FC 93/9(b)





Finance Committee



Ninety-third Session

Rome, 13 - 17 September 1999

Audited Accounts

FAO Commissary 1998

Attached for the information of Finance Committee Members are the Audited Accounts of the FAO Commissary 1998.

 


F.A.O. STAFF COMMISSARY FUND

OPINION OF THE EXTERNAL AUDITOR

FINANCIAL STATEMENTS FOR THE PERIOD
1 JANUARY TO 31 DECEMBER 1998

 

I have examined the accompanying financial statements, as stated on attached pages 1 to 10, comprising the balance sheet, the income and expenditure statement, the statement of cash flow and the notes to the statements of the Food and Agriculture Organization's Staff Commissary Fund for the year ended 31 December 1998. These financial statements are the responsibility of the Staff Commissary's management. My responsibility is to express an opinion on these financial statements based on the audit.

The audit was conducted in accordance with the Common Auditing Standards of the Panel of External Auditors of the United Nations, the Specialised Agencies and the International Atomic Energy Agency. These standards require that the audit be planned and carried out to obtain reasonable assurance that the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and evaluating the overall financial statement presentation.

As a result of my audit, I am of the opinion that the financial statements present fairly the financial position of the Staff Commissary Fund as at 31 December 1998 and the results of its operations for the period then ended, that they were prepared in accordance with the stated accounting policies, and that the transactions were in accordance with the financial regulations and legislative authority.

Jean-Louis Beaud de Brive,
Directeur,
pour le Premier Président de la Cour des Comptes
de la République Française
Commissaire aux Comptes

21 July 1999


STAFF COMMISSARY FUND

ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1998

 

Submitted by:

.........................................

C.I. Denny

Commissary Manager, AFSCM

Approved by:

........................................ 

G. Politis

Officer-in-charge, AFS

 

19 July 1999


Balance Sheet at 31 December 1998

(all figures in Lit. `000)

  1998 1997
     
FIXED ASSETS (note 2) 469,916 568,517
     
CURRENT ASSETS    
Stocks (note 3) 2,680,238 2,475,261
Sundry Debtors (note 10) 111,168 254,607
Cash at Bank and in Hand (note 4) 1,045,851 1,847,334
     
TOTAL 4,307,172 5,145,718
     
Less    
     
CURRENT LIABILITIES    
Creditors (note 10) 981,795 1,925,340
Payable to Staff Welfare Fund (note 5) 61,998 63,975
  1,043,794 1,989,315
     
LONG TERM LIABILITIES    
Terminal Emoluments Reserve (note 6) 328,169 317,672
     
TOTAL 1,371,962 2,306,987
     
NET ASSETS 2,935,210 2,838,731
     
Represented by:    
     
Working Capital Fund (note 7) 2,664,975 2,573,681
Retained Surplus (note 8) 270,235 265,050
     
  2,935,210 2,838,731

Notes 1 to 10 form an integral part of these accounts


Income and Expenditures Statement
For the year ended 31 December 1998

(all figures in Lit. `000)

  1998 1997
     

Sales

20,499,810 19,797,547
Less: Cost of Goods Sold 17,255,778 16,468,189
     
Gross Trading Surplus 3,244,032 3,329,358
     

Less: Operating Expenses

   
Personnel (note 11a)
Guard Services (note 11b)
2,564,882
36,830
2,622,847
-
Support Cost Reimbursement to FAO (note 12) 132,750 130,258
General Operating Expenses 165,374 266,086
Depreciation 242,778 175,578
Write-offs (note 13) 18,740 13,565
Provision for Terminal Emoluments (note 6) 10,497 (3,681)
     
  3,171,851 3,204,653
     
Operating Surplus/(Deficit) 72,181 124,706
     
Add: Other income (note 9a) 188,496 170,730
Extraordinary income (note 9b) 40,800 -
Less: Contribution to Staff Welfare Fund (note 5) 204,998 197,975
     
Net Surplus/(Deficit) 96,479 97,460
     

Transfers (To)/From Reserves

   
     
(To)/From Working Capital Fund (note 7) (91,294) (47,706)
     
(To)/From retained Surplus (note 8) ( 5,185) (49,754)

 

