FC 99/3

FINANCE COMMITTEE

Table of Contents

I. Introduction

II. Regular Programme

III. TCP

IV. Extra budgetary funding

V. Net Equity Position

ANNEX TO FINANCIAL HIGHLIGHTS AS AT 31 DECEMBER 2001

I. Introduction

1. The Financial Highlights Report shows, at a summary level, the results for the biennium ended 31 December 2001. The report is organised to show:

• Income and expenditure by source of funds - Regular Programme (RP) appropriations with the Technical Cooperation Programme (TCP) shown separately, and extra-budgetary funds - Trust Funds and UNDP coming to a total funds presentation;
• The plan (budget) for the Regular Programme is from the Programme of Work and Budget whereas the budget for Trust Funds represents the expenditure plan formulated by project managers and other plan figures are projections based on past experience;
• Balances for the comparative period - these figures are balances from the previous biennium.
• An Annex provides additional information on reserves, showing movements during the period for the Working Capital Fund, Special Reserve Account and the General Fund. This Annex also provides additional TCP information activity relative to the appropriations.

II. Regular Programme

2. Contributions received for the Regular Programme improved slightly (by 1%) over the last biennium, but fell short of the budgeted level by $12.4 million or 2%. Regular Programme expenditures for the biennium, including $64.6 million of TCP disbursements from the 1998-99 appropriation, totaled $669.8 million. In addition to budgeted expenditures, FAO had unbudgeted costs of some $14.1 million related to the amortization of after-service liabilities.

3. The net result of the Regular Programme expenditures and income is a reduction in equity of $11.8 million, notwithstanding the fact that the Director-General, in the light of the non-receipt of arrears, restricted spending against the 2000-01 appropriation to cover the US$ 8.3 million in Redeployment and Separation costs advanced from the Working Capital Fund by Conference Resolution 3/99. When this reduction or "loss" on the year's activities is closed to the equity accounts which, at the start of the biennium, were in deficit by $63.6 million, the General Fund balance at the end of 2000-2001 biennium stands at $75.4 million. This deficit, as shown in the Highlights Report, is being funded by undisbursed TCP allotments.

4. Other income accruing to the Regular Programme was below expectations, as detailed below :

5. Project servicing costs of $29.1 million from Trust Funds and UNDP projects decreased when compared to the projection in spite of an overall increase in project expenditure due to the change in mix of projects with a large increase in emergency projects that do not attract project servicing costs.

6. Miscellaneous income is made up of investment income, bank interest, the lapse of accrued liabilities and other miscellaneous income. The major decline in this income category , which came down from US$65.3 million in 1998-99 to US$15.5 million in 2000-01, is due to the fall in investment income over the two accounting periods. The figures year-by-year are shown in the table below.

7. The table shows that 1998 accounts for a very high level of income compared with 1999 and 2000. On analysis, the 1998 figure is unusually high because in that year FAO found itself in need of liquidity and at the same time (because of strong market growth) with security values in the portfolio in excess of what was required to meet the actuarial funding levels needed to cover staff termination grants. In consequence, in the summer of 1998, FAO sold US$40 million in securities and in this process created a one-time capital gain of US$23.7 million. The dividend and interest income in 2000 was above 1999, but again FAO had fairly high capital gains in 1999. In 2000 capital gains dropped as profits and investment returns fell off that year. In 2001, with world equity markets in sharp decline and with the Euro weakening against the dollar, dividends fell to a level of US$4.3 million. In addition to this decline in dividends and interest income (owing to market forces) the long term portfolio manager repositioned the portfolio after 11 September, moving out of equities (selling equities and buying bonds) which generated some US$16.4 million in realised losses (see Report on Investments - 2001). The net effect of the decline in dividends and interest income, combined with capital losses, put investment income into the red by some US$12.0 million in 2001. Over the four year period 1998 - 2001 the effect of 2001 brought the return on the portfolio to an average of about US$13.5 million per year or a return of 6.75% per year on average.

