Finance Committee

Attached for the information of Finance Committee Members are the Audited Accounts of the FAO Commissary 1999.

Table of Contents

Food and Agriculture Organization of the United Nations
Staff Commissary Fund
Accounts for the year ended 31 december 1999

Opinion of the external auditor

Income and Expenditures Statement for the year ended 31 December 1999

Balance Sheet at 31 December 1999

Statement of Cash Flow for the Year ended 31 December 1999

Notes to the accounts

Report of the external auditor

F.A.O. STAFF COMMISSARY FUND

OPINION OF THE EXTERNAL AUDITOR

FINANCIAL STATEMENTS FOR THE PERIOD
1 JANUARY TO 31 DECEMBER 1999

I have examined the accompanying financial statements, as stated on attached pages 1 to 10, comprising the income and expenditure statement, the balance sheet, 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 1999. 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 misstatement. 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 1999 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.

Michèle Coudurier
Directrice
pour le Premier Président de la Cour des Comptes
de la République Française
Commissaire aux Comptes

1 February 2001

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS

STAFF COMMISSARY FUND

ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1999

STAFF COMMISSARY FUND

INCOME AND EXPENDITURES STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 1999

(all figures in Lit. `000)

Notes 1 to 13 form an integral part of these accounts

STAFF COMMISSARY FUND

BALANCE SHEET AT 31 DECEMBER 1999

(all figures in Lit. `000)

Notes 1 to 13 form an integral part of these accounts

STAFF COMMISSARY FUND

STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 1999

(all figures in Lit. `000)

Notes 1 to 13 form an integral part of these accounts

STAFF COMMISSARY FUND

ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 1999

NOTES TO THE ACCOUNTS

1. Summary of Significant Accounting Policies

1. Accounting Convention

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

2. 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 1999.

3. 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, write-offs, transportation, customs clearance and insurance premiums. The cost of stocks is determined using the first-in, first-out (FIFO) method.

4. Foreign currencies

   Assets and liabilities in currencies other than Italian Lira have been translated at the UN operational rate of exchange at 31 December 1999. 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

3. Stocks

Stocks are made up as follows:

4. Cash at Bank and in Hand

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

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 1999 and its movement for the year then ended were as follows:

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:

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:

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 1999, Lit. 41,314,019 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:

9. Income

Other Income

10. Cost of Personnel

1. 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 subsidise 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.

   It should be noted that personnel costs increased 5.4% in 1999, despite any increase in the size of the Commissary's workforce. This increase is well above the inflation rate and contrasts with the 3.7% decrease in the number of Commissary cardholders. However, as part of the UN Common System, the Commissary has little control over its personnel costs and maybe eventually forced to reduce posts or increase prices if this trend continues.

   Temporary staff costs (COASE) increased by 7.6% in 1999 due to two reasons: (1) there was a 5% increase in the fixed daily costs per person following FAO's replacement of the temporary contract from Eurogroup to COASE in August 1998; and (2) the absence of certain salesroom/warehouse staff members on certified sick leave required the additional use of temporary assistance and (3) extra cleaning costs (which were previously included in the Eurogroup contract).

2. Breakdown of staff costs:

   	1999	1998
   	Lit. `000	Lit. `000
   FAO Staff	2,373,752	2,259,686
   COASE Staff	328,378	305,196
   Balance at 31 December	2,702,130	2,564,882

3. The Operating Expenses include a FAO back charge of Lit. 42,332,590 for guard services received in 1999.

11. 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:

12. Write - Offs

The composition of the write-offs account at 31 December 1999 was as follows:

As of 31 December 1999, the write-offs have been included in the cost of goods sold
as per Audit's recommendation.

13. Statement of Cash Flows

Reconciliation of Operating Surplus to Net Cash Inflow/(Outflow) from Operating Activities

Analysis of Changes in Cash

REPORT OF THE EXTERNAL AUDITOR

THE F.A.O. STAFF COMMISSARY FUND
FINANCIAL STATEMENTS 1999

Background

1. 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 that are presented in Italian Lire (Lit.). I express a separate opinion on such statements.

In 1999, the Commissary had a turnover of Lit. 20.7 billion (+ Lit. 0.3 billion compared to 1998) and assets amounting to Lit. 4.8 billion (+ Lit. 0.5 billion compared to 1998).