Notes 1 to 10 form an integral part of these accounts


Statement of Cash Flow for the Year ended 31 December 1998

(all figures in Lit. `000)

  1998 1997
     

Net Cash Inflow/(Outflow)

   

  from Operating Activities (note 14a)

(829,505) 126,132
     

Return on Servicing of Finance

   

Interest Received
Income from the sale of two trucks
Extraordinary income (note 9b)

94,689
42,800
40,800
120,728
-
-
     

Investing Activities

   

Payments to Acquire Tangible Fixed Assets

(150,267) (321,592)
     

Increase/(Decrease) in Cash (note 14b)

(801,483) (74,732)

 

Notes 1 to 10 form an integral part of these accounts


ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1998

NOTES TO THE ACCOUNTS

 

1. Summary of Significant Accounting Policies

(a) Accounting Convention

The accounts have been prepared on an accrual basis under the historical cost convention.

(b) Depreciation

Depreciation is calculated using the straight-line method to write off the cost of fixed assets over their estimated useful life of five years. The first year's depreciation of new assets is based on the actual number of months the asset has been in service.

Note: Recognising that the Organisation estimates a useful life of four years for all computer equipment, all of the Commissary's computer equipment has been depreciated using a four-year straight-line method in 1998.

(c) Cost of goods sold and stocks

Stocks are stated at the lower of cost and net realisable value. Cost is comprised of cost of goods, transportation, customs clearance and insurance premiums. The cost of stocks is determined using the first-in, first-out (FIFO) method.

(d) Foreign currencies

Assets and liabilities in currencies other than Italian Lira have been translated at the UN operational rate of exchange at 31 December 1998. Income and expenditure items have been recorded at the rate of exchange in effect at the date of transaction. Any eventual differences arising when payment is made are reflected under the income and expenditure statement.

2. Fixed Assets

 

Figures in Lit. `000

Cost:

Improvements of Premises Furnitue Equipment Motor Vehicles Total
At 1.1.1998 112,730 286,021 795,660 245,197 1,439,608
Additions 38,648 43,319 68,300 150,267
Disposals      -     - (12,807) (32,131) (101,33)- (146,272)
At 31.12.1998 112,730 311,862 806,848 212,163 1,443,603
           
Depreciation:          
At 1.1.1998 16,909 212,357 400,119 241,706 871,091
Charge for the year 21,627 52,987 157,843 10,321 242,778
Disposals      -     (12,807) (26,041) (101,33) - (140,182)
At 31.12.1998 38,536 252,537 531,921 150,693 973,687
           
Net Book Amount:        
At 31.12.1998 74,194 59,325 274,927 61,470 469,916
At 31.12.1997 95,821 73,664 395,541 3,491 568,517

3. Stocks

Stocks are made up as follows:


Description

1998
Lit. ‘000

1997
Lit. ‘000

Goods
Petrol/Oil coupons

2,418,110
262,128

2,262,103
213,158

Total

2,680,238

2,475,261

 

4. Cash at Bank and in Hand

Cash at bank and in hand are made up as follows;


Description

1998
Lit. ‘000

1997
Lit. ‘000

Cash at bank, current account
Cash in hand

965,393
80,458

1,703,852
143,482

Total

1,045,851

1,847,334

 

5. Staff Welfare Fund

In accordance with Conference Resolution 18/93, effective with the year ending 31 December 1992, the equivalent of 1 per cent of total sales of the Staff Commissary is paid to the Staff Welfare Fund.

The composition of the account payable to the Staff Welfare Fund at 31 December 1998 and its movement for the year then ended were as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Balance at 1 January
Add: Contribution to Staff Welfare Fund

63,975
204,998

24,306
197,975

268,973

222,281

Less: Amount paid during the year

206,975

158,306

Balance at 31 December

61,998

63,975

 

6. Terminal Emoluments Fund

 

At the Eighteenth session of the Committee on Financial Control on 17 – 22 May 1954 it was decided to create a Reserve for costs for terminal indemnities. Further to this, at the Sixty-first session of the FAO Finance Committee held on 14 – 25 September 1987, it was decided that the level of the Terminal Emoluments Reserve should represent 75 percent of the calculated expenses for repatriation grants and unused annual leave. At the Seventy-fourth session of Finance Committee held on 14 – 22 September 1992 it was decided, as the Commissary is a self-sufficient unit and is requested to operate without cost of the Organisation, to accrue in full for known liabilities in accordance with generally accepted accounting principles applicable to commercial concerns.

