066,718 1,600,000 Subtotal SECO Grant funds 319,099 1,066,718 1,600,000 Government of Azerbaijan Advance to Project Account 678,899 196,841 1,533,445 Other Receipts - 140 140 Subtotal Government of Azerbaijan funds 678,899 196,981 1,533,585 Other Receipts - 1,271 1,271 Subtotal Other Receipts - 1,271 1,271 TOTAL FUNDS RECEIVED 4,826,350 2,430,640 12,126,309 LESS: EXPENDITURE IBRD Loan Number 8024-AZ 1. Goods 2,065,331 - 2,065,331 2. Consultant's services including audit and training 1,833,063 1,105,289 6,634,559 3. Incremental operating costs 8,918 41,288 86,235 Subtotal IBRD Loan expenditure 3,907,312 1,146,577 8,786,125 Front-end fee - - 30,000 SECO Grant Number TF011975 2. Consultant's services including audit and training 319,099 1,066,718 1,600,000 Subtotal SECO Grant expenditure 319,099 1,066,718 1,600,000 Government of Azerbaijan VAT expenses 677,926 196,831 1,532,352 Other expenses 523 - 541 Subtotal Government of Azerbaijan expenditure 678,449 196,831 1,532,893 TOTAL EXPENDITURE 4,904,860 2,410,126 11,949,018 FOREIGN EXCHANGE LOSS Project Account 562 25 665 TOTAL FOREIGN EXCHANGE LOSS 562 25 665 4 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) December 31, December 31, 2015 2014 CLOSING BALANCE IBRD Designated Account 176,599 255,559 Project Account 27 139 TOTAL CLOSING BALANCE 176,626 255,698 Approved and signed on behalf of the Project Implementation Unit: Bakhtiyar Azizov.: Azulla Hdseynov PIU Director Head of Financial Division April 5, 2016 April 5, 2016 Baku, the Republi f A a Baku, the Republic of Azerbaijan The notes on pages 10-15 fo4n an integral part of these Special-Purpose Financial Statements. 5 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Amounts expressed in United States Dollars unless otherwise indicated) December 31, December 31, Cumulative to 2015 2014 date December 31, 2015 Project Components Component A: Streamlining and Automating Market Infrastructure 1.1 Establish Market Participant Advisory Groups - 71,394 267,389 1.2 Establish a Single Central Securities Depository 69,597 142,752 532,629 1.3 Expand access to and functionality of the Depository 351,586 278,401 789,133 1.4 Increase automation of the Market 69,597 - 384,794 1.5 Establish an appropriate Market guarantee mechanism 140,993 142,752 532,631 1.6 Reduce off-Market transactions - 142,752 445,349 1.7 Provision for Clearing and Settlement systems 2,065,331 - 2,065,331 Total Component A 2,697,104 778,051 5,017,256 Component B: Updating and Strengthening the Legal and Regulatory Framework 2.1 Support adaptation of a New Law on Securities - - 178,312 2.2 Drafting implementing Regulations - 71,394 267,311 2.3 Evaluate Banks' participation in the Securities Market 142,788 71,394 267,231 2.4 Promote revised, supporting Tax Policies - 285,578 356,309 2.5 Allow Pooled Investments by Insurance Companies - 71,394 89,077 2.6 Minimum Capital Adequacy and risk assessment methods for Market - 71,394 267,232 Total Component B 142,788 571,154 1,425,472 Component C: Stimulating Supply 3.1 Create appropriate environment for raising capital/ BSE' listing - 71,394 178,154 3.2 Develop the Government securities market 142,790 - 195,839 3.3 Encourage development of the Corporate Debt Market 142,788 - 178,154 3.4 Conduct corporate education 71,395 142,789 267,233 3.5 Develop other products 142,793 209,985 458,875 3.6 Enhance and promote funding of the State companies and Projects 213,234 - 266,283 3.7 Enhance support to private sector and SME2 - 71,394 89,077 Total Component C 713,000 495,562 1,633,615 6 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in United States Dollars unless otherwise indicated) December 31, December 31, Cumulative to 2015 2014 date December 31, Component D: Capacity Building 2015 4.1 Strengthen SCS's3 Knowledge Management 142,788 64,255 527,402 4.2 Strengthen SCS's3 internal systems and operating 71,399 71,357 178,122 4.3 Strengthen public information system 214,178 - 373,986 4.4 Promote the Azerbaijani Market to international investors - 21,318 109,924 4.5 Improve public awareness of the Capital Market 69,597 64,255 275,977 4.6 Create a Capital Market Training Centre 142,786 71,357 623,501 Total Component D 640,748 292,542 2,088,912 Component E: Project management PIU4 staff costs 9,156 23,141 85,393 Conversion charges 1,845 829 5,106 Bank charges 2,390 1,073 6,292 PIU4 support costs 3,608 25,073 37,986 FMS' development costs - - 9,647 Translation fees 1,949 1,098 7,461 Training costs - 11,208 25,158 Audit fees 14,346 13,564 44,368 Total Component