Short-Form Audit Report ACGF - Afghan Credit Guarantee Foundation Cologne Annual Financial Statements for the Period Ending December 31, 2019 and Management Report for the Financial Year 2019 INDEPENDENT AUDITOR’S REPORT (Translation - the German text is authoritative) Contents Page Management Report for the Financial Year 2019........................................................................... 1 Annual Financial Statements for the financial year from January 1 to December 31, 2019............. 1 1. Balance Sheet as of December 31, 2019.................................................................................. 2 2. Income Statement for the Period from January 1 to December 31, 2019................................. 5 3. Notes to the Financial Statements for the Financial Year 2019................................................ 7 Fixed Assets Movement Schedule......................................................................................... 23 INDEPENDENT AUDITORS REPORT............................................................................................. 1 0.0908218.002 M4GenPDF V2.00 Management Report of ACGF - Afghan Credit Guarantee Foundation for the Financial Year 2019 Page 1 of 33 Contents 1 Report on the Fundamentals of ACGF ............................................................................................. 4 2 Economic Report .............................................................................................................................. 6 2.1 Business development .................................................................................................................... 10 2.2 Personnel ........................................................................................................................................ 11 2.3 Further activities by the Management Board and Board of Trustees ............................................. 11 2.4 Significant transactions ................................................................................................................... 13 2.5 ACGF’s results of operations in 2019 ............................................................................................. 13 2.5.1 Sales and Foundation result ........................................................................................................... 13 2.5.2 Other operating income .................................................................................................................. 15 2.5.3 Cost of purchased services............................................................................................................. 15 2.5.4 Personnel expenses ....................................................................................................................... 16 2.5.5 Amortization and depreciation ........................................................................................................ 16 2.5.6 Other operating expenses............................................................................................................... 17 2.5.7 Other interest and similar income ................................................................................................... 17 2.6 ACGF's net asset position .............................................................................................................. 18 2.7 ACGF’s financial position ................................................................................................................ 20 2.7.1 Principles ......................................................................................................................................... 20 2.7.2 Capital structure .............................................................................................................................. 21 2.8 Report on opportunities and risks ................................................................................................... 21 2.8.1 In general ........................................................................................................................................ 21 2.8.2 Individual risks................................................................................................................................. 22 2.8.3 Overall assessment of the opportunities and risk position ............................................................. 28 3 Significant Events after the Balance Sheet Date ............................................................................ 28 4 Forecast Report .............................................................................................................................. 29 5 Note from the Management Board ................................................................................................. 33 Page 2 of 33 List of Tables Table 1: Income Statement of ACGF per 12/31/2019.................................................................................... 14 Table 2: Management Board Remuneration 2019 ......................................................................................... 16 Table 3: ACGF Balance Sheet 2019 - Assets ................................................................................................ 18 Table 4: ACGF Balance Sheet 2019 – Equity and Liabilities ......................................................................... 19 Table 5: ACGF Capital Structure as of 12/31/2019 ....................................................................................... 21 Table 6: ACGF Budget 2020 .......................................................................................................................... 31 Page 3 of 33 1 Report on the Fundamentals of ACGF ACGF was founded by act of formation of 09/08/2014 by the sponsors DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH (“DEG”) and the Federal Republic of Germany with reference to the Foundation Law for the German state of North-Rhine Westphalia (“StiftG NRW”) dated 02/15/2005. With its letter of 09/26/2014, the Ministry for Internal Affairs and Communal Issues of the State of North Rhine-Westphalia recognized ACGF as a Foundation with legal capacity under the German Civil Code with registered office in Cologne and overseen by Cologne District Council. ACGF is the institutional successor to the Afghanistan Credit Guarantee Facility (CGF) managed by DEG from 2005 to the end of 2014 – an international development collaboration program with Afghanistan to promote small and medium-sized Afghan enterprises (SMEs). CGF was financed using funds from the Federal German Ministry for Economic Cooperation and Development (BMZ) and the United States Agency for International Development (USAID). CGF consisted of a capital fund for issuing guarantees to Afghan financial institutions in conjunction with issuing SME credits as well as providing comprehensive technical assistance (“TA”). The purpose of the Foundation is the temporary promotion of development collaboration with Afghanistan to support private economy until achieving a stable banking system with sufficient credit supply for small and medium-sized enterprises in Afghanistan. ACGF is a limited-term Foundation established for a minimum period of ten years. Accordingly, it can use its assets in whole or in part to realize its goals. The credit guarantee fund for Afghanistan (CGF Afghanistan), which operates as a special- purpose fiscal enterprise for ACGF, is broken down for business purposes into the sub-areas of operational credit guarantee fund (CGF Guarantee Operations) and financial sector development (CGF Technical Assistance). In its decision of 10/23/2014, the Cologne Old Town tax office (“Finanzamt Köln-Altstadt”) recognized ACGF as a non-profit-making foundation based on the purpose it achieves in promoting development collaboration. In its capacity as a merchant, the Foundation was entered under Section 1 of the German Commercial Code (Handelsgesetzbuch, “HGB”) on 22 January 2015 in Commercial Register A of the Cologne Local Court. The Foundation is jointly represented by a Foundation Management Board consisting of at least two persons. The currently appointed Management Board consists of Mr. Bernd Leidner, Kassel, as Chairman, and Mr. Dirk Josef Thiesen, Berlin, as Vice-Chairman. The Management Board contracts were extended in October 2017 for a further three years until the end of September 2020. Page 4 of 33 With effect from 06/28/2018, the sponsors appointed the following trustees for the third period of office of the Board of Trustees: Mr. Bernt Hagenlocher, Cologne, has held the position of Chairman of the Board of Trustees continuously since 12/23/2016. In addition, the Deputy Chairwoman of the Board of Trustees, Ms. Katharina Weber, Berlin, and the Afghan member of the Board of Trustees, Ms. Salma Alakoza, Kabul, Afghanistan, were continuous members of the Board of Trustees in the reporting year. The tenure of the third Board of Trustees runs until the adoption of the annual financial statements for 2020 in the course of the 2nd quarter of 2021. The Foundation’s assets (core assets and donations) as of 12/31/2019 have remained unchanged in comparison to the previous year and amount to TEUR 4,4771. Taking into account result carryforwards and the negative result during the reporting year, equity capital amounts to TEUR 2,302. Upon reaching the Implementing Partner Agreement between ACGF and the Afghan Ministry of Finance (MoF) signed in 2017, the Foundation received a conditionally repayable grant to a total of USD 5.6 million. In legal terms, the conditionally repayable grant does not represent any equity capital, however, it does strengthen the substance of the Foundation due to the contractually agreed outline conditions with regard to repayability. Under the terms of the Implementing Partner Agreement, the Foundation has at its disposal up to USD 2.5 million for Technical Assistance Activities (TA), while at the same time the original project duration of the years 2017 and 2018 has been extended until mid-2021 without any additional funds being made available. Payment of the maximum available TA funds (USD 2.5 million) after deduction of the Afghan withholding tax contained therein (7 %: TUSD 175) was made by the beginning of the fourth quarter of 2019. Full utilization of the remaining TA funds to an amount of TEUR 271 is expected in 2020. The existing credit guarantee framework agreements (CGF agreements) with the Afghan financial partners were amended in 2019 (Finance Partner II on 08/02/2019, Finance Partner III on 03/20/2019 and 08/02/2019) and continue to be agreed for an indefinite period. A further credit guarantee framework agreement with Finance Partner IV was reached on 09/05/2019. In addition, an agreement for the provision of TA services with an existing Afghan financial institution was extended until the end of 2020. Overall, the guarantee capital blocked in favor of the Afghan banks to cover the maximum guarantee obligations amounted to USD 4.96 million at the end of 2019. The wholly-owned Afghan subsidiary SME Client Support Afghanista n LLC (“SCSA”) was registered in 2015 by AISA, the Afghan registration authority competent at that time, with a share capital of TUSD 50. Since its Foundation, SCSA, as an auxiliary entity to ACGF under the German law governing non-profit organizations, has supported ACGF’s local activities in the 1) In order to improve readability, the figures in the Management Report have been rounded off in TEUR/TUSD or EUR/USD millions, as a result of which there may be slight deviations in tables and the summation of values in the text in comparison to the actual figures in the income statement or balance sheet. Page 5 of 33 credit guarantee business and the technical assistance of Afghan partner banks as well as other financial partners. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungs- aufsicht / “BaFin”) had already established in its letter of 02/22/2012 that the Foundation, under adherence to certain general conditions, does not operate a guarantee business as defined by Section 1 (1) p. 2 No. 8 of the German Banking Act (Gesetz über das Kreditwesen / “KWG”). As a result, the Foundation is not a credit institution or another company that is subject to the provisions of the German Banking Act, but is instead a miscellaneous service providing company. ACGF’s prescribed regulatory liquidity reserve of TUSD 750 was in place at all times without interruption in the form of fixed USD deposits or liquid funds in 2019. As the Foundation’s credit guarantee business, as well as significant portions of the Technical Assistance Activities, are conducted in USD, the Foundation’s core transaction currency is the USD. Over 90 % of ACGF’s liquid assets are denominated in USD. Due to the favorable development of the exchange rate for the USD in 2019, up to the date of preparation of the annual financial statements this has resulted in total in not insubstantial income from currency translation in the annual financial statements prepared in Euro in accordance with the principles for large German corporations. 2 Economic Report The following points summarize the results of the main economic performance indicators for the financial year 2019:  The Foundation’s result for the financial year 2019 shows a deficit to an amount of TEUR 821 which, in the opinion of the Foundation’s Management Board, is rated as sufficient from an objective point of view taking into account the extremely challenging outline conditions and the institutional character of the Foundation.  The EUR-budget result of the 2019 USD budget (TUSD -1,4672) approved in December 2018 amounted to TEUR -1,298 on the basis of the exchange rate assumed at the time of EUR 1 = USD 1.13 and taking into account a deviation margin of +20% / -50%, corresponds to the projected net loss for 2019. Considering the positive effects of the conditionally repayable grant, the adjusted net loss in the annual financial statements amounts to TEUR 821. The net loss without including the positive effect of the conditionally repayable grant amounts to TEUR 2,013 and is therefore significantly higher than the budgeted result, but within the assumed range of +20% / -50%. The negative deviation is mainly due to the considerable guarantee expenses of TEUR 1,402. In contrast, the actual net loss for 2019 (TEUR - 821) is below the forecast figure. 2 Result prior to consideration of the effects of the repayable grant – this is not budgeted in USD. Page 6 of 33  Portfolio at Risk (PAR 30) of the credit portfolio3: The mean value of the PAR 30 was planned at 4 % – with certain technical simplifications – and averaging out at 8 % over the reporting year was significantly higher than expectations, due in particular to a considerable deterioration in the portfolio as a result of the significantly more difficult macroeconomic framework conditions.  