October 1, 2019 MR. TOMAS A. STA. MARIA Financial Management Specialist - World Bank 26th Floor, One Global Place, 5th Avenue corner 25th Street Bonifacio Global City, Taguig, Metro Manila Dear Mr. Sta. Maria, LANDBANK-EPMD submits herewith the Audited Financial Statements on Carbon Asset Development Fund for the years ended December 31, 2018 and 2017 in compliance with Carbon Asset Development Fund Methane Recovery from Waste Management Project (Grant No. TF 019049) Grant Agreement. We also have sent a softcopy of the said audited financial statements to your email address. We hope you find everything in order. Thank you very much. Very truly yours, JOSE C. DI R. Officer-Jn-Ch'r Environmenta rogram and Management Department Land Bank of the Philippines 27th Floor, LANDBANK Plaza 1598 MH del Pilar corner Dr. 3 Quintos Streets Malate, Manila Land Bank of the Philippines LANDBANK Plaza, 1598 M.H. Del Pilar corner Dr. J. Quintos Sts., Malate, Manila, Philippines 1004 (632) 522-0000 551-2200 450-7001 www.landbank.com 4 F s , s s s - s - - s T EXECUTIVE SUMMARY INTRODUCTION Carbon Asset Development Fund (CADF) concerns the financing of the Methane Recovery from Waste Management Project. On October 12, 2015, the International Bank for Reconstruction and Development (World Bank) and Land Bank of the Philippines (LBP) entered into a Grant Agreement which became effective upon signing on October 28, 2015. The World Bank, as trustee of grant funds provided by donors, extended a grant amounting to USD 410, 000.00, of which USD 210,000.00 was initially transferred from WB to LBP on December 8, 2015. Additional grant of USD 51,220.47 was given on July 3, 2018, thus, aggregating to USD 261,220.47 or 64 per cent of the total grant. The Project objectives are to assist LBP in the development of carbon assets by supporting the identified technical activities and to provide technical support to LBP's clients in order to encourage them to implement best practices on waste management and renewable energy generation. The project closing date is on June 30, 2019 as stipulated in the grant agreement. However, in a letter dated June 20, 2019, World Bank has approved the extension of the CADF grant closing date to April 30, 2021 SCOPE AND OBJECTIVE OF AUDIT The audit covered the examination, on a test basis, of the accounts and financial transactions of the CADF for the period from January 1 to December 31, 2018 in accordance with International Standards of Supreme Audit Institutions, to enable us to express an opinion on the fairness of presentation of the financial statements for the years ended December 31, 2018 and 2017. Also, we conducted the audit to assess the propriety of financial transactions and compliance with the terms and conditions in the Grant Agreement. FINANCIAL HIGHLIGHTS 1. Comparative Financial Position 2018 2017 Increasel (Decrease) Assets 160,950 196,901 (35,843) Liabilities 6,919 4,005 3,034 Fund balance 154,031 192,896 19,123 II. Comparative Results of Operations 2018 2017 Increasel (Decrease) Revenues 229 51,438 (51,209) Expenses 39,094 32,315 (6,779) Excess/(Deficiency) of Revenues over (38,865) 19,123 (57,988) Expenses INDEPENDENT AUDITOR'S OPINION The Auditor rendered an unmodified opinion on the fairness of presentation of the financial statements of the CADF for the years ended December 31, 2018 and 2017 in accordance with Philippine Financial Reporting Standards. TABLE OF CONTENTS Page PART I AUDITED FINANCIAL STATEMENTS Independent Auditor's Report 1 Statements of Financial Position 3 Statements of Financial Performance 4 Statements of Cash Flows 5 Notes to Financial Statements 6 PART II STATUS OF IMPLEMENTATION OF PRIOR YEARS' 10 AUDIT RECOMMENDATIONS PART I AUDITED FINANCIAL STATEMENTS Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City CORPORATE GOVERNMENT SECTOR TAL~ CLUSTER I- BANKING AND CREDIT INDEPENDENT AUDITOR'S REPORT The Board of Directors Land Bank of the Philippines Malate, Manila Report on the Audit of the Financial Statements Opinion We have audited the accompanying financial statements of Carbon Asset Development Fund (CADF) (a project of Land Bank of the Philippines (LBP) funded by World Bank grant No. TF 019049), which comprise the statements of financial position as at December 31, 2018 and 2017, statements of financial performance, and statements of cash flows for the years then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the CADF as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards (PFRSs). Basis for Opinion We conducted our audit in accordance with International Standards of Supreme Audit Institutions (ISSAI). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the LBP in accordance with the ethical requirements that are relevant to our audit of the financial statements in the Philippine Public Sector, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with PFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the CADF's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAI will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISSAI, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the financial statements, 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 provide a basis for our opinion. 