The movements in the Terminal Emoluments Reserve during the year were as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Balance at 1 January
Annual Charge
317,672
10,497
321,352
(3,681)
Balance at 31 December 328,169 317,672

 

7.  Working Capital Fund

At the Sixth session of the FAO Conference held from 19 November – 6 December 1951 it was decided that the Commissary should establish a Fund for the purchase of stocks for the Commissary, the fund to be reimbursed from the proceeds of sale of such stocks.

At the Ninety-second session of the Council held from 3 – 5 November 1987 it was decided that the Working Capital Fund should be maintained at a level of 12 percent of annual turnover. Subsequently at the Seventy-second session of the Finance Committee held from 16 – 26 September 1991,it was decided that the level of the Working Capital Fund should be increased from 12 percent to 13 percent of turnover and that the sum to cover this increase in respect of the years 1988 and 1989 should be transferred from the Unappropriated Surplus at 31 December 1988 and 1989.

The movements in the Working Capital Fund during the year were as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Balance at 1 January
Transfer To/(From) Working Capital Fund

2,573,681
91,294

2,525,975
47,706

Balance at 31 December

2,664,975

2,573,681

 

8.  Retained Surplus

Conference Resolution 18/93 provides that the Director-General decides whether any net surplus of the Commissary Funds are to be carried forward to the next year or are to be transferred to the Staff Welfare Fund. As a result of surplus incurred during 1998, Lit. 5,184,896 have been transferred to the Retained Surplus pending final approval from the Director-General.

The movements on the retained surplus during the year were as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Balance at 1 January
Transferred To/(From) Retained Surplus

265,050
5,185

215,296
49,754

Balance at 31 December

270,235

265,050

9.  Income

(a) Other Income

1998
Lit. ‘000

1997
Lit. ‘000

Bank Interest
Income from the sale of two trucks
Profit/(Loss) on Exchange

71,290
42,800
74,406

94,689
-
76,041

Total

188,496

170,730

(b)Extraordinary Income

Extraordinary income represents the cancellation of an 1997 accounts payable of Lit. 40,800,000 for guard services.

 

10.&nbs Contingencies

In response to the Legal Office's opinion that there are no legal grounds for the FAO to claim reimbursement for IVA paid by the Commissary, the following actions have been taken:

(a) Lit. 2,406,662 of accumulated IVA payments from April 1995 through December 1998 for provisions and services costing less than Lit. 500,000 has been expensed under Operating Expenses and deducted from Sundry Debtors.
(b) Lit. 79,708,000 of IVA paid by the Commissary for petrol and oil coupons and then recovered through sales to staff members has been deleted from Sundry Debtors and Creditors.

 

11. Cost of Personnel

(a) The accounts reflect payroll cost as charged by FAO. Provisions for terminal emoluments are made separately as explained in Note 6.

Payroll cost includes compensation for Commissary staff including two General Service staff members dealing with car import privileges. Their cost is absorbed by mark-ups on petrol coupons, ensuring thereby that Commissary customers not entitled to petrol do not subsidize the services of the Car Import Office.

In line with their existing job descriptions, both the Commissary Manager and the Assistant Commissary Manager spend some time with the supervision of the FAO catering operations.

(b) The Operating Expenses include a FAO back charge of Lit. 36,830,000 for guard services received in 1998.

12. Support Cost Reimbursement to FAO

At the Twenty-fifth session of the FAO Conference held on 11 – 30 November 1989, it was decided that the Commissary should reimburse FAO in respect of all services provided to the Commissary and that the related actual costs should be charged to the Commissary on an estimated basis henceforward. The Support Cost Reimbursement to FAO was made up as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Electricity
Cleaning
Water
Heating
Garbage Collection

20,580
24,220
4,400
3,070
4,430

20,260
23,840
4,330
3,021
4,359

External Audit
Internal Audit

25,350
50,700

26,448
48,000

Total

132,750

130,258

13.  Write-Offs

The composition of the write-offs account at 31 December 1998 was as follows:

1998
Lit. ‘000

1997
Lit. ‘000

Goods write-offs
Fixed Asset write-offs
12,650
6,090*
13,165
400*
Total 18,740 13,565

*Note: Book value of the 9 PC AST BRAVO LC4/66D that became unserviceable to the Commissary's needs.

