EXPERIENCE MATTERS FINANCIALS 2016 Table of Contents _p. 2 MANAGEMENT’S DISCUSSION AND ANALYSIS 3 Executive Summary 7 Client Services 15 Liquid Assets 15 Funding Resources 18 Risk Management 26 Critical Accounting Policies 28 Results of Operations 38 Governance and Control _p. 41 CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS 42 Management’s Report Regarding Effectiveness of Internal Control over External Financial Reporting 44 Independent Auditors’ Report on Management’s Assertion Regarding Effectiveness of Internal Control over External Financial Reporting 45 Consolidated Balance Sheets 46 Consolidated Statements of Operations 47 Consolidated Statements of Comprehensive Income (Loss) 48 Consolidated Statements of Changes in Capital 50 Consolidated Statements of Cash Flows 52 Consolidated Statement of Capital Stock and Voting Power 53 Notes to Consolidated Financial Statements 110 Independent Auditors’ Report _p. 112 INVESTMENT PORTFOLIO—CUMULATIVE GROSS COMMITMENTS BY REGION IFC FINANCIALS 2016 1 Management’s Discussion and Analysis 2 IFC FINANCIALS 2016 Executive not accept host government guarantees of its expo- sures. IFC raises virtually all of the funds for its lending activities through the issuance of debt obligations in the Summary international capital markets, while maintaining a small borrowing window with IBRD. Equity investments are funded from capital (or net worth). IFC’s capital base and its assets and liabilities, other than its equity investments, are primarily denominated in US dollars ($ or US$) or swapped into US dollars but International Finance Corporation (IFC or the it has a growing portion of debt issuances denominated Corporation) is the largest global development institu- in currencies other than USD and which are invested in tion focused on the private sector in developing countries. such currencies. Overall, IFC seeks to minimize foreign Established in 1956, IFC is owned by 184 member coun- exchange and interest rate risks arising from its loans and tries, a group that collectively determines its policies. IFC liquid assets by closely matching the currency and rate is a member of the World Bank Group (WBG)1 but is a legal bases of its assets in various currencies with liabilities entity separate and distinct from IBRD, IDA, MIGA, and having the same characteristics. IFC generally man- ICSID, with its own Articles of Agreement, share capital, ages non-equity investment related and certain lending financial structure, management, and staff. Membership related residual currency and interest rate risks by utiliz- in IFC is open only to member countries of IBRD. ing currency and interest rate swaps and other derivative The mission of the WBG is defined by two goals: instruments. • To end extreme poverty by reducing the percentage of The Management’s Discussion and Analysis contains for- people living on less than $1.90 a day to no more than ward looking statements which may be identified by such 3 percent globally by 2030; and terms as “anticipates,” “believes,” “expects,” “intends,” • To promote shared prosperity in a sustainable manner “plans” or words of similar meaning. Such statements by fostering income growth for the bottom 40 percent of involve a number of assumptions and estimates that are the population of every developing country. based on current expectations, which are subject to risks and uncertainties beyond IFC’s control. Consequently, In the year ended June 30, 2016 (FY16), WBG, together actual future results could differ materially from those with the international community, agreed to support currently anticipated. a more ambitious and broader development agenda, including the Sustainable Development Goals (SDGs), the climate change goals at the 21st Conference of Parties BASIS OF PREPARATION OF (COP21), and the Addis Ababa Action Agenda agreed at the Financing for Development (FfD) conference in Ethiopia. IFC’S CONSOLIDATED FINANCIAL STATEMENTS IFC’s overall strategy remains focused on contributing to the WBG strategy and goals. The accounting and reporting policies of IFC con- IFC helps developing countries achieve sustainable form to accounting principles generally accepted in the growth by financing private sector investment, mobilizing United States (GAAP). IFC’s accounting policies are dis- capital in international financial markets, and providing cussed in more detail in Section VI, Critical Accounting advisory services to businesses and governments. IFC’s Policies, and in Note A to IFC’s Consolidated Financial principal investment products are loans and equity Statements as of and for the year ended June  30, 2016 investments, with smaller debt securities and guarantee (FY16 Consolidated Financial Statements). portfolios. IFC also plays an active and direct role in mobi- Management uses income available for designations lizing additional funding from other investors and lenders (Allocable Income) (a non-GAAP measure) as a basis through a variety of means. Such means principally com- for designations of retained earnings. Allocable Income prise: loan participations, parallel loans, sales of loans, generally comprises net income excluding net unrealized the non-IFC portion of structured finance transactions gains and losses on equity investments and net unrealized which meet core mobilization criteria, the non-IFC por- gains and losses on non-trading financial instruments tion of commitments in IFC’s initiatives, and the non-IFC accounted for at fair value, income from consolidated investment portion of commitments in funds managed by entities other than AMC, and expenses reported in net IFC’s wholly owned subsidiary, IFC Asset Management income related to prior year designations. Company LLC (AMC), (collectively Core Mobilization). Unlike most other development institutions, IFC does 1 The other institutions of the World Bank Group are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guaranty Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). IFC FINANCIALS 2016 3 TABLE 1: RECONCILIATION OF REPORTED NET FINANCIAL INCOME TO INCOME AVAILABLE FOR DESIGNATIONS PERFORMANCE SUMMARY From year to year, IFC’s net income is affected by a FY16 FY15 FY14 number of factors that can result in volatile financial Net (loss) income attributable performance. to IFC $ (33) $ 445 $ 1,483 Global equity markets in emerging economies were vola- Add: Net losses (gains) attributable to tile in the years ended June 30, 2016 (FY16) and June 30, non-controlling interests (1) (36) 5 2015 (FY15). Additionally, there was further depreci- Net (loss) income $ (34) $ 409 $ 1,488 ation of certain of IFC’s major investment currencies Adjustments to reconcile against IFC’s reporting currency, the US$, particularly net income to Income in the Latin America and Caribbean region in the first Available for Designations six months of FY16, continuing the trend experienced Grants to IDA from prior throughout much of FY15. The second half of FY16 saw year designations 330 340 251 a partial reversal of the recent trend as certain of IFC’s Unrealized gains and losses major investment currencies appreciated against the US$. on investments 470 456 (287) FY16 also saw a continuation of lower commodities prices. Unrealized gains and losses Collectively, these factors negatively impacted the valua- on borrowings (62) 52 74 tion of many of IFC’s investments in FY16. Advisory Services Expenses from prior year designations 57 59 79 The above factors, together with some adverse proj- Other 9 11 9 ect-specific developments, have put downward pressure on IFC’s investment portfolio returns in FY16, resulting Income Available for Designations $ 770 $ 1,327 $ 1,614 in continuing high other-than-temporary impairments on equity investments and debt securities, albeit margin- Based on the distribution policy approved by IFC’s Board ally lower than in FY15, along with higher provisions for of Directors, the maximum amount available for designa- losses on loans when compared to FY15. Partially offset- tion relating to FY16 would be $161 million. On August 4, ting these negative impacts on the investment portfolio, 2016, the Board of Directors approved a designation of IFC realized robust capital gains on equity investment $101 million of IFC’s retained earnings for grants to IDA sales, the largest of which occurred in the three months and a designation of $60 million of IFC’s retained earnings ended September 30, 2015 (FY16 Q1). Realized gains were for Advisory Services. These designations are expected concentrated in FY16, with six investments accounting to be noted with approval by the Board of Governors, and for 56 percent of the realized gains. thereby concluded, in FY17. Capital markets were particularly turbulent in FY16 Q4 with credit spreads widening significantly. By the end of FY16, however, markets had largely recovered and IFC ultimately recorded stronger liquid asset income in the TABLE 2A: CHANGE IN INCOME BEFORE NET second half of FY16 than in the first half of FY16, although UNREALIZED GAINS AND LOSSES ON NON-TRADING gross income from liquid assets in FY16 remained lower than in FY15. FINANCIAL INSTRUMENTS ACCOUNTED FOR AT FAIR VALUE, GRANTS TO IDA AND NET GAINS AND LOSSES IFC’s financial performance is detailed more fully in Section VII—Results of Operations. ATTRIBUTABLE TO NON-CONTROLLING INTERESTS FY16 VS FY15 (US$ MILLIONS) IFC has reported income before net unrealized gains and losses on non-trading financial instruments accounted INCREASE (DECREASE) for at fair value and grants to IDA of $500  million in FY16 VS FY15 FY16, $355 million lower than FY15 ($855 million) and Higher provisions for losses on loans, $1,282 million lower than FY14 ($1,782 million). guarantees and other receivables $ (188) Income Available for Designations (a non-GAAP mea- Higher charges on borrowings (151) sure)2was $770  million, 42  percent lower than in FY15 Higher foreign currency transaction losses ($1,327  million) and 52  percent lower than in FY14 on non-trading activities (99) ($1,614 million). Lower realized gains on equity investments and associated derivatives, net (71) Higher other-than-temporary impairments on equity investments and debt securities (24) Lower unrealized losses on equity investments and associated derivatives, net 198 Other, net (20) Change in income before net unrealized gains and losses on non - trading financial instruments accounted for at fair value, grants to IDA and net gains and losses 2 Income available for designations generally comprises net income excluding attributable to non-controlling interests $ (355) unrealized gains and losses on investments and unrealized gains and losses on other non-trading financial instruments, income from consolidated VIEs, and expenses reported in net income related to prior year designations. 4 IFC FINANCIALS 2016 TABLE 2B: CHANGE IN INCOME BEFORE NET UNREALIZED GAINS AND LOSSES ON NON-TRADING FINANCIAL INSTRUMENTS ACCOUNTED FOR AT FAIR VALUE, GRANTS TO IDA AND NET GAINS AND LOSSES ATTRIBUTABLE TO NON-CONTROLLING INTERESTS FY15 VS FY14 (US$ MILLIONS) INCREASE (DECREASE) FY15 VS FY14 Higher unrealized losses on equity investments and associated derivatives, net $ (658) Higher other-than-temporary impairments on equity investments and debt securities (484) Lower income from liquid asset trading activities (132) Higher provisions for losses on loans, guarantees and other receivables (83) Higher income from loans and guarantees, realized gains and losses on loans and associated derivatives 58 Higher foreign currency transaction gains on non-trading activities 72 Higher realized gains on equity investments and associated derivatives, net 275 Other, net 25 Change in income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value, grants to IDA and net gains and losses attributable to non-controlling interests $ (927) TABLE 3: SELECTED FINANCIAL DATA AS OF AND FOR THE LAST FIVE FISCAL YEARS (US$ MILLIONS) AS OF AND FOR THE YEARS ENDED JUNE 30 2016 2015 2014 2013 2012 Consolidated income highlights: Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,126 $ 1,123 $ 1,065 $ 996 $ 993 Provision for losses on loans, guarantees and other receivables (359) (171) (88) (243) (117) Income from equity investments and associated derivatives 518 427 1,289 732 1,548 Income from debt securities, including realized gains and losses on debt securities and associated derivatives 129 132 89 69 71 Income from liquid asset trading activities 504 467 599 500 313 Charges on borrowings (409) (258) (196) (220) (181) Other income 501 505 461 441 448 Other expenses (1,464) (1,423) (1,418) (1,401) (1,207) Foreign currency transaction gains and losses on non-trading activities (46) 53 (19) 35 145 Income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA 500 855 2,013 1,782 909 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (204) (106) (43) 441 (355) Income before grants to IDA 296 749 1,350 1,739 1,658 Grants to IDA (330) (340) (251) (340) (330) Net (loss) income (34) 409 1,488 1,010 1,328 Less: Net losses (gains) attributable to non- controlling interests 1 36 (5) 8 – Net (loss) income attributable to IFC $ (33) $ 445 $ 1,483 $ 1,018 $ 1,328 AS OF AND FOR THE YEARS ENDED JUNE 30 2016 2015 2014 2013 2012 Consolidated balance sheet highlights: Total assets $ 90,434 $ 87,548 $ 84,130 $ 77,525 $ 75,761 Liquid assets, net of associated derivatives 41,373 39,475 33,738 31,237 29,721 Investments 37,356 37,578 38,176 34,677 31,438 Borrowings outstanding, including fair value adjustments 55,142 51,265 49,481 44,869 44,665 Total capital $ 22,766 $ 24,426 $ 23,990 $ 22,275 $ 20,580 of which Undesignated retained earnings $ 20,475 $ 20,457 $ 20,002 $ 18,435 $ 17,373 Designated retained earnings 133 184 194 278 322 Capital stock 2,566 2,566 2,502 2,403 2,372 Accumulated other comprehensive (loss) income (AOCI) (431) 1,197 1,239 1,121 513 Non-controlling interests 23 22 53 38 – IFC FINANCIALS 2016 5 TABLE 4: KEY FINANCIAL RATIOS 2016 2015 2014 2013 2012 Financial ratios:  a Return on average assets (GAAP basis) b 0.0% 0.5% 1.8% 1.3% 1.8% Return on average assets (non- GAAP basis) c 0.5% 1.3% 1.8% 0.9% 2.8% Return on average capital (GAAP basis) d (0.1)% 1.8% 6.4% 4.8% 6.5% Return on average capital (non- GAAP basis) e 1.8% 4.6% 6.5% 3.1% 9.9% Overall liquidity ratio f 85% 81% 78% 77% 77% External funding liquidity level 504% 494% 359% 309% 327% Debt to equity ratio g 2.8:1 2.6:1 2.7:1 2.6:1 2.7:1 Total reserves against losses on loans to total disbursed portfolio h 7.4% 7.5% 6.9% 7.2% 6.6% Capital measures: Total Resources Required ($ billions) i 19.2 19.2 18.0 16.8 15.5 Total Resources Available ($ billions) j 22.5 22.6 21.6 20.5 19.2 Strategic Capital k 3.3 3.4 3.6 3.8 3.7 Deployable Strategic Capital l 1.0 1.1 1.4 1.7 1.8 Deployable Strategic Capital as a percentage of Total Resources Available 4% 5% 7% 8% 9% Certain financial ratios, as described below, are calculated excluding the effects of unrealized gains and losses on investments, other non‑trading financial a. instruments, AOCI, and impacts from consolidated Variable Interest Entities (VIEs). b. Net income for the fiscal year as a percentage of the average of total assets at the end of such fiscal year and the previous fiscal year. c. Return on average assets is defined as Net income, excluding unrealized gains/losses on investments accounted for at fair value, income from consolidated VIEs and net gains/losses on non-trading financial investments, as a percentage of total disbursed loan and equity investments (net of reserves), liquid assets net of repos, and other assets averaged for the current and previous fiscal year. d. Net income for the fiscal year as a percentage of the average of total capital (excluding payments on account of pending subscriptions) at the end of such fiscal year and the previous fiscal year. e. Return on average capital is defined as Net income, excluding unrealized gains/losses on investments accounted for at fair value, income from consolidated VIEs and net gains/losses on non-trading financial investments, as percentage of the paid-in share capital and accumulated earnings (before certain unrealized gains/ losses and excluding cumulative designations not yet expensed) averaged for the current and previous fiscal year. f. Overall Liquidity Policy states that IFC would at all times maintain a minimum level of liquidity, plus undrawn borrowing commitments from the IBRD, that would cover at least 45 percent of the next three years’ estimated net cash requirements (target range of 65 -95 percent). g. Leverage (Debt/equity) ratio is defined as the number of times outstanding borrowings plus outstanding guarantees cover paid-in capital and accumulated earnings (net of retained earnings designations and certain unrealized gains/losses). h. Total reserves against losses on loans to total disbursed loan portfolio is defined as reserve against losses on loans as a percentage of the total disbursed. i. Total resources required (TRR) is the minimum capital required to cover the expected and unexpected loss on IFC’s portfolio, calibrated to maintain IFC’s triple -A rating. TRR is the sum of the economic capital requirements for IFC’s different assets, and it is determined by the absolute size of the committed portfolio, the product mix (equity, loans, short-term finance, and Treasury portfolio assets), and by operational and other risks. j. Total resources available (TRA) is the total capital of the Corporation, consisting of (i) paid-in capital; (ii) retained earnings net of designations and some unrealized gains and losses; and (iii) total loan loss reserves. TRA grows based on retained earnings (profit minus distributions) and increases in reserves. k. Total resources available less total resources required. l. 90 percent of total resources available less total resources required. 6 IFC FINANCIALS 2016 Client Services • Project Supervision and Development Outcome Tracking • Evaluation • Closing IFC comprehensively supervises its projects to monitor project performance and compliance with con- tractual obligations and with IFC’s internal policies and procedures. BUSINESS OVERVIEW INVESTMENT PRODUCTS IFC fosters sustainable economic growth in develop- ing countries by financing private sector investment, Loans—IFC finances projects and companies through mobilizing capital in the international financial mar- loans, typically for seven to twelve years. IFC also makes kets, and providing advisory services to businesses and loans to intermediary banks, leasing companies, and governments. other financial institutions for on-lending. IFC provides long-term local-currency solutions and helps compa- For all new investments, IFC articulates the expected nies access local capital markets through loans from IFC impact on sustainable development, and, as the projects denominated in local currency, derivatives which allow mature, IFC assesses the quality of the development ben- clients to hedge existing or new foreign currency denom- efits realized. inated liabilities back in to the client’s local currency, IFC’s strategic focus areas are aligned to advance the and structured finance which enable clients to borrow in World Bank Group’s global priorities. local currency from other sources. While IFC’s loans have traditionally been dominated in the currencies of major industrial nations, IFC has made it a priority to struc- INVESTMENT ture local-currency products based on client demand SERVICES and on IFC’s ability to economically hedge loans in these currencies through the use of cross currency swaps or for- ward contracts. IFC’s investments are normally made in its developing member countries. The Articles of Agreement mandate Loans generally have the following characteristics: that IFC shall invest in productive private enterprise. • Term—typically amortizing with final maturities gener- The requirement for private ownership does not disqual- ally for seven to twelve years, although some loans have ify enterprises that are partly owned by the public sector been made for tenors as long as 20 years if such enterprises are organized under local commer- • Currency—primarily in major convertible currencies, cial and corporate law, operate free of host government principally US dollar, and to a lesser extent, Euro, but control in a market context and according to profitability with a growing local-currency loan portfolio criteria, and/or are in the process of being totally or par- tially privatized. • Interest rate—typically variable (or fixed and swapped into variable) IFC provides a range of financial products and services to its clients to promote sustainable enterprises, encourage • Pricing—reflects such factors as market conditions and entrepreneurship, and mobilize resources that wouldn’t country and project risks otherwise be available. IFC’s financing products are Equity—IFC’s equity investments provide developmental tailored to meet the needs of each project. Investment support and long-term growth capital that private enter- services product lines include: loans, equity investments, prises need. IFC invests directly in companies’ equity, and trade finance, loan participations, structured finance, cli- also through private-equity funds. IFC generally invests ent risk management services, and blended finance. between 5 and 20  percent of a company’s equity. IFC’s IFC’s investment project cycle can be divided into the fol- equity investments are typically in the form of common lowing stages: or preferred stock which is not mandatorily redeemable by the issuer or puttable to the issuer by IFC, and are • Business Development usually denominated in the currency of the