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 control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the LBP's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 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 deficiencies in internal control that we identify during our audit. COMMISSION ON AUDIT t . EiES pervi Auditor August 15, 2019 LAND BANK OF THE PHILIPPINES STATEMENTS OF FINANCIAL POSITION CARBON ASSET DEVELOPMENT FUND (A Project Implemented by Land Bank of the Philippines Funded by World Bank Grant No. TF 019049) December 31, 2018 and 2017 (In U.S. Dollar) Note 2018 2017 ASSETS Cash and Cash Equivalents 3 158,713 196,901 Equipment - net 4 2,237 - Total Assets 160,950 196,901 LIABILITIES Accounts Payable 5 6,919 4,005 Total Liabilities 6,919 4,005 FUND BALANCE Fund Balance, beginning 192,896 173,773 Excess/(Deficiency) of Revenues over Expenses (38,865) 19,123 Total Fund Balance 154,031 192,896 Total Liabilities and Fund Balance 160,950 196,901 The Notes on pages 6 to 9 form part of these financial statements. 3 LAND BANK OF THE PHILIPPINES STATEMENTS OF FINANCIAL PERFORMANCE CARBON ASSET DEVELOPMENT FUND (A Project Implemented by Land Bank of the Philippines Funded by World Bank Grant No. TF 019049) For the years ended December 31, 2018 and 2017 (In U.S. Dollar) Note 2018 2017 Revenues Grants and Donations 1 0 51,220 Interest income 229 218 Total Revenues 229 51,438 Expenses Project Expenses Consultancy Services 19,638 17,042 Training 8,271 8,805 Traveling 8,703 5,643 Telephone 295 318 Office Supplies 217 145 Depreciation Expense 108 - Rent - 119 Total Project Expenses 5 37,232 32,072 Operating Expenses Bank Charges - 10 Withholding Taxes 34 16 Total Operating Expenses 34 26 Other Expenses Foreign exchange loss on revaluation 6 1,828 217 Total Other Expenses 1,828 217 Total Expenses 39,094 32,315 Excessl(Deficiency) of Revenues over Expenses (38,865) 19,123 4 CARBON ASSET DEVELOPMENT FUND (A Project Implemented by Land Bank of the Philippines Funded by World Bank Grant No. TF 019049) STATEMENTS OF CASH FLOWS For the years ended December 31, 2018 and 2017 (In U.S. Dollar) Note 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Cash Inflows Grants and Donations 1 - 51,220 Interest Income 229 218 Reimbursed Amount - - Total Cash Inflows 229 51,438 Cash Outflows Consultancy Services 16,899 15,626 Training Expenses 8,535 8,499 Traveling Expenses 8,229 5,616 Telephone Expenses 256 311 Office Supplies - 145 Equipment 2,523 - Rent Expenses - 119 Withholding Taxes 34 16 Bank Charges - 10 Total Cash Outflows 36,476 30,342 Net Cash Generated from/(Used in) Operating Activities (36,247) 21,096 Foreign Exchange Loss on Revaluation 6 (1,941) (227) Net Increase/(Decrease) in Cash and Cash Equivalents (38,188) 20,869 Cash and Cash equivalents, January 1 196,901 176,032 Cash and Cash Equivalents, December 31 3 158,713 196,901 The Notes on pages 6 to 9 form part of these financial statements. 5 CARBON ASSET DEVELOPMENT FUND (A Project Implemented by Land Bank of the Philippines Funded by World Bank Grant No. TF 019049) NOTES TO FINANCIAL STATEMENTS 1. Project Information The World Bank (WB), acting as trustee of grant funds provided by donors under the CADF of the Carbon Partnership Facility (CPF), extended to the Land Bank of the Philippines (LBP) a grant in the amount of USD 410,000. The grant shall be used to assist in financing the development of carbon assets for purchase by the CPF. The CADF Grant Agreement between the WB and LBP was signed on October 28, 2015. The carbon assets or Certified Emission Reductions will be generated from the LBP's two Program of Activities (POAs) for Animal / Piggery Waste-to-Energy and Landfill Gas-to- Energy Projects that are covered by Emission Reduction Purchase Agreements between the WB and the LBP. The Project consists of four parts namely: Capacity Building and Technical Support; Marketing and Communication; Sub-Project Inclusion, Monitoring and Verification; and Project Management, which serve as the basis of CADF utilization. The categories of Eligible Expenditures that may be financed out of the Grant proceeds, and the allocations of the amounts to each category under Goods, Non-Consulting Services, Consultants' Services, Training and Workshops, and Incremental Operating Costs are as follows: Grant Expense Category Amount of Allocation (in USD) 1. Animal / Piggery Waste-to-Energy Project 221,007 2. Landfill Gas-to-Energy Project 55,917 3. Project other than above cited categories 133,076 410,000 Out of the USD 410,000 total grant, a USD 210,000.00 was initially transferred from WB to LBP on December 8, 2015 and an additional grant of USD 51,220.47 on July 3, 2017. The CADF grant is covered by implementing guidelines based on the CADF Grant Agreement, and LBP Executive Order No. 066 Series of 2016 approved on May 20, 2016. An interim arrangement was established to access the fund via direct withdrawal by EPMD from the USD Account prior to the effectivity of the Implementing Guidelines on the Utilization of Carbon Asset Development Fund under LBP EO No. 066, Series of 2016. As stipulated in Section 3.06 (c) of the Standard Conditions of the Grant Agreement, the CADF'grant shall expire by June 30, 2019. However, in a letter dated June 20, 2019, WB has approved the extension of the CADF grant closing date to April 30, 2021. 