 

14. Statement of Cash Flows

  1. Reconciliation of Operating Surplus to Net Cash Inflow/(Outflow) from Operating Activities
  2. 1998
    Lit. ‘000

    1997
    Lit. ‘000

    Net Operating Surplus
    Contribution to Staff Welfare Fund
    Depreciation Charges
    Profit/(Loss) on Exchange
    (Increase)/Decrease in Stock
    (Increase)/Decrease in Debtors
    Increase/(Decrease) in Current Liabilities
    Increase in Provision for Terminal Emoluments
    78,271
    (204,998)
    242,778
    74,406
    (204,978)
    37,926
    (863,407)
    10,497
    125,106
    (197,975)
    175,578
    76,040
    (166,213)
    121,994
    (4,717)
    (3,681)
    Total (829,505) 126,132

     

  3. Analysis of Changes in Cash
  4. 1998
    Lit. ‘000

    1997
    Lit. ‘000

    Cash at 1 January 1998
    Net inflow
    Cash at Bank and in Hand at 31.12.98
    1,847,334
    (801,483)
    1,045,851
    1,922,066
    (74,732)
    1,847,334

 


REPORT OF THE EXTERNAL AUDITOR

THE FAO STAFF COMMISSARY FUND

FINANCIAL STATEMENTS 1998

Background

The FAO Staff Commissary was established in 1951 to facilitate duty free importation of goods by international staff under Article XII, Section 27 (j) (ii), and Annex D of the Headquarter's Agreement between the Government of the Italian Republic and the FAO.

Although the Commissary is part of the FAO, it is a self-financing unit and prepares separate financial statements, which are presented in Italian Lire (Lit.). I express a separate opinion on such statements.

In 1998, the Commissary had a turnover of Lit. 20.5 billion (+ Lit. 0.6 billion compared to 1997) and assets amounting to Lit. 4.4 billion (- Lit. 0.7 billion compared to 1997).

Duty Free Purchase of Italian Products

In July 1994 it was indicated to the External Auditor that: "In 1993 the value of Italian products purchased by the Commissary in Italy represented 17 per cent of the total purchases for that year. It is FAO's objective to reduce the level of Italian products from 17 to 10-12 per cent of the total purchase volume of the Commissary in favour of products from other countries that were not readily available locally".

In my report on the 1994 financial statements, reference was made to the necessary clarification of the understanding of the provisions of the Headquarters Agreement concerning the duty free purchase of Italian products by the Commissary. As disclosed in Note 10 to the financial statements, in August 1995, the Italian Authorities contested the legal basis for exempting the purchase of Italian products by the Commissary from the Italian value added tax (IVA). As for the Organization, it has always maintained that it was not liable to pay IVA on Italian goods sold in the Commissary under the FAO Headquarter's Agreement in accordance with agreed quotas. I received assurances from the Legal Counsel of the Organization that this matter would be resolved after clarification with the Italian Authorities and that there was no need to provide for such a contingent liability in the accounts of the Commissary. There have been no further developments on the matter since I submitted my report on the 1995 accounts of the Commissary.

Statistics provided to me showed that in 1998 the total number of Italian articles sold by the Commissary represented 11 per cent of all articles sold. The value of the sales of these articles amounted to Lit.8.8 billion out of Lit 20.5 billion for all sales (43 per cent). Their share in the Commissary's gross profit was 59 per cent.

Inventory

Stocks amounted to Lit.2.68 billion at the end of 1998 and represented 61% of total assets.

Considering the amount of discrepancies between inventory records and 1997 year-end physical counts, last year I recommended that stricter and more frequent checks of inventoried goods be implemented and that year-end stock-taking procedures and reconciliation with perpetual inventory records be carried out in line with usual commercial practice.

Although measures have been taken, since autumn 1998, to reduce inventory discrepancies on attractive and high-risk items and to improve year-end stock taking and inventory control they cannot be considered as being sufficiently satisfactory.