8. Sundry income is made up of Government Cash Contributions, information products revolving fund, other miscellaneous income and exchange rate gains and losses. The US$39 million "loss" on this income category is due to the way FAO accounts for the forward purchase of the Euro. The forward Euro contract of €312 million FAO bought at the start of the biennium fixes the rate at which the Organization buys its Euro for the forward period of the biennium. FAO, under UN accounting and local FAO accounting rules, accounts for Euro expenditure at the budget rate (in case of salary related Euro payments) or at the prevailing monthly UN rate of exchange for non-staff payments. Where the dollar is strengthening against the Euro over an accounting period (which was the case in the biennium under report), these accounting practices produce an exchange rate loss to the Special Reserve Account which is the consequence of the interaction of three factors:

• as Euro are purchased under the forward contract the cost to FAO of the currency is the forward rate agreed in the contract. This is in fact the purpose of a forward contract to lock in exchange rates so as not to face gains or losses;
• as the Euro are used they are posted to the expenses at either the budget rate agreed by Conference (in the case of Euro-based salary payments) or at the UN monthly rate of exchange (non-payroll Euro payments). In a market with a strengthening dollar this accounting has the effect of reducing the cost to the budget of Euro payments compared with the forward rate paid for the Euro. In 2000-01 this practice produced US$24 million in budget savings in staff costs which, by Conference resolution, were credited to the Special Reserve Account as currency gains. The same impact applies to other currency gains and losses as applicable to non-staff costs and non-Headquarters staff costs. However, the Conference resolution that provides for crediting currency gains on staff costs to the Special Reserve Account does not apply to these costs, which means that some US$20 million accrued to the budget instead of the Special Reserve Account; and,
• since the cash paid to buy Euro is at the forward rate but expenses paid with those Euro are booked at a lower rate, the difference is charged as a loss to the Special Reserve Account. The gain credited to the Special Reserve (for salary related payments) offsets in part the loss to the Special Reserve on the forward purchase. Had the Euro strengthened during the period, the loss would have been a gain. It is, however, important to remember that the forward contract is not to support a speculative venture. It is done for the purpose of avoiding gains or losses on exchange given that the expenses faced by the Organization are mostly in two currencies. Clearly, FAO needs to review its accounting practices with respect to forward hedge accounting so that funds are not moving from the reserves to the budget or vice versa. This is a subject that will be addressed when independent consultants are brought in to advise on changing FAO functional currency to Euro.

III. TCP

9. The TCP 1998-99 appropriation of $87.3 million was completely utilized at the end of the 4-year TCP life cycle. The total TCP expenditure in the 2000-2001 biennium of $76.0 million was divided between $64.6 million and $11.4 million for the 1998-99 and 2000-01 appropriation respectively. The balance at 31 December 2001 available for the 2000-01 TCP appropriation was $77.7 million. (See the Annex attached).

IV. Extra budgetary funding

10. The income and expenditure figures for Trust Fund and UNDP exceeded the plan by over $130 million. Almost all of the increase is accounted for by the higher delivery on the Iraq Oil for Food programme.

V. Net Equity Position

11. The equity position of the General Fund for this biennium has deteriorated to a deficit of $75.4 million at 31 December 2001 from $63.6 million at the end of 1999. The increase in the deficit can be attributed mainly to the amortization of after-service medical liability of $14.1 million. As regards after service medical costs it is noted that as a consequence of the decisions by the governing bodies not to budget for the amortization of past liabilities of such costs at the time they were incurred, over the last two biennia (98/99 and 00/01) some $35.2 million of unbudgeted after-service medical costs have been charged to the General Fund. In addition, the Special Reserve Account balance is reduced to $0.5 million at 31 December 2001 from $23.2 million at the end of 1999 as a result of exchange losses incurred during the biennium, as explained above. The Working Capital Fund balance is reduced to $15.5 million at 31 December 2001 from $23.7 million at the end of 1999. The reduction of $8.3 million is an advance, as authorized by Conference Resolution 3/99, to be reimbursed on the eventual receipt of arrears from the major contributor.

12. It is important to note that several major assets and liabilities are not shown on the financial statements under standing UN accounting practices or by FAO Financial Rules approved by the Council. More specifically, the largest asset the Organization has - arrears of $130.4 million - are carried on the books at zero value so as not to treat unpaid assessments as income. The unrecorded liabilities in respect of staff related schemes at 31 December 2001 amounted to $126.4 million.

13. All figures in this report are based on year-end unaudited figures.

ANNEX TO FINANCIAL HIGHLIGHTS
AS AT 31 DECEMBER 2001