E 33,294 75,986 221,411 Front-end fee - - 30,000 VAT (Government of Azerbaijan) 677,926 196,831 1,532,352 Total Uses of Funds by Project Components 4,904,860 2,410,126 11,949,018 1. BSE - Baku Stock Exchange 2. SME - Small and Medium Enterprises 3. SCS - State Committee for Securities 4. PIU - Project Implementation Unit 5. FMS - Financial Management System Approved and signed on behalf of the Project Implementation Unit: Bakhtiyar Azov Azulla Huseynov PI Directolf Head of Financial division April 5, 2016 April 5, 2016 Baku, the Republic, o Aerbiw Baku, the Republic of Azerbaijan The notes on pages 10-15 form an integral part of these Special-Purpose Financial Statements. 7 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES STATEMENT OF DESIGNATED ACCOUNT AS AT DECEMBER 31,2015 (Amounts expressed in United States Dollars unless otherwise indicated) IBRD Loan Number 8024-AZ Account held at: International Bank of Azerbaijan OJSC Account no: 33317018401841605204USD Opening Designated Account balance as at January 1, 2015 255,559 Add: IBRD advances during the year ended December 31, 2015 328,784 Other Receipts Total outstanding amount advanced to Designated Account 584,343 Less: Closing Designated Account balance as at December 31, 2015 carried forward to the next period (176,599) Amount of eligible expenditures paid during the year (407,744) Total advanced amount during 2015 584,343) Discrepancy Opening Designated Account balance as at January 1, 2014 235,195 Add: IBRD advances during the year ended December 31, 2014 201,845 Other Receipts 1,271 Total outstanding amount advanced to Designated Account 438,311 Less: Closing Designated Account balance as at December 31, 2014 carried forward to the next period (255,559) Amount of eligible expenditures paid during the year (182,752) Total advanced amount during 2014 (438,311) Discrepancy Approved and siwn oIm*alf of the Project Implementation Unit: Bakbtiyq4z Azwovt Azulla Huseynov PIU Director Head of Financial Division April 5,2016Apri Baku th Reu6Icof*k_zrbajanBaku, the Republic of Azerbaijan The notes on pages 10- 15 form an integral part of these Special-Purpose Financial Statements. 8 CAPITAL MARKETS MODERNIZATION PROJECT OF THE STATE COMMITTEE FOR SECURITIES STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31,2015 (Amounts expressed in the United States Dollars unless otherwise indicated) IBRD Loan Number 8024-AZ AND SECO GRANT NUMBER TF011975 Advance Replenishment Direct Payments Total Total payment account for Consultants' application application services including amounts amounts audit and training submitted received CMMP/2012/01 150,000 - - 150,000 150,000 CMMP/2012/02 300,000 - - 300,000 300,000 CMMP/2012/03 - - 33,942 - CMMP/2012/04 - - 1,511,883 1,511,883 1,511,883 Total applications reimbursed during the period since inception date to December 31, 2012 450,000 1,511,883 1,995,825 1,961,883 CMMP/2013/05 - - 415,768 415,768 415,768 CMMP/2013/06 - 259,323 - 259,323 259,323 CMMP/2013/07 - - 771,060 771,060 771,060 CMMP/2013/08 - - 559,397 559,397 559,397 SCS-01 - - 214,183 214,183 214,183 Total applications reimbursed during the year ended December 31, 2013 - 259,323 1,960,408 2,219,731 2,219,731 CMMP/2014/09 - 84,606 - 109,604 84,606 CMMP/2014/10 - - 192,765 192,765 192,765 CMMP/2014/11 - 117,239 - 117,239 117,239 CMMP/2014/12 - - 385,530 385,530 385,530 CMMP/2014/13 - - 385,530 385,530 385,530 SCS-02 - - 356,972 356,972 356,972 SCS-03 - - 424,167 424,167 424,167 SCS-04 - - 285,579 285,579 285,579 Total applications reimbursed during the year ended December 31, 2014 - 201,845 2,030,543 2,257,386 2,232,388 CMMP/2015/23 - - 584,706 584,706 584,706 CMMP/2015/22 - - 321,275 321,275 321,275 CMMP/2015/21 - 193,039 - 193,039 193,039 CMMP/2015/20 - - 321,275 321,275 321,275 CMMP/2015/19 - 611,550 611,550 611,550 CMMP/2015/18 - - 239,850 239,850 239,850 CMMP/2015/17 - - 514,041 514,041 514,041 CMMP/2015/16 - - 423,000 423,000 423,000 CMMP/2015/15 - - 483,871 483,871 483,871 CMMP/2015/14 - 135,745 - 135,745 135,745 SCS-05 - - 319,099 319,099 319,099 Total applications reimbursed during the year ended December 31, 2015 - 328,784 3,818,667 4,147,451 4,147,451 TOTAL APPLICATIONS REIMBURSED AS AT DECEMBER 31, 2015 450,000 789,952 9,321,501 10,620,393 10,561,453 Approved and signed on behalf of the Project Implementation Unit: Bakhtiyat Azizov Azulla Hus ynov PIU Director Head of Financial Division April 5, 2016 April 5, 2016 Baku, the Republic of Azerbatjan Baku, the Republic of Azerbaijan The notes on pages 1I0-15 form an integral part of these Special-Purpose Financial Statements. 