country in • Concept Review which the investment is made. IFC also uses put and call • Appraisal (Due Diligence) options, profit participation features, conversion features, warrants and other types of instruments in managing its • Investment Review equity investments. • Negotiations Debt Securities—Investments typically in the form • Public Disclosure of bonds and notes issued in bearer or registered form, • Board of Directors Review and Approval securitized debt obligations (e.g. asset-backed securities • Commitment (ABS), mortgage-backed securities (MBS), and other col- • Disbursement of funds lateralized debt obligations) and preferred shares that are mandatorily redeemable by the issuer or puttable to the issuer by IFC. IFC FINANCIALS 2016 7 Guarantees and Partial Credit Guarantees—IFC Trade and Supply Chain Finance—IFC’s Global Trade offers partial credit guarantees to clients covering, on Finance Program (GTFP) guarantees trade-related a risk-sharing basis, client obligations on bonds and/or payment obligations of approved financial institutions. loans. IFC’s guarantee is available for debt instruments Separately, the Global Trade Liquidity Program (GTLP) and trade obligations of clients and covers commercial and Critical Commodities Finance Program (CCFP) as well as noncommercial risks. IFC will provide local provides liquidity for trade in developing countries. IFC currency guarantees, but when a guarantee is called, the has also commenced a number of other Trade and Supply client will generally be obligated to reimburse IFC in US Chain Finance-related programs, including Global Trade dollar terms. Supplier Finance (GTSF), Global Warehouse Finance Program, Working Capital and Systemic Solutions and Client Risk Management Services—IFC extends Global Trade Structured Trade. long-maturity risk management products to clients in developing countries. IFC provides derivative products Structured Finance—IFC uses structured and secu- to its clients to allow them to hedge their interest rate, ritized products to provide forms of financing that may currency, or commodity-price exposures. IFC inter- not otherwise be available to clients to help clients diver- mediates between clients in developing countries and sify funding, extend maturities, and obtain financing in derivatives market makers to provide such clients with particular currencies. Products include partial credit access to risk‑management products to bridge the credit guarantees, structured liquidity facilities, portfolio risk gap between its clients and the market. transfer, securitizations, and Islamic finance. Loan Mobilization—IFC promotes development by Blended Finance—IFC combines concessional funds, mobilizing financing for the private sector in its develop- typically from donor partners, with IFC’s resources to ing member countries. IFC mobilizes funds through loan finance certain projects. participation programs, parallel loans and, beginning in FY14, a Managed Co-Lending Portfolio Program (MCPP). INVESTMENT Loan Participations: Through its “B Loan Program”, IFC offers commercial banks and other financial institutions PROGRAM the opportunity to lend to IFC-financed projects. These loans are a key part of IFC’s efforts to mobilize additional private sector financing in developing countries, thereby COMMITMENTS broadening the Corporation’s developmental impact. In FY16, the Long-Term Finance program was Through the B Loan Program, financial institutions share $11,117 million, as compared to $10,539 million in FY15 fully in the commercial credit risk of projects, while IFC and Core Mobilization was $7,739 million, as compared remains the lender of record. When IFC participates a B to $7,133 million for FY15, a total increase of 7 percent Loan, it always maintains a portion for its own account reflecting the more favorable investing climate in FY16. (an A Loan). An A Loan Participation (ALP) is an expo- sure management tool which IFC uses to reduce its risk In addition, the average outstanding balance for Short- exposures to a client, country or sector. An ALP is created Term Finance was $2,807  million at June  30, 2016, as through the partial sale of an IFC A Loan to commercial compared to $2,837 million at June 30, 2015. banks or other financial institutions and is governed in much the same way as a B Loan. IFC remains the lender CORE of record and an ALP participant shares all project risks MOBILIZATION with IFC. Core Mobilization is financing from entities other than Parallel Loans: IFC acts as an arranger (and can also act IFC that becomes available to clients due to IFC’s direct as an administrative agent) by using its existing mobili- involvement in raising resources. lFC finances only a zation platform, deal‑structuring expertise and global portion, usually not more than 25 percent, of the cost of presence to identify investments, perform due diligence, any project. All IFC-financed projects, therefore, require and negotiate loan documents in cooperation with paral- other financial partners. IFC mobilizes such private lel lenders. sector finance from other entities through a number of MCPP : The MCPP allows institutional investors the means, as outlined in the Table on the following page. opportunity to passively participate in IFC’s future loan portfolio. Investors provide capital on a portfolio basis, which can be deployed by IFC in individual investments in accordance with IFC’s strategy and processes. Through MCPP, IFC can expand its base of co-lending partners to include investors that do not have the capacity to invest on a “deal by deal” basis. 8 IFC FINANCIALS 2016 TABLE 5: FY16 AND FY15 LONG-TERM FINANCE INVESTMENT AND CORE MOBILIZATION (US$ MILLIONS) DISBURSEMENTS FY16 FY15 IFC disbursed $9,952  million for its own account in Total Long -Term Finance and FY16 ($9,258  million in FY15): $7,248  million of loans Core Mobilization 3 $ 18,856 $ 17,672 ($6,359 million in FY15), $1,929 million of equity invest- LONG-TERM FINANCE ments ($2,299 million in FY15), and $775 million of debt Loans $ 8,097 $ 7,019 securities ($600 million in FY15). Equity investments 2,595 3,187 Guarantees 378 273 DISBURSED Client risk management 47 60 INVESTMENT PORTFOLIO Total Long -Term Finance $ 11,117 $ 10,539 CORE MOBILIZATION IFC’s total disbursed investment portfolio (a non-GAAP Loan participations, parallel loans, performance measure) was $37,554 million at June 30, and other mobilization 2016 ($36,401 million at June 30, 2015), comprising the Loan participations $ 3,670 $ 1,853 disbursed loan portfolio of $23,910 million ($23,252 mil- Parallel loans 1,205 1,522 lion at June 30, 2015), the disbursed equity portfolio of Managed Co -lending $10,793  million ($10,581  million at June  30, 2015), and Portfolio Program 541 818 the disbursed debt security portfolio of $2,851  million Other Mobilization 554 881 ($2,568 million at June 30, 2015). Total loan participations, parallel loans and other mobilization $ 5,970 $ 5,074 IFC’s disbursed investment portfolio is diversified by industry sector and geographic region. AMC (see definitions in Table 8) China-Mexico Fund $ 140 $ - The following charts show the distribution of the dis- GEM Funds 87 – bursed investment portfolio by geographical region and FIG Fund 82 – industry sector as of June 30, 2016, and June 30, 2015: Catalyst Funds 66 66 ALAC Fund 43 86 Africa Capitalization Fund 28 – WED Fund 20 – FIGURE 1: DISBURSED INVESTMENT PORTFOLIO MENA Fund 8 – DISTRIBUTION BY REGION Global Infrastructure Fund (GIF) 2 226 GIF Co -Investments – 230 FY16 FY15 Sub-debt Capitalization Fund – 150 Equity Capitalization Fund – 3 Asia Asia Total AMC $ 476 $ 761 Other initiatives Latin America Latin America Public Private Partnership $ 793 $ 548 and the Caribbean and the Caribbean Global Trade Liquidity Program and Critical Commodities Finance Program 500 750 Europe and Europe and Central Asia Central Asia Total other initiatives $ 1,293 $ 1,298 Total Core Mobilization $ 7,739 $ 7,133 Sub-Saharan Africa Sub-Saharan Africa Middle East Middle East and North Africa and North Africa 3 Debt security commitments are included in loans and equity Other Other investments based on their predominant characteristics. IFC FINANCIALS 2016 9 FIGURE 2: DISBURSED INVESTMENT PORTFOLIO DISTRIBUTION BY INDUSTRY SECTOR (PERCENTAGE) Finance and Insurance Wholesale and Retail Trade Electric Power Construction and Real Estate Collective Investment Vehicles Education Services Transportation and Warehousing Utilities Oil, Gas and Mining Professional, Scientific and Technical Services Chemicals Accommodation and Tourism Services Agriculture and Forestry Primary Metals Information Pulp and Paper Food and Beverages Public Administration Nonmetallic Mineral Product Manufacturing Textiles, Apparel, and Leather Health Care Other Industrial and Consumer Products 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 FY16 FY15 The carrying value of IFC’s investment portfolio com- balance sheet (comprising the disbursed loan portfolio prises: (i) the disbursed investment portfolio; (ii) reserves together with adjustments as detailed in Note D to IFC’s against losses on loans; (iii) unamortized deferred loan FY16 Consolidated Financial Statements) grew 2.5 per- origination fees, net and other; (iv) disbursed amount cent to $21,868 million at June 30, 2016 ($21,336 million allocated to a related financial instrument reported sep- at June 30, 2015). arately in other assets or derivative assets; (v) unrealized Loans traditionally have been denominated in the curren- gains and losses on equity investments held by consol- cies of major industrial nations, but IFC has an extensive idated variable interest entities; (vi) unrealized gains portfolio of local currency products. IFC typically offers and losses on investments accounted for at fair value as local currency products in other currencies where it available-for-sale; and (vii) unrealized gains and losses can economically hedge the local currency loan cash on investments. flows back into US dollars using swap markets or where it can fund itself in local bond markets. IFC’s disbursed LOANS loan portfolio at June  30, 2016 includes $2,458  million of currency products denominated in Brazilian reals, Loans comprise 64 percent of the disbursed investment Indian rupees, Chinese renminbi, South African rands, portfolio as of June 30, 2016 (64 percent at June 30, 2015) Philippine pesos, Colombian pesos, Mexican pesos, and 58 percent of the carrying amount of the investment Indonesian rupiahs, Russian rubles, Peruvian nue- portfolio as of June 30, 2016 (57 percent at June 30, 2015). vos soles, New Romanian Lei, Hong Kong dollars and IFC’s disbursed loan portfolio totaled $23,910 million at Dominican pesos ($3,026 million at June 30, 2015). The June 30, 2016 ($23,252 million at June 30, 2015). The car- $568  million decline over FY16 in local currency loans rying amount of IFC’s loan portfolio on IFC’s consolidated outstanding measured in US dollars was mainly due to 10 IFC FINANCIALS 2016 repayments of loans denominated in Chinese renminbi, Mexican pesos, and Indonesian rupiahs. IFC has also EQUITY INVESTMENTS made loans in a number of frontier market currencies IFC’s disbursed equity portfolio totaled $10,793 million such as Tunisian dinar, Paraguayan guarani, Rwandan at June  30, 2016 ($10,581  million at June  30, 2015), an franc, and Zambian kwacha. At June 30, 2016, 78 percent increase of 2 percent. (75 percent at June 30, 2015) of IFC’s disbursed loan port- folio was US dollar-denominated. Equity investments accounted for 29 percent of IFC’s dis- bursed investment portfolio at June 30, 2016, compared The currency position of the disbursed loan portfolio at with 29 percent at June 30, 2015 and 34 percent of the car- June 30, 2016 and June 30, 2015 is shown below: rying amount of the investment portfolio at June 30, 2016 (36 percent at June 30, 2015). The carrying amount of IFC’s equity investment portfo- lio (comprising the disbursed equity portfolio, together FIGURE 3: CURRENCY POSITION OF THE DISBURSED with adjustments as detailed in Note D to IFC’s FY16 LOAN PORTFOLIO (US$ MILLIONS) Consolidated Financial Statements), fell 7  percent to $12,588  million at June  30, 2016 ($13,503  million at US dollars June 30, 2015). While equity disbursements were robust in FY16, this was more than offset by sales, other than temporary impairments and unrealized losses on equity Euro investments accounted for at fair value, reflecting the tough overall environment for emerging markets equi- ties in FY16. Brazilian reais The fair value of IFC’s equity portfolio4 was $14,642 mil- lion at June 30, 2016 ($15,721 million at June 30, 2015). Indian rupees DEBT SECURITIES IFC’s disbursed debt securities portfolio totaled Chinese renminbi $2,851  million at June  30, 2016 ($2,568  million at June 30, 2015). South African rand Debt securities accounted for 7  percent of IFC’s dis- bursed investment portfolio at June 30, 2016 (7 percent at June 30, 2015) and 8 percent of the carrying amount Philippine pesos of the investment portfolio at June 30, 2016 (7 percent at June 30, 2015). The carrying amount of IFC’s debt securities port- Colombian pesos folio (comprising the disbursed debt securities portfolio, together with adjustments as detailed in Note D to IFC’s FY16 Consolidated Financial Statements), Mexican pesos was $2,900  million at June  30, 2016 ($2,739  million at June 30, 2015). Indonesian rupiah Additional information on IFC’s investment portfolio as of and for the years ended June 30, 2016, and June 30, 2015, can be found in Notes B, D, E, F, G, H, P and R to IFC’s Russian rubles FY16 Consolidated Financial Statements. GUARANTEES AND Peruvian Soles nuevos PARTIAL CREDIT GUARANTEES IFC offers partial credit guarantees to clients covering, New Romanian Lei on a risk-sharing basis, client obligations on bonds and/ or loans. IFC’s guarantee is available for debt instruments and trade obligations of clients and covers commercial as Other well as noncommercial risks. IFC will provide local cur- rency guarantees, but when a guarantee is called, the client will generally be obligated to reimburse IFC in US dollar terms. Guarantee fees are consistent with IFC’s 0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000 loan pricing policies. FY16 FY15 Guarantees of $3,478 million were outstanding (i.e., not called) at June 30, 2016 ($3,168 million at June 30, 2015). 4 Including “equity-like” securities classified as debt securities in IFC’s consolidated balance sheet and equity-related options. IFC FINANCIALS 2016 11 ADVISORY opportunities while helping clients make better use of local suppliers and resources. Central to IFC’s advisory SERVICES work is helping clients build robust and inclusive business performance by making them aware of, and invest in, the It takes more than finance to achieve sustainable devel- value women can bring either as a defined consumer seg- opment. IFC’s experience shows the powerful role ment that can be better served, as employees, as business advice can play in unlocking private sector investment leaders or as entrepreneurs and suppliers. and helping businesses expand and create jobs—thereby strengthening the World Bank Group’s efforts to end pov- The IFC Advisory Services Portfolio5 as of June 30, 2016 erty and boost shared prosperity. totaled $1.3 billion ($1.2 billion at June 30, 2015). FY16 program expenditures with clients was $221  million That is why IFC continues to strengthen advisory work, ($202 million–FY15) with a strong focus in strategic pri- which is now closely aligned with other areas of IFC and ority areas of IDA (62 percent) and FCS (21 percent) as the World Bank, so that IFC’s clients can benefit from the of June 30, 2016 (65 percent and 20 percent at June 30, full range of capabilities available across the Bank Group. 2015). This emphasis is expected to continue in the com- Advice is increasingly integrated into the wide suite of ing years. solutions IFC provides to clients. During FY16, IFC provided advice in a number of areas critical to development: Financial Sector: IFC helps increase the availability and TABLE 6: IFC ADVISORY SERVICES—PROGRAM affordability of financial services for individuals and for EXPENDITURES BY REGION FOR FY16 VS FY15 micro, small, and medium enterprises. IFC works with financial institutions to strengthen their risk manage- FY16 FY16 ment and diversify their product offering in areas such as IFC ADVISORY SERVICES US$ US$ SMEs, housing finance, and sustainable energy. As part PROGRAM BY REGION MILLIONS % MILLIONS % of an integrated World Bank Group team in the Finance & Markets Global Practice, IFC also supports the devel- Sub Saharan Africa $ 63 29 $   54 27 opment of financial markets—by promoting universal East Asia and the Pacific 39 18 38 19 access to finance, strengthening capital markets, and Europe and Central Asia 34 15 34 17 establishing credit bureaus and collateral registries that South Asia 27 12 23 11 open up new avenues for companies to create jobs and Latin America and grow sustainably. the Caribbean 25 11 22 11 Middle East and Investment Climate: As part of an integrated Work North Africa 23 10 20 10 Bank Group team in the Trade & Competitiveness Global World region 10 5 11 5 Practice, IFC helps national and local governments imple- Total expenditures $221 100 $202 100 ment reforms that improve the business environment and attract and retain investment—fostering growth, compet- itive markets, and job creation. Public-Private Partnerships: IFC helps governments design and implement public-private partnerships in TABLE 7: IFC ADVISORY SERVICES—PROGRAM infrastructure and basic public services. IFC’s advice EXPENDITURES BY AREA FOR FY16 VS FY15 helps increase public access to electricity, water, health, FY16 FY16 and education. Agribusiness: IFC helps clients improve productivity IFC ADVISORY SERVICES US$ US$ and standards in agribusiness. IFC’s efforts are focused PROGRAM BY AREA MILLIONS % MILLIONS % on designing efficient value chains and boosting food Financial Sector $ 67 30 $   64 32 security—thereby providing valuable social, economic, Investment Climate 57 26 50 25 and environmental benefits for all stakeholders. Cross-Industry Areas 34 15 28 14 Public -Private Partnerships 31 14 31 15 Energy & Resource Efficiency: IFC helps clients Energy & Resource develop clean, affordable, competitive, and high-quality Efficiency 19 9 17 8 energy solutions across the value chain. IFC accelerates Agribusiness 13 6 12 6 the development of commercial markets to increase Total expenditures $221 100 $202 100 renewable energy production and improve people’s access to modern energy services. Similar to FY15, the program results in FY16 were pos- IFC also provides advisory solutions that can be deployed itive. Development effectiveness ratings of the projects across several industries. This includes helping busi- reached 68 percent success rate (77 percent in FY15) and nesses improve corporate governance and building the client satisfaction was 91 percent (91 percent in FY15). capacity of smaller businesses operating within the sup- ply chains of larger companies, thereby increasing local 5 IFC Advisory Services Portfolio is the total of funds managed by IFC for active advisory projects. 