The credit guarantee business measured by the loans paid out and guaranteed by the partner banks was around 55 % below the budgeted figure during financial year 2019. The credit guarantee portfolio fell in the course of the 2019 reporting year from TUSD 19,541 (TEUR 17,061)4 at the end of 2018 to TUSD 13,907 (TEUR 12,386) at the end of 2019. Income from the guarantee business rose slightly in particular as a result of the risk-adjusted guarantee provisions (TEUR +27), and refunds from the disposal of collateral (TEUR +39) were also up in comparison to the previous year, as a result of which income from the guarantee business in total at TEUR 784 was up on the level of the previous year (TEUR 718) despite the considerably lower volume of business. Along with the income from the guarantee business, the Foundation also charged the Afghan Ministry of Finance (MoF) a total of TEUR 331 in 2019 for Technical Assistance (TA) activities. In 2019, the Foundation worked on a total of 17 TA projects which are either aimed directly at the partner institutions or at the development of new services and/or the strengthening of internal capacities of ACGF and SCSA. The projects aimed at partner institutions consist primarily of the development of new products, improvement of structures and/or processes or the strengthening of capacities through employee training. The partner institutions have paid a total of TEUR 52 to the Foundation as own contribution to TA activities received. The objective of the projects aimed at ACGF and/or SCSA respectively is to strengthen internal processes and structures with the focus in this case primarily on the areas of IT and risk management. As part of its TA activities in 2019, the Foundation also worked on sector-wide topics (e.g. financing of companies managed by women, digital finance, Agriculture Finance, Solar Finance etc.). The conditionally repayable grant provided by the Afghan Ministry of Finance (MoF) amounted to EUR 3.21 million at the end of the year. The amount of the conditionally repayable grant is calculated on the basis of the ratio calculated using the Implementing Partner Agreement, and lay throughout 2019 at a MoF share of 59.23 %. The conditionally repayable grant includes as structural element an adjustment of its amount according to the Foundation's results. As a consequence, the Foundation’s liability to the Afghan Ministry of Finance fell by TEUR 1,192 to EUR 3.21 million at the end of the year as a result of the Foundation’s loss in 2019. From a structural point of view, the amount of the grant could increase again in the event of the 3 Not to be confused with the credit guarantee portfolio. 4 Comparability of EUR values is distorted because of fluctuations in US dollar (USD) exchange rates. Translation of the values for 2019 at the exchange rate on 12/31/2019 of EUR 1 = USD 1.1228 (in comparison in 2018: EUR 1 = USD 1.1453). Page 7 of 33 Foundation making a profit, however, the original grant amount (EUR 5.07 million) forms the upper limit. The Foundation’s overall financial result in 2019 was characterized by high guarantee payments and is reflected in the much higher net loss rate of 8.49 % in the reporting year in comparison to the previous year (1.23 %). The quality of the credit guarantee portfolio in the year 2019 was at a significantly higher risk level in comparison to the previous year: PAR 30 (portfolio-at-risk with payment delay > 30 days of the credit guarantee portfolio) on average in 2019 = 8 % (2018: 5 %). Provisions for guarantee payments amount to TEUR 697, representing a decrease in comparison to the previous year (previous year’s figure: TEUR 829 at the end of 2018). Provisions have fallen in comparison to the previous year as guarantees to a total amount of TEUR 626 had been approved by the end of 2019 but not yet paid out. The volume of provisions is made up of a general provision and an individual provision. After taking into account the actual guarantee payments and reimbursements from collateral liquidation (weighted net and gross loss rates), as well as the PAR 30 at the end of the year 2019, the general provisioning rate at 4.27 % remained almost at the same level year-on-year (previous year: 4.23 %). The individual provisioning rate have remained unchanged. Guarantee expenditure was incurred to an amount of TEUR 1,402 in 2019 (previous year: TEUR 257) as a result of defaults of loans secured by guarantees. Overall, guarantees to an amount of TUSD 1,711 (TEUR 1,5245) were approved. In the case of the costs incurred in 2019, attention should be drawn not only to the already mentioned guarantee expenses but also, due to their particular relevance, to the fees paid to SCSA for services in the area of Guarantee Business and Technical Assistance to an amount of TEUR 822, the Foundation’s personnel expenses to an amount of TEUR 586, and consultancy costs at TEUR 406 for external consultancy services in connection with Technical Assistance activities and other projects, e.g. in the areas of Risk and IT. The budget/actual comparison of specific structural costs (personnel costs; depreciation and amortization; bookkeeping, tax advisory and auditing costs; bank fees and ACGF´s and SCSA’s usual operating costs) shows a USD-budget shortfall of 9 % (TUSD 162) which is due to the shortfall in various budget items, e.g. lower personnel costs of SCSA and deliberate expenditure management for controllable ordinary operating costs. Investment of Foundation assets generated USD interest income of 140 TEUR. The main control indicator (financial performance indicator) during the current financial year continued to be the Foundation result. The annual result is characterized by significant guarantee expenses and considerable income from the reduction of the conditionally repayable grant. The course of business and the corresponding loss for the 2019 financial year to an amount of TEUR 821 (previous year loss of TEUR 113) can be regarded objectively as sufficient from the 5 Guarantee payments were made exclusively in USD. For information purposes: the USD payout amount of TUSD 1,711 was translated at the exchange rate at the end of the 2019 year (€ 1 = USD 1.12 28). Page 8 of 33 point of view of the Foundation’s Management Board taking into account the extremely challenging framework conditions. The Foundation’s Management Board has reached this conclusion in particular because, despite the very difficult framework conditions, it has been able in accordance with its development mandate to increase the number of partner institutions from three to four and implement the successful continuation of its Technical Assistance activities following the receipt of World Bank funds. The implementation of rational development policy measures to support SME lending in Afghanistan – which provides a sustained contribution to job creation and securing income – as well as the strengthening of financial institutions through Technical Assistance activities, are regarded as a positive and effective contribution to German development cooperation6. Nevertheless, in the opinion of the Board of Managing Directors, the new loan guarantee business achieved in 2019 was significantly influenced by the poor security situation, as well as the presidential elections and corresponding uncertainty, as a result of which there was a noticeable decline in the demand for loans by SMEs. In addition, the guarantee expenditure and the net default rate are at a significantly higher level, which is not considered satisfactory in the overall assessment despite the Foundation only having a very limited influence on this factor, which is determined by external influences. On a positive note, SCSA's activities in Afghanistan could nevertheless be continued, despite the very difficult security situation. The annual financial statements for the 2019 financial year of the subsidiary SCSA audited by the accountancy firm of Grant Thornton Afghanistan, which were provided with an unqualified audit report, show after accumulated tax payments a deficit for the year of TUSD 29, which will be carried forward to the new account. SCSA's financial situation is stable due to the contract concluded with the Foundation and continues to be characterized by a very high degree of dependence on ACGF. In 2019, SCSA was heavily involved in ACGF's Technical Assistance activities in addition to its normal activities to secure the Foundation's guarantee business. A further control indicator is the loan portfolio’s Portfolio at Risk (PAR 30)7. This involves the value share of all loans secured by guarantee with payment arrears of more than 30 days of the entire loan portfolio. The average value of the PAR 30 budgeted at 4 % – with certain technical simplifications – was higher than expectations at an average of 8 % throughout the reporting year due in particular to a significant worsening of the portfolio. New loan guarantee business measured by the paid out and guaranteed loans of the partner institutions was approximately 55% below budget in the 2019 financial year. In particular, a significant reduction in activity by the two long-standing partner institutions, caused e.g. by liquidity bottlenecks on the part of Financial Partner I in the first half of 2019 and much more restrictive lending policies on the part of Financial Partner II, and the delayed conclusion of the credit guarantee agreement with a fourth partner institution led to the deviation from budget. In addition, the planned conclusion of a credit guarantee framework agreement with a fifth partner institution did not take place. Nevertheless, the business performance of the third financial 6 The external evaluation carried out in 2018 confirms this assessment. 7 Not to be confused with the credit guarantee portfolio. Page 9 of 33 partner, with whom business relations have been in place since 2018, has been satisfactory and in line with planning. The overall result was down on expectations due to the significant budget shortfall. The Board of Trustees introduced a success indicator matrix in 2017 with which it would be possible to assess on the basis of various indicators the success of the Foundation’s work in the course of the complete project. The matrix serves to monitor the Foundation’s activities and provided services with regard to effectiveness, efficiency (performance capability or profitability) and financial and development-related sustainability (financial viability of the Foundation and long-term effect). In these three target areas, ACGF has formulated a respective orientating main objective and smaller-scale sub-targets. Achievement of objectives is measured on a qualitative and quantitative basis using verifiable indicators and self-imposed interim targets in annual intervals. The ongoing monitoring and evaluation of the indicators makes it possible to achieve an effect-oriented management of project contents and puts the Foundation in a position where it can react on the spot to the changing outline conditions of the Foundation’s work. The results of the external evaluation carried out in 2018 have led to partial adjustments to the indicator matrix for 2019. Achievement of the objectives of the indicator matrix set for the 2019 financial year will be approved at the meeting of the Board of Trustees on June 30, 2020. The Foundation’s key activities of financial relevance for the financial year 2019 are presented below. In addition to the general overview of the Foundation’s business development in the credit guarantee business, we report on the personnel situation and further activities by the Management Board and Board of Trustees, as well as substantial contracts and agreements. The report then goes on to discuss the net assets, financial position and results of operations. 2.1 Business development ACGF’s business development in the credit guarantee business during the reporting year was characterized by its contractual relationships with four partner banks at the end of the year. A total of 286 guarantees were extended in 2019. The guaranteed loan volume amounted to TUSD 16,788 (TEUR 14,9528). The outstanding guaranteed loan portfolio decreased from TUSD 26,338 (TEUR 23,4589) at the end of 2018 to TUSD 19,262 (TEUR 17,15510) at the end of 2019. In 2019, 27 claims with a total amount of TUSD 1,777 (TEUR 1,583) were reviewed, of which 25 claims with a total amount of TUSD 1,711 (TEUR 1,524) were approved; this represents a gross claims rate (prior to income from the recovery of securities = gross loss rate) of 9.87 %. 8 Translation at the exchange rate on 12/31/2019 of 1 EUR = USD 1.1228. 9 Translation at the exchange rate on 12/31/2019 of 1 EUR = USD 1.1228. 10 Translation at the exchange rate on 12/31/2019 of 1 EUR = USD 1.1228. Page 10 of 33 In 2019, ACGF generated income to an amount of TUSD 204 (TEUR 216) from the liquidation of securities of partner banks. With this, ACGF generated a net loss rate of 8.49 % (net guarantee payments / average outstanding guarantee portfolio 2019). 2.2 Personnel The business of the foundation continued to be managed by the two board members Bernd Leidner and Dirk Josef Thiesen, with both board contracts having already been renewed in October 2017 for three years. At the end of 2019, ACGF had a total of 16 employees, mainly part- time11. A breakdown into individual departments is as follows:  Finance Department: Two part-time employees  Guarantee operations, Regulatory and Compliance Department: three part-time employees, one of whom has been on parental leave yet working since November for up to 5 hours per week. In addition, one part-time employee to support reporting and quality assurance in guarantee business and one student assistant.  Business Development and Communication Department: two part-time employees and one student assistant  Technical Assistance Department: three employees and one student assistant.  In addition, a further employee was hired full-time to prepare a new technical assistance project (start-up) at the beginning of the fourth quarter of 2019.  Risk Department: one part-time employee. 