9 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Amounts expressed in the United States Dollars unless otherwise indicated) 1. DESCRIPTION OF THE PROJECT Capital Markets Modernization Project implemented by the State Committee for Securities of the Republic of Azerbaijan (the "Project") was formed under the loan agreement number 8024-AZ dated September 22, 2011 (the "Loan agreement") between the Republic of Azerbaijan (the "Recipient") and the International Bank for Reconstruction and Development ("IBRD") in the amount of USD 12,000,000. In addition to the Loan agreement, additional non-reimbursable contribution of up to a maximum amount of USD 1,600,000 will be provided by the Government of the Swiss Confederation ("SECO") according to the agreement between the SECO and the Government of the Republic of Azerbaijan dated September 13, 2012 (the "Grant agreement") for the financing of the international labor for components B "Updating and Strengthening the Legal and Regulatory Framework" and component C "Stimulating Supply" of the Project. According to the Trust Fund Administration Agreement (the "Administration agreement") concluded between the SECO and IBRD dated December 13, 2011, the Grant is co-ordinated and administered by IBRD. In addition to the Loan agreement and the Grant agreement, additional financing in the amount of USD 2,300,400 will be provided by the Government of the Republic of Azerbaijan. The Project's original completion date of December 31, 2015 has been extended to July 1, 2016. The overall Project objective is to assist the Recipient in increasing the use of equity and corporate debt as financing and/or investment instruments, through the adoption of an effective capital markets regulatory framework and infrastructure. The Project consists of the following components: Component A: Streamlining and Automating Market Infrastructure This component will support: i. Establishing capital market participant advisory groups; ii. Establishing a single central independent national depository and consolidated clearance and settlement systems for all securities transactions in Azerbaijan; iii. Expanding access to and functionality of the national depository by preparing and issuing new rules and procedures for a participant structure that allows custodians' access alongside broker-dealer participants; iv. Increasing automation of the capital market by adopting modern and efficient trading, risk management, clearance, settlement and depository systems; v. Establishing an appropriate capital market guarantee mechanism to ensure timely clearing and settlement of trades; vi. Revision of the rules governing the national depository to reduce off-market transactions. vii. Provision of Information and Communication Technology for Clearing and Settlement systems. Component B: Updating and Strengthening the Legal and Regulatory Framework This component will provide: i. Conducting a comprehensive review of the existing legal and regulatory framework for capital market and preparing a new capital market law; ii. Preparing the executive regulations for the new capital market law and the operating rules of the stock exchange, central depository and the clearing house; 10 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) iii. Adopting new licensing regimes for capital market participants in line with the new capital market law; iv. Supporting the SCS and the tax authorities in the development of a policy for a favourable tax environment to attract capital market participants and transactions, through the provision of consultants' services; V. Supporting the SCS and the relevant competent authorities in the development of a policy and regulatory framework to allow pooled investments by insurance companies; vi. Introducing appropriate capital market adequacy and risk assessment methods for capital market participants. Component C: Stimulating Supplv This component will provide: i. Conducting a strategic assessment on the modality of attracting local and foreign issuers to list on the Baku Stock Exchange; ii. Supporting the SCS and the Ministry of Finance to develop the government securities market; iii. Developing the policy and regulatory framework to improve the corporate debt market; iv. Supporting the SCS in developing a corporate education and outreach program on the business advantages of raising funds in the Azerbaijani capital market; V. Supporting the SCS in