12 IFC FINANCIALS 2016 ASSET MANAGEMENT in funds managed by AMC include sovereign wealth funds, national pension funds, multilateral and bilateral COMPANY development institutions, national development agencies and international financial institutions. AMC helps IFC IFC Asset Management Company, LLC (AMC), a whol- mobilize additional capital resources for investment in ly-owned subsidiary of IFC, invests third-party capital productive private enterprise in developing countries. and IFC capital, enabling outside investors to benefit from IFC’s expertise in achieving strong equity returns, as well At June  30, 2016, AMC managed twelve funds, with as positive development impact in the countries in which $8.9  billion total assets under management (ten funds; it invests in developing and frontier markets. Investors $8.5 billion at June 30, 2015): TABLE 8: LIST OF FUNDS MANAGED BY AMC AT JUNE 30, 2016 FUND NAME ESTABLISHED DESCRIPTION The IFC Capitalization (Equity) Fund, L.P. Year ended June 30, Help strengthen systemically important banks in (Equity Capitalization Fund) 2009 (FY09) emerging markets The Capitalization (Subordinated Debt) Fund, L.P. FY09 Help strengthen systemically important banks in (Sub -Debt Capitalization Fund) emerging markets The African, Latin American and Caribbean Fund, Year ended June 30, Invest in equity investments across a range of sectors in LP (ALAC Fund) 2010 (FY10) Sub‑Saharan Africa, Latin America, and the Caribbean. The Africa Capitalization Fund, Ltd. FY10 Capitalize on systemically important commercial banking (Africa Capitalization Fund) institutions in northern and Sub -Saharan Africa The Russian Bank Capitalization Fund, LP Year ended June 30, Invest in mid-sized commercial banks in Russia that (Russian Bank Cap Fund) 2012 (FY12) are either: (i) privately owned and controlled; or (ii) state -owned; or (iii) controlled and on a clear path to privatization The Catalyst Fund, LP, IFC Catalyst Fund (UK), LP Year ended June 30, Make investments in selected climate - and and IFC Catalyst Fund (Japan), LP (collectively, 2013 (FY13) resource efficiency-focused private equity funds in Catalyst Funds) emerging markets The Global Infrastructure Fund, LP FY13 Focus on making equity and equity-related investments (Global Infrastructure Fund) in the infrastructure sector in global emerging markets The China-Mexico Fund, LP FY15 Focus on making equity and equity-related investments (China-Mexico Fund) across all sectors in Mexico The Financial Institutions Growth Fund, LP FY15 Invest in equity and equity-related investments in (FIG Fund) financial institutions in global emerging markets The Global Emerging Markets Fund of Funds, LP FY15 Primarily invest in a portfolio of investment funds in and IFC Global Emerging Markets Fund of Funds global emerging markets. (Japan Parallel), LP (collectively, GEM Funds) The Middle East and North Africa Fund, LP FY16 Make equity and equity related investments in the Middle (MENA Fund) East and North Africa region Women Entrepreneurs Debt Fund, LP FY16 Focus on extending senior loans to commercial banks (WED Fund) for on‑lending to women- owned small and medium enterprises in emerging markets IFC FINANCIALS 2016 13 The activities of the funds managed by AMC at June 30, 2016 and 2015 can be summarized as follows: TABLE 9: ACTIVITIES OF THE FUNDS MANAGED BY AMC FY16 VS FY15 (US$ MILLIONS UNLESS OTHERWISE INDICATED) AS OF JUNE 30, 2016 FOR THE YEAR ENDED JUNE 30, 2016 TOTAL ASSETS UNDER MANAGEMENT DISBURSEMENTS TO FUND MADE FROM OTHER TO FUND FROM OTHER MADE BY FUND TOTAL FROM IFC INVESTORS FROM IFC INVESTORS BY FUND (NUMBER)* Equity Capitalization Fund $ 1,275 $ 775 $ 500 $ 2 $ 1 $ – $ – Sub-Debt Capitalization Fund 1,725 225 1,500 – 2 - - ALAC Fund 1,000 200 800 19 80 81 8 Africa Capitalization Fund 182 – 182 – 56 29 2 Russian Bank Cap Fund 550 250 300 2 2 - - Catalyst Funds 418 75 343 9 38 48 96 Global Infrastructure Fund** 1,430 200 1,230 24 104 102 5 China-Mexico Funds 1,200 – 1,200 - 13 4 1 FIG Fund 464 150 314 45 63 96 3 GEM Funds 406 81 325 7 26 25 16 MENA Fund 162 60 102 6 11 12 1 WED Fund 90 30 60 9 17 10 1 Total $8,902 $2,046 $6,856 $123 $413 $407 $133 * Number of disbursements may include multiple disbursements to a single investee company or fund. ** Includes co-investment fund managed by AMC on behalf of Fund LPs. AS OF JUNE 30, 2015 FOR THE YEAR ENDED JUNE 30, 2015 TOTAL ASSETS UNDER MANAGEMENT DISBURSEMENTS TO FUND MADE FROM OTHER TO FUND FROM OTHER MADE BY FUND TOTAL FROM IFC INVESTORS FROM IFC INVESTORS BY FUND (NUMBER)* Equity Capitalization Fund $ 1,275 $ 775 $ 500 $ 6 $ 4 $ 8 $ 1 Sub-Debt Capitalization Fund 1,725 225 1,500 29 196 254 4 ALAC Fund 1,000 200 800 29 112 94 7 Africa Capitalization Fund 182 – 182 – 3 – – Russian Bank Cap Fund 550 250 300 5 5 – – Catalyst Funds 418 75 343 9 41 36 46 Global Infrastructure Fund** 1,430 200 1,230 27 298 293 7 China-Mexico Funds 1,200 – 1,200 – 6 – – FIG Fund 344 150 194 – – – – GEM Funds 406 81 325 – – – – MENA Fund – – – – – – – WED Fund – – – – – – – Total $8,530 $1,956 $6,574 $105 $665 $685 65 * Number of disbursements may include multiple disbursements to a single investee company or fund. ** Includes co-investment fund managed by AMC on behalf of Fund LPs. 14 IFC FINANCIALS 2016 MANAGED Liquid NET WORTH Assets The second funding source of liquid assets is that portion of IFC’s net worth not invested in equity and equity-like investments (Managed Net Worth) which is managed against a U.S. Treasury benchmark. A portion of these assets are managed by third parties with the same bench- mark as that part managed internally. All liquid assets are managed according to an invest- ment authority approved by the Board of Directors and Net income from liquid assets trading activities6 from liquid asset investment guidelines approved by IFC’s Funded Liquidity was $419  million and from Managed Corporate Risk Committee, a subcommittee of IFC’s Net Worth totaled $85 million in FY16. Management Team. IFC funds its liquid assets from two sources, borrow- ings from the market (funded liquidity) and capital (net Funding worth). Liquid assets are managed in a number of portfo- lios related to these sources. IFC invests its liquid assets generally in highly rated fixed and floating rate instruments issued by, or uncondition- ally guaranteed by, governments, government agencies Resources and instrumentalities, multilateral organizations, and high quality corporate issuers; these include asset‑backed securities and mortgage-backed securities, time deposits, and other unconditional obligations of banks and financial IFC’s funding resources (comprising borrowings, capital institutions. Diversification across multiple dimensions and retained earnings) as of June 30, 2016 and June 30, ensures a favorable risk return profile. IFC has a flex- 2015 are as follows: ible approach to managing the liquid assets portfolios by making investments on an aggregate portfolio basis against its benchmarks within specified risk parameters. In implementing these portfolio management strategies, IFC utilizes derivative instruments, principally currency FIGURE 4: IFC’S FUNDING RESOURCES and interest rate swaps and futures and options, and takes FY16 FY15 positions in various industry sectors and countries. IFC’s liquid assets are accounted for as trading portfo- lios. The net asset value of the liquid assets portfolio was $41.4  billion at June  30, 2016 ($39.5  billion at June  30, 2015). The increase in FY16 was principally due to addi- Borrowings from Borrowings from market sources market sources tions to the portfolio from the investment of the net proceeds of market borrowings, plus returns made on the investment portfolio partially offset by reductions due to investment disbursements. Retained earnings Retained earnings Paid-in capital Paid-in capital Discount Note Program and Discount Note Program and FUNDED other short-term borrowings other short-term borrowings LIQUIDITY Borrowings from IDA Borrowings from IDA Borrowings from IBRD Borrowings from IBRD The primary funding source for liquid assets for IFC is borrowings from market sources. Proceeds of borrow- BORROWINGS ings from market sources not immediately disbursed for loans and loan-like debt securities (Funded Liquidity) The major source of IFC’s borrowings is the international are managed internally against money market bench- capital markets. Under the Articles of Agreement, IFC marks. A small portion of Funded Liquidity is managed may borrow in the public markets of a member country by third parties with the same benchmark as that man- only with approvals from that member, together with the aged internally. member in whose currency the borrowing is denominated. 6 Reported gross of borrowing costs and excluding foreign exchange gains and losses on local currency Funded Liquidity which are reported separately from income from liquid assets trading activities in foreign currency gains and losses on non-trading activities and the effects of internal trades related to foregone swapping of market borrowings and Funded Liquidity in certain currencies. IFC FINANCIALS 2016 15 Beginning July  1, 2014, IFC has a General Funding Kwacha, Nigerian Naira, Russian Ruble and Rwanda Authorization that authorizes IFC to borrow within the Francs. Proceeds of such borrowings were invested in limits of its risk policies without requiring annual autho- such local currencies, on-lent to clients and/or partially rizations from the Board of the Corporation as to the swapped into US dollars. size of its borrowing program for the subsequent finan- IFC has short term discount note programs in US$, cial year. Chinese renminbi and Turkish lira to provide an addi- IFC borrowed (after the effect of borrowing-related deriv- tional funding and liquidity management tool for IFC in atives) $14.3 billion during FY16 ($14.8 billion in FY15 and support of certain of IFC’s trade finance and supply chain $15.3 billion in FY14). In addition, the Board of Directors initiatives and to expand the availability of short term has authorized the repurchase and/or redemption of debt local currency finance.. The discount note programs pro- obligations issued by IFC, which enhances the liquid- vide for issuances with maturities ranging from overnight ity of IFC’s borrowings. During FY16, IFC repurchased to one year. The weighted average cost of discount note and retired $0.5 billion of outstanding debt ($1.4 billion borrowing was at 0.33 percent at June 30, 2016. During in FY15 and $1.4  billion in FY14), generating gains on FY16, IFC issued $11.5  billion of discount notes and buybacks of $6  million in FY16 ($2  million—FY15 and $1.8 billion were outstanding as of June 30, 2016 under $3 million—FY14). the short-term discount note programs. IFC uses its borrowings issuances as a tool to promote capital markets development in emerging and frontier CAPITAL AND markets. Proceeds of these issuances not disbursed into loans have primarily been invested in securities of the RETAINED EARNINGS related sovereign and sovereign instrumentalities in the currency of the issuances. As a result, borrowings As of June 30, 2016, IFC’s authorized capital was $2.58 bil- from market sources at June 30, 2016 that have not been lion ($2.58 billion—June 30, 2015), of which $2.57 billion swapped amounted to 5 percent of the total borrowings was subscribed and paid in at June 30, 2016 ($2.57 billion from market sources (6 percent at June 30, 2015 and 5 per- at June 30, 2015). cent at June 30, 2014). IFC diversifies its borrowings by currency, country, source, and maturity to provide flexibility and cost-effec- tiveness. In FY16 IFC borrowed in eighteen currencies TABLE 10: IFC’S CAPITAL (US$ MILLIONS) and in final maturities ranging from one to 30 years. JUNE 30, 2016 JUNE 30, 2015 Remaining maturities have a weighted average remain- ing contractual maturity of 4.1 years at June  30, 2016 Capital (3.3 years at June 30, 2015). Actual maturities may differ Capital stock, subscribed and paid-in $ 2,566 $ 2,566 from contractual maturities due to the existence of call Accumulated other features in certain of IFC’s borrowings. comprehensive (loss) income (431) 1,197 Market borrowings are generally swapped into float- Retained earnings 20,608 20,641 ing-rate obligations denominated in US dollars. As of Total IFC capital $ 22,743 $ 24,404 June  30, 2016, IFC had gross payables from borrow- Non- controlling interests 23 22 ing-related currency swaps of $19.9 billion ($19.6 billion Total capital $ 22,766 $ 24,426 at June  30, 2015) and from borrowing-related interest rate swaps in the notional principal payable amount of $35.2  billion ($35.2  billion at June  30, 2015). After the At June  30, 2016 and June  30, 2015, retained earnings effect of these derivative instruments is taken into con- comprised the following: sideration, 95  percent of IFC’s market borrowings at June 30, 2016 were variable rate US dollar-denominated (94 percent—June 30, 2015). The weighted average cost of market borrowings after currency and interest rate swap transactions was 1.1 percent at June 30, 2016 (0.5 percent TABLE 11: IFC’S RETAINED EARNINGS (US$ MILLIONS) at June 30, 2015). This was mainly due to developments in USD funding, where compared to the prior year, US$ JUNE 30, 2016 JUNE 30, 2015 six‑month LIBOR rates were 0.5 percent higher and IFC’s Undesignated retained earnings $ 20,475 $ 20,457 credit spread widened by 0.1 percent. Designated retained earnings: Advisory services 98 137 IFC’s mandate to help develop domestic capital markets Performance -based grants 12 16 can result in raising local currency funds. As of June 30, IFC SME Ventures for IDA 2016, $2.2 billion ($2.5 billion as of June 30, 2015) of such countries and Global non-US$ denominated market borrowings were out- Infrastructure Project standing, denominated in Chinese Renminbi, Dominican Development Fund 23 31 Pesos, Indian Rupees, Namibia dollar, New Zambian Total designated retained earnings $ 133 $ 184 Total retained earnings $ 20,608 $ 20,641 16 IFC FINANCIALS 2016 SELECTIVE CAPITAL FY15 INCREASE (SCI) DESIGNATIONS On July  20, 2010, the IFC Board of Directors recom- On August  6, 2015, the Board of Directors approved a mended that the IFC Board of Governors approve an designation of $330  million of IFC’s retained earnings increase of $130  million in the authorized share cap- for grants to IDA and a designation of $14 million of IFC’s ital of IFC to $2,580  million, through the issuance of retained earnings for Advisory Services. On October  9, $200 million in shares (including $70 million in unallo- 2015, IFC’s Board of Governors noted with approval cated shares). The Board of Directors also recommended these designations. On January 15, 2016 IFC recognized that the Board of Governors approve an increase in Basic expenditures against designations of retained earnings Votes aimed at enhancing the voice and participation of for grants to IDA of $330 million pursuant to signing of a developing and transition countries which required an grant agreement between IDA and IFC. amendment to IFC’s Articles of Agreement. The resolution recommended by the Board of Directors FY16 was adopted by the Board of Governors on March  9, DESIGNATIONS 2012 (IFC Resolution no. 256 entitled “Amendment to Income available for designations in FY16 (a non-GAAP the Articles of Agreement and 2010 Selective Capital measure)7 totaled $770 million. Based on the distribution Increase”). The amendment to the Articles of Agreement policy approved by IFC’s Board of Directors the maximum and the increase in the authorized share capital became amount available for designation would be $161 million. effective on June  27, 2012. As of the same date, eligible On August  4, 2016, the Board of Directors approved a members were authorized to subscribe to their allocated designation of $101 million of IFC’s retained earnings for IFC shares. grants to IDA and a designation of $60 million of IFC’s As of June  30, 2015, IFC had received payments with retained earnings for Advisory Services. These designa- respect to the SCI totaling $194 million and the balance tions are expected to be noted with approval by the Board of $6  million has become part of IFC’s authorized and of Governors, and thereby concluded, in FY17. unallocated capital stock. DEPLOYABLE DESIGNATIONS OF STRATEGIC CAPITAL RETAINED EARNINGS IFC’s deployable strategic capital (DSC) ratio was 4.4 per- Beginning in the year ended June  30, 2004, IFC began cent at June  30, 2016, compared with 5.4  percent at a process of designating retained earnings to increase June 30, 2015. Total Resources Available (TRA) decreased its support of advisory services and, subsequently, for to $22.5 billion at the end of FY16 from $22.6 billion at performance-based grants (PBG) (year ended June  30, the end of FY15. Total Resources Required (TRR) was 2005), grants to IDA (year ended June  30, 2006), the unchanged at $19.2 billion at the end of FY16. The increase Global Infrastructure Project Development Fund (year in capital required for the investment portfolio was offset ended June  30, 2008 (FY08), and IFC SME Ventures by a decline in capital to support the Treasury portfolio for IDA Countries (FY08). The levels and purposes of and for operational risk. The decrease in total resources retained earnings designations are set based on the Board available was heavily affected by the $0.8 billion increase of Directors-approved principles, which are applied each in the underfunded status of the pension plans—without year to assess IFC’s financial capacity and to determine this impact, the DSC ratio would have been 7.3 percent. the maximum levels of retained earnings designations. Amounts available to be designated are determined based on a Board of Directors-approved income-based formula and, beginning in the year ended June 30, 2008, on a principles-based Board of Directors-approved finan- cial distribution policy, and are approved by the Board of Directors. IFC recognizes designations of retained earnings for advisory services when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. Expenditures for the various approved des- ignations are recorded as expenses in IFC’s consolidated income statement in the year in which they occur, and have the effect of reducing retained earnings designated for this specific purpose. 7 Income available for designations generally comprises net income excluding unrealized gains and losses on investments and unrealized gains and losses on other non-trading financial instruments, income from consolidated VIEs, and expenses reported in net income related to prior year designations. IFC FINANCIALS 2016 17 Risk • Sharing responsibility for risk management across the Corporation. Management The ERM Framework comprises several components, each addressing a specific issue within the Framework. These components are dynamic in nature and reflect the fact that IFC’s risk management evolution is a continual, iterative and interconnected effort. The Framework is depicted as follows: ENTERPRISE RISK MANAGEMENT FIGURE 5: IFC’S ENTERPRISE RISK MANAGEMENT FRAMEWORK IFC provides long-term investments to the private sec- tor in emerging markets, which includes expanding the What else can go What are all the risks to wrong and how are IFC’s business strategy investment frontier into the most challenging markets. the risks that IFC and operations? In doing so, IFC is exposed to a variety of financial and faces interconnected? Stress Coverage non-financial risks. Sound risk management is crucial in Testing fulfilling IFC’s mission. What is IFC doing about How much risk is IFC Risk the risks? Response willing to take? The Corporate Risk and Sustainability Vice-Presidency Appetite combines all of IFC’s financial and non-financial risk Risk Culture functions to streamline and enhance risk management at both corporate and project levels, as well as to improve How well does Control Environment Governance & Policies How good is IFC IFC manage at overseeing its support for IFC’s external clients. its risks? risk taking? Measurement Risk Data & & Evaluation Infrastructure ENTERPRISE RISK MANAGEMENT FRAMEWORK How does IFC determine the size and How does IFC ensure it has the right information scope of the risks? to manage its risk pro le? IFC’s enterprise risk management framework (ERM) is designed to enable the prudent management of finan- cial and reputational impacts that originate from the Risk Culture—Starting with IFC’s Management Team, Corporation’s business activities. In this context, IFC’s building the right risk culture instills behaviors that are risk management efforts are designed specifically to help integral to the success of ERM. align the Corporation’s performance with its strategic Risk Coverage—IFC’s risk profile is categorized across direction. The ERM framework that IFC adopted in FY14 five classes of risk, namely Credit, Market, Operational, is aligned broadly with industry standards and is designed Liquidity and Business risks. Each of these is addressed to underpin IFC’s response to risk by defining: in the following paragraphs. • IFC’s core risk management principles; Risk Appetite —A comprehensive set of explicit risk • A common risk taxonomy for use across the organiza- appetite statements, with associated metrics, will provide tion, to help ensure that risk management efforts are a consistent and integrated basis for making decisions coordinated and aligned across the distinct parts of the that impact IFC’s risk profile, while monitoring IFC’s organization that share responsibility for managing dif- risk exposures, and taking action when risk tolerances ferent aspects of risk; are exceeded. • A standard classification of roles and responsibilities Risk Governance and Policies—IFC’s risk governance for risk management, to differentiate and thereby clar- structure is based on the industry-standard principle of ify how different parts of the organization contribute “three lines of defense”. towards the overall management of risk; and • IFC’s first line of defense is line management, consist- • The structures, processes and methods that are neces- ing of frontline decision makers on individual projects sary to put active risk management into practice. and transactions. The second line of defense is, collec- tively, the Management Team, its committees and IFC’s KEY RISK independent risk management functions. Independent MANAGEMENT PRINCIPLES oversight bodies, together with the Board of Directors, serve as the third line of defense. These independent The key principles that inform IFC’s ERM Framework are: oversight bodies are: • Maximizing development impact while maintaining • The Independent Evaluation Group, which assesses financial sustainability; the alignment between projected and realized out- • Ensuring that business decisions are based on a thor- comes of IFC’s investment and advisory projects ough understanding of risks and that risks and rewards undertaken with its clients; are balanced appropriately; • The Compliance Advisor/Ombudsman, which is the • Being selective in undertaking activities that could independent recourse mechanism for IFC’s stakehold- cause significant, adverse reputational impact; and ers, responding to complaints from project-affected 18 IFC FINANCIALS 2016 communities with the goal of enhancing social and economic capital framework, which is the foundation of environmental outcomes on the ground; financial risk management at IFC. Economic capital acts • The World Bank Group’s Internal Audit Vice as a “common currency of risk” across the organization, Presidency, which evaluates the effectiveness of the providing IFC with an objective, quantifiable measure organization’s governance, risk management, and con- of risk that can be applied consistently across business trol processes; and lines, products, regions and sectors. IFC holds economic capital for credit, market and operational risks. The main • The Integrity Vice-Presidency, which