2. Summary of Significant Accounting Policies 2.1. Statement of Compliance The financial statements have been prepared in compliance with the Philippine Financial Reporting Standards. 2.2. Accounting of Disbursements Starting June 2016, all approved Disbursement Orders (DOs) and Procurement Request Forms (PRFs) paid by LBP Administrative Accounting Department (AAD) were charged outright from the CADF Revolving Fund handled by the LBP Agrarian Accounting Department (AgAD). 2.3. Reporting Currency and Translation from PHP into USD The original currency of the CADF grant is in US Dollar. Most of the operating expenses were transacted in Philippine Peso currency. Transactions in PHP were translated to USD using the exchange rate at the date of booking. Year-end rates for the December 31, 2017 and December 31, 2018, were P49.930 and P52.580 to a dollar, respectively. All foreign exchange rates were based on the Philippine Dealing System (PDS) closing rates. 2.4. Revenue The primary source of revenue is the CADF grant. Its purpose is to spend on eligible activities as covered by its implementing guidelines. Interest income is the interest earned on the USD and PHP bank accounts. 2.5. Equipment Equipment is carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the equipment. The residual value of 10% of acquisition cost is in accordance with LANDBANK Executive Order No. 059 series of 2006. 3. Cash and Other Cash Items This account consists of: 2018 2017 In USD Cash in bank USD Savings Account 139,614 162,419 Revolving fund 19,099 34,482 158,713 196,901 7 The CADF revolving fund was set up on June 8, 2016 amounting to P2.0 million and maintained by the AgAD. The revolving fund shall be used for payment of all allowable expenditures to support the implementation of CADF projects. 4. Equipment This account consists of two laptop computer units booked in October 2018 for a total amount of USD 2,345.28 as follows: 2018 2017 In USD Equipment - Laptop 2,345 0 Less: Accumulated Depreciation 108 0 2,237 0 5. Accounts Payable This account represents outstanding obligations on the basis of normal credit terms and do not bear interest: Date Particular 2018 2017 Peso Rate * USD Rate * USD Dec-18 Various unpaid Consultancy 251,444 52.58 4,782 Services, Training, Travelling and Telephone expenses incurred in CY 2018, related to the promotion of Carbon Finance Support Facility (CFSF). 11-Mar-15 Promotion of CFSF on Financing 37,364 52.58 711 49.93 749 and CDM Services for hog raisers in Malaybalay City, Bukidnon 8-Jun-15 Workshop on the Preparation of 75,000 52.58 1,426 49.93 1,502 CFSF Component Project Activity Design Document (CPA-DD) 363,808 6,919 Conversion rate based on PDS year-end closing rates: P52.58=$1 for 2018 and P49.93=$1 for 2017 6. Project Expenses This account represents expenses incurred in the attendance and conduct of CADF training activities and other supporting operations as follows: 8 2018 2017 Piggery Landfill Program Total Piggery Landfill Program Total level level level level level level In USD Consultancy 15,757 3,881 - 19,638 17,042 - - 17,042 Services Training 7,773 368 130 8,271 7,757 277 771 8,805 Traveling 8,333 370 - 8,703 2,547 - 3,096 5,643 Telephone 295 - - 295 318 - - 318 Office Spies 71 118 28 217 - 27 118 145 Supplies Depreciation - - 108 108 - - - - Rent - - - - 119 - - 119 31,469 5,498 256 37,232 27,783 304 3,985 32,072 7. Foreign Exchange Gain/(Loss) This account represents foreign exchange gain/(loss) arising from revaluation recognized as follows: 2018 2017 In USD On Cash Components (1,941) (227) On Accounts Payable 113 10 (1,828) (217) 9 PART II STATUS OF IMPLEMENTATION OF PRIOR YEARS' AUDIT RECOMMENDATIONS STATUS OF IMPLEMENTATION OF PRIOR YEARS' AUDIT RECOMMENDATIONS The audit recommendations embodied in the prior year Annual Audit Report were not yet implemented. The unimplemented audit recommendation is presented below. OBSERVATIONS AND RECOMMENDATIONS 2016 1. There was significant months delay in the submission of the financial statements and its supporting documents resulting in the late issuance of Audit Report on CADF for the year ended December 31, 2016 contrary to paragraph 2.06 (c) of the Annex to the CADF Grant Agreement. We recommended and Management Not implemented, agreed to timely prepare and submit the financial statements and its The Financial Statements for CY 2018 supporting documents to give the were submitted by Management to the Auditor ample time to render the Audit Team only on May 17, 2019, and audit, and strictly meet the deadline supporting documents and schedules in the submission of the audited were submitted until August 15, 2019. financial statements to World Bank as required in the Grant Agreement, and to further maintain LBP's good standing as a contracting party. 10