2.3 Further activities by the Management Board and Board of Trustees Two meetings of the Board of Trustees were held in 2019 on 06/27/2019 and 12/20/2019 at which all relevant business, organizational and legal topics were discussed and approved. At the first meeting, the annual financial statements and the audit report for 2018 were adopted and the activities of the Management Board were approved for financial the year 2018. Furthermore, achievement of the set targets in accordance with the Success Indicator Matrix was explained and confirmed by the Board of Trustees. In addition, the revised Success Indicator Matrix was presented and approved and the targets were agreed for the Management Board for 2019. In addition, the appointment of the auditor for the 2019 financial year was carried out with the condition of approval of the German Federal Court of Auditors (Bundesrechnungshof) and the credit guarantee framework agreements with the fourth financial partner were approved. In addition, several part-time employees were given signatory powers. The budget for 2020 was 11 The word “employee” is used here for both male and female employees. Page 11 of 33 approved at the December meeting. In addition, the auditor for the Technical Assistance Audit 2019 was appointed. The risk manual was also approved. The Board of Trustees also decided to subject the salaries of the Management Board in 2020 to an external evaluation in preparation for the reappointment of the current Management Board. Signatory powers of part-time employees were renewed or extended. The members of the two-person Management Board discuss all relevant topics on an ongoing basis and reach joint decisions. Furthermore, during the year there were six Management Board meetings to discuss and formally adopt important issues. In order to conduct its business, the Foundation needs an appropriate internal control system that is adapted to its size. The Operations & Credit Risk Manual being used has been brought into line with the requirements of the ACGF structure and has been in use in the credit guarantee business since 2015. A complete revision of the Operations & Credit Risk Manual was carried out in the fourth quarter of 2019 under inclusion of the new Management Information System (MIS). The final revision took place in the first half year of 2020. Furthermore, the ACGF Financial Management & Accounting Manual for regulating business processes in the administrative and financial sector and the ACGF TA Manual were applied throughout the whole of the 2019 year. The SCSA Finance & Accounting Manual was completed in the first half of 2019 following revision due to departmental restructuring at the middle of 2018 and further necessary adjustments. The Foundation applies a risk matrix for risk management and holds regular risk committee meetings in order to identify risks and introduce appropriate measures for risk mitigation. The new Risk Manual has been in force since the end of 2019. Organigrams as well as job descriptions for employees also govern the tasks and processes in ACGF and SCSA. A Monitoring & Evaluation Policy was finalized at the end of 2019 and is to be applied throughout the year in 2020. Due to its number of employees and the special local requirements, SCSA has a Human Resources Manual. In conjunction with the development of a comprehensive management information system (MIS), ACGF entered into a cooperation in 2016 with an Italian IT company specializing in guarantee funds with personnel and practical support of the Tajikistan guarantee fund. Due to extensive technical adjustments required to meet the special requirements of the credit guarantee business and significant delays due to capacity bottlenecks on the part of the IT company, the MIS could not be put into operation with regard to the core processes in the credit guarantee business until the end of 2018. Completion of some of the still-missing sub-modules, e.g. in the area of reporting and projections, has been completed according to the current status, but is still subject to final acceptance. The Foundation has paid the service fee for the 2019 financial year to the service provider. The Foundation continued to attach huge importance to the topic of fundraising in 2019 despite signing the Implementing Partner Agreement with the Afghan government in March 2017 as a Page 12 of 33 further strengthening of Foundation capital will be necessary in the course of 2020 to maintain and expand the Foundation’s activities. After the Foundation had received the World Bank's total funding of USD 5.6 million in 2018 for the loan guarantee business, no further funds were initially earmarked under the Implementing Partner Agreement. However, the recent impact of the Covid- 19 crisis led to an adjustment of the Implementing Partner Agreement in June 2020 which will provide additional funds of TUSD 900 for the guarantee business and TUSD 100 for Technical Assistance activities (including Afghan withholding tax). 2.4 Significant transactions The existing credit guarantee framework agreements (CGF agreements) with two Afghan financial partners were adjusted in 2019 (Partner II on August 2, 2019 and Partner III on March 20, 2019 and August 2, 2019 respectively). The credit guarantee agreement with Partner I remained unchanged. A further credit guarantee framework agreement was concluded with Partner IV on September 5, 2019. In addition, in 2019 an agreement for the provision of TA services with an existing Afghan financial institution was extended until the end of 2020. The valid version of the Procurement Agreement LANDT-ACGF-CGFT with the management company for the credit guarantee fund for Tajikistan (“LANDT12”) managed by the Foundation’s Management Board members, as well as the credit guarantee fund Tajikistan (CGFT) to enhance synergies with regard to the joint purchase of services in the areas of IT, communication and other services, was extended in 2019 (meeting of the Board of Trustees in June and December 2019). The arrangement of the agreements to be adopted by the respective boards guards against potential conflicts of interest. A variety of agreements were conducted with external service providers in 2019 with regard in particular to the performance of Technical Assistance activities. 2.5 ACGF’s results of operations in 2019 2.5.1 Sales and Foundation result The Foundation’s financial year 2019 ended with a negative Foundatio n result of TEUR 821 (previous year: negative Foundation result of TEUR 113 – see Table 1). 12 Leidner & Thiesen Tajikistan GmbH was merged with Leidner & Thiesen GmbH in 2019 and as a consequence renamed LANDT GmbH. Page 13 of 33 ACGF-Afghan Credit Guarantee Foundation, Cologne Income Statement for Financial Year 2019 January 1 to December 31, 2019 01/01/2019 - Previous year 12/31/2019 (2018) € € 1. Sales 836,058.88 747,476.81 2. Other operating income 1,747,577.75 1,368,063.35 - of which contributions from donors EUR 331,003.73 (previous year: EUR 982,866.99) - of which reduction of repayable grant EUR 1,192,336.19 (previous year: EUR 164,189.53) - of which income from currency translation EUR 198,071.25 (previous year: EUR 220,637.36) 3. Cost of purchased services -1,228,102.26 -1,181,578.19 4. Personnel expenses -585,798.98 -523,053.87 a) Wages and salaries -497,480.16 -446,393.05 b) Social insurance contributions -88,318.82 -76,660.82 5. Depreciation and amortization - of fixed intangible and tangible assets -7,286.31 -4,617.20 6. Other operating expenses -1,723,200.11 -548,853.07 - of which expenses from currency translation EUR 86,389.80 (previous year: EUR 29,440.30) 7. Other interest and similar income 139,871.02 98,561.48 8. Pre-tax earnings -820,880.01 -44,000.69 9. Taxes on income -€ -69,037.81 10. Earnings after taxes / Foundation result (loss) -820,880.01 -113,038.50 Table 1: Income Statement of ACGF per 12/31/2019 Sales billed to partner banks to an amount of TEUR 836 consisted of earnings from commissions on guarantee fees and guarantee processing fees from ACGF's core business (TEUR 569),as well as refunds from the recovery of securities (TEUR 216) and contributions by Afghan partner institutions for Technical Assistance Activities received (TEUR 52). Due to the higher risk parameters of the guarantee portfolio, guarantee commission revenues of TEUR 455 increased in the year under review in line with the risk-adjusted fee structure compared with the previous year (previous year: TEUR 380), with guarantee processing fees falling to TEUR 114 in 2019 (previous year: TEUR 161) in line with the lower new commitments. Overall, income from guarantee Page 14 of 33 commissions and guarantee processing fees of TEUR 569 is slightly higher than the previous year's figure of TEUR 541. Reimbursements from the realization of collateral of TEUR 216 are subject to significantly different time patterns in the process of collateral realization and increased slightly compared to the previous year (2018: TEUR 177). 2.5.2 Other operating income Other operating income to an amount of TEUR 1,748 (previous year: TEUR 1,368) is achieved primarily in connection with the Implementing Partner Agreement. Under the terms of the Implementing Partner Agreement, the Foundation issued reimbursement requests to MoF in the reporting year in connection with the performance of Technical Assistance activities to an amount of TEUR 331 (excluding Afghan withholding tax). The coordination process with the World Bank and the MoF regarding the Afghan withholding tax has shown that the withholding tax is paid directly from the World Bank to the MoF and the ACGF only issues net invoices. In addition, earnings resulted from the reduction of the repayable grant (liability to the MoF) to an amount of TEUR 1,192 (previous year: TEUR 164). Under the terms of the Implementing Partner Agreement, the Foundation received a repayable grant with the extent of the grant being adjusted in line with the Foundation’s results. Consequently, the MoF participates proportionately in the profits and losses of the Foundation. The original MoF quota of 41.25 % was determined in accordance with the World Bank Accounting & Finance Manual upon receipt of the repayable grant and was adjusted following supply of the second tranche so that the MoF quota at the end of 2018 now amounts to 59.23 %. As a result of the Foundation’s negative result in 2019, there is a reduction in the liability to the MoF to an amount of TEUR 1,192 which simultaneously leads to income at ACGF to the same amount. Non-consideration of the proportionate participation of the repayable grant would result in the Foundation’s negative result being much higher in 2019. Furthermore, income from currency translation to an amount of TEUR 198 (previous year: TEUR 221) also plays a significant role. Income from currency translation has resulted from the rise in the exchange rate of the US dollar to the Euro in 2019 and primarily from the corresponding increase in value of US dollar bank balances in Euro. In addition, other income amounting to TEUR 26 arose, among other things, from the charging of services to the sister project in Tajikistan and income unrelated to the accounting period. 2.5.3 Cost of purchased services The cost of purchased services in the financial year 2019 amounted to a total of TEUR 1,228 (previous year: TEUR 1,182). These include the cost of services received from the Afghan subsidiary SCSA to support the guarantee business and to perform Technical Assistance activities to an amount of TEUR 822 (previous year: TEUR 747). Proportionately, TEUR 442 (previous year: TEUR 367) relates to services received in conjunction with the credit guarantee Page 15 of 33 business and TEUR 380 (previous year: TEUR 380) to services in connection with Technical Assistance activities. Further significant expenses arose in connection with the realization of Technical Assistance activities and the related purchase of external services to an amount of TEUR 304 (previous year: TEUR 423) and the purchase of other specific services, among others in the areas of Risk and MIS to an amount of TEUR 102 (previous year: TEUR 12). 2.5.4 Personnel expenses Personnel expenses are made up of remuneration for the Management Board and the salaries of the Foundation’s employees as well as corresponding social insurance contributions. Overall, as a result of the personnel structure, the total amount of personnel expenses increased in comparison to 2018. Personnel expenses to an amount of TEUR 586 were incurred in the financial year 2019 (previous year: TEUR 523). Remuneration of Foundation Management Board Members During the previous financial year 2019, ACGF’s business was managed by the Foundation’s Management Board members Mr. Bernd Leidner and Mr. Dirk Josef Thiesen. The remuneration paid to the Foundation's Management Board members comprises fixed monthly remuneration based on the Management Board employment contracts approved by the Board of Trustees. No additional fixed, variable or other remuneration components, including payment in kind, were granted (see Table 2). Remuneration of Management Board members 2019 Annual remuneration (in Euro) (Jan. - Dec. 2019) Bernd Leidner 105,038.04 Dirk Josef Thiesen 70,026.00 Total 2019 175,064.04 Table 2: Management Board Remuneration 2019 Remuneration of the members of the Board of Trustees Members of the Board of Trustees resident in Germany do not receive any remuneration. The members receive compensation for any travel costs and cash expenses incurred. No such costs arose for the Board of Trustees members in 2019. Likewise, no remuneration entitlements arose for Afghan members of the Board of Trustees in 2019. 2.5.5 Amortization and depreciation Depreciation and amortization of TEUR 7.3 (previous year TEUR 4.6) was incurred in 2019 and was attributable to the establishment of the Foundation office and corresponding office Page 16 of 33 equipment, as well as the acquisition of new operating materials, in particular additional fixtures and fittings and computers for new employees, as well as the replacement of outdated equipment. 2.5.6 Other operating expenses In the completed 2019 financial year, other operating expenses were incurred to an amount of TEUR 1,723 (previous year: TEUR 549). These consisted primarily of incurred guarantee expenses to an amount of TEUR 1,402 (previous year: TEUR 257), costs of currency translation at TEUR 86 (previous year: TEUR 29), legal and tax consultancy expenses as well as accounting and financial statement costs to an amount of TEUR 20 (previous year: TEUR 82), and auditing costs of TEUR 37 (previous year: TEUR 36). Additional expenses to an amount of TEUR 177 (previous year: TEUR 145) consist of various operating expenses such as travel expenses, training costs, IT costs, rental expenses incl. incidental rental costs, bank fees, insurance contributions etc. In particular, expenditure in connection with the MIS license led to an increase in overall expenditure in comparison to the previous year. The members of the Board of Trustees and the Management Board are covered by a common D&O insurance policy. The overall annual costs of the insurance policy totaled TEUR 6 in 2019 including insurance tax at 19 %. 