investigates measure of capital adequacy is DSC, which is the capital and pursues sanctions related to allegations of fraud and available to support future commitments, over and above corruption in World Bank Group-financed activities. the current portfolio. It is calculated as the amount by • IFC’s risk management policies define the types and which Total Resources Available (TRA)8 exceeds (a) Total amounts of risk that IFC’s Management Team is willing Resources Required (TRR)9, plus (b) a conservation buf- to assume, via delegated authority from the Board. fer10 and is expressed as a percentage of TRA. Risk Data and Infrastructure—Source data is collected, IFC operates under a number of key financial policies integrated and analyzed to support decision-making approved by its Board of Directors, as detailed below: across the Corporation. • Capital Adequacy Policy—IFC is required to maintain Measurement and Evaluation—IFC uses a combination a minimum level of total resources (including paid-in of quantitative and qualitative metrics to manage its risk capital, total loss reserves and retained earnings, net profile. Key metrics for each category of risk are discussed of designations) equal to total potential losses for all later in this document. on- and off-balance sheet exposures estimated at levels consistent with maintaining a triple-A rating. Control Environment—Management relies on internal controls, modelled on the COSO Framework, to reduce • Leverage Policy—IFC’s outstanding debt plus guaran- the level of inherent risk to an acceptable level. tees held must not exceed four times its net worth. • Overall Liquidity Policy—Minimum liquidity (liquid Risk Response—Risks are analyzed and monitored assets plus undrawn borrowing commitments from by IFC’s risk oversight units and the Corporate Risk IBRD) must be sufficient at all times to cover at least Committee, a subcommittee of IFC’s Management 45 percent of IFC’s estimated net cash requirements for Team, meets frequently to discuss and decide upon enter- the next three years. prise-level risk issues. • External Funding Liquidity Policy—IFC maintains a Stress Testing—Semi-annual, IFC-wide, stress testing minimum level of liquidity, consisting of proceeds from provides Management with an additional tool to inform external funding, covering at least 65  percent of the capital management and decision making. The testing sum of: (i) 100 percent of committed but undisbursed involves multi-year projections of IFC’s financial perfor- straight senior loans; (ii) 30  percent of committed mance and capital adequacy under base case and stressed guarantees; and (iii) 30 percent of committed client risk macroeconomic scenarios. management products. • Matched Funding Policy—Loans are funded with liabili- ENTERPRISE LEVEL ties that have similar characteristics in terms of interest RISK APPETITE rate basis, currency, and duration, except for new prod- IFC has developed risk appetite statements which set the ucts, approved by the Board of Directors, involving direction for the Corporation’s willingness to take risks asset-liability mismatches. in fulfillment of its development goals. These statements In order to safeguard its reputation, IFC pays close atten- reflect the Corporation’s core values of maximizing devel- tion to potential adverse reputational impact, as negative opment impact, preserving its financial sustainability and perceptions of stakeholders or the general public may safeguarding its reputation. adversely impact its ability to carry out business effec- At the strategic level, IFC has adopted the following risk tively. In determining which engagements and activities appetite statements: to pursue, IFC assesses whether any potential adverse impact to its reputation is balanced by the potential devel- • Developmental Impact: IFC will maximize develop- opment impact and financial returns. mental impact by focusing on the World Bank Group’s twin goals of addressing extreme poverty and boosting One of the key tools used by IFC for managing reputational shared prosperity, while maintaining financial sustain- impact is effective communication. Communication activ- ability and safeguarding its brand. ities are coordinated by the World Bank Group’s External and Corporate Relations Vice Presidency. This unit pro- • Financial Sustainability: IFC will generate and main- vides advice on strategic and crisis communications for tain sufficient financial resources, conduct its business and manage risks consistent with standards implied by 8 Total resources available (TRA) is the total capital of the Corporation, consisting of (i) paid-in capital; (ii) retained earnings net of designations and some a triple-A rating. unrealized gains and losses; and (iii) total loan loss reserves. TRA grows based on retained earnings (profit minus distributions) and increases in reserves. • Safeguarding Reputation: In determining what 9 Total resources required (TRR) is the minimum capital required to cover the engagement and activities to pursue, IFC will assess expected and unexpected loss on IFC’s portfolio, calibrated to maintain IFC’s triple-A rating. TRR is the sum of the economic capital requirements for IFC’s whether any potential adverse impact to its reputation different assets, and it is determined by the absolute size of the committed is balanced by the potential development impact. portfolio, the product mix (equity, loans, short-term finance, and Treasury portfolio assets), and by operational and other risks. From a financial sustainability perspective, the capital 10 The conservation buffer is set at a pre-determined percent of TRA. Its purpose is to absorb short-term fluctuations in TRR and TRA that result from the volatile required to maintain a triple-A rating is assessed using an nature of IFC’s portfolio. IFC FINANCIALS 2016 19 managing potential and actual reputational impacts at (2) a hard economic capital limit for treasury activities. both the corporate and project levels, throughout the proj- The policy framework is based on four principles: ect life cycle. It is also responsible for external and internal • Investment in high quality assets; communications, campaigns, civil society engagement, • Diversification via position size/concentration limits; brand marketing, and web, social, and other media. It col- laborates across IFC and with the other World Bank Group • Tight limits on market risks (credit spread, interest rate entities to develop and implement effective communica- and foreign exchange risk); tions strategies that strengthen the IFC brand. • Proactive portfolio surveillance. In line with the changes that are occurring in the global PORTFOLIO financial markets, IFC has enhanced its Treasury policy framework in FY16. Some of the key initiatives include: RISK MANAGEMENT development of an expanded framework for stress test- ing and contingency planning; enhancements to IFC’s Portfolio management is an intrinsic part of managing approach to monitoring of counterparty risk and struc- IFC’s business to ensure strong financial and develop- tured product credit; bilateral collateral exchanges with ment results of our projects. IFC’s management reviews derivatives counterparties; and enhancements to IFC’s our entire portfolio on a semi-annual basis, looking at model validation framework. broad trends as well as select individual assets. IFC pro- vides summary reports on portfolio performance to the Board on a quarterly basis, and provides an in-depth CREDIT review of portfolio results to the Board annually. Our RISK MANAGEMENT portfolio teams, largely based in field offices, complement global reviews with asset-by-asset quarterly reviews. On the corporate level, IFC combines the analysis of our DEFINITION AND SCOPE $52.0 billion portfolio performance with projections of OF CREDIT RISK global macroeconomic and market trends to inform deci- sions about future investments. IFC also regularly tests IFC defines credit risk as the risk of loss of principal or the performance of the portfolio against possible mac- loss of an expected financial return due to credit events roeconomic developments to identify and proactively such as a default or downgrade in credit ratings or any address risks. In FY16, in light of substantially volatility other failure to meet a contractual obligation that results in emerging markets, IFC’s senior management convened in financial loss. IFC is exposed to credit risk in its loan in-depth region-by-region portfolio reviews to analyze portfolio and in the form of counterparty credit risk in its similar metrics across different markets. Treasury portfolios. At the core of active risk and portfolio management is the INVESTMENT OPERATIONS need to have timely and accurate information to drive informed business decisions. IFC continues to invest in Credit risk in investment projects is actively managed its IT strategy and continues to improve its risk and port- throughout the project life cycle. Investment teams are folio management systems. This is critically important to responsible for gathering the necessary information from allow IFC to actively manage its risks and portfolio, and the client to verify the financial viability of the project, and to continue to be responsive to the challenging external for assigning a credit risk rating (CRR) at defined stages environment. in the project approval process. The CRR, the investment In FY16, IFC began rolling out a new Investment Risk size and the product type determine the authority level Platform (IRP), which will replace IFC’s existing credit required for transaction approval. All projects are sub- risk rating system and economic capital engine. The new ject to independent credit assessment by a credit officer systems are aimed at better aligning IFC’s practice to within the independent risk oversight function and who internationally recognized standards, where they make participates in the project approval process. Projects sense given our portfolio. The new risk rating system will are approved with reference to a number of operational allow for easier comparison between outside ratings and and prudential limits approved by the Corporate Risk IFC’s internal ratings. More granular ratings will lead to Committee, including limits related to single project or better differentiation and a better understanding of client client exposure, single country exposure, and sector con- credit standing which will allow for more focus on those centration; these are detailed below: credits that most warrant the scrutiny. The improved • IFC’s total exposure to a country is measured as the predictive power for probability of default and loss given amount of economic capital required to support its default will lead to more informed investment decisions. investment portfolio in that country. Exposure limits are set for each country based on the size of its economy and its risk rating. Sub-limits apply for certain sector TREASURY exposures within a country. RISK MANAGEMENT • IFC’s total exposure to a single client or client group may not exceed stipulated economic capital and nomi- Treasury risks are managed through a two-tier risk nal limits based on the CRR for the client. framework: (1) a comprehensive policy framework and • Individual Investment Limits are applied at the individual project or client level to prevent excessive concentrations. 20 IFC FINANCIALS 2016 • Preferential debt exposure to a country is limited by obligations. Conservative counterparty eligibility crite- reference to that country’s total medium and long-term ria are set by Authorizations from the Board of Directors external debt. and by Directives approved by IFC’s senior management. • IFC’s total equity and quasi-equity exposure (outstand- Eligible counterparties are predominantly banks and ing exposure net of impairments) shall not exceed IFC’s financial institutions with high quality credit ratings net worth. issued by leading international credit rating agencies. Details of applicable financial policies and guidelines are The quality of IFC’s investment projects is actively moni- given below: tored after commitment. CRRs are reviewed regularly for • Counterparties are selected based on standard eli- every project, and revised if required. In addition, an inde- gibility criteria, with a tenor limit for deposits and pendent corporate portfolio team monitors and assesses repurchase agreements. the health of the portfolio, including stress testing of expo- sure to emerging risks. When projects get into difficulty, • Counterparties for derivative instruments are rapid response is the key to recovery. Seasoned profession- restricted to banks and financial institutions with high als from IFC’s Department of Special Operations provide quality credit ratings from leading international credit focused attention on portfolio projects that require more rating agencies; for the sole purpose of funding local cur- sophisticated workout and restructuring. rency loans, eligibility is extended to central banks and select local banks. The credit risk of loans is quantified in terms of the prob- • Exposures to individual counterparties are subject to ability of default, loss given default and exposure at risk. exposure limits. For derivatives, exposure is measured These risk parameters are used to determine risk-based in terms of total potential exposure based on replace- economic capital for capital adequacy, capital allocation ment cost. and internal risk management purposes, as well as for setting the general reserve against loan losses and expo- • IFC signs collateral agreements with counterpar- sure limits. ties that require the posting of collateral when net mark-to-market exposures exceed certain predeter- mined thresholds. TREASURY OPERATIONS • For exchange-traded instruments, credit risk is lim- IFC’s manages its exposures to counterparties in its ited by restricting transactions to a list of authorized Treasury operations to mitigate potential losses from exchanges, contracts and dealers, and by placing limits the failure by a counterparty to fulfill its contractual on IFC’s position in each contract. FY16 CREDIT RISK COMMENTARY INVESTMENT OPERATIONS Selected indicators of credit risk exposure in IFC’s loan portfolio, together with the five-year trend of non-performing loans (NPLs), are given below: TABLE 12: IFC LOAN PORTFOLIO CREDIT RISK INDICATORS INDICATOR JUNE 30, 2016 JUNE 30, 2015 CHANGE NPLs as % of the loan portfolio11 6.5% 6.2% Up 0.3% Principal amount outstanding on NPLs $1,712 million $1,578 million Up $134 million Total reserves against losses on loans $1,775 million $1,743 million Up $32 million Total reserves against losses on loans as % of disbursed loan portfolio 7.4% 7.5% Down 0.1% Total reserves against losses on guarantees $23 million $20 million Up $3 million 11 A non-GAAP measure that includes loan-like debt securities. FIGURE 6: NPLS AS PERCENTAGE OF DISBURSED LOAN PORTFOLIO $ millions 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 FY12 FY13 FY14 FY15 FY16 Percentage 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 IFC FINANCIALS 2016 21 currency is monitored on a daily basis and the risk is man- TREASURY OPERATIONS aged within a range of +/- $5  million equivalent in each Treasury operations counterparties remain well diver- currency. Residual interest rate risk may arise from differ- sified by sector and geography. In accordance with its ing interest rate reset dates on assets and liabilities, or from agreements with counterparties, at June  30, 2016, IFC assets that are fully match-funded at inception, but become held $305 million in cash and $415 million in securities mismatched over time due to write-downs, prepayments, as collateral for changes in mark-to-market exposures or rescheduling. The residual interest rate risk is managed on open trades (June 30, 2015—$237 million in cash and by measuring the sensitivity of the present value of assets $756 million in securities). and liabilities in each currency to a one basis point change in interest rates and managing exposures on a daily basis to within a potential change in value of +/- $50,000. MARKET RISK MANAGEMENT FY16 MARKET RISK COMMENTARY DEFINITION AND SCOPE OF MARKET RISK IFC’s liquid asset portfolios have minimal interest rate risk due to short-tenor benchmarks and because devi- IFC defines market risk as the risk of losses in positions ations from those benchmarks are small. The overall arising from movements in market prices. IFC’s exposure level of market risk in IFC’s Treasury operations reduced to market risk is largely mitigated by its matched funding slightly between FY15 and FY16 due to lower credit policy, whereby it uses derivative instruments to convert spread exposure in a slightly larger liquid asset portfo- loans funded from market borrowings, and the market lio. FY16 was also characterized by periods of elevated borrowings themselves, into floating rate US dollar assets Treasury portfolio volatility as credit spreads and inter- and liabilities with similar duration. Similarly, market est rates fluctuated with external market events. Interest risk resulting from derivative transactions with clients, to rate, foreign exchange, and spread risks are all controlled facilitate clients’ risk management, is typically mitigated on a daily basis using a system of limits that remained in by entering into offsetting positions with highly rated compliance during FY16. market counterparties. IFC’s residual exposure to market risk arises primarily from its listed and unlisted equity In FY16, financial markets endured several rounds of investments in emerging markets, from its Treasury liq- global contagion risk concerns, higher volatility, and asso- uid asset portfolios, and also from its aggregate asset and ciated risk-off trading. FY16 Q1 started with the Chinese liability management positions. stock market turbulence and the risk that a decelerating of China’s economy would dampen global growth. Sharp declines in oil and commodity prices in Q2 prompted EQUITY INVESTMENTS IFC to increase surveillance on affected sectors and The risk of loss in value of IFC’s emerging markets equity individual investments, although price trends started to investments is mitigated primarily by applying the same stabilize in Q4. Divergence of monetary policies intensi- limits framework, decision making process and portfolio fied across major central banks. In the U.S., the Federal management methods as described above for its lending Reserve raised interest rates in December 2015, which operations. IFC has a long time horizon for its equity created significant challenges to emerging markets. The investments and accepts short term price volatility of normalization of U.S. monetary policy, however, could these investments, which can be significant. still be some time away, with continuing mixed signals in domestic and global economies. Expanded quantitative easing policies in the European Union and Japan led to LIQUID ASSET PORTFOLIOS negative interest rates in almost a third of global govern- Market risk in IFC’s liquid assets portfolios is managed ment debt in those regions. Quantitative easing policies to the chosen risk profile of the respective portfolio are also creating price distortions in some markets as a benchmarks, using derivative and other financial instru- result of government intervention. The U.K. voting to exit ments such as over-the-counter foreign exchange the European Union (‘Brexit’) emerged as an additional forward agreements, interest rate and currency swaps, major source of uncertainty, which could elevate the over- and exchange-traded interest rate futures and options. all market stress both in the U.K. and European countries Overall market risk exposure is also subject to daily mon- for an extended period of time. itoring, based on Directives approved by the Corporate Income from liquid assets was notably lower and less Risk Committee, which limit interest rate and spread risk, stable in FY16 as a result of the external market context. foreign exchange exposure and value-at-risk. At the start of the fiscal year, Income from liquid assets was already forecast to be lower as a result of lower credit ASSET-LIABILITY MANAGEMENT spreads and fewer attractive investment opportunities than in prior years. FY16 income from liquid assets was While IFC’s matched-funding policy mitigates most cur- further depressed as a result of credit spread widening rency and interest rate risk, IFC is still exposed to residual in many sectors due to heightened macro uncertainty. In market risks in the market borrowings-funded portion of addition, sector-specific mark-to-market losses in IFC’s the balance sheet. Residual currency risk arises from fac- investments in US government-guaranteed student loan tors such as changes in the level of reserves for losses on asset backed securities and U.K. residential mortgage non-US dollar loans. The aggregate position in each lending backed securities had a proportionally larger contribution 22 IFC FINANCIALS 2016 than other sectors. In the case of student loans, mark-to- issue concentration and on the percentage of total bond market losses were driven by concerns on the cash flow issuance held by IFC. Consequently, a significant portion of extension risk resulting from generous income-based the liquid asset portfolio is invested in highly liquid securi- repayment government programs. In the case of U.K. res- ties such as high quality sovereign, sovereign-​ guaranteed, idential mortgages, mark-to-market losses resulted from and supranational fixed income instruments, and in short