developing a corporate education and outreach program on the business advantages of raising funds in the Azerbaijani capital market; vi. Conducting: (a) an assessment of the impediments in the capital market and demands for introducing public- private partnerships to finance large infrastructure projects; and (b) an analysis of how the Azerbaijani capital market may support privatization by providing organized mechanisms for the bids and sales of shares. Component D: Capacity Building This component will support: i. Conducting a training needs assessment and designing a training program to strengthen the capacity of SCS staff as well as developing a knowledge management system for the SCS; ii. Revising SCS's internal systems, policies, structures and procedures in light of the new capital market law and adopting an action plan to strengthen the SCS's systems and operations; iii, Strengthening surveillance, enforcement and reporting systems of SCS; iv. Supporting the SCS in the development of investment conferences domestically and internationally to attract investors; v. Undertaking a nationwide capital market public awareness campaign; vi. Establishing a capital market training centre to provide continuous professional training for SCS staff and licensed capital market participants, 11 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The Special-Purpose Financial Statements have been prepared on the cash basis of accounting in conformity with International Public Sector Accounting Standards ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants ("IFAC-PSC") and incorporate the principal accounting policies from the "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities". Other basis of preparation criteria The Special-Purpose Financial Statements are prepared under the historical cost basis of accounting. Source funding and government contributions are recognized when the related cash is received or paid out on the Project's behalf. Expenditures are accounted for on the basis of actual disbursement of funds from the Project's accounts. Foreign currency transactions and translation The Project uses the United States Dollar ("USD") as its functional currency for the following reasons: a) The IBRD's funding is received in USD; b) Budgets and financial reports for the Project are prepared in USD. Balance sheet monetary items denominated in currencies other than USD have been translated into USD using the exchange rate of the Central Bank of the Republic of Azerbaijan ("CBAR") effective as at appropriate date. All income and expense transactions denominated in currencies other than USD are converted into USD using the exchange rate of the CBAR prevailing on the date of transaction. On February 21, 2015 the CBAR devalued the Azerbaijani Manat (AZN). As a result, the official exchange rates of AZN to the USD fell to AZN 1.05 per USD, and the official exchange rate of AZN to the EUR fell to AZN 1.19 per EUR, i.e. by approximately 34% from the exchange rates at the effective date of devaluation. On December 21, 2015 the CBAR introduced a floating exchange rate that resulted in one-time devaluation of AZN against USD and other major currencies by approximately 48%. 3. CASH AT BANK As at December 31, 2015 and 2014 the Project had cash at bank balances with International Bank of Azerbaijan ("BA") as follows: December 31, December 31, 2015 2014 IBRD Designated Account in USD 176,599 255,559 Project Account in AZN 27 139 Total cash at bank 176,626 255,698 12 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) 4. DESIGNATED ACCOUNT The Recipient has established a Designated Account at a commercial bank acceptable to the IBRD in accordance with the Loan Agreement. Designated Account is established, managed, replenished and liquidated in accordance with the IBRD's "Project's Operations Manual" and detailed arrangements agreed upon between the Recipient and the IBRD. The Designated Account of the Project is maintained in USD with IBA (located in the Republic of Azerbaijan). 