Our review of year-end stock-taking disclosed that greater efforts should be made for more rigour in the instructions given and their implementation with a view to clearly separate the preparation, counting and reconciliation phases of the inventory procedures and to complete them before the re-opening of the salesroom.

The provision of theoretical inventory lists to External and Internal Auditors before stock-taking began can be considered as a progress compared to past practice. However, weaknesses in the procedure will still exist as long as the reconciliation exercise between figures resulting from permanent inventory and data from the physical count will be completed after the salesrooms re-open for business, contrary to what good commercial practice would require.

When the final result of the reconciliation work was available and provided to me, in March 1999, the physical count of goods appeared to be Lit.41 million below what it should have been. The same difference evaluated at cost price of the goods was Lit.33.3 million last year. Such an increase of the global discrepancy figure can be attributed mainly to cosmetics and non food items for which there was a significant increase in the number of line items, whereas the diminution of the difference for various alcohols and frozen/chilled goods is noticeable, the difference on tobaccos remaining at about the same level of Lit.10 million. In addition, the difference in stocks of plastic shopping bags increased from Lit.16 million to Lit.22 million. Whatever profit can be made on the sale of plastic bags I think that measures should be taken to eliminate the large year end inventory discrepancies on this item as well as on the other items.

In a more general way, I cannot but reiterate the comment I made last year when I stated that, "even though the impact on the valuation of the stocks of goods is not material, such discrepancies should be investigated as the eventuality of pilferage or fraud cannot be readily ruled out". I should add also that measures taken in 1998 to increase controls and security over attractive items proved to be ineffective.

Staff Costs

The Organization considers that the costs of services such as the administration of the car import privileges granted under the Headquarter's Agreement and the supervision of catering activities should be borne by the Commissary. This long standing practice is disclosed in Note 11 to the Financial Statements.

I mentioned last year that the Organization started charging security services costs to the Commissary. Such costs were estimated at 50% of the cost of one security guard. The amount of Lit.40.8 million corresponding to these services was posted as a payable in the 1997 accounts. I concurred with this decision made in accordance, on the one hand, with the principle that in the UN system non-mainstream activities (including commissaries) should disclose full costs and should not be subsidized from regular budget services, and, on the other hand, with Resolution No 16/89 of the FAO conference adopted on 28 November 1989.

I noted that this decision was reversed and that the 1998 accounts register a cancellation of 1997 accounts payable of Lit 40.8 million in extraordinary income (note 9b). However, in 1998 the Commissary was charged for the security services it received and I understand that the Organization will continue to do so.

Support Cost Reimbursement to FAO

As a result of the FAO's decision to reorganise the storage of its publications and to transfer them to an external warehouse, the Commissary was provided with storage facilities within the Headquarters premises (894 square meters).

The decision not to charge rent for the space provided at Headquarters implied savings for the Commissary compared to the previous situation where it had to pay for the use of an external warehouse. The annual savings are estimated at Lit.286 million amongst which Lit.150 million for free rental charges.

Referring to the fact that the Commissary should be a self-financing unit and to the above-mentioned principle of full cost disclosure I noted that the Commissary is being presently subsidised in that respect.

Funding of Working Capital Fund

In 1998, operations resulted in a net surplus of Lit.96.5 million. This was distributed between the working capital fund and the retained surplus. As a result, the retained surplus reserve increased from Lit.265 million as at 31 December 1997 to Lit.270 million as at 31 December 1998. However, I could not be provided with the decision of the Director-General authorising the allocation of Lit.5 million to the retained surplus of the Commissary at the closure of 1998.

Adoption of the Final Accounts of the Staff Commissary Fund

In my report on the 1994 accounts, I had recommended that the final accounts of the Staff Commissary Fund be formally adopted by a Governing Body of the Organization in pursuance to Rule XX-b of the General Rules. At its thirty ninth session, on 17 November 1997, the Conference adopted resolution 16/97 delegating to the Finance Committee the responsibility to approve the annual accounts of the Staff Commissary Fund as of 1 January 1998.

Acknowledgement

I wish to record my appreciation for the cooperation and assistance extended by the Director-General and the staff of the Organization during my audit.

Jean-Louis Beaud de Brive
Directeur,
pour le Premier Président de la Cour des Comptes
de la République Française
Commissaire aux Comptes

21 July 1999