the potential future impact of Brexit. More generally, term investments such as money market mutual funds. IFC portfolio volatility spiked on multiple occasions during expects to continue to be able to realize these assets as needed FY16 as spreads widened and sovereign safe haven yields to meet its cash requirements, even in a liquidity crisis. decreased in response to the contagion risks of a poten- tial hard landing in China, the collapse in oil prices, and FUNDING Brexit. Liquid asset holdings remain well diversified both geographically and across the eligible sectors of the eligi- IFC’s funding operations ensure that IFC has the funds it ble interest-bearing investment universe. needs for its lending operations, and that it has sufficient liquidity to safeguard its triple-A rating and fulfill IFC’s Volatility in Emerging Market (EM) equities persisted in counter-cyclical role. IFC is able to access a variety of FY16 with EMs significantly lagging behind the returns funding markets, including the US dollar benchmark mar- in developed markets. EMs sold off in FY16 Q1 on the back ket, the Australian dollar market and the Japanese retail of a slowdown in the Chinese economy and concerns of market. IFC’s discount note programs complement IFC’s substantial devaluation in the renminbi. This was fol- traditional funding sources by providing swift access to lowed by a stabilization during FY16 Q2. In January funded liquidity. IFC’s triple-A rating is critical to the 2016, a significant deterioration in market sentiment due Corporation’s ability to maintain its low cost of funds. to weakening macro fundamentals in EMs and collapsing Regular issuance in a variety of markets serves to sustain commodity prices led to another sharp correction which investor confidence and maintain a diversified investor translated into a negative total return for Ems for the fis- base. IFC continued to enjoy one of the lowest funding costs cal year. Investor sentiment on EMs remained subdued, of any multilateral development bank in FY16. As a result of with money mostly flowing out of those markets and seek- changes to the external market interest rates and spreads, ing protection in markets with more solid fundamentals, however, IFC’s funding costs for large benchmark issues such as India and Mexico. Economic growth in many increased somewhat in FY16 compared to US dollar Libor. markets was subdued and it was difficult for markets to post strong returns in this environment. The US dollar remained strong in FY16, leading to negative returns FY16 LIQUIDITY for US dollar‑based investors. In this very challenging environment, IFC’s equity portfolio performed well on a RISK COMMENTARY relative basis, again exceeding the overall market return as benchmarked by the MSCI Emerging Markets Index. On June  30, 2016, IFC’s liquid asset portfolios totaled IFC continues to focus on selectivity at entry and active $41.4 billion (June 30, 2015—$39.5 billion). The externally management of its portfolio through close monitoring, funded liquidity ratio was 504 percent, above the required portfolio reviews and oversight. Active management minimum of 65  percent and the Corporation’s overall enabled the Corporation to continue its judicious divesti- liquidity as a percentage of next three years’ estimated tures in FY16 and take advantage of market opportunities net cash needs stood at 85 percent, above the minimum to generate significant realized gains from its mature requirement of 45  percent. During FY16, IFC raised exposures. This significantly reduced the impact of write- $14.3  billion in market borrowings, net of derivatives downs and fair value changes linked to market turbulence. (FY15—$14.8 billion). The outstanding balance under the Discount Note Program at June 30, 2016 was $1.8 billion (June 30, 2015—$1.3 billion). LIQUIDITY RISK MANAGEMENT OPERATIONAL IFC defines liquidity risk as the risk of a financial loss RISK MANAGEMENT arising from the inability to liquidate financial assets or to raise additional funds in the expected time frame to Consistent with the Basel Framework, IFC defines oper- meet contractual obligations. IFC faces liquidity risk in ational risk as the risk of loss resulting from inadequate its core development finance activities because its invest- or failed internal processes, people and systems, or from ments are predominantly illiquid in nature, due to the external events. lack of capital flows, the infrequency of transactions, and IFC’s Operational Risk Management (ORM) program the lack of price transparency in many emerging markets. is based on a Directive approved by the Corporate Risk To offset this risk, IFC maintains substantial liquid asset Committee. This directive establishes the approach and portfolios funded by market borrowings. roles and responsibilities for operational risk manage- ment in the Corporation. IFC’s ORM approach is designed LIQUID ASSET PORTFOLIOS to ensure that operational risks are identified, assessed, and managed so as to minimize potential adverse impacts, Liquidity risk in the liquid asset portfolios is addressed by and to enable Senior Management to determine which strict eligibility criteria defined in Directives approved by risks IFC will accept, mitigate or transfer. IFC seeks to the Corporate Risk Committee. Examples include mini- mitigate key risks by maintaining a comprehensive set of mum sizes for bond issuances, and limits on single bond processes and internal controls. IFC FINANCIALS 2016 23 IFC utilizes risk transfer mechanisms, including insur- IFC uses the Sustainability Framework along with other ance, at both the project and the institutional levels for strategies, policies and initiatives to focus business mitigation of low frequency and high severity operational activities on achieving the Corporation’s development risks. At both levels, IFC identifies and evaluates risks, objectives. All project teams are required to record determines available contractual transfer and insurance expectations of development outcomes with time-bound options, implements the optimal structure, and tracks targets using standard indicators. These indicators are its effectiveness over time. IFC also insures its corporate tracked and performance is rated on an annual basis for assets and operations against catastrophic losses where the duration of every project. commercially viable. Focused supervision efforts in the last two fiscal years have improved the E&S risk profile of our portfolio FY16 OPERATIONAL by reducing the number of poor performing projects, defined as a historical environmental and social risk RISK COMMENTARY rating (ESRR) of 3 and 4. The ESRR evaluates a client’s management of E&S risks and avoidance and control of IFC continues to develop and implement enhanced adverse outcomes. methodologies to identify, measure, monitor and man- age material operational risks in its key activities. IFC adopted an enterprise-level approach to assess opera- tional risks in FY15 and has continued to develop this approach in FY16. Under this approach, IFC assesses FIGURE 7: ENVIRONMENT AND SOCIAL RISK operational risks in the processes that support IFC’s key FY10 business pillars, namely, equity, debt, and treasury. IFC 13% also continues to focus on its preparedness to react to 65% extreme situations that could disrupt its normal oper- 21% ations through the Business Continuity Management 1% program, which covers all IFC offices. FY11 10% 68% BUSINESS RISK 20% MANAGEMENT 1% FY12 7% DEFINITION AND SCOPE OF BUSINESS RISK 68% 23% Business risk is risk that is specific to IFC given its mis- 2% sion and strategy and that is not covered by other risk FY13 dimensions. It has the following components, which are 9% described in the paragraphs below together with the 67% specific risk mitigation measures that are adopted: envi- 21% ronment and social; corporate governance; integrity; 3% conflict of interest; and external financing. FY14 7% ENVIRONMENT AND SOCIAL RISK 70% Environment and social (E&S) risk is the risk that IFC 21% does not effectively engage and influence clients to ful- 2% fill the requirements of the Performance Standards FY15 on Environmental and Social Sustainability, poten- 7% tially causing harm to people or the environment. The 73% Performance Standards form part of IFC’s Sustainability 18% Framework, articulating the Corporation’s strategic com- 2% mitment to sustainable development: FY16 7% • The Performance Standards guide clients on sustainable 77% business practices, including continually identifying 16% and managing risks through: analytical work such as 1% environmental and social assessments; stakeholder engagement; and client disclosure obligations in relation 0 10 20 30 40 50 60 70 80 to project-level activities. 1 2 3 4 • The Policy on Environmental and Social Sustainability ESRR distribution scale: 1) Excellent, 2) Satisfactory, describes IFC’s commitments, roles and responsibilities 3) Partly Unsatisfactory, 4) Unsatisfactory. The score is in relation to environmental and social sustainability. calculated at appraisal as a baseline, and is then updated • IFC’s Access to Information Policy reflects the Corpora- after each supervision activity. tion’s commitment to transparency and good governance and outlines institutional disclosure obligations. 24 IFC FINANCIALS 2016 CLIENT CORPORATE OPERATIONAL GOVERNANCE RISK CONFLICT OF INTEREST RISK Corporate governance risk is the risk that IFC’s clients Operational conflict of interests can arise when IFC acts have inefficient or ineffective corporate governance prac- in the interests of more than one party, where the inter- tices, leading to adverse reputational or financial impact ests of those parties might be, or might be perceived to on IFC. IFC manages corporate governance risk primarily be, inconsistent. Given the nature and scope of products by conducting a structured evaluation of every invest- and services that IFC provides to its clients in further- ment project, covering the following five areas: ance of its development mandate, and the different roles • Effectiveness of the Board of Directors; played by other World Bank Group entities, actual or perceived operational conflicts of interest can arise in • Sufficiency of internal controls, audit, risk management the normal course of its activities. IFC recognizes that and compliance; adverse legal, reputational, client relationship and other • Adequacy of financial disclosure; implications may arise if such conflicts are not managed. • Adequacy of shareholders’ rights; and IFC has implemented policies and procedures to manage • Demonstration of the client’s commitment to imple- these risks. ment high quality corporate governance policies and practices. EXTERNAL The findings from these assessments are taken into FINANCING RISK account in the decision on whether to proceed with As well as using its own resources to invest in and provide the project. advice to clients, IFC raises additional funds from public and private sector investors, lenders and donors through INTEGRITY several different mechanisms. External financing risk RISK is the risk that when entrusted with oversight of such funds, IFC does not act in the best interests of the third Integrity risk is the risk of engaging with external institu- parties involved. tions or persons whose background or activities may have adverse reputational and/or financial impact on IFC. IFC To mitigate this risk, IFC works within agreed frame- works with a wide range of partners in both Investment works which establish IFC’s responsibilities and Operations and Advisory Services, from multi‑national obligations with respect to the third parties. For example, to small companies, and from government institutions where financing to clients is mobilized through B Loans to Non-Governmental Organizations. Thus, each trans- or the MCPP, the specialized Syndications Department action or service opportunity presents unique integrity follows defined processes to identify co-financiers, advise risks, affected by different factors including the structure on structuring, and monitor compliance with investment and duration of the engagement. IFC has defined proce- agreements. In some cases, financing from third parties, dures for conducting Integrity Due Diligence and these including donors, is administered through trust funds. A are used to: separate unit within IFC follows predefined procedures for clearing all IFC trust fund proposals and agreements • Uncover integrity risk issues related to a project or and overseeing IFC’s trust fund portfolio. Finally, AMC, engagement and the institutions and persons involved; a wholly‑owned subsidiary, provides for an independent • Evaluate and assess integrity risks, including decid- governance process making decisions for the benefit of ing on whether to mitigate or to accept the risks, and investors in funds managed by AMC. determining next steps, which may include IFC senior management and Board approval; • Document results and appropriately classify documen- FY16 BUSINESS tation; and RISK COMMENTARY • Monitor integrity risks and update documentation throughout the life of the project or engagement. During FY16, IFC established a centralized Business Risk and Compliance Department to enhance and build out oversight of compliance risk relating to IFC’s operational, advisory and corporate functions, in particular relating to market conduct and the mobilization of third party capital; management of operational conflicts of interest; oversight of integrity risk, anti-money laundering, com- bating the financing of terrorism, sanctionable practices and debarment; information access and security; and use of offshore financial centers and tax behaviors, and to assist client departments and project teams improve con- sistency and accountability in relation to the management of such risks. IFC FINANCIALS 2016 25 RESERVE AGAINST Critical LOSSES ON LOANS Accounting IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be Policies unable to collect all amounts due according to the loan’s contractual terms. The reserve against losses for impaired loans reflects management’s judgment of the present value of expected future cash flows discounted at the loan’s effective interest rate. The reserve against losses for loans also includes an estimate of probable losses on Note A to IFC’s FY16 Consolidated Financial Statements loans inherent in the portfolio but not specifically identi- contain a summary of IFC’s significant accounting poli- fiable. The reserve is established through periodic charges cies, including a discussion of recently adopted accounting to income in the form of a provision for losses on loans. standards and accounting and financial reporting devel- Loans written off, as well as any subsequent recoveries, opments. Certain of these policies are considered to be are recorded through the reserve. “critical” to the portrayal of IFC’s financial condition and results of operations, since they require management to The assessment of the adequacy of reserves against losses make difficult, complex or subjective judgments, some of for loans is highly dependent on management’s judgment which may relate to matters that are inherently uncertain. about factors such as its assessment of the financial capac- ity of borrowers, geographical concentration, industry, These policies include: regional and macroeconomic conditions, and historical • Determining the level of reserves against losses in the trends. Due to the inherent limitation of any particular loan portfolio; estimation technique, management utilizes a capital pric- • Determining the level and nature of impairment for ing and risk framework to estimate the probable losses on equity investments and debt securities carried at fair loans inherent in the portfolio but not specifically identi- value with changes in fair value being reported in other fiable. This Board of Directors-approved framework uses comprehensive income (OCI) and for equity invest- actual loan loss history and aligns the loan loss provision- ments accounted for at cost less impairment (where ing framework with IFC’s capital adequacy framework. impairment is determined with reference to fair value); The reserve against losses on loans is separately reported • Determining the fair value of certain equity invest- in the consolidated balance sheet as a reduction of IFC’s ments, debt securities, loans, liquid assets, borrowings total loans. Increases or decreases in the reserve level are and derivatives, which have no quoted market prices and reported in the income statement as provision for losses are accounted for at fair value; and or release of provision for losses on loans, and guaran- tees. The reserve against losses on loans relates only to • Determining the future pension and postretirement the Investment services segment of IFC (see Note S to the benefit costs and obligations using actuarial assump- FY16 Consolidated Financial Statements for further dis- tions based on financial market interest rates, past cussion of IFC’s business segments). experience, and management’s best estimate of future benefit cost changes and economic conditions. Many of IFC’s financial instruments are classified in OTHER-THAN-TEMPORARY accordance with the fair value hierarchy established IMPAIRMENTS ON by accounting standards for fair value measurements EQUITY INVESTMENTS AND and disclosures where the fair value and/or impair- ment is estimated based on internally developed models DEBT SECURITIES or methodologies utilizing significant inputs that are non-observable. IFC assesses all equity investments accounted for at fair value through OCI and all equity investments accounted for at cost less impairment for impairment each quar- ter. When impairment is identified and is deemed to be other-than-temporary, the equity investment is writ- ten down to its impaired value, which becomes the new cost basis in the equity investment. IFC generally 26 IFC FINANCIALS 2016 presumes that all equity impairments are deemed to Many of IFC’s financial instruments accounted for at be other-than-temporary. Impairment losses on equity fair value are valued based on unadjusted quoted market investments accounted for at cost less impairment are not prices or using models where the significant assump- reversed for subsequent recoveries in value of the equity tions and inputs are market-observable. The fair values investment until it is sold. Recoveries in value on equity of financial instruments valued using models where the investments accounted for at fair value through OCI that significant assumptions and inputs are not market-ob- have been the subject of an other-than-temporary impair- servable are generally estimated using complex pricing ments are reported in OCI until sold. models of the net present value of estimated future cash flows. Management makes numerous assumptions in IFC assesses all debt security investments accounted for developing pricing models, including an assessment about at fair value through OCI for impairment each quarter. the counterparty’s financial position and prospects, the When impairment is identified, the entire impairment is appropriate discount rates, interest rates, and related recognized in net income if certain conditions are met (as volatility and expected movement in foreign currency detailed in Note A to IFC’s FY16 Consolidated Financial exchange rates. Changes in assumptions could have a Statements). However, if IFC does not intend to sell the significant impact on the amounts reported as assets and debt security and it is not more likely than not that IFC liabilities and the related unrealized gains and losses will be required to sell the security, but the security has reported in the income statement and statement of OCI. suffered a credit loss, the credit-related impairment loss is The fair value computations affect both the Investment recognized in net income and the non‑credit related loss services and Treasury segments of IFC (see Note S to the is recognized in OCI. FY16 Consolidated Financial Statements for further dis- cussion of IFC’s business segments). VALUATION OF FINANCIAL INSTRUMENTS WITH PENSION AND NO QUOTED MARKET PRICES OTHER POSTRETIREMENT BENEFITS IFC reports at fair value all of its derivative instru- ments, all of its liquid asset trading securities and IFC participates, along with IBRD and MIGA, in pension certain borrowings, loans, equity investments and debt and postretirement benefit plans that cover substantially securities. In addition, various investment agreements all of their staff members. All costs, assets and liabilities contain embedded or stand-alone derivatives that, for associated with the plans are allocated between IBRD, accounting purposes, are separately accounted as either IFC and MIGA based upon their employees’ respective derivative assets or liabilities, including puts, caps, participation in the plans. The underlying actuarial floors, and forwards. IFC classifies all financial instru- assumptions used to determine the projected benefit obli- ments accounted for at fair value based on the fair value gations, the fair value of plan assets and the funded status hierarchy established by accounting standards for fair associated with these plans are based on financial market value measurements and disclosures as described in interest rates, past experience, and management’s best more detail in Notes A and R to IFC’s FY16 Consolidated estimate of future benefit cost changes and economic Financial Statements. conditions. For further details, please refer to Note V to the FY16 Consolidated Financial Statements. IFC FINANCIALS 2016 27 Results of Operations OVERVIEW The overall market environment has a significant influence on IFC’s financial performance. The main elements of IFC’s net income (loss) and comprehensive income (loss) and influences on the level and variability of net income and comprehensive income from year to year are: TABLE 13: MAIN ELEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) ELEMENTS SIGNIFICANT INFLUENCES NET INCOME: Yield on interest earning assets Market conditions including spread levels and degree of competition. Nonaccruals and recoveries of interest on loans formerly in nonaccrual status and income from participation notes on individual loans are also included in income from loans. Liquid asset income Realized and unrealized gains and losses on the liquid asset portfolios, which are driven by external factors such as: the interest rate environment and liquidity of certain asset classes within the liquid asset portfolio. Income from the equity Global climate for emerging markets equities, fluctuations in currency and commodity investment portfolio markets and company-specific performance for equity investments. Performance of the equity portfolio (principally realized capital gains, dividends, equity impairments, gains on non-monetary exchanges and unrealized gains and losses on equity investments). Provisions for losses on loans and Risk assessment of borrowers and probability of default and loss given default. guarantees Other income and expenses Level of advisory services provided by IFC to its clients, the level of expense from the staff retirement and other benefits plans, and the approved and actual administrative expenses and other budgets. Gains and losses on other non-trading Principally, differences between changes in fair values of borrowings, including IFC’s credit financial instruments accounted for at spread, and associated derivative instruments and unrealized gains or losses associated fair value with the investment portfolio including puts, warrants and stock options which in part are dependent on the global climate for emerging markets. These securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non- observable. Grants to IDA Level of the Board of Governors-approved grants to IDA. OTHER COMPREHENSIVE INCOME (LOSS): Unrealized gains and losses on listed Global climate for emerging markets equities, fluctuations in currency and commodity equity investments and debt securities markets and company-specific performance. Such equity investments are valued using accounted for as available -for-sale unadjusted quoted market prices and debt securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-observable. Unrecognized net actuarial gains and Returns on pension plan assets and the key assumptions that underlay projected benefit losses and unrecognized prior service obligations, including financial market interest rates, staff expenses, past experience, and costs on benefit plans management’s best estimate of future benefit cost changes and economic conditions. 