2.5.7 Other interest and similar income Significant portions of the Foundation assets were invested in USD fixed-term deposits during the reporting year. Overall, this generated earnings from capital investments to an amount of TEUR 140 (previous year: TEUR 99). Income from capital investments increased in comparison to the previous year due to the possibility of ongoing investment of the second tranche of the conditionally repayable grant made available in 2018 and the improvement in the USD capital market conditions. Page 17 of 33 2.6 ACGF's net asset position Assets – Fixed and Current assets ACGF - Afghan Credit Guarantee Foundation: Balance Sheet Previous year 12/31/2019 in EUR 2018 A: Fixed Assets 56,968 58,747 I. Intangible assets 1 1 II. Tangible assets 9,923 11,702 III. Financial assets 47,044 47,044 B. Current Assets 7,349,190 8,688,936 I. Receivables and other assets 467,532 1,383,514 II. Cash and cash equivalents 6,881,658 7,305,421 C. Prepaid expenses and deferred charges 5,163 4,771 Total Assets 7,411,321 8,752,454 Table 3: ACGF Balance Sheet 2019 - Assets At the end of 2019 financial year, ACGF had assets amounting to TEUR 57 (previous year: TEUR 59). This consisted of software taken over from CGF (memo value EUR 1), tangible assets (office equipment TEUR 10) and the participation in the Afghan subsidiary SCSA to an amount of TEUR 47 (see Table 3). Current assets as of 12/31/2019 include receivables from the Afghan partner banks for guarantee commission, guarantee processing fees and refunds from the recovery of securities to an amount of TEUR 374 (previous year: TEUR 355). The previous year’s receivables from the Afghan Ministry of Finance from the charging of provided TA measures have been settled by making available the complete remaining TA funds after deduction of Afghan withholding tax. As a consequence, at the end of 2019 there was a prepayment of TA funds to an amount of TEUR 271 which is recognized on the balance sheet as deferred income. Utilization of the TA funds in full is planned for 2020. In addition, there are other trade receivables to an amount of TEUR 18. Furthermore, the USD advance on the agency contract to an amount of TEUR 74 granted to SCSA at the beginning of the 2019 financial year had been reduced to an amount of TEUR 15 by the end of the year.13 Other receivables consist primarily of interest receivables on capital investments to an amount of TEUR 38 (previous year: TEUR 48) as well as tax receivables from 13 Complete repayment took place with the bill for the first quarter of 2020. Page 18 of 33 VAT refunds, deposit receivables and deductible input tax in the following period to a total amount of TEUR 22 (previous year: TEUR 24). ACGF’s liquid funds amount to a total of TEUR 6,882 (previous year: TEUR 7,305). Further details regarding the funds overview can be found in the financial position section. Prepaid expenses and deferred charges amounting to TEUR 5 relate to deferred insurance premiums for the D&O insurance policy of the Management Board and the Board of Trustees. The foundation capital of ACGF as at 12/31/2019 amounted to TEUR 4,477 and has therefore not changed in comparison to the previous year (see Table 4). Equity, Provisions and Liabilities ACGF - Afghan Credit Guarantee Foundation: Balance Sheet Previous year 12/31/2019 in EUR 2018 A. Equity 2,302,076 3,122,956 I. Foundation capital 4,477,180 4,477,180 II. Retained profits brought forward - 1,354,224 - 1,241,185 III. Foundation result - 820,880 - 113,039 B. Provisions 741,927 875,171 C. Liabilities 4,096,232 4,754,327 D. Deferred income 271,086 - Total equity and liabilities 7,411,321 8,752,454 Table 4: ACGF Balance Sheet 2019 – Equity and Liabilities The cumulative negative Foundation result for the preceding financial years from 2014 to 2018 amounted to TEUR 1,354 which was carried forward into reporting year 2019. The financial year ended with a Foundation result of TEUR -821, reducing the entire equity of the limited-term Foundation ACGF as of the end of 2019 to a figure of TEUR 2,302 (previous year: TEUR 3,123). Provisions to an amount of TEUR 742 (previous year: TEUR 875) primarily consist of “ provisions for guarantee claims” to an amount of TEUR 697 (previous year: TEUR 829) and “other provisions” to an amount of TEUR 45 (previous year: TEUR 47). In this case, the provisions for guarantee claims are made up of general and individual provisions for the outstanding credit guarantee portfolio as of December 31, 2019. A percentage rate of 4.27 % of the outstanding credit guarantee portfolio has been used for the general provisions to an amount of EUR 511. The percentage remained almost unchanged from 4.23 % at the end of 2018 to 4.27 % at the end of 2019. The level continues to reflect the very tense security situation in Afghanistan, but takes into account the actual default rates of the last three fiscal years (different weighting of gross and Page 19 of 33 net loss rates) and the portfolio-at-risk with payment default of more than 30 days of the outstanding loan guarantee portfolio at year-end. The very low loss rates of CGF-Afghanistan were no longer taken into account because of the significant worsening of the security situation over the last three years as this would have led to a much lower rate and would not have done justice to the actual risk situation. The individual provisions amounting to TEUR 186 comprise various percentage rates (from 5 % to 100 %) for the amounts in the outstanding credit guarantee portfolio with a delay in payment from >30 to 180 days. The “other provisions” of TEUR 45 include provisions for the preparation and audit of annual financial statements including the TA-audit and the preparation of annual tax declarations and vacation provisions. Liabilities amounting to a total of TEUR 4,096 (previous year: TEUR 4,754) consist of liabilities to the Afghan Ministry of Finance (MoF) with regard to the conditionally repayable grant to an amount of TEUR 3,207, trade payables and other liabilities totaling TEUR 890, including liabilities to Afghan partner banks for guarantee drawings already approved but not yet paid out (TEUR 632), affiliated companies (Afghan subsidiary SCSA), external consultants for TA activities, legal and tax consultancy firms and other purchased services. 2.7 ACGF’s financial position 2.7.1 Principles ACGF’s Foundation assets must be administered in such a way as to generate income, in line with the Foundation's statutes. ACGF’s investment guidelines approved by the Board of Trustees must be followed. The investment guidelines take into account the recommendations of the German Federal Finance Ministry with regard to the minimum requirements of the management of financial assets (BMF circular dated 02/08/2013, GZ II A 3 – H 1012-2/12/10003) in the updated version of 08/20/2019 to the extent that these rules can be reasonably applied based on the organizational structure, type of transaction and size of the Foundation. The ‘free Foundation assets’ must be invested in such assets that can be c onsidered safe when selected with the due care and attention of a prudent businessman. Funds that are not free and blocked in favor of the Afghan partner financial institutions are invested in fixed-term deposits, overnight money or comparable (bank) products without structural fluctuations in value. The investments are to be structured as far as possible in such a way as to provide a clear overview, a high degree of transparency and low administrative costs. The possible actions by the Foundation with regard to investing its cash and cash equivalents were actually very limited, given the requirement to establish blocked accounts and the liquidity requirement in 2019. The funds available in 2019 were invested for a maximum term of 12 months due to the continuing high liquidity requirements for operating expenses including TA measures and to ensure liquidity in the event of guarantee drawings. Page 20 of 33 2.7.2 Capital structure The Foundation’s equity ratio as of the balance sheet date is 31 % (previous year: 36%). ACGF’s Foundation capital as of 12/31/2019 was mainly used for USD blocked fixed-term deposits created in favor of the Afghan partner financial institutions with a EUR value of TEUR 4,593 and for free liquidity in EUR and USD to a total EUR value of TEUR 2,289 (see Table 5). The blocked fixed-term deposits, as well as the fixed-term deposits of uncommitted funds, show terms of up to a maximum of 12 months as of 12/31/2019. The liquidity reserve of TUSD 750 established as part of the limit control is included in the fixed-term deposits of free liquidity. On average, an interest yield of 2.02 % p.a. was achieved in US dollars on fixed-term deposits. There were no fixed-term deposits in Euros. ACGF Capital Structure per 12/31/2019 Account balance per Type of account Investment currency Investment type Term balance sheet in EUR 1. Blocked accounts (Blocked accounts in favor of the Afghan partner 4,592,859 € USD institutions) - Giro account and call money accounts 696,351 € USD Giro/Call money daily - Fixed deposit accounts 3,718,383 € USD Fixed deposit < 12 months - Designated blocked fixed deposits 178,126 € USD Fixed deposit < 12 months 2. Free liquidity 2,288,799 € USD and EUR - Liquid funds in EUR 61,125 € EUR Giro daily - Liquid funds in USD 490,945 € USD Giro daily - Fixed deposit accounts 1,736,730 € USD Fixed deposit < 12 months Bank balances and cash and cash equivalents 6,881,658 € EUR Per 12/31/2019 in EUR Table 5: ACGF Capital Structure as of 12/31/201914 2.8 Report on opportunities and risks 2.8.1 In general During the reporting year, ACGF implemented an opportunities and risks management policy adapted to the Foundation’s size and requirements. The opportunities and risk management falls under the overall responsibility of the Management Board. Since the end of 2019, the systematic identification and assessment of business risks has been carried out with the support of a risk manual, which includes the risk matrix that has been used for some time. The application of the risk manual is expected to further improve the Foundation's risk management. 14 Deviations of +/- EUR 1 may occur as a result of rounding off for simplification reasons. Page 21 of 33 The risk categories are: Credit risks, counterparty risks (partner banks and investment banks), market risks, operational risks, strategic risks, legal risks and the country risk Afghanistan. Seven risk committee meetings were held during the reporting year, which were attended by at least one Management Board member, as well as employees from ACGF and SCSA. As part of the respective risk committee meetings, incidents and risk assessments were discussed in line with the individual risk categories and, if necessary, risk mitigation measures were resolved. Under the terms of the Risk Management Policy, the Risk Department has direct access to the Board of Trustees where necessary. We have presented below, in descending order, the risks within the relevant risk categories according to their importance for the Foundation and, where applicable, with details of risk mitigation measures. The opportunities and risks assessment period generally corresponds to the one-year forecast period. We classify the risks and any opportunities in the categories of serious, medium and low (or high, medium and small with regard to opportunities). Risks and opportunities are categorized as low or small if they will not lead to a noticeable change in the central key performance indicators. The presence of medium or serious risks and medium and high opportunities would result in appreciable or noticeably negative/positive changes in the central key performance indicators. The key control indicator (financial performance indicator) for 2019 is the Foundation result. The value-based share of all guarantees with payment arrears of the underlying credit in excess of 30 days of the entire guarantee portfolio (‘portfolio at risk’ - PAR 30 as a percentage of the guaranteed loan portfolio) and the new credit business (volume of guaranteed loans newly disbursed in the period from the partner banks) are considered to be other performance indicators. 2.8.2 Individual risks The country risk Afghanistan continues to be classified as serious with negative tendencies. The ongoing very poor security situation in 2019 caused by the extreme delay in the results of the presidential election and the corresponding government formation, significant expansion in the activities of the Taliban and other groups, as well as the peace negotiations between the Taliban and the United States of America without any direct inclusion of the Afghan government, have led to a high degree of uncertainty which had a direct impact on the credit guarantee business. Despite greatest possible endeavors by the Afghan security forces, the situation in various provinces has deteriorated and regional advances by the Taliban have resulted in increasing unease among the population, and in economic terms have led to loan defaults or delayed payments for the loans guaranteed by ACGF. In addition, there were individual problems with cross-frontier transactions, e.g. with Uzbekistan. As a precaution, the provision rate measured in terms of the outstanding guarantee portfolio (end of 2019 = 6 %) has remained significantly above Page 22 of 33 the actual net default rate of the last three years (on average: 3.62 % p.a.). Despite the tense security situation, it was possible for ACGF´s Management Board members and some employees to travel to Kabul in 2019 under significantly heightened security precautions for the SCSA office and the involvement of an external security service provider located in Kabul. In addition, the freedom to travel to particular regions and cities continues to be restricted for SCSA employees, who in some cases are forbidden to do so due to existing security regulations, and for whom it is still not possible. As a consequence, employees are unable to visit certain branches and customers of partner institutions and cannot carry out necessary monitoring activities. This continues to entail the risk of deterioration in portfolio quality. In the event of a massive deterioration in the security situation in Afghanistan, with the result that it would no longer be possible to keep the office of the SCSA subsidiary in the two Afghan locations open, ACGF’s business operations in Germany might also have to be restricted, because it is not possible to issue a credit guarantee without the support of the Afghan subsidiary and it would be necessary to consider the provision of portfolio guarantees. Under certain circumstances, a further dramatic deterioration in the security situation would result in a massive collapse in credit demand in Afghanistan. Measures to reduce this risk are not possible, given that ACGF is not in a position to influence or manage it. Since the second quarter of 2019, new loan guarantee commitments have remained at a significantly lower level compared with the previous year. The Covid-19 crisis, which commenced in the first quarter of 2020, led to first reported cases in Afghanistan in March 2020. This global crisis has also led to a significant break in economic activities in Afghanistan and will have a massive impact on the Foundation's results with regard to the originally planned results. Nevertheless, and particularly because of the crisis, the Foundation will provide the best possible support to the SME business of existing Afghan and potential new partner institutions in the context of market opportunities and the respective available capital resources in 2020. Credit risks ACGF understands the credit risk as the risk that guaranteed credits are not, or not fully, repaid by the borrowers to the partner banks and as a result, become guarantee payouts. The credit risk is ACGF’s main risk, and a direct and inherent risk with regard to the Foundation’s purpose. It is influenced both by macroeconomic factors and by the individually assignable risks from the relevant credits. It also continues to be characterized by the partner banks’ operational risks. The portfolio quality measured by the net loss rate (guarantee claims – refunds /average outstanding credit guarantee portfolio) decreased significantly in 2019 compared with the previous year as a result of considerably higher guarantee drawings and amounted to 8.49 % in 2019 (2018: 1.23 %). The net loss rate in a historical comparison (under inclusion of CGF) remained at a low level of approx. 