5. BASIS OF FUNDING AND ELIGIBLE EXPENDITURE The following table specifies the categories of eligible expenditure that may be financed out of the allocations of the amounts indicated in the Loan Agreement to each category, and the percentage of expenditure to be financed for eligible expenditure in each category: Amount of the Percentage of loan allocated expenditures to (expressed in be financed USD) by IBRD (Net of VAT) (1) Goods 4,300,000 100% (2) Consultants' services including audit and training 7,600,000 100% (3) Incremental Operating Costs 70,000 100% (4) Front-end fee 0.25% of the total 30,000 disbursement TOTAL 12,000,000 Amount of the Percentage of grant allocated expenditures to (expressed in be financed USD) by SECO (2) Consultants' services including audit and training 1,600,000 100% TOTAL 1,600,000 On March 4, 2015, the Recipient and 3RD agreed to extend the closing date of the captioned loan to July 1, 2016, and additionally the parties agreed on reallocation of the existing loan disbursement categories as follows: 13 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) Amount of Percentage of the loan expenditures to reallocated be financed (expressed in (Net of VAT) USD) by IBRD (1) Goods 4,700,000 100% (2) Consultants' services including audit and training 7,160,000 100% (3) Incremental Operating Costs 110,000 100% 0.25% of the total (4) Front-end fee 30,000 disbursement TOTAL 12,000,000 Amount of the Percentage of grant allocated expenditures to (expressed in be financed USD) by SECO (2) Consultants' services including audit and training 1,600,000 100% TOTAL 1,600,000 6. METHOD OF DISBURSEMENT The methods of disbursement used from the inception of the financing up to and including December 31, 2015 were as follows: Advance - the IBRD may advance loan proceeds into the Designated Account of the Recipient to finance eligible expenditure as they are incurred and for which supporting documents will be provided at a later date. Direct Funding - the 1BRD may make payments, at the Recipient's request, directly to a third party for eligible expenditure. Reimbursement procedure - the IBRD may reimburse the Recipient for expenditure eligible for financing pursuant to the Loan Agreement that the Recipient has pre-financed from its own resources. Commitment procedure - the IBRD may pay amounts to a third party for eligible expenditure under special commitments entered into, in writing, at the Recipient's request and on terms and conditions agreed between the IBRD and the Recipient. 14 CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATE COMMITTEE FOR SECURITIES NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2015 (Continued) (Amounts expressed in the United States Dollars unless otherwise indicated) 7. METHOD OF WITHDRAWAL IBRD Designated Account Designated Accounts are designated disbursement accounts of the Project to effect the payment of eligible expenditure, within defined limits, which do not require individual authorization from the IBRD. Available amounts were drawn down within the limits determined by the relevant loan agreement for the payment of eligible expenditure for sub-contractors from the Designated Accounts. Direct payments from the IBRD Designated Account Under this method, the Project management prepares applications based on supporting documents which are submitted to the IBRD. Payments are made from the Loan Account directly to the contractors. Project Account The Project maintains a separate account where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on the shares of expenditure to be incurred by each funding source. Statement of expenditure ("SOE") Under the SOE method, the Project forwards to the IBRD an application for reimbursement of payments already made using an application for withdrawal with SOE forms as the only documentation. 8. OPERATING ENVIRONMENT The Project's principal business activities are within the Republic of Azerbaijan. Laws and regulations affecting entities operating in the Republic of Azerbaijan are subject to rapid changes and the Project's operations could be at risk due to negative changes in the political and business environment. 9. EVENTS AFTER THE REPORTING DATE On February 3, 2016 the President of the Republic of Azerbaijan signed a decree on the establishment of a public legal entity of the Financial Markets Monitoring Board in the Republic of Azerbaijan. The establishment of a public legal entity of the Financial Markets Monitoring Board aims to license, regulate and control the securities market, investment funds, insurance companies, credit organizations (banks, non-banking credit organizations and operator of postal communication) and payment systems, as well as improve control system over the money laundering prevention activities. The State Committee for Securities ceases its operations and the functions of the State Committee for Securities are transferred to the Financial Markets Monitoring Board public legal entity upon establishment of this entity. 15