28 IFC FINANCIALS 2016 IFC’s net (loss) income for each of the past five fiscal years ended June 30, 2016 is presented below (US$ millions): FY16 FY15 Income before net unrealized gains and losses on non - trading financial instruments accounted for at fair value, grants to IDA FIGURE 8: IFC’S NET (LOSS) INCOME, and net gains and losses attributable FISCAL YEARS 2012–2016 to non - controlling interests $ 500 $ 855 Net unrealized gains/(losses) on $ millions 0 200 400 600 800 1,000 1,200 1,400 1,600 non-trading financial instruments FY12 accounted for at fair value (204) (106) FY13 Income before grants to IDA 296 749 FY14 Grants to IDA (330) (340) FY15 FY16 Net (loss)/Income (34) 409 Net losses attributable to The following paragraphs detail significant variances non-controlling interests 1 36 between FY16 vs FY15 and FY15 vs FY14, covering the Net (loss)/Income attributable to IFC $ (33) $ 445 periods included in IFC’s FY16 Consolidated Finan- cial Statements. A more detailed analysis of the components of IFC’s net income (loss) follows. INCOME FROM LOANS AND GUARANTEES, FY16 VERSUS FY15 INCLUDING REALIZED GAINS AND LOSSES ON LOANS AND ASSOCIATED DERIVATIVES NET INCOME IFC’s primary interest earning asset is its loan portfolio. Income from loans and guarantees, including realized IFC reported income before net unrealized gains and gains and losses on loans and associated derivatives for losses on non-trading financial instruments accounted FY16 totaled $1,126 million, compared with $1,123 million for at fair value, grants to IDA and net gains and losses in FY15, an increase of $3 million. attributable to non-controlling interest of $500 million in FY16, as compared to $855 million in FY15. The disbursed loan portfolio increased $658 million from $23,252  million at June  30, 2015 to $23,910  million at June 30, 2016. The increase in the loan portfolio due to new disburse- TABLE 14: CHANGE IN NET INCOME FY16 VS FY15 ments exceeding repayments ($1,233 million in FY16) was (US$ MILLIONS) partially offset by the reduction in loans outstanding due to currency exchange rate fluctuations ($244 million in INCREASE (DECREASE) FY16) as IFC’s reporting currency, the US dollar appre- FY16 vs FY15 ciated against most of IFC’s lending currencies in FY16 Higher provisions for losses on loans, notwithstanding the depreciation of the US dollar against guarantees and other receivables $ (188) most of IFC’s lending currencies in FY16. Higher charges on borrowings (151) Higher foreign currency transaction losses on non-trading activities (99) Lower realized gains on equity investments and associated derivatives, net (71) Higher other-than-temporary impairments on equity investments and debt securities (24) Lower unrealized losses on equity investments and associated derivatives, net 198 Other, net (20) Change in income before net unrealized gains and losses on non - trading financial instruments accounted for at fair value, grants to IDA and net gains and losses attributable to non - controlling interests $ (355) IFC FINANCIALS 2016 29 TABLE 15: FY16 CHANGE IN INCOME FROM LOANS Dividend income in FY16 totaled $241 million, as com- AND GUARANTEES, INCLUDING REALIZED GAINS AND pared with $272 million in FY15. Dividend income in FY16 included returns from two unincorporated joint venture LOSSES ON LOANS AND ASSOCIATED DERIVATIVES (UJVs) in the oil, gas and mining sectors accounted for (US$ MILLIONS) under the cost recovery method, which totaled $11 mil- lion, as compared with $23 million from four such UJVs Income from loans and guarantees, including realized gains and losses on in FY15. loans and associated derivatives in FY15 $ 1,123 Other-than-temporary impairments on equity invest- Increase due to increase in the loan ments totaled $744  million in FY16 ($360  million on portfolio and interest rate environment 92 equity investments accounted for as available-for-sale; Decrease due to lower realized gains on loans, and $384 million on equity investments accounted for at guarantees and associated derivatives (55) cost less impairment), as compared with $732 million in Decrease due to higher amount of interest FY15 ($381 million on equity investments accounted for reversed on non-accruing loans, net (15) as available-for-sale; and $351 million on equity invest- Decrease due to lower commitment and ments accounted for at cost less impairment), an increase financial fees (11) of $12  million. Other-than-temporary impairments on Decrease due to lower income from participation notes and other income (8) equity investments in FY16 reflected the economic down- turn in certain countries in the East Asia and the Pacific, Change in Income from loans and guarantees, including realized gains and Latin America and the Caribbean, and the Middle East losses on loans and associated derivatives $ 3 and North Africa regions. In FY16, six investments gen- Income from loans and guarantees, erated individual other-than-temporary impairments in including realized gains and losses on excess of $20 million for a total of $173 million. In FY15, loans and associated derivatives in FY16 $ 1,126 four investment generated an individual other-than-tem- porary impairment in excess of $20 million for a total of The weighted average contractual interest rate on loans $234 million. at June  30, 2016 was 5.1  percent, up from 4.9  percent Net unrealized losses on equity investments and asso- June 30, 2015. Contributing to the increase was growth in ciated derivatives totaled $204 million (Net unrealized fixed-rate local currency loans, and as many of IFC’s loans losses of $402 million in FY15) reflecting a generally dete- periodically re-price against US$ LIBOR, the increase in riorating macro environment in emerging market equities US$ six-month LIBOR from 0.44 percent at June 30, 2015 which has negatively impacted the value of many of IFC’s to 0.92 percent at June 30, 2016. These factors combined equity investments accounted for at fair value in net resulted in $92  million higher interest income in FY16 income. Seven investments in equity funds accounted for than in FY15. Realized gains on loans were significantly $194 million of the unrealized losses in FY16. In FY15 one lower in FY16 primarily due to a successful workout of a investment accounted for $58 million of the unrealized loan and the conversion of a loan to equity in an investee gains. Nine investments in equity funds accounted for company which together generated $35 million of real- $179 million of the unrealized losses in FY15. Individual ized gains in FY15. investments in such funds provided a significant compo- INCOME FROM EQUITY INVESTMENTS AND nent of such unrealized gains and losses. ASSOCIATED DERIVATIVES INCOME FROM DEBT SECURITIES AND REALIZED Income from the equity investment portfolio, including GAINS AND LOSSES ON DEBT SECURITIES AND associated derivatives, increased by $91  million from ASSOCIATED DERIVATIVES $427 million in FY15 to $518 million in FY16. Income from debt securities and realized gains and losses IFC sells equity investments where IFC’s developmental on debt securities and associated derivatives decreased role was complete, where pre-determined sales trigger to $129 million in FY16 from $132 million in FY15. The levels had been met and, where applicable, lock ups have largest changes were higher interest income ($18 million), expired. Gains on equity investments and associated lower realized gains on debt securities and associated derivatives comprise realized and unrealized gains. derivatives ($7  million) and higher other-than-tempo- rary impairments ($12 million) in FY16 when compared IFC recognized realized gains on equity investments with FY15. and associated derivatives in the form of cash and non-monetary considerations for FY16 of $1,217 million, PROVISION FOR LOSSES ON LOANS, as compared with $1,288 million for FY15, a decrease of GUARANTEES AND OTHER RECEIVABLES $71  million. Realized gains on equity investments and The quality of the loan portfolio, as measured by the associated derivatives are concentrated in a small number weighted average country risk ratings and the weighted of investments. In FY16, there were thirteen investments average credit risk ratings, deteriorated in FY16. that generated individual capital gains in excess of Non‑performing loans (NPLs) increased by $134  mil- $20 million for a total of $856 million, or 70 percent, of the lion, from $1,578 million of the disbursed loan portfolio FY16 realized gains, compared to twelve investments that at June 30, 2015 to $1,712 million* at June 30, 2016. The generated individual capital gains in excess of $20 million increase of $134 million comprised $713 million of loans for a total of $920 million, or 71 percent, of the FY15 real- and loan-like debt securities being placed in NPL sta- ized gains. tus, $542 million being removed from NPL status and a * Includes $66 million reported as debt securities on the Balance Sheet as of June 30, 2016 ($44 million—June 30, 2015). 30 IFC FINANCIALS 2016 $37  million reduction due to repayments and currency rates, U.S. Treasuries rallied strongly with the 10-year translation adjustments. In FY16, 24 loans greater than yield down 88 bps and the 2-year down 6 bps. Even $10  million, and totaling $638  million, were placed in though the U.S. S&P 500 index managed a small gain NPL status. over the fiscal year, credit spreads were generally wider as tail risks increased. In addition, U.S. swap spreads (the IFC recorded a net provision for losses on loans, guar- yield difference between the fixed-leg of a fixed-floating antees and other receivables of $359  million in FY16 swap versus USD LIBOR and the same maturity U.S. ($319 million of specific provisions on loans; $36 million Treasury) narrowed significantly, e.g., 15 basis points of portfolio provisions on loans; $3 million provision on for 5-year maturity. With spreads to U.S. Treasuries for guarantees; and $1  million provision on other receiv- high-quality credit securities already quite narrow, the ables) as compared to a provision of $171 million in FY15 “cheapening” of U.S. Treasuries to swaps led to a wid- ($199  million of specific provisions for losses on loans; ening in the spreads of swaps for high-quality assets $30 million release of portfolio provisions for losses on (including IFC’s own issuances). As a result, liquid assets, loans; and net $2 million of provision for losses on guaran- many of which are swapped or indexed to LIBOR, gener- tees and other receivables). Project-specific developments ally underperformed their LIBOR-based benchmark. The on four loans comprised $122 million of the specific provi- aforementioned rise in perceived tail-risks also hindered sion for losses on loans in FY16. the performance of liquid assets as did developments in At June  30, 2016, IFC’s total reserves against losses on the UK and in the market for U.S. government-guaranteed loans were $1,775 million or 7.4 percent of the disbursed student loan ABS. loan portfolio ($1,743  million; 7.5  percent at June  30, The absolute return on liquid assets in FY16 benefited 2015), an increase of $32  million from June  30, 2015. from rising short-term interest rates (3-month LIBOR The increase in reserves against losses on loans due rose 37  bps) and a relatively dovish Federal Reserve, to provisions of $355  million has been partially offset which supported a rally in U.S. Treasury yields that con- by write-offs, net of recoveries, and other adjustments tributed to the performance of the net worth portion of of $298  million and foreign exchange gains related to liquid assets. Note that the increase in short-term inter- reserves held against non-U.S. dollar-denominated est rates was offset by a corresponding increase in IFC’s loans and the strengthening of the U.S. dollar against funding cost. many of IFC’s lending currencies of $25 million. In FY16, IFC actively sought to exit a number of loan exposures In FY16 and FY15, all internally managed liquid asset through settlement or sale or a recognition that the pos- portfolios outperformed their respective benchmarks. sibility of recovery was remote resulting in a significant At June 30, 2016, trading securities with a fair value of amount of exits. $68 million are classified as Level 3 securities ($86 mil- Specific reserves against losses on loans at June 30, 2016 lion—June 30, 2015). of $965 million ($962 million at June 30, 2015) are held CHARGES ON BORROWINGS against impaired loans of $1,752 million ($1,722 million at June 30, 2015), a coverage ratio of 55 percent (56 percent IFC’s charges on borrowings increased by $151 million, at June 30, 2015). from $258  million in FY15 (net of $2  million gain on extinguishment of borrowings) to $409 million in FY16 INCOME FROM LIQUID ASSET (net of $6 million gain on extinguishment of borrowings), TRADING ACTIVITIES largely attributable to increase in borrowings outstand- The liquid assets portfolio, net of derivatives and secu- ing, rising LIBOR rates, and increased interest charges on rities lending activities, increased by $1.9  billion from the back of pricing in the SSA (Sovereigns, Supranational $39.5 billion at June 30, 2015, to $41.4 billion at June 30, and Agency) market becoming more expensive due to USD 2016. Gross income from liquid asset trading activities swap curve tightening and widening borrowing spreads totaled $504 million in FY16 compared to $467 million vs. LIBOR. in FY15, an increase of $37 million. The weighted average cost of IFC’s borrowings out- Interest income in FY16 totaled $561 million, compared standing from market sources, after the effects of to $614 million in FY15. In addition, the portfolio of ABS borrowing-related derivatives, and excluding short- and MBS experienced fair value losses totaling $70 mil- term borrowings from market and other sources, was lion in FY16. Holdings in other products, including US 1.1 percent at June 30, 2016, an increase from 0.5 percent Treasuries, global government bonds, high quality cor- at June  30, 2015. The size of the borrowings portfolio porate bonds and derivatives generated $13  million of (excluding the short-term borrowings), net of borrow- gains in FY16, a total loss of $57  million (realized and ing-related derivatives and before fair value adjustments, unrealized). This compares to a total loss (realized and increased by $2.2 billion during FY16 from $51.7 billion at unrealized) of $147 million in FY15. June 30, 2015, to $53.9 billion at June 30, 2016. In FY16, the liquid assets portfolios outperformed their OTHER INCOME benchmarks by $145  million. The capital markets were Other income of $501  million for FY16 was $4  million highly turbulent during FY16 with contributions to the lower than in FY15 ($505  million). There were lower environment from highly volatile oil prices, Chinese returns on the Post Employment Benefit Plan (PEBP) foreign-exchange policy (weakening RMB) and politi- assets which are partly invested in global equities and cal developments (Brexit). Surprisingly, in a fiscal year reflected the challenging market for equity investments in which the Federal Reserve raised their benchmark in FY16 as compared to the same period in FY15. The IFC FINANCIALS 2016 31 decline in service fees was due to decreases in FY16 evalu- TABLE 16: NET UNREALIZED GAINS AND LOSSES ON ation fees, supervision fees, and other project related fees, NON-TRADING FINANCIAL INSTRUMENTS FY16 VS partially offset by an increase in mobilization fees when FY15 (US$ MILLIONS) compared with FY15 activities. Other income also includes management and other fees FY16 FY15 from IFC’s consolidated subsidiary, AMC, of $66  mil- Unrealized gains and losses on loans, debt lion ($59  million in FY15) and income from Advisory securities and associated derivatives $ (266) $ (54) Services, predominantly contributions from donors, of Unrealized gains and losses on borrowings $266  million ($244  million in FY15). In FY16, income from market, IDA and associated from advisory services comprised $217 million of donor derivatives, net 62 (52) funds utilized ($197  million—FY15) and $49  million of Net unrealized gains and losses on fees from clients and administrative fees from donors non - trading financial instruments ($47 million—FY15). accounted for at fair value $ (204) $ (106) OTHER EXPENSES Changes in the fair value of IFC’s borrowings from Administrative expenses (the principal component of market, IDA and associated derivatives, net, includes other expenses) increased by $32 million from $901 mil- the impact of changes in IFC’s own credit spread when lion in FY15 to $933 million in FY16. The increase in FY16 measured against US$ LIBOR. As credit spreads widen, is due to marginally higher salary and benefit costs, the unrealized gains are recorded and when credit spreads largest component of administrative expenses, and higher narrow, unrealized losses are recorded (notwithstanding variable expenses, primarily consultants and travel. the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The mag- Advisory services expenses totaled $308 million in FY16 nitude and direction (gain or loss) can be volatile from ($285 million in FY15) with the increase from FY15 con- period to period but do not alter the cash flows. IFC’s pol- sistent with the increase in advisory services income. icy is to generally match currency, amount and timing of IFC recorded expenses from pension and other postre- cash flows on market borrowings with cash flows on asso- tirement benefit plans in FY16 of $185 million, compared ciated derivatives entered into contemporaneously. with $197  million in FY15. This decrease, based on the In FY16, the trend of the first half of the fiscal year to higher beginning of the year actuarial assumptions and calcu- after swap borrowing costs continued, coupled with an lations, was driven by lower service and higher interest increase in volatility in credit markets. Additionally, at costs, partially offset by higher expected returns on the end of FY16, the cost of economically hedging bor- plan assets. rowings in US dollars, Australian dollars, New Zealand FOREIGN CURRENCY TRANSACTION GAINS AND dollars and Japanese yen was more expensive across all LOSSES ON NON-TRADING ACTIVITIES maturities with respect to benchmarks as compared to the end of FY15. While these credit spreads for IFC bor- Foreign currency transaction losses reported in net loss rowing issuances were higher than at the end of the prior in FY16 totaled $46 million (gains of $53 million—FY15). year, interest rate levels had generally fallen by the end of Foreign currency