1.63 % p.a. corresponding to the country risk (previous year: 1.15 % p.a.) despite the increased level in 2019. The results of the liquidation of collateral in the Page 23 of 33 last three years has been rated positively, however, has only been taken into account to a minor extent for risk provisioning decisions in view of the generally insecure situation in Afghanistan. The crisis situation in Afghanistan and its effects can only be controlled by the Foundation to a very limited extent. The Management Board uses its own existing risk management options and monitors the risk intensively in cooperation with the Risk department. It also uses appropriate mitigating measures where necessary. Risk management activities developed over the years have proven their value despite the considerable defaults recorded in 2019 with regard to individual credit risks and the operational risks of the partner banks according to the assessment of the Board of Managing Directors. The Board of Managing Directors and the risk department are working continuously on further improving these processes. Among other things, these measures include the selection of partner institutions according to very strict criteria and intensive checks, establishment of credit technologies based on internationally proven norms, intensive checking of (individual) guarantee applications, regular auditing of outstanding credits/guarantees and the provision of intensive technical support for the partner institutions, in this case by expert SCSA staff in particular. In an international comparison and in view of the considerable country risk of Afghanistan, the historical loss ratio achieved so far, despite the higher level in 2019, can be considered as a good above-average result. In view of the Covid-19 crisis, loan defaults of fundamentally healthy SMEs are to be expected in 2020 and 2021 with a significant decline in demand. The Foundation supports the Afghan partner institutions by restructuring the loans, e.g. by suspending monthly repayments. Since April 2020, the Foundation has intensified its monitoring of risk developments with weekly risk reports from SCSA. The credit risk is fundamentally serious but was categorized as moderate in previous years as a result of long-term experience in the Afghan SME sector and careful risk management. Even though the first quarter of 2020 showed a moderate and significantly reduced risk level in comparison to the previous year, the credit risk is currently considered to be serious for the period under review due to the Covid-19 crisis. The crisis could lead to a renewed high credit loss rate and corresponding drawing of guarantees which, although rated as unpredictable and uncontrollable, can nevertheless only be managed as risk to a very limited extent. Strategic risks The continuing relatively low level of capital resources at ACGF represented an increased risk in the reporting year. The Foundation received the advance liquid funds for Technical Assistance measures for the period from Q1 2018 to Q2 2019 from the World Bank in the third quarter of 2019, as a result of which there was initially a relaxation in the liquidity situation. Furthermore, the Foundation has also received the complete funds still available under the TA facility which were to have been used through corresponding quarterly accounts by the end of the third quarter of 2020. The risk of a renewed advance of liquid funds for provided TA measures was eliminated as a result of this. The liquidity risk to the end of the 2019 year was rated overall as moderate. Page 24 of 33 Nevertheless, there is an urgent need for new funds to maintain the overall structure, expand activities including TA measures and implement anticyclic programs with regard to the Covid-19 crisis in the course of the year 2020, in order to be in a position to achieve a continuation of the credit guarantee business and pursue and expand the purposes of the Foundation as laid out in the statutes. The current situation with regard to the blocked accounts and the overall capital resources clearly requires strengthening. The individual partner institutions, as well as the additional new partner institutions under consideration require a strengthening of the corresponding funds for guarantee securitization in accordance with the leverage objectives. Additional funds to increase the maximum coverage amounts are currently only available to a very limited extent. As part of the Covid-19 crisis, the Implementing Partner Agreement with the MoF was amended in June 2020 so that additional funds to an amount of USD 1 million are being made available to the Foundation (of which TUSD 900 for securitizing the credit guarantee business and TUSD 100 for TA measures). These funding measures once again reduce the liquidity risk. Nevertheless, additional significant funds will be required to secure capital resources in the medium and long term in order to be a strong partner for the partner institutions, while at the same time being able to maintain and expand the established structures of ACGF and the subsidiary company SCSA. In view of this, the Foundation undertook considerable fundraising activities both internationally as well as locally in Kabul. Two projects are currently both in place and promising. As a follow-up project to the current “Access to Finance” project (ACGF – MoF – Implementing Partner Agreement), the Islamic Republic of Afghanistan and the World Bank have launched the project SAFI – Supporting Afghanistan’s Financial Intermediation, as a result of which it will be possible to place up to USD 50 million at the disposal of the Foundation. This includes components to strengthen the credit guarantee business at USD 15 million, funds for TA measures at USD 5 million, and up to USD 30 million (including the required structure costs) as direct advance for strengthening Afghan SMEs. Furthermore, a program from German federal funds via the KfW is in preparation which would place additional funds of up to EUR 15 million at the disposal of the Foundation. Both project plans have been submitted as proposals to the respective funding institutions (World Bank and BMZ) and corresponding decisions and subsequent contractual implementation are expected in the course of the third quarter of 2020. The KfW Start-up Program for Afghanistan, which also receives federal funds, is currently on hold due to the priorities of the Covid 19 crisis and will continue to be pursued at the beginning of 2021, if appropriate. If, in the course of the second half of 2020, no positive progress is made with regard to a sustainable strengthening of the Foundation's substance despite the programs currently being pursued in conjunction with the Islamic Republic of Afghanistan and KfW, the Foundation would submit to the Board of Trustees in December 2020 two different budgets for the year 2021 for approval and propose a very substantial reduction in the Foundation's activities in 2021 in one of the variants. Page 25 of 33 Counterparty risks exist in the risk review period with regard to the German investment banks and the Afghan partner banks. Due to the membership of the German investment banks in German deposit guarantee systems, the counterparty risk in this respect can be considered to be moderate, although the likelihood of an inability to pay is considered to be very low, yet its impact would be dramatic and, consequently, the risk is deemed to be moderate. Despite the adjustments to the German deposit guarantee scheme in 2017, the ACGF continues to enjoy extensive protection as a charitable foundation, as it continues to be fully covered by the deposit guarantee scheme in the same way as private individuals due to its charitable status, despite the adjustments made in 2017. ACGF’s Afghan partner institutions consist of credit institutions with a sound reputation where no payment interruptions have occurred in the past and where such interruptions are not anticipated during the forecast period. Nevertheless, the Foundation – supported by the SCSA – takes over control responsibilities insofar as lending decisions are checked individually in the form of an audit prior to commitment or – on a sample basis – after commitment. As a result of the established processes and controls of ACGF and the subsidiary company SCSA it is possible to reduce the counterparty risk. In addition, ACGF carries out an analysis of partner bank indicators on a half- yearly basis. This analysis comprises various areas including issuing credits and portfolio quality (of the entire institution, not only the guaranteed credits), balance sheet figures, profitability, liquidity, etc. The evaluation of these indicators so far did not provide any indications of significantly higher counterparty risks in this area, even if some key figures show decreases. Potential new partner institutions are subject to a due diligence review by external experts and further discussions at Foundation level before a decision is reached regarding the conclusion of a partner agreement. Furthermore, the Foundation does not issue any loans to its partner institutions and, with the exception of SCSA accounts, does not maintain any accounts with these institutions. Despite a generally very high country risk, this counterparty risk is currently classified as moderate. In the case of market risks, the USD ($) to EUR (€) exchange rate, the USD to AFN exchange rate and the short- to medium-term interest rate for secure USD investments are of particular significance for ACGF. In 2019, there was once again a rise in the exchange rate of the USD to Euro which again led to high foreign exchange gains due to the appreciation in the value of the Foundation’s extensive bank balances in USD as well as a reduction in the cost of covering the Foundation’s requirement of funds in Euro. The currency risk of the local Afghan currency lies primarily in a downward movement in comparison to the USD, making the repayment of USD loans more difficult for final borrowers with local earnings. A calculation instrument was developed for the evaluation of this risk in order to evaluate the repayment capability of the end borrower in the end of currency changes. Both currency risks are rated as moderate. There were indications of a downward tendency in the USD interest on fixed-term deposits, however, overall it was possible to achieve increased income on capital investments which was Page 26 of 33 mainly due to the higher level of available funds. Exchange rate dynamics in the past financial year were difficult to forecast and a prediction for the following financial year of 2020 is linked with a high degree of uncertainty. With regard to planning, the Foundation based its planning on a stable EUR-USD exchange rate on the basis of the level at the end of the 2019 year (budget assumption: 1 EUR = 1.15 USD). An increasing rise in the value of the USD against the EUR in 2020 cannot be excluded which, in the end, would lead to further currency-related gains and is regarded as a slight opportunity. In view of the Covid-19 crisis and the upcoming presidential election in the USA, it is difficult to make a reliable forecast for 2020. An exchange rate of 1 EUR = 1.10 USD is used for calculations for the updated budget 2020. In view of the decisions of the US Federal Reserve as a result of Covid-19, opportunities presented by the USD interest rate level for investments are assumed to be very low and a return close to zero percent is assumed. An increase in the USD interest rate level is currently not expected. The Foundation continues to have a key person risk in respect of its Management Board members, particularly with regard to the Chairman Bernd Leidner who, in the event of his departure or extended absence, would be extremely difficult to replace given his expertise over many years in the development and operation of credit guarantee funds. This ongoing risk is successively being reduced through an increasing division of labor and know-how transfer to employees of ACGF as well as SCSA. Following the institutionalization of ACGF and SCSA and the associated spread of expertise, the risk continues to be estimated as moderate during the risk review period. Operational risks in the Foundation (IT risks, faulty transfers, errors, fraud etc.), which could arise despite the Foundation’s well-developed yet streamlined structure, are primarily counteracted by preserving the dual-control (“four-eyes”) principle when concluding agreements, performing purchases and conducting banking transactions, as well as when obtaining comparison offers, where applicable. A random inspection by the auditor of Procurement operations, particularly with regard to the purchasing of services as part of TA activities did not lead to any objections. The Foundation’s financial processes are laid out in the comprehensive Financial Management & Accounting Manual and financial transactions are undertaken using an electronic transfer system with various assignments of permissions. The CGF Operations Manual was replaced at the end of 2019 by the fully revised Operations & Credit Risk Manual of ACGF. This manual ensures the comprehensive mitigation of operational risks. Risk management is primarily in the form of appropriate supervision of the Management Board by the Board of Trustees. Furthermore, all persons employed by the Foundation and SCSA have been obliged in writing to report any potential or actual cases of fraud immediately. In this way, it is possible to identify and mitigate any occurring operational weaknesses at an early date. Overall, operational risks continue to be regarded as low. An exception here is the IT risk, which is classified as moderate due to the high security requirements, combined with the simultaneous availability of data in Germany and Afghanistan. A reduction in the IT risk is expected with the new Page 27 of 33 management information system (software-as-a-service) to handle the guarantee process, save documents and the production of corresponding portfolio reports, as well as carrying out risk analyses, which is in place since 2019. The completion of an IT manual including the data protection requirements will take place in the third quarter of 2020. Since February 2020, the Foundation has been using the services of an external data protection officer. 2.8.3 Overall assessment of the opportunities and risk position An overall assessment of the risk position of ACGF leads to the conclusion that the existing risks, taking into account the risk identification and the introduction of measures to reduce risk, do not represent any direct impact on ACGF that would threaten it as a going concern. With regard to the Foundation’s capital resources which, although still suf ficient, in perspective should still be increased, the Foundation will be able in the financial year 2020 to continue the existing credit guarantee portfolio and carry out TA measures. The very poor security situation and the corresponding still very high default risks are a reflection of the limiting factor to business development. In addition, the Covid-19 crisis has shown that unforeseen external crisis situations can have considerable effects on business development and, in this case, it is not possible to mitigate against them. If, in the second half of the 2020 year, there are no actual positive confirmations of the currently existing project plans – which would contribute to a sustained strengthening of the Foundation’s substance – it is possible that the Foundation’s capital could be largely used up by December 31, 2020, and it would be necessary at the end of the year to agree on the implementation of drastic measures for the 2021 financial year. In view of the promising project progress, it is expected that the agreement with KfW will be signed by the end of July 2020 and would entail a donation of up to EUR 14.5 million as a result. Other than this, current circumstances indicate that the agreement with the Afghan Government can be reached by the end of the 2020 year with corresponding World Bank funds. This provides the Foundation with good opportunities for a medium to long-term continuation of the Foundation’s activities. 