Presentation of the Balance Sheet and the Income and Expenditure Statements

2. In accordance with the United Nations Accounting Standards, the Income and Expenditures Statement is now presented as Statement I and the Balance Sheet as Statement II. I understand that in the Financial Statements for the year 2000, Assets will be presented in terms of decreasing liquidity in line with the United Nations Accounting Standards.

Depreciation accounting policy

3. As detailed in note 1b to the Financial Statements, depreciation was calculated using the straight-line method to write off the cost of fixed assets over their useful life estimated at four years for all computer equipment and five years for other assets. Considering the obsolescence of computer equipment, I would recommend switching the depreciation method used from straight-line to accelerated for all new purchases of computer equipment.

Duty Free Purchase of Italian Products

4. 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".

Statistics provided to me showed that in 1999 the total number of Italian articles sold by the Commissary represented 10 per cent of all articles sold (11 per cent in 1998). The value of the sales of these articles amounted to Lit. 6.2 billion out of Lit. 20.7 billion for all sales (30 per cent, compared to 43 per cent in 1998). Their share in the Commissary's gross profit was 37 per cent (59 per cent in 1998).

If fuel coupon sales were removed from the list of Italian articles, the total number of Italian articles sold by the Commissary would still represent 10 per cent of all articles sold, but their share in the turnover and in the gross profit would drop to 19 per cent and 26 per cent.

Inventory

5. Stocks amounted to Lit. 3.04 billion at the end of 1999 and represented 63 per cent of total assets.

Considering the amount of discrepancies between inventory records in 1997 and 1998 year-end physical counts, I made the comment in previous reports 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". Last year, I also added that "measures taken in 1998 to increase controls and security over attractive items proved to be ineffective".

The physical stock count as at 31 December 1999 was observed by a joint internal and external audit team. The physical count of goods disclosed that the actual stock was Lit. 22.4 million below what it should have been according to the permanent inventory. The same difference evaluated at cost price of the goods was Lit 33.3 million in 1997 and Lit.41 million last year. The trend has been reversed and the stock losses in 1999 were reduced by 45 per cent when compared to 1998. This decrease of the global discrepancy figure can be attributed mainly to frozen/chilled goods and tobacco.

Such an improvement is probably due to stricter and more frequent checks of inventoried goods that I recommended last year, and to the activation of anti-theft sensors in August (equipment bought in May, total cost Lit 30 million). The effort should be continued and the anti-theft equipment, first authorized by ODG for an initial period of six months, should be maintained active.

Write-offs

6. In previous years, year-end inventory adjustments were reported in the "cost of sales" line in the Income and Expenditure Statement whilst losses due to breakage and shortage during the year were disclosed under a separate line entitled "write-offs". I concurred with the Office of the Inspector General that the presentation treatment of these two items should be combined and uniform and recommended that all losses be reported under the costs of sales. This change is mentioned in note 1c and in note 12 to the Financial Statements.

Staff Costs

7. 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 10a to the Financial Statements.

8. In 1998, the Organization started charging security services costs to the Commissary (the decision was taken in 1997, but it was reversed for that first year and the payable was cancelled in 1998). 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.

In 1999, the Commissary was charged for the security services it received, on the same basis as in 1998 (50 per cent of the cost of one security guard) and I understand that the Organization will continue to do so.

9. Personnel operating expenses amounted to Lit. 2.7 billion in 1999. As mentioned in note 10a, this represented an increase of 5.4 per cent compared to 1998 "despite any increase in the size of the Commissary's workforce" and in contrast "with the 3.7 per cent decrease in the number of Commissary holders". To give a more complete view of the personnel costs, new note 10b presents a breakdown between personnel costs reimbursed to FAO for permanent staff, and personnel costs paid to Coase Company for temporary labour. The reasons for the substantial increase in temporary labour costs (7.6 per cent) are explained in note 10a.

Funding of Working Capital Fund

10. In 1999, operations resulted in a net surplus of Lit. 70.8 million. This was distributed between the working capital fund and the retained surplus. As a result, the retained surplus reserve increased from Lit. 270 million as at 31 December 1998 to Lit. 312 million as at 31 December 1999.

Acknowledgement

11. 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.

Michèle Coudurier Directrice
pour le Premier Président de la Cour des Comptes
de la République Française
Commissaire aux Comptes

1 February 2001