transaction losses on debt securities FY16 back to below prior year levels. This coupled with accounted for as available-for-sale in the amount of the deterioration in credit spreads, resulted in unrealized $49  million in FY16 (losses of $115  million—FY15) are losses on the valuation of IFC’s market borrowings that reported in Other Comprehensive Income, while gains were more than offset by gains on related hedging swaps. and losses on the derivatives economically hedging such As a result, IFC has reported net $62 million of unrealized debt securities are reported in net income. gains on borrowings and associated derivatives in FY16 Largely due to IFC having a small population of unhedged (net $52 million of unrealized losses in FY15). non-U.S. dollar-denominated loans and debt secu- IFC reported net unrealized losses on loans, debt secu- rities and the U.S. dollar strengthening against such rities and associated derivatives of $266 million in FY16 currencies, IFC has recorded overall foreign exchange (net unrealized losses of $54  million in FY15). In FY16 related losses in a combination of Net Income and Other this comprised unrealized losses of $143 million on the Comprehensive Income of $95 million in FY16 (losses of loan and debt securities portfolio carried at fair value, $62 million—FY15). unrealized losses of $107 million on asset liability man- NET UNREALIZED GAINS AND LOSSES ON NON- agement swaps, and unrealized losses of $16 million on TRADING FINANCIAL INSTRUMENTS other derivatives, mainly conversion features, warrants in investment contracts and interest rate and currency As discussed in more detail in Note A to IFC’s FY16 swaps hedging the fixed rate and/or non-US$ loan port- Consolidated Financial Statements, IFC accounts for folio and funding local currency lending pools. Currency certain financial instruments at fair value with unreal- swap losses were mainly in instruments denominated in ized gains and losses on such financial instruments being Brazilian real and Indian rupees reflecting declines in reported in net income, namely: (i) all market borrowings local interest rates and supply and demand in forward that are economically hedged with financial instruments foreign exchange markets. that are accounted for at fair value with changes therein reported in net income; (ii) unrealized gains and losses on certain loans, debt securities and associated derivatives; and (iii) borrowings from IDA. 32 IFC FINANCIALS 2016 GRANTS TO IDA Q4, reflecting the significantly weaker emerging markets environment that existed in FY16 Q1 when compared to During FY16, IFC recorded a grant to IDA of $330 million, FY16 Q2 and FY16 Q3 and larger realizations of gains on as compared with $340 million in FY15. equity investments accounted for as available for sale early in FY16 Q1. OTHER COMPREHENSIVE UNRECOGNIZED NET ACTUARIAL GAINS AND INCOME (OCI) LOSSES AND UNRECOGNIZED PRIOR SERVICE UNREALIZED GAINS AND LOSSES ON EQUITY COSTS ON BENEFIT PLANS INVESTMENTS AND DEBT SECURITIES Unrecognized pension adjustments largely represent IFC’s investments in debt securities and equity invest- the unrecognized net actuarial gains and losses on ben- ments that are listed in markets that provide readily efit plans. Actuarial gains and losses occur when actual determinable fair values are classified as available-for- results differ from expected results in determining the sale, with unrealized gains and losses on these investments funded status of the pension plans. Since the pension being reported in OCI until realized. When realized, the plans are long term, changes in asset returns and discount gain or loss is transferred to net income. Changes in unre- rates cause volatility in fair value income. The decline in alized gains and losses on equity investments and debt the funded status reflects the decline in interest rates securities reported in OCI are significantly impacted by and to a lesser extent the lower asset returns compared (i) the global environment for emerging markets; and (ii) with the long-term projection. Given its long term plan- the realization of gains on sales of such equity invest- ning horizon for pension plans, Management is focused ments and debt securities. mainly on ensuring that contributions to pension plans appropriately reflect long term assumptions about asset returns and discount rates. During FY16, IFC experienced a loss of $764 million pri- TABLE 17: CHANGE IN OTHER COMPREHENSIVE marily due to $763 million and $1 million of unrecognized INCOME (LOSS)—UNREALIZED GAINS AND LOSSES net actuarial loss and prior service cost, resulting largely ON EQUITY INVESTMENTS AND DEBT SECURITIES from the decrease in the discount rates used to deter- mine the projected benefit obligations. The discount rate FY16 VS FY15 (US$ MILLIONS) assumptions used to determine the projected benefit obli- FY16 FY15 gation for the Staff Retirement Plan and Post-Employment Benefits Plan decreased from 4.3 percent at June 30, 2015 Net unrealized gains and losses on to 3.4  percent at June  30, 2016 and from 4.4  percent at equity investments arising during the year: June 30, 2015 to 3.5 percent at June 30, 2016, respectively. Unrealized gains $ 355 $ 1,067 Unrealized losses (871) (799) FY15 Reclassification adjustment for realized gains and other-than-temporary VERSUS FY14 impairments included in net income (281) (393) Net unrealized gains and losses on equity investments $ (797) $ (125) NET INCOME Net unrealized gains and losses on debt IFC reported income before net unrealized gains and securities arising during the year: losses on non-trading financial instruments accounted Unrealized gains $ 103 $ 110 for at fair value and grants to IDA of $855 million in FY15, Unrealized losses (180) (182) as compared to $1,782 million in FY14. Reclassification adjustment for realized gains, non- credit related portion of impairments which were recognized in net income and other-than-temporary included in net income 10 (7) Net unrealized gains and losses on debt securities $ (67) $ (79) Total unrealized gains and losses on equity investments and debt securities $ (864) $ (204) Net unrealized losses on equity investments arising in FY16 totaled $797  million, mainly due to decreases in equity fair values reflecting the volatile and overall significantly negative market conditions (equity, com- modities and foreign exchange) in FY16. Unrealized losses of $976 million were reported in FY16 Q1, unrealized gains of $24 million in FY16 Q2, unrealized losses of $55 million in FY16 Q3 and unrealized gains of $143 million in FY16 IFC FINANCIALS 2016 33 TABLE 18: CHANGE IN NET INCOME FY15 VS FY14 the currency risk in most of its loan portfolio, substan- (US$ MILLIONS) tially offsetting gains on lending-related derivatives due to currency exchange fluctuations have also been recorded. INCREASE (DECREASE) FY15 vs FY14 Higher other-than-temporary impairments on equity investments TABLE 19: FY15 CHANGE IN INCOME FROM LOANS and debt securities $ (484) AND GUARANTEES, INCLUDING REALIZED GAINS AND Lower gains on equity investments and associated derivatives, net (383) LOSSES ON LOANS AND ASSOCIATED DERIVATIVES Lower income from liquid asset (US$ MILLIONS) trading activities (132) Income from loans and guarantees, including Higher provisions for losses on loans, realized gains and losses on loans and guarantees and other receivables (83) associated derivatives in FY14 $ 1,065 Higher income from loans and guarantees, Increase due to change in loan portfolio and interest realized gains and losses on loans and rate environment 94 associated derivatives 58 Increase due to higher realized gains on loans, Higher foreign currency transaction gains guarantees and associated derivatives 48 on non-trading activities 72 Decrease due to lower recoveries of interest Other, net 25 on non-accruing loans, net (25) Change in income before net unrealized Decrease due to lower commitment and financial fees (11) gains and losses on non - trading Decrease due to lower income from participation financial instruments accounting for notes and other income (48) at fair value and grants to IDA and net gains and losses attributable to non - Change in income from loans and guarantees, controlling interests $ (927) including realized gains and losses on loans and associated derivatives $ 58 Income from loans and guarantees, including FY15 FY14 realized gains and losses on loans and Income before net unrealized gains associated derivatives in FY15 $ 1,123 and losses on non - trading financial instruments accounted for at fair The weighted average contractual interest rate on loans value and grants to IDA and net at June  30, 2015 was 4.9  percent, up from 4.5  percent gains and losses attributable to non - June 30, 2014. Contributing to the increase was growth in controlling interests $ 855 $ 1,782 fixed-rate local currency loans, and as many of IFC’s loans Net unrealized (losses) gains on non- periodically re-price against US$ LIBOR, the increase in trading financial instruments accounted US$ six-month LIBOR from 0.33 percent at June 30, 2014 for at fair value (106) (43) to 0.44 percent at June 30, 2015. These factors combined Income before grants to IDA 749 1,739 resulted in $94  million higher interest income in FY15 Grants to IDA (340) (251) than in FY14. Realized gains on loans were significantly Net losses (gains) attributable to higher in FY15 due mainly to a successful workout of a non- controlling interests 36 (5) loan which generated $19 million of gains, and the con- Net income attributable to IFC $ 445 $ 1,483 version of a loan to equity in an investee company which generated gains of $16 million. A more detailed analysis of the components of IFC’s net income follows. INCOME FROM EQUITY INVESTMENTS AND ASSOCIATED DERIVATIVES INCOME FROM LOANS AND GUARANTEES, REALIZED GAINS AND LOSSES ON LOANS AND Income from the equity investment portfolio, including ASSOCIATED DERIVATIVES associated derivatives decreased by $862  million from $1,289 million in FY14 to $427 million in FY15. IFC’s primary interest earning asset is its loan portfolio. Income from loans and guarantees, realized gains and IFC sells equity investments where IFC’s developmental losses on loans and associated derivatives for FY15 totaled role was complete, and where pre-determined sales trig- $1,123 million, compared with $1,065 million in FY14, an ger levels had been met and, where applicable, lock ups increase of $58 million. have expired. Gains on equity investments and associated derivatives comprise realized and unrealized gains. The disbursed loan portfolio decreased by $1,155 million, from $24,407 million at June 30, 2014 to $23,252 million IFC recognized gains on equity investments and associ- at June 30, 2015. ated derivatives in the form of cash and non-monetary considerations for FY15 of $1,288 million, as compared New disbursements of loans exceeded repayments in with $1,013 million for FY14, an increase of $275 million FY15. The reduction in total loan outstanding was due to with the majority of realized gains being recorded in the currency exchange rate fluctuations as IFC’s reporting six months ended December 31, 2014. Realized gains on currency, the US dollar, appreciated significantly in FY15 equity investments and associated derivatives are con- against most of IFC’s lending currencies. Loans outstand- centrated. In FY15, there were twelve investments that ing decreased by $1,076  million in FY15 from currency exchange rate fluctuations. As IFC economically hedges 34 IFC FINANCIALS 2016 generated individual capital gains in excess of $20 mil- increase were higher interest income ($45 million) and lion for a total of $920 million, or 71 percent, of the FY15 realized gains on debt securities and associated deriva- realized gains, compared to thirteen investments that tives ($17 million) in FY15 when compared with FY14. generated individual capital gains in excess of $20 mil- PROVISION FOR LOSSES ON LOANS, lion for a total of $733 million, or 72 percent, of the FY14 GUARANTEES AND OTHER RECEIVABLES realized gains. The quality of the loan portfolio, as measured by aver- Dividend income in FY15 totaled $272 million, substan- age country risk ratings and average credit risk ratings, tially unchanged from $274  million in FY14. Dividend deteriorated marginally in FY15. Non-performing loans income in FY15 included returns from four unincorpo- increased by $236 million, from $1,342 million of the dis- rated joint ventures (UJVs) in the oil, gas and mining bursed loan portfolio at June 30, 2014 to $1,578 million sectors accounted for under the cost recovery method, at June 30, 2015. The increase of $236 million comprised which totaled $23 million, as compared with $19 million $587 million of loans and loan-like debt securities being from four such UJVs in FY14. placed in NPL status, $278 million being removed from Other-than-temporary impairments on equity invest- NPL status and a $73 million reduction due to repayments ments totaled $732  million in FY15 ($381  million on and currency translation adjustments. equity investments accounted for as available-for-sale; IFC recorded a provision for losses on loans, guarantees and $351 million on equity investments accounted for at and other receivables of $171 million in FY15 ($199 million cost less impairment), as compared with $268 million in of specific provisions on loans; $30 million release of port- FY14 ($161 million on equity investments accounted for folio provisions on loans; $2 million release of provision as available-for-sale; and $107  million on equity invest- on guarantees; and $4 million provision on other receiv- ments accounted for at cost less impairment), an increase ables) as compared to a provision of $88 million in FY14 of $464 million. Other-than-temporary impairments on ($127  million of specific provisions for losses on loans; equity investments in FY15 reflected the economic down- $44 million release of portfolio provisions for losses on turn in certain countries in Eastern Europe and Central loans; and $5 million of provision for losses on guarantees Asia and Latin America and the Caribbean, a decline in and other receivables). Project‑specific developments on the price of oil and currency depreciation versus the US two loans resulted in $92 million of the specific provision dollar in most of IFC’s equity investing currencies and for losses on loans in FY15. some adverse project-specific developments. $305 million (42  percent) of other-than-temporary impairments on On June 30, 2015, IFC’s total reserves against losses on equity investments in FY15 were in Europe and Central loans were 7.5  percent of the disbursed loan portfolio Asia and $205 million (28 percent) were in Latin America (6.9 percent at June 30, 2014), an increase of $57 million. and the Caribbean. In FY15, four investments generated The increase in reserves against losses on loans due to pro- individual other-than-temporary impairments in excess visions of $169 million has been partially offset by foreign of $20  million for a total of $234  million. In FY14, one exchange gains related to reserves held against non-U.S. investment generated an individual other-than-tempo- dollar-denominated loans and the strengthening of the rary impairment in excess of $20  million for a total of U.S. dollar against many of IFC’s lending currencies of $34 million. $80 million and write-offs, net of recoveries, and other adjustments of $32 million. Net unrealized losses on equity investments and asso- ciated derivatives totaled $402 million (Net unrealized Specific reserves against losses on loans at June 30, 2015 gains of $256 million in FY14) in large part due to reversal of $962 million ($838 million at June 30, 2014) are held of previously reported unrealized gains of $235 million against impaired loans of $1,722 million ($1,725 million at relating to unwinding the value of put options that were June 30, 2014), a coverage ratio of 56 percent (49 percent on IFC’s balance sheet at June 30, 2014, together with the at June 30, 2014). overall weak environment for emerging markets equities INCOME FROM LIQUID ASSET negatively impacting the value of many of IFC’s equity TRADING ACTIVITIES investments accounted for at fair value in net income. One investment accounted for $58  million of the unre- The liquid assets portfolio, net of derivatives and secu- alized gains in FY15. Nine investments in equity funds rities lending activities, increased from $33.7  billion at accounted for $179  million of the unrealized losses in June  30, 2014, to $39.5  billion at June  30, 2015. Gross FY15. In FY14 one investment accounted for $181 million income from liquid asset trading activities totaled of the unrealized gains. Six investments in equity funds $467 million in FY15 ($599 million in FY14). accounted for $31 million of the unrealized losses in FY14. Interest income in FY15 totaled $614 million. In addition, Individual investments in such funds provided a signifi- the portfolio of ABS and MBS experienced fair value losses cant component of such unrealized gains and losses. totaling $38  million in FY15. Holdings in other prod- INCOME FROM DEBT SECURITIES AND REALIZED ucts, including US Treasuries, global government bonds, GAINS AND LOSSES ON DEBT SECURITIES AND high quality corporate bonds and derivatives generated ASSOCIATED DERIVATIVES $109 million of losses in FY15, a net loss of $147 million. Income from debt securities and realized gains and losses The primary driver of income for FY15 was interest on debt securities and associated derivatives increased earned over the period, totaling $614 million ($533 mil- to $132  million in FY15 from $89  million in FY14, an lion—FY14). Relative to FY14, there were fewer gains increase of $43  million. The largest components of the from spread tightening, and income on liquid assets IFC FINANCIALS 2016 35 denominated in foreign currencies was reduced by the In addition, pursuant to a series of expenditure controls, strengthening of the U.S. dollar. Net foreign exchange administrative expenses were favorably impacted due to losses for assets held in liquidity are offset by gains lower head count and resulting impact on staff salaries on foreign exchange hedges including, among other and benefits, lower spending on consultants and lower things, derivative instruments and debt issuances in the spending on travel, partially offset by an increase in ser- related currencies. vice and support fees paid to IBRD due to an increase in shared services. Lastly, administrative expenses were In FY15 and FY14, all internally managed liquid asset also lower due to expenses being incurred in currencies portfolios outperformed their respective benchmarks. other than US dollars. At June 30, 2015, trading securities with a fair value of FOREIGN CURRENCY TRANSACTION GAINS AND $86 million are classified as Level 3 securities ($188 mil- LOSSES ON NON-TRADING ACTIVITIES lion on June 30, 2014). Foreign currency transaction gains reported in net CHARGES ON BORROWINGS income in FY15 totaled $53 million ($19 million losses— IFC’s charges on borrowings increased by $62  million, FY14). Foreign currency transaction losses on debt from $196 million in FY14 (net of $3 million gain on extin- securities accounted for as available-for-sale in the guishment of borrowings) to $258 million in FY15 (net of amount of $115  million in FY15 (losses of $8  million— $2 million gain on extinguishment of borrowings), largely FY14) are reported in Other Comprehensive Income, reflecting an increase in interest charges relating to fixed while gains and losses on the derivatives economically rate local currency bonds raised from capital market hedging such debt securities are reported in net income. development activities (which in the aggregate have been Largely due to IFC having a small population of unhedged invested in higher rate local currency assets). non-U.S. dollar-denominated loans and debt securities The weighted average rate of IFC’s borrowings out- and the U.S. dollar strengthening against such currencies, standing from market sources, after the effects of IFC has recorded overall foreign exchange related losses borrowing-related derivatives, and excluding short-term in both Net Income and Other Comprehensive Income of borrowings from market and other sources, was 0.5 per- $62 million in FY15 (losses of $27 million—FY14). cent at June 30, 2015, slightly increased from 0.4 percent NET UNREALIZED GAINS AND LOSSES ON NON- June  30, 2014. The size of the borrowings portfolio TRADING FINANCIAL INSTRUMENTS (excluding the short-term borrowings), net of borrow- ing-related derivatives and before fair value adjustments, As discussed in more detail in Note A to IFC’s FY15 increased by $3.9 billion during FY15 from $47.8 billion at Consolidated Financial Statements, IFC accounts for June 30, 2014, to $51.7 billion at June 30, 2015. certain financial instruments at fair value with unreal- ized gains and losses on such financial instruments being OTHER INCOME reported in net income, namely: (i) all market borrowings Other income of $505 million for FY15 was $44 million that are economically hedged; and (ii) unrealized gains higher than in FY14 ($461 million) principally due to fee and losses on certain loans, debt securities and associated income generated from stronger mobilization activities in derivatives, (iii) substantially all market borrowings, and FY15 as compared with FY14. Other income in FY15 also (iv) borrowings from IDA. includes management fees and service fee reimburse- The resulting effects of fair value accounting for these ments of $59  million ($57  million in FY14) from IFC’s non-trading financial instruments on net income in FY15 consolidated subsidiary, AMC, and income from advisory and FY14 are summarized as follows: services of $244 million ($254 million in FY14). In FY15, income from advisory services comprised $197 million of donor funds utilized ($216 million—FY14) and $47 million of fees from clients and administrative fees from donors ($38 million—FY14). TABLE 20: NET UNREALIZED GAINS AND LOSSES ON OTHER EXPENSES NON-TRADING FINANCIAL INSTRUMENTS FY15 VS FY14 (US$ MILLIONS) Other expenses increased modestly in FY15 by $5 million from $1,418  million to $1,423  million. Other expenses FY15 FY14 reflect higher expense from pension and other postre- Unrealized gains and losses on loans, debt tirement plans, driven by higher service and interest costs securities and associated derivatives $ (54) $ 31 partially offset by higher expected returns on plan assets Unrealized gains and losses on borrowings and higher expenses from AMC, driven by the growth in from market, IDA and associated AMC’s funds and assets under management. derivatives, net (52) (74) Advisory services expenses totaled $285 million in FY15 Net unrealized gains and losses ($324 million in FY14) with the decrease in advisory ser- on other non - trading financial instruments accounted for at vices reflecting the series of advisory service reforms and fair value $ (106) $ (43) transition to the new organizational structure. 