3 Significant Events after the Balance Sheet Date With the ongoing spread of the Covid-19 virus worldwide since January 2020, it is still not possible to foresee when the epidemic will have reached its peak, in particular outside of Europe. It can be assumed and is already evident that both the Afghan and the global economy will be severely affected by the Covid-19 pandemic. As a result and disregarding special sales through Covid-19 mitigation measures such as onboarding of already existing loan portfolios, the Foundation expects decreases in the guarantee business, among others as a result of significantly lower new business and through the suspension of risk-adjusted loan commission. The risk in the guarantee portfolio and the corresponding risks of guarantee calls are much higher – despite restructuring measures – and, correspondingly, increased risk provisioning can be expected. Furthermore, the crisis-related significant reduction in the USD interest level is a Page 28 of 33 burden on the income situation. The budget/actual deviation at the end of May 2020 indicates that the planned deficit of approx. 25 % will be exceeded, primarily as a result of the increased provisioning requirement for loan guarantees. In addition, substantial budget/actual deviations are expected in the further course of the year so that a revised budget will be submitted to the Board of Trustees at the end of June 2020. Effects on the valuation of assets, such as the formation of higher provisions for drawing guarantees, are expected but cannot currently be estimated reliably because of the rapid and unclear development and the corresponding high degree of uncertainty. The Foundation, however, has already introduced measures in order to limit the negative effects on results as far as possible, in particular through dialogue with the Afghan partner banks and corresponding loan restructuring, as well as adjustment of the Implementing Partner Agreement and the related provision of further funds by the Afghan Ministry of Finance and/or the World Bank (USD 0.9 million). 4 Forecast Report As in previous years, the 2020 financial year will be dominated by the uncertain political and economic framework conditions in Afghanistan and, moreover, by the Covid-19 crisis which came into full effect at the end of the first quarter of 2020. In particular due to the events in connection with the Covid-19 crisis and related measures, e.g. border closures and lockdown, as well as the deepest economic crisis since the end of World War II, the previously valid budget for 2020 was updated by the Board of Directors in June 2020 (approved by the Board of Trustees in December 2019) and it will be submitted for approval at the upcoming meeting of the Board of Trustees at the end of June 2020. The business development forecast for 2020 by the Board of Directors is based on assumptions regarding various factors (economic and political situation, capital resources of the Foundation, cooperation with partner institutions, the security situation in Afghanistan and the effects of the Covid-19 crisis). In addition to the total budget of the Foundation (including its subsidiary SCSA), a separate Technical Assistance Budget for 2020 was prepared which contains the planning targets for the individual TA projects. The result of this TA budget is included in the Foundation's budget. The following sections describe the main budget assumptions of the updated 2020 budget:  Overall, the updated budget assumes a reduction in guaranteed loans in 2020 of about 10% compared to the actual figure for 2019. The reduction in the guaranteed commitments is based on the significant slump in demand in the second quarter and resuming recovery effects during the second half of the year. The inclusion of at least one further partner institution is planned for the beginning of the fourth quarter at the latest. The Foundation will provide the partner institutions with the best possible support, e.g. by restructuring the loans backed by guarantees, suspending the risk adjustment of Page 29 of 33 guarantee commissions, and interest subsidies for new loans. In addition, so-called Matching Grants (subsidies) to small and medium-sized enterprises will be entered into.  Adjustment of the Implementing Partner Agreement with the MoF in June 2020, so that additional funds of a total of USD 1 million will be made available to the Foundation in the course of Q3 2020 (of which TUSD 900 to support the loan guarantee business and TUSD 100 for TA activities).  Completion of the program from German federal funds through the KfW in the course of Q3 2020, which provides the Foundation with additional funds of up to EUR 15 million over a total term of 5 years.  Increase in staff at the Foundation and SCSA (up to 12 new posts in total) to increase the capacities for implementing the KfW project and in preparation for the SAFI project, which will not be included in the budget in implementation terms until the beginning of 2021.  The updated 2020 budget, denominated in USD, assumes an exchange rate of EUR 1 = USD 1.10 (assumed in the original budget at EUR 1 = USD 1.15). Any income and expenses from currency translation cannot be forecasted reliably and are therefore not taken into account in budget planning. Table 6 shows the updated USD budget for financial year 2020 and for planning purposes also assigns SCSA’s expenses to the individual categories of the income statement. As a result, the ACGF budget including SCSA expenses reflects the planned USD result for the Foundation for 2020. Page 30 of 33 ACGF Budget 2020 Update June 2020 in USD 1st Q 2nd Q 3rd Q 4th Q Total 2020 FX: 1€ = 1.10 1. Revenues 236,973 297,528 490,102 449,391 1,473,994 a. Operating revenues 183,550 154,973 188,048 225,141 751,712 b. Other grants 53,423 142,555 302,055 224,250 722,282 2. Other operating income - - - - - 3. Personnel expenses 328,399 386,368 429,370 535,465 1,679,603 a. Wages and salaries – Board of Directors 48,143 48,143 48,143 48,143 192,570 b. Wages and salaries - Employees 131,299 128,872 199,498 253,733 713,401 c. Wages and salaries SCSA LLC 148,958 209,354 181,730 233,590 773,631 4. Amortization/Depreciation 5,468 8,244 9,184 9,414 32,310 5. Other operating expenses 538,007 768,482 1,566,096 629,161 3,501,746 6. Other interest and similar income 24,426 13,057 1,610 3,500 42,593 tax profit 7. Pre-tax - 622,910 - 870,468 - 1,527,836 - 740,816 - 3,762,030 (incl. SCSA profit margin) 8. Tax expense 1,274 900 4,400 17,621 24,194 9. Net profit/loss for the year - 624,183 - 871,368 - 1,532,236 - 758,437 - 3,786,224 Table 6: ACGF Budget 2020 The “operating revenues” from the 2020 credit guarantee business consists of guarantee fee income, guarantee processing fees and refunds from the recovery of securities and amount to a total of TUSD 752. "Other grants" amounting to TUSD 722 include the TA funds available from the current or adjusted "Access to Finance" TA project and the TA grants in connection with the KfW project. Cost-sharing by the Afghan partner banks in TA projects is planned for 2020 in addition to the proceeds from the other grants from the World Bank TA funds. Overall, net total revenues of TUSD 1,474 from the loan guarantee business and other grants are shown in the updated budget. Personnel expenses in 2020 of TUSD 1,680 consist of wages and salaries of the two Management Board members15 and the employees of ACGF including their social insurance contributions, as well as SCSA's personnel expenses in Afghanistan. Personnel expenditure at ACGF reflects the broadened personnel structure which is necessary for the execution of the guarantee business and the implementation of the TA projects, as well as the start of further activities in the area of Matching Grants. Along with the two Management Board members, a total of 27 employees have been budgeted for 2020. On the part of SCSA, the planned KfW project will slightly increase the need for personnel, which is reflected in SCSA's personnel structure. In 2020 depreciation totaling TUSD 32 is assumed, consisting of depreciation on existing or new tangible assets (office equipment, IT and communication systems) of ACGF and SCSA. 15 Contractual negotiations for the Management Board contracts to be renewed as of October 2020 had not been completed at the time of reporting. An increase in Management Board remuneration, however, has to be assumed. Existing Management Board remuneration is currently reported in the budget. Page 31 of 33 Other operating expenses to a total amount of TUSD 3,502 include (i) an addition to provisions for forecasted guarantee claims of TUSD 1,749 (average PAR 30 = 18%), (ii) ACGF structural costs in Germany to an amount of TUSD 379 (including legal and tax consultancy services and costs of auditing the annual financial statements of TUSD 137), (iii) operating costs of the Afghan subsidiary to an amount of TUSD 495 and (iv) planned expenditure to an amount of TUSD 878 for consultancy services relating to Technical Assistance and capacity development activities. In particular, the significant worsening of the risk situation of the guarantee portfolio has led to a considerable need for provisions and has had a massive impact on the planned result. The budgeted interest income to an amount of TUSD 43 relates to the investment of the USD capital in fixed-term deposits in accordance with the Foundation’s investment guidelines. The budgeted interest rates in this respect correspond to the current interest level on the fixed-term deposit market (average of 0.2 % in 2020). The capital market development at the time of reporting shows a significant reduction in the USD interest level so that at present almost no interest income is generated by new investments. Only the investments already made at the beginning of the year generate moderate interest income. The budget shows a negative planned result in USD for ACGF for 2020 of TUSD 3,786. This also includes SCSA bills which are charged to ACGF for services provided on the basis of a reimbursement of costs from the monthly income statement, plus a profit mark-up of 5 %. SCSA’s local tax expense is expected to be in the region of TUSD 13. Furthermore, expenses in respect of Afghan withholding tax will be incurred to an amount of TUSD 11, primarily as part of Technical Assistance charging to the Afghan Ministry of Finance. The updated negative year-end result to an amount of TUSD 3,786 (TEUR 3,442)16 indicates a significant deviation from the original budget for 2020 (deficit of TUSD 2,458). The deviation is characterized primarily by a lower level of new business (-48 % in comparison to the original budget assumption), a significantly increased risk situation and the substantial reduction in the USD interest level. Overall, the adjustment of the guarantee volume and corresponding support measures result in lower income of TUSD 309, planned additional expenditure for risk provisioning of TUSD 1,047 and lower projected income from capital investments of TUSD 109. Further adjustments to the updated budget have led overall to a reduction of other expenses of TUSD 138. Taking into account the positive earnings impact from the earnings-relevant reversal of the conditionally repayable grant, results in an adjusted expected net loss for the year in the 2020 annual financial statements to an amount of around TEUR 1,403 on the basis of the converted USD planning and a constant MoF rate. The Foundation’s equity capital (TEUR 2,302 as at December 31, 2019) would be sufficient to cover the loss in the event of a loss occurrence at the aforementioned level. The planned annual result shows the dramatic situation in the wake of the Covid-19 crisis and the 16 The EUR result was translated on the basis of an exchange rate of 1 EUR = USD 1.10 and does not include the expected positive earnings effect from the adjustment of the conditionally repayable grant. USD result prior to allowance for the effects of the conditionally repayable grant – this is not budgeted in USD. Page 32 of 33 corresponding need for funds so that the Foundation can continue to fulfil its development policy mandate to support the financial sector in Afghanistan and even strengthen it. Due to the current uncertainties which could have a substantial impact on the Foundation’s business, the revised budget and with it the expected net loss for 2020 is subject to significant fluctuation which is being forecasted at a positive deviation of 30 % and a negative deviation of up to 50 %. 5 Note from the Management Board The management report contains forward-looking statements that are based on the assumptions, estimates and forecasts of the Management Board, as presented, using the information available at the time of drafting this report. Future developments and results depend on a wide variety of factors and are based on assumptions that may not be borne out. Cologne, June 10, 2020 Bernd Leidner Dirk Josef Thiesen Page 33 of 33 Annual Financial Statements for the financial year from January 1 to December 31, 2019 M4PDFUtilities V1.00 2 ACGF-Afghan Credit Guarantee Foundation, Cologne Balance Sheet as of December 31, 2019 Assets 31.12.2019 31.12.2018 € € A. Fixed assets I. Intangible assets Purchased concessions, industrial and similar rights 1,14 1,14 and licenses in such rights and assets II. Tangible assets Other equipment, operating and office equipment 9.922,74 11.702,06 9.923,88 11.703,20 III. Financial assets Equity investments 47.044,09 47.044,09 56.967,97 58.747,29 B. Current assets I. Receivables and other assets 1. Trade receivables 392.561,98 360.113,15 2. Other assets 74.969,77 1.023.401,25 - of which, advance payment by ACGF to SCSA EUR 15.140,72 (EUR 74.216,36) 467.531,75 1.383.514,40 II. Bank balances 6.881.658,18 7.305.421,30 C. Prepaid expenses and deferred charges 5.163,29 4.770,68 7.411.321,19 8.752.453,67 3 Equity and liabilities 31.12.2019 31.12.2018 € € A. Equity I. Foundation capital 1. Founding donation 400.000,00 400.000,00 2. Further donations 4.077.180,05 4.077.180,05 4.477.180,05 4.477.180,05 II. Retained profit/loss brought forward (loss) -1.354.223,67 -1.241.185,17 III. Foundation result (loss) -820.880,01 -113.038,50 2.302.076,37 3.122.956,38 B. Provisions 1. Provisions for credit guarantees 697.316,71 828.570,52 2. Other provisions 44.609,86 46.600,00 741.926,57 875.170,52 C. Liabilities 1. Trade payables 248.306,60 346.008,10 - of which to affiliated companies EUR 102.719,38 (EUR 104.717,2) 2. Other liabilities 3.847.925,78 4.408.318,67 - of which, repayable grant EUR 3.206.696,64 (EUR 4.399.032,83) - of which taxes EUR 9.107,74 (EUR 8.888,17) 4.096.232,38 4.754.326,77 D. Deferred income 271.085,87 0,00 7.411.321,19 8.752.453,67 5 ACGF-Afghan Credit Guarantee Foundation, Cologne Income Statement for the Period from January 1 to December 31, 2019 01/01/ - 01/01/ - 12/31/2019 12/31/2018 € € 1. Sales a) Guarantee fees 454.855,93 380.169,82 b) Upfront fees 113.673,46 161.270,75 c) Refund of collateral realization 215.710,89 176.501,22 d) Technical Assistance income 51.818,60 29.535,02 836.058,88 747.476,81 2. Other operating income a) Contributions from donors 331.003,73 982.866,99 b) Other income from ordinary activities 1.416.574,02 385.196,36 1.747.577,75 1.368.063,35 3. Cost of purchased services a) SCSA guarantee ops 442.206,08 366.995,25 b) SCSA TA 379.811,56 379.933,76 c) Specific consultancy costs 101.814,95 11.673,50 d) WB - TA consultancy services 304.269,67 422.975,68 1.228.102,26 1.181.578,19 4. Personnel expenses a) Wages and salaries 497.480,16 446.393,05 b) Social insurance contributions 88.318,82 76.660,82 585.798,98 523.053,87 5. Depreciation and amortization a) of fixed intangible and tangible assets 7.286,31 4.617,20 6. Other operating expenses a) Expenses from currency translation 86.389,80 29.440,30 b) Warranty expenses 1.402.487,36 256.725,02 c) Consultancy costs 57.105,58 117.804,58 d) General operating costs 170.770,20 134.562,04 e) Incidental monetary transaction charges 6.447,17 10.321,13 1.723.200,11 548.853,07 7. Other interest and similar income a) Income from fixed-term deposits and investments 139.871,02 98.561,48 8. Taxes on income 0,00 69.037,81 9. Earnings after taxes / Foundation result (loss) -820.880,01 -113.038,50 ACGF - AFGHAN CREDIT GUARANTEE FOUNDATION, COLOGNE ANNUAL FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019 N O T E S 2019 In General The provisions of the German Civil Code (Bürgerliches Gesetzbuch, BGB) govern the main reporting principles for foundations. The obligation to prepare annual financial statements for presentation to the foundation supervisory authority is based on Section 7 of the Foundation Act for the German state of North-Rhine Westphalia. As a merchant, ACGF – Afghan Credit Guarantee Foundation (“ACGF”) – is subject to the accounting rules of German Commercial Law (Handelsgesetzbuch – HGB). The Founda- tion is registered with the Cologne District Court under No. HRA 31007. Pursuant to Section 17 of ACGF’s articles of association, the Management Board is required to prepare annual financial state- ments plus a management report in accordance with the principles for large corporations. The annual financial statements consist of a balance sheet, an income statement, notes and a management report. These annual financial statements were prepared in accordance with the provisions of the Third Book of the HGB (Sections 238-324a HGB) and the articles of association. The income statement has been prepared using the total cost method. In order to meet the provisions of German law governing non- profit organizations (Gemeinnützigkeitsrecht), a 'sphere-based’ income statement is additionally pre- pared according to Section 275 HGB comprising the divisions of Ideal Area, Asset Administration and Special-Purpose Enterprise. ACGF does not conduct any commercial business operations. The statutory structuring arrangements contained in Sections 266 and 275 (2) HGB were applied. The due dates indicated for receivables (Section 268 (4) HGB) and liabilities (Section 268 (5) HGB) were included in the Notes to improve clarity and transparency. Anlage 3/1 Accounting and valuation methods The following accounting and valuation methods were applied in the preparation of the annual financial statements. Valuation corresponds to the statutory regulations and German principles of proper accounting (in par- ticular the realization principle, imparity principle and general prudence principle, the principle of single- asset valuation, the principle of period accruals and the going-concern principle). Fixed assets are verified with an asset directory containing acquisition or production costs, additions and disposals, depreciation amounts and remaining book values of the individual assets. Purchased intangible and tangible assets are stated at cost of acquisition including ancillary acquisi- tion costs, if applicable, and, if subject to wear and tear, reduced by scheduled amortiza- tion/depreciation. Depreciation and amortization are applied by straight-line method based on actual useful operating lives and pro rata temporis during the year. Financial assets are carried at cost of acquisition. There were no devaluation prerequisites. Receivables and other assets are reported at nominal value. There were no devaluation prerequisites. Cash and cash equivalents are recognized at nominal values. Prepaid expenses and deferred charges are recognized for expenditure incurred prior to the balance sheet date if it relates to expenses for a certain period after that date. Reversal of this item is in line with actual performance. Other provisions take into account all recognizable risks and contingent liabilities on the basis of rea- sonable business judgment at the necessary repayment amount. There were no long-term other provi- sions with a remaining term of more than one year on the balance sheet date. Liabilities are reported at their repayment amount. Deferred income relates to income before the balance sheet date if it represents income for a certain period after that date; it is released in line with the actual performance of the service. With regard to foreign-currency conversion, it should be noted that the assets and liabilities con- cerned are converted at the relevant exchange rate on the date of initial measurement. Foreign-currency assets and liabilities due in not more than one year are converted at the average spot rate on the bal- ance sheet date pursuant to Section 265 a HGB; currency gains/losses are therefore already recognized in income. Comments on the balance sheet and income statement Fixed assets Intangible assets This consists of the memo value for a management information system module that comes from the takeover of the Credit Guarantee Facility for Afghanistan. Tangible assets Movements of fixed asset items with details of the respective amortization and depreciation during the financial year can be found in the fixed-asset movement schedule which is attached as appendix to the Notes. Financial assets Details of the Foundation’s long-term equity investments are shown below: Prior year-end Equity result Holding in % USD TUSD SCSA LLC., Kabul (AFG) 100.00 50,000.00 -29.41 1 Year-end result on the basis of the audited annual financial statements. In addition to the equity of EUR 46,554.93 (USD 50,000.00), ancillary acquisition costs of EUR 489.16 were paid for the acquisition of the equity investment, resulting in an investment stake of EUR 47,044.09. Current assets All receivables and other assets are due within a period of less than one year. Trade receivables at an amount of EUR 392,561.98 primarily represent receivables from credit guaran- tee fees and refunds from the realization of collateral provided for Afghan partner institutions. Other assets to a total of EUR 74,969.77 include - among other assets - receivables from affiliated com- panies (SCSA LLC) to an amount of EUR 15,140.72. The remaining other assets include the following anticipatory receivables of EUR 59,829.05: - Accrued interest - Input tax deductible in the following year - Deposits and - VAT for the current year and the previous year Deposits at credit institutions Cash at banks totals EUR 6,881,658.18 and relates primarily to foreign currency balances in USD at an amount of EUR 6,820,533.54. Prepaid expenses and deferred charges Prepaid expenses of EUR 5,163.29 relate to deferred insurance premiums and office rent. Equity A breakdown of the foundation’s capital consisting of core assets and further donations is shown below: EUR Founding donation (set-up capital) 400,000.00 1. External donation 4,316,095.11 less the assumption of liabilities and receivables from CGF-Afghanistan -376,659.16 2. External donation 137,744.10 Total 4,477,180.05 Taking into account the loss carryforward and the negative foundation result for the reporting year, equi- ty amounts to a total of EUR 2,302,076.37. Provisions The guarantee provision amounting to EUR 697,316.71 is based on a general valuation adjustment and individual valuation adjustments of the credit guarantee portfolio on the balance sheet date. This corre- sponds to a value of USD 782,947.20 which is made up of the general valuation adjustment of USD 573,665.23 and individual valuation adjustments to an amount of USD 209,281.97. Other provisions relate primarily to outstanding invoice receipts and annual financial statement and au- diting costs and can be broken down as follows: EUR Preparation of annual financial statements 4,300.00 Preparation of tax declaration 2,500.00 Audit of annual financial statements 18,500.00 Translation costs 3,000.00 Audit costs TA 12,000.00 Remaining leave for employees 4,309.86 Total 44,609.86 Liabilities The remaining terms of liabilities can be broken down as follows: Thereof with a residual term of Up to Up to over 12/31/2019 1 year 5 years 5 years EUR EUR EUR EUR Trade payables Trade payables 145,587.22 145,587.22 0.00 0.00 (previous year) (241,290.82) (241,290.82) (0.00) (0.00) Payables to affiliated companies 102,719.38 102,719.38 0.00 0.00 (previous year) (104,717.28) (104 (104,717.28) (0.00) (0.00) 248,306.60 248,306.60 0.00 0.00 (previous year) (346,008.10) (346,008.10) (0.00) (0.00) Other liabilities Liabilities from income and church tax 9,107.74 9,107.74 0.00 0.00 (previous year) (8,888.17) (8,888.17) (0.00) (0.00) Liabilities from credit card charg- ing 0.00 0.00 0.00 0.00 (previous year) (397.67) (397.67) (0.00) (0.00) Liabilities to partner banks 632,121.40 632,121.40 0.00 0.00 (previous year) (0.00) (0.00) (0.00) (0.00) Conditionally repayable grant 3,206,696.66 0.00 0.00 3,206,696.64 (previous year) (4,399,032.83) (0.00) (0.00) (4,399,032.83) 3,847,925.78 641,229.14 0.00 3,206,696.64 (previous year) (4,408,318.67) (9,285.84) (0.00) (4,399,032.83) Liabilities 4,096,232.38 889,535.74 0.00 3,206,696.64 (previous year) (4,754,326.77) (355,293.94) (0.00) (4,399,032.83) The liabilities are unsecured. Liabilities to affiliated companies relate in full to trade payables to SCSA LLC. Liabilities to partner banks relate to approved and not yet paid guarantee drawings. Accruals and deferred income This consists of an amount in connection with the second advance received from the Afghan Ministry of Finance for the implementation of Technical Assistance activities as part of the World Bank project. The corresponding income to an amount of EUR 271,085.87 will not be realized until 2020. Contingencies and other financial obligations In accordance with the external donation agreement reached between DEG and the Federal Republic of Germany in December 2014, the Foundation took over with effect from January 1, 2015, the complete guarantee portfolio managed by DEG for the Afghanistan credit guarantee facility with all rights and obli- gations existing in this respect. At the time of the takeover, the guarantee portfolio (relating to credits + interest for a maximum of 3 months) amounted in total to USD 15,073,182. As of the balance sheet date the company had the following contingent liabilities (Sections 251 in con- junction with 268 (7) HGB): EUR Outstanding credit guarantee portfolio 12,386,013.99 This corresponds to an outstanding credit guarantee portfolio of USD 13,907,016.50 as of the balance sheet date (translation of USD at the Commerzbank exchange rate as of 12/31/2019; 1 EUR = USD 1.1228). The maximum obligations based on the corresponding contractual agreements with the Afghan partner institutions amount to a total of up to USD 4,956,888.55. The obligations are fully covered through blocked time deposits with German banks. The risk of utilization has been taken into account through the guarantee provision at 15.8% of the maximum obligation on the basis of the risk situation as of the balance sheet date. Sales Sales consist of revenues from guarantee and processing fees in the year 2019 to a total amount of EUR 568,529.39, revenues from refunds from the realization of collateral of EUR 215,710.89 and Tech- nical Assistance revenues of EUR 51,818.60. Other operating income Other operating income at an amount of EUR 1,747,577.75 consists primarily of contributions from do- nors to an amount of EUR 331,003.73, income from the reduction of the repayable grant at an amount of EUR 1,192,336.19 and currency translation gains amounting to EUR 198,071.25. Cost of purchased services SCSA expenses (EUR 822,017.64) consist of costs charged in the areas of Guarantee Operations and Technical Assistance (TA) on the basis of the corresponding agency contract. Other operating expenses Other operating expenses are made up of the following: EUR Expenses from currency translation 86,389.80 Guarantee expenses 1,402,487.36 Legal and tax consultancy fees 5,912.10 Bookkeeping and annual account costs 13,977.22 Auditing costs 37,216.26 Insurance premiums and fees 8,322.55 Further training costs 9,836.74 Rent incl. incidental rental costs 28,186.81 International travel costs 50,450.35 National travel costs 12,495.75 Costs for IT & software 34,846.10 Costs for communication, PR and website 19,334.58 Hospitality costs 807.61 Office material and postage 4,044.03 Gifts 0.00 Ancillary money transfer costs 6,447.17 Non-deductible input tax 2,445.68 Total 1,723,200.11 Interest Interest income comes from fixed-term deposits at German banks. Sphere-based income statement 2019 Parallel to the current accounting and preparation of the financial statements, ACGF prepared in 2019 - as already in previous years - a tax sphere profit and loss account for its divisions Ideal Area, Asset Management and Special Purpose Operation CGF Afghanistan. Taking into consideration the ACGF Financial Management & Accounting Manual (last version of 03/23/2017, in particular Chapter IV – 2. Overview on Spheres) and the reference it contains to a regular examination of the percentage distribution of income and expenses over the individual spheres of the income statement, further adjustments were made with regard to the percentage distribution over the individual spheres in the annual financial statements for 2019 due to the growth in staff numbers and the partial creation of new structures in the Foundation following the last adjustment made in the 2017 an- nual financial statements. Weighting of the activities of the board members and, in particular, the em- ployees were taken into consideration when establishing changes. As a result, the former distribution key for the Ideal Area was adjusted in accordance with the assessed workload in that the percentage value of the allocation of income and expenses to the Ideal Area – taking into account a prudent re- evaluation – was lowered from 10 % to 5 %. Corresponding to this, the allocation to the two special- purpose enterprises I and II was increased in each case from 41.25 % to 43.75 %. The Asset Admin- istration division remains unchanged with a share of 7.5 %. A breakdown of the income statement into the areas of Ideal, Asset Administration and Special-Purpose Enterprise CGF Afghanistan (CGF Opera- tional and CGF TA Special-Purpose Enterprises) can be presented as follows: Previous year EUR EUR EUR A. IDEAL AREA I. Non-taxable income Other non-taxable income of which income from currency translation EUR 9,903.56 69,791.13 38,482.69 II. Expenses 1. Depreciation and amortization 364.32 461.71 2. Personnel expenses 22,390.70 30,746.40 3. Currency translation expenses 4,319.49 2,944.03 4. Other expenses 8,336.04 35,410.54 19,650.57 Profit/Loss – Ideal Area 34,380.59 -15,320.02 B. ASSET ADMINISTRATION I. Earnings Income tax-free earnings 1. Interest income and foreign exchange gains 0.00 98,561.48 2. Other income-tax-free-earnings of which income from currency translation EUR 14,855.35 244,521.93 244,521.93 28,862.02 II. Expenses/Outgoings 1. Depreciation and amortization 546.47 346.33 2. Currency translation expenses 6,479.23 2,323.53 3. Personnel expenses 33,809.32 23,059.80 4. Other operating expenses 12,139.89 52,974.11 13,664.18 Profit/Loss – Asset Administration 191,547.03 88,029.67 Previous year EUR EUR EUR C. SPECIAL PURPOSE ENTERPRISE (SPE) CGF Afghanistan I. SPE 1: CGF Operational 1. Income from fees and commissions 784,240.28 717,941.79 2. Other operating income of which income from currency translation EUR 86,656.17 610,848.63 1,395,088.91 158,741.09 3. Cost of purchases services Guarantee operations 442,206.08 366,995.25 4. Personnel expenses Wages and salaries 197,144.45 126,828.93 5. Depreciation and amortization Amortization of intangible assets and depreciation of tangible assets 3,187.76 1,904.58 6. Currency and translation expenses 37,795.54 12,779.42 7. Other operating expenses 1,553,288.29 2,233,622.12 345,295.18 Profit/Loss CGF Operational -838,533.21 22,879,52 II. SPE 2: CGF TA 1. Other operating income of which income from currency translation EUR 86,656.17 1,014,069.89 1,171,295.51 2. Cost of purchased services Technical Assistance 684,081.23 802,909.44 3. Personnel expenses Wages and salaries 332,454.51 342,418.75 4. Depreciation and amortization Amortization of intangible assets and depreciation of tangible assets 3,187.76 1,9 5. Currency translation expenses 37,795.54 12,779.42 6. Other operating expenses 164,825.27 1,222,344.31 220,128.04 Profit/Loss CGF TA -208,274.42 -208,844,72 Profit/Loss SPEs -1,046,807.63 -185,965.20 D. FOUNDATION RESULT -820,880.01 -113,038.50 Other disclosures Employees Together with the two members of the Management Board, the Foundation had an average of 13.75 salaried employees during the financial year, one of whom in a managerial position, predominantly em- ployed on a part-time basis. Remuneration paid for activities of the members of the Board of Trustees No remuneration is paid to members of the Board of Trustees resident in Germany. Similarly, no remu- neration or reimbursement of travel expenses was incurred in 2019 for the Afghan members of the Board of Trustees. Auditor’s fee The total fee charged by the auditor for auditing services for the financial year is EUR 18,500.00. Further services by the auditor, in particular for translation services, were estimated at EUR 2,500.00. The fee for the separate Technical Assistance audit by the auditor for 2019 amounts to EUR 12,000.00 (other assurance services). Transactions with affiliated persons The Foundation did not enter into any transactions with related persons or companies that did not reflect normal commercial practice. Central purchasing of services (e.g. in the areas of IT and Communication) were provided under the terms of a procurement agreement. Significant events after the balance sheet date The following significant business transactions with serious effects occurred in the period leading up to the preparation of this report. With the ongoing spread of the Covid-19 virus worldwide since January 2020, it is still not possible to foresee when the epidemic will have reached its peak, in particular outside of Europe. It can be as- sumed and is already evident that both the Afghan and the global economy will be severely affected by the Covid-19 pandemic. As a result and disregarding special sales through Covid-19 mitigation measures such as onboarding of already existing loan portfolios, the Foundation expects decreases in the guarantee business, among others as a result of significantly lower new business and through the suspension of risk-adjusted commission. The risk in the guarantee portfolio and the corresponding risks of guarantee calls are much higher – despite restructuring measures – and, correspondingly, increased risk provisioning can be expected. Furthermore, the crisis-related significant reduction in the USD inter- est level is a burden on the income situation. The budget/actual deviation at the end of May 2020 indi- cates that the planned deficit of approx. 25 % will be exceeded, primarily as a result of the increased provisioning requirement for loan guarantees. In addition, substantial budget/actual deviations are ex- pected in the further course of the year so that a revised budget will be submitted to the board of trus- tees at the end of June 2020. Effects on the valuation of assets, such as the formation of higher provi- sions for drawing guarantees, are expected but cannot currently be estimated reliably because of the rapid and unclear development and the corresponding high degree of uncertainty. The Foundation, however, has already introduced measures in order to limit the negative effects on results as far as pos- sible, in particular through dialogue with the Afghan partner banks and corresponding loan restructuring, as well as adjustment of the Implementing Partner Agreement and the related provision of further funds by the Afghan Ministry of Finance and/or the World Bank (USD 0.9 million). Members of the Management Board The business was managed by the two management board members during the financial year: Mr. Bernd Leidner, merchant, Kassel, and Mr. Dirk Josef Thiesen, merchant, Berlin. The Foundation is represented by two management board members jointly. The Board of Trustees had the following members during the reporting year: Mr. Bernt Hagenlocher, Vice President, DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH, Cologne (Chairman as of December 23, 2016); Ms. Katharina Weber, Country Consultant Afghanistan, German Federal Ministry for Economic Cooper- ation and Development, Berlin (member since March 15, 2018 and Vice Chairwoman since May 9, 2018) Ms. Salma Alokozai, Director - Aid Management, Ministry of Finance, Kabul, Afghanistan (member as of Dec. 21, 2018). The declaration on the Federal Corporate Governance Code prescribed by Section 16 of the Founda- tion’s statutes is issued by the Management Board and Board of Trustees and is made permanently available accordingly on the Internet in the electronic version of the Federal Gazette (Bundesanzeiger). Management Board remuneration in the financial year 2019 Management Board remuneration was as follows in the past financial year: Mr. Bernd Leidner: EUR 105,038.04 Mr. Dirk Josef Thiesen: EUR 70,026.00 Cologne, June 10, 2020 Bernd Leidner Dirk Josef Thiesen - Chairman - - Vice-Chairman - Fixed Assets Movement Schedule M4PDFUtilities V1.00 ACGF - AFGHAN CREDIT GUARANTEE FOUNDATION FIXED ASSET MOVEMENT SCHEDULE IN THE FINANCIAL YEAR 2019 PURCHASE- AND MANUFACTURING COSTS As at As at 01.01.2019 Additions Disposals 31.12.2019 EUR EUR EUR EUR I. INTANGIBLE ASSETS Purchased concessions, industrial property rights and similar rights and assets and licenses in such rights and assets 1,14 0,00 0,00 1,14 II. FIXED ASSETS 1. Other equipment, operating and office equipment 22.607,43 5.506,99 0,00 28.114,42 22.607,43 5.506,99 0,00 28.114,42 III. FINANCIAL ASSETS Equity investments 47.044,09 0,00 0,00 47.044,09 69.652,66 5.506,99 0,00 75.159,65 DEPRECIATION BOOK VALUE As at As at As at As at 01.01.2019 Additions Disposals 31.12.2019 31.12.2019 31.12.2018 EUR EUR EUR EUR EUR EUR 0,00 0,00 0,00 0,00 1,14 1,14 10.905,37 7.286,31 0,00 18.191,68 9.922,74 11.702,06 10.905,37 7.286,31 0,00 18.191,68 9.922,74 11.702,06 0,00 0,00 0,00 0,00 47.044,09 47.044,09 10.905,37 7.286,31 0,00 18.191,68 56.967,97 58.747,29 1 INDEPENDENT AUDITOR’S REPORT To ACGF - Afghan Credit Guarantee Foundation, Cologne Audit Opinions We have audited the annual financial statements of ACGF - Afghan Credit Guarantee Foundation, Cologne, which comprise the balance sheet as at 31 December 2019, and the statement of profit and loss for the financial year from from 1 January to 31 December 2019, and notes to the finan- cial statements, including the recognition and measurement policies presented therein. In addi- tion, we have audited the management report of ACGF - Afghan Credit Guarantee Foundation for the financial year from 1 January to 31 December 2019. In our opinion, on the basis of the knowledge obtained in the audit,  the accompanying annual financial statements comply, in all material respects, with the re- quirements of German commercial law and give a true and fair view of the assets, liabilities and financial position of the Foundation as at 31 December 2019 and of its financial perfor- mance for the financial year from 1 January to 31 December 2019 in compliance with German Legally Required Accounting Principles, and  the accompanying management report as a whole provides an appropriate view of the Founda- tion’s position. In all material respects, this management report is consistent with the annual financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Pursuant to § [Article] 322 Abs. [paragraph] 3 Satz [sentence] 1 HGB [Handelsgesetzbuch: Ger- man Commercial Code], we declare that our audit has not led to any reservations relating to the legal compliance of the annual financial statements and of the management report. Basis for the Audit Opinions We conducted our audit of the annual financial statements and of the management report in ac- cordance with § 317 HGB and in compliance with German Generally Accepted Standards for Fi- nancial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Au- ditors in Germany] (IDW). Our responsibilities under those requirements and principles are fur- ther described in the “Auditor’s Responsibilities for the Audit of the Annual Financial Statements and of the Management Report” section of our auditor’s report. We are independent of the Com- pany in accordance with the requirements of German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these require- ments. We believe that the audit evidence we have obtained is sufficient and appropriate to pro- vide a basis for our audit opinions on the annual financial statements and on the management re- port. 0.0908218.002 2 Responsibilities of the Executive Directors and the Board of Trustees for the Annual Financial Statements and the Management Report The executive directors are responsible for the preparation of the annual financial statements that comply, in all material respects, with the requirements of German commercial law, and that the annual financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Foundation in compliance with German Legally Required Accounting Principles. In addition, the executive directors are responsible for such internal control as they, in accordance with German Legally Required Accounting Principles, have determined necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, the executive directors are responsible for assessing the Foundation’s ability to continue as a going concern. They also have the responsibility for dis- closing, as applicable, matters related to going concern. In addition, they are responsible for finan- cial reporting based on the going concern basis of accounting, provided no actual or legal circum- stances conflict therewith. Furthermore, the executive directors are responsible for the preparation of the management report that as a whole provides an appropriate view of the Foundation’s position and is, in all material re- spects, consistent with the annual financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the ex- ecutive directors are responsible for such arrangements and measures (systems) as they have con- sidered necessary to enable the preparation of a management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the management report. The Board of Trustees is responsible for overseeing the Foundation’s financial reporting process for the preparation of the annual financial statements and of the management report.] Auditor’s Responsibilities for the Audit of the Annual Financial Statements and of the Management Report Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the management report as a whole provides an appropriate view of the Foundation’s position and, in all material respects, is consistent with the annual financial statements and the knowledge ob- tained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our audit opinions on the annual financial statements and on the management report. 0.0908218.002 3 Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with § 317 HGB and in compliance with German Generally Accepted Standards for Fi- nancial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always de- tect a material misstatement. Misstatements can arise from fraud or error and are considered ma- terial if, individually or in the aggregate, they could reasonably be expected to influence the eco- nomic decisions of users taken on the basis of these annual financial statements and this manage- ment report. We exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the annual financial statements and of the management report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to pro- vide a basis for our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.  Obtain an understanding of internal control relevant to the audit of the annual financial state- ments and of arrangements and measures (systems) relevant to the audit of the management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an audit opinion on the effectiveness of these systems of the Foundation.  Evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness of estimates made by the executive directors and related disclosures.  Conclude on the appropriateness of the executive directors’ use of the going concern basi s of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Foundation’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the annual financial state- ments and in the management report or, if such disclosures are inadequate, to modify our re- spective audit opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Foundation to cease to be able to continue as a going concern.  Evaluate the overall presentation, structure and content of the annual financial statements, in- cluding the disclosures, and whether the annual financial statements present the underlying transactions and events in a manner that the annual financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Foundation in compliance with German Legally Required Accounting Principles.  Evaluate the consistency of the management report with the annual financial statements, its conformity with German law, and the view of the Foundation’s position it provides. 0.0908218.002 4    Perform audit procedures on the prospective information presented by the executive directors in the management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by the executive directors as a basis for the pro- spective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate audit opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant defi- ciencies in internal control that we identify during our audit. Düsseldorf, June 22, 2020 PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft 20000004045330 sgd. Joachim Gorgs sgd. ppa. Barbara Hegeler Wirtschaftsprüfer Wirtschaftsprüferin (German Public Auditor) (German Public Auditor) 0.0908218.002 M4PDF-Engine V15.20