36 IFC FINANCIALS 2016 Changes in the fair value of IFC’s borrowings from The net change in unrealized gains and losses on equity market, IDA and associated derivatives, net, includes investments and debt securities in OCI can be summa- the impact of changes in IFC’s own credit spread when rized as follows: measured against US$ LIBOR. As credit spreads widen, unrealized gains are recorded and when credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free TABLE 21: CHANGE IN OTHER COMPREHENSIVE interest and foreign currency exchange rates). The mag- INCOME—UNREALIZED GAINS AND LOSSES ON nitude and direction (gain or loss) can be volatile from period to period but do not alter cash flow. IFC’s policy is EQUITY INVESTMENTS AND DEBT SECURITIES to generally match currency, amount, and timing of cash FY15 VS FY14 (US$ MILLIONS) flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. FY15 FY14 Net unrealized gains and losses on equity In FY15, modest unrealized losses were incurred on mar- investments arising during the year: ket borrowings after swaps, on balance, across funding Unrealized gains $ 1,067 $ 882 currency portfolios. The cost of economically hedging Unrealized losses (799) (228) borrowings in US dollars and Australian dollars after Reclassification adjustment for realized swaps was largely unchanged with respect to bench- gains and other-than-temporary marks at FY15 -end as compared to FY14-end. The cost impairments included in net income (393) (312) of economically hedging borrowings in Japanese yen Net unrealized gains and losses was slightly cheaper at FY15-end compared to FY14-end, on equity investments $ (125) $ 3 42 while the cost of hedging the fair value of New Zealand Net unrealized gains and losses on debt dollar borrowings was more expensive at FY15-end. As securities arising during the year: a result, IFC has reported net $52 million of unrealized Unrealized gains $ 110 $ 154 losses on borrowings and associated derivatives in FY15 Unrealized losses (182) (93) (net $74 million of unrealized losses in FY14) Reclassification adjustment for realized IFC reported net unrealized losses on loans, debt secu- gains, non- credit related portion of impairments which were recognized in rities and associated derivatives (principally conversion net income and other-than-temporary features, warrants and interest rate and currency swaps included in net income (7) (16) economically hedging the fixed rate and/or non-US$ loan Net unrealized gains and losses portfolio) of $54 million in FY15 (net unrealized gains of on debt securities $ (79) $ 45 $31 million in FY14). Total unrealized gains and losses GRANTS TO IDA on equity investments and debt securities $ (204) $ 387 During FY15, IFC recorded a grant to IDA of $340 million, as compared with $251 million in FY14. Net unrealized gains on equity investments arising in FY15 totaled $268 million. This gains were achieved in OTHER spite of the overall negative environment for emerging COMPREHENSIVE INCOME markets equities through FY15 as a whole due to a small number of financial institution investments in Asia UNREALIZED GAINS AND LOSSES ON EQUITY accounted for as available-for-sale that increased in value INVESTMENTS AND DEBT SECURITIES during FY15, despite significant volatility in that region IFC’s investments in debt securities and equity invest- late in FY15. ments that are listed in markets that provide readily UNRECOGNIZED NET ACTUARIAL GAINS AND determinable fair values are classified as available-for- LOSSES AND UNRECOGNIZED PRIOR SERVICE sale, with unrealized gains and losses on these investments COSTS ON BENEFIT PLANS being reported in OCI until realized. When realized, the gain or loss is transferred to net income. Changes in unre- Changes in the funded status of pension and other post- alized gains and losses on equity investments and debt retirement benefit plans are recognized in OCI, to the securities reported in OCI are significantly impacted by extent they are not recognized in net income under peri- (i) the global environment for emerging markets; and (ii) odic benefit cost for the year. the realization of gains on sales of such equity invest- During FY15, IFC experienced a gain of $162 million pri- ments and debt securities. marily due to $156 million of unrecognized net actuarial gains, resulting largely from the increase in the discount rates used to determine the projected benefit obligations. The discount rate assumptions used to determine the pro- jected benefit obligation for the Staff Retirement Plan and Post-Employment Benefits Plan increased from 4.2 per- cent at June 30, 2014 to 4.3 percent at June 30, 2015 and from 4.3 percent at June 30, 2014 to 4.4 percent at June 30, 2015, respectively. IFC FINANCIALS 2016 37 Governance GENERAL GOVERNANCE and Control IFC’s decision-making structure consists of the Board of Governors, the Board of Directors, the President, the Executive Vice President and CEO, management and staff. The Board of Governors is the highest decision-mak- ing authority. Governors are appointed by their member governments for a five-year term, which is renewable. The Board of Governors may delegate authority to the Board SENIOR MANAGEMENT of Directors to exercise any of its powers, except those CHANGES reserved to the Board of Governors under the Articles of Agreement. The following changes became effective July 1, 2015: Nena Stoiljkovic assumed the role of Vice President, BOARD Global Client Services. Jean Philippe Prosper left the MEMBERSHIP position of Vice President, Global Client Services and became an Adviser to IFC’s Executive Vice President and CEO. Karin Finkelston left the position of Vice President, In accordance with its Articles of Agreement, Directors Global Partnerships to become Vice President and Chief are appointed or elected every two years by their member Operating Officer of MIGA. Saran Kebet-Koulibaly governments. The Board currently has 25 Directors who assumed the role of Vice President, Corporate Risk and represent all member countries. Directors are neither Sustainability. The units that previously reported to the officers nor staff of IFC. The President is the only mem- Co-Vice Presidents, Global Partnerships, were realigned ber of the Board from management, and he serves as a with synergistic functional areas in IFC. non-voting member and as Chairman of the Board. James Scriven, Vice President, Corporate Risk and The Board has established several Committees. Sustainability on June  30, 2015 left IFC effective These include: October 31, 2015. • Audit Committee Jin-Yong Cai left IFC effective January  8, 2016. IFC • Budget Committee appointed Philippe Le Houérou Executive Vice President • Committee on Development Effectiveness and CEO effective March 1, 2016. Ethiopis Tafara, IFC’s • Committee on Governance and Executive Directors’ Vice President and General Counsel was the acting Administrative Matters Executive Vice President and CEO until Mr. Le Houérou’s • Human Resources Committee appointment became effective. The Board and its committees are in continuous session The following is a list of the principal officers of IFC as of at the main IBRD offices in Washington DC, as business June 30, 2016. requires. Each committee’s terms of reference establishes President Dr. Jim Yong Kim its respective roles and responsibilities. As committees Executive Vice President and CEO Philippe Le Houérou do not vote on issues, their role is primarily to serve the Board in discharging its responsibilities. Vice President, Global Client Services Dimitris Tsitsiragos The Board is required to consider proposals made by the Vice President, Global Client Services Nena Stoiljkovic President on the use of IFC’s net income: retained earn- Vice President, Corporate Risk & ings and designation of retained earnings and on other Sustainability and General Counsel Ethiopis Tafara policies that affect its general operations. The Board is Vice President, Corporate also responsible for presenting to the Board of Governors, Risk & Sustainability Saran Kebet-Koulibaly at the Annual meetings, audited accounts, an adminis- trative budget, and an annual report on operations and Vice President, Treasury and Syndications Jingdong Hua policies and on other matters. Vice President, CEO, IFC Asset Management Company LLC (a wholly-owned subsidiary of IFC) Gavin E.R. Wilson 38 IFC FINANCIALS 2016 AUDIT BUSINESS COMMITTEE CONDUCT The WBG promotes a positive work environment in which MEMBERSHIP staff members understand their ethical obligations to the institution. In support of this commitment, the institu- The Audit Committee consists of eight Directors. tion has in place a Code of Conduct. The WBG has both Membership in the Committee is determined by the an Ethics HelpLine and a Fraud and Corruption hotline. Board, based on nominations by the Chairman of the A third-party service offers many methods of worldwide Board, following informal consultation with Directors. communication. Reporting channels include telephone, mail, email, or confidential submission through a website. KEY RESPONSIBILITIES IFC has in place procedures for receiving, retaining, and The Audit Committee is appointed by the Board for the handling recommendations and concerns relating to busi- primary purpose of assisting the Board in overseeing ness conduct identified during the accounting, internal IFC’s finances, accounting, risk management, internal control and auditing processes. controls and institutional integrity, specific responsibil- WBG staff rules clarify and codify the staff’s obliga- ities include: tions in reporting suspected fraud, corruption, or other • Oversight of the integrity of IFC’s financial statements. misconduct that may threaten the operations or gover- • Appointment, qualifications, independence and perfor- nance of the WBG. These rules also offer protection from mance of the External Auditor. retaliation. • Performance of the Internal Audit Department. • Adequacy and effectiveness of financial and accounting AUDITOR policies and internal controls and the mechanisms to deter, prevent and penalize fraud and corruption in IFC INDEPENDENCE operations and corporate procurement. The appointment of the external auditor for IFC is gov- • Effective management of financial, fiduciary, compli- erned by a set of Board-approved principles. These include: ance in IFC. Prohibiting the external auditor from providing any non • Oversight of the institutional arrangements and pro- audit-related services; cesses for risk management across IFC. Requiring all audit-related services to be pre-approved on In carrying out its role, the Audit Committee discusses a case-by-case basis by the Board, upon recommendation financial issues and policies that affect IFC’s financial of the Audit Committee; and position and capital adequacy with Management, exter- nal auditors, and internal auditors. It recommends the Mandatory rebidding of the external audit contract every annual audited financial statements for approval to the five years, with a limit of two consecutive terms and man- Board. The Audit Committee monitors and reviews devel- datory rotation thereafter, provided however that the opments in corporate governance and its own role on an Audit Committee may exceptionally recommend that the ongoing basis. incumbent audit firm should be allowed to participate in the re-bidding. EXECUTIVE SESSIONS The external auditor is appointed to a five-year term and is subject to annual reappointment based on the rec- Under the Audit Committee’s terms of reference, it ommendation of the Audit Committee and approval of may convene in executive session at any time, without a resolution by the Board. In FY14, KPMG LLP began a Management’s presence. The Audit Committee meets second five-year term as IFC’s external auditor. separately in executive session with the external and internal auditors. Communication between the external auditor and the Audit Committee is ongoing and carried out as often as ACCESS TO RESOURCES deemed necessary by either party. The Audit Committee meets periodically with the external auditor and individ- AND TO MANAGEMENT ual committee members have independent access to the Throughout the year, the Audit Committee receives a external auditor. IFC’s external auditors also follow the large volume of information to enable it to carry out its communication requirements with audit committees set duties, and meets both formally and informally through- out under generally accepted auditing standards in the out the year to discuss relevant matters. It has complete United States. access to Management and reviews and discusses with Management topics considered in its terms of reference. The Audit Committee has the authority to seek advice and assistance from outside legal, accounting, or other advi- sors as it deems necessary. IFC FINANCIALS 2016 39 INTERNAL CONTROL INTERNAL CONTROL OVER EXTERNAL FINANCIAL REPORTING Each fiscal year, Management evaluates the internal controls over external financial reporting to determine whether any changes made in these controls during the fiscal year materially affect, or would be reasonably likely to materially affect IFC’s internal control over external financial reporting. The internal control framework pro- mulgated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “Internal Control–​ Integrated Framework (2013)” provides guidance for designing, implementing and conducting internal control and assessing its effectiveness. Beginning in FY15, IFC used the 2013 COSO framework to assess the effectiveness of the internal control over external financial reporting. As of June 30, 2016, these controls were determined to be effective. See “Management’s report regarding effec- tiveness of Internal Control over External Financial Reporting” on Page 41. Concurrently, IFC’s external auditor provides a report on whether Management’s assertion statement regarding the effectiveness of internal control over external finan- cial reporting is fairly stated in all material respects. See “Independent Auditors Report on Management’s Assertion Regarding Effectiveness of Internal Control over External Financial Reporting” on Page 43. DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures are designed to ensure that information required to be disclosed is gath- ered and communicated to Management as appropriate, to allow timely decisions regarding required disclosure by IFC. Management conducted an evaluation of the effectiveness of such controls and procedures and the President, the Executive Vice President and CEO, and the Vice President, World Bank Group Controller and IFC’s Chief Administrative Officer have concluded that these controls and procedures were effective as of June 30, 2016. 40 IFC FINANCIALS 2016 Consolidated Financial Statements and Internal Control Reports IFC FINANCIALS 2016 41 Page 41 42 IFC FINANCIALS 2016 Page 42 IFC FINANCIALS 2016 43 Page 43 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. 44 IFC FINANCIALS 2016 Page 44 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED BALANCE SHEETS as of June 30, 2016 and June 30, 2015 (US$ millions) 2016 2015 Assets Cash and due from banks………………………………………………………………………….………. $ 1,391 $ 1,509 Time deposits – Note C….................................................................................................................. 13,114 7,509 Trading securities - Note C and R……………..………………………………………………................. . 31,212 34,731 Securities purchased under resale agreements and receivable for cash collateral pledged - Note C and W….…………………………………………..................... 495 68 Investments - Notes B, D, E, F, G, R and T Loans ($962 at June 30, 2016, $784 at June 30, 2015 at fair value; net of reserve against losses of $1,775 at June 30, 2016, $1,743 at June 30, 2015) - Notes D, E and R...................................................................................................................... 21,868 21,336 Equity investments ($9,443 at June 30, 2016, $10,253 at June 30, 2015 at fair value) - Notes B, D, G and R 12,588 13,503 Debt securities - Notes D, F and R ……………………………………………………………………… 2,900 2,739 Total investments ………………………………………………………..……………………………... 37,356 37,578 Derivative assets - Notes Q, R and W…………………………………………………………………..... 3,695 3,255 Receivables and other assets – Note J………………………………………………………..…............ 3,171 2,898 Total assets ……………………………………………………..………………………………………. $ 90,434 $ 87,548 Liabilities and capital Liabilities Securities sold under repurchase agreements and payable for cash collateral received - Note C and W..…………………………………….……………........... $ 4,143 $ 4,695 Borrowings outstanding - Note K and R From market and other sources at amortized cost …..………………………………………………. 2,061 1,587 From market sources at fair value ……………………………………………………….……………. 51,777 48,329 From International Development Association at fair value …......…………………...…….…….…. 1,099 1,136 From International Bank for Reconstruction and Development at amortized cost …………..…… 205 213 Total borrowings ……………………………………………………………………………….……..... 55,142 51,265 Derivative liabilities - Notes Q, R and W…………………………………………...………………..…... 3,952 4,225 Payables and other liabilities – Note L……………………………….…………………….…................ 4,431 2,937 Total liabilities …………………………………………………….……………………………….…….. 67,668 63,122 Capital Capital stock, authorized (2,580,000 at June 30, 2016 and June 30, 2015) shares of $1,000 par value each - Note M Subscribed and paid-in ………………………………………………………………………………… 2,566 2,566 Accumulated other comprehensive (loss) income - Note O …………………………………………... (431) 1,197 Retained earnings - Note O …………………………………………………………….………………... 20,608 20,641 Total IFC capital ……………………………………………………………………….………………. 22,743 24,404 Non-controlling interests ……………………………………………………………….………………… 23 22 Total capital ………………………………………………………………………….…………………. 22,766 24,426 Total liabilities and capital ……………………………………………………….…………………... $ 90,434 $ 87,548 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2016 45 Page 45 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for each of the three years ended June 30, 2016 (US$ millions) 2016 2015 2014 Income from investments Income from loans and guarantees, including realized gains and losses on loans and associated derivatives - Note E …............................................................. $ 1,126 $ 1,123 $ 1,065 Provision for losses on loans, guarantees and other receivables - Note E.......................... (359) (171) (88) Income from equity investments and associated derivatives - Note G………….................. 518 427 1,289 Income from debt securities, including realized gains and losses on debt securities and associated derivatives - Note F…………………………………….……...... 129 132 89 Total income from investments.................................................................................... 1,414 1,511 2,355 Income from liquid asset trading activities - Note C................................................................. 504 467 599 Charges on borrowings – Note K………………………………………………………................. (409) (258) (196) Income from investments and liquid asset trading activities, after charges on borrowings......................................................................................... 1,509 1,720 2,758 Other income Advisory services income..................................................................................................... 266 244 254 Service fees.......................................................................................................................... 117 137 75 Other - Note B and N............................................................................................................ 118 124 132 Total other income......................................................................................................... 501 505 461 Other expenses Administrative expenses – Note X........................................................................................ (933) (901) (888) Advisory services expenses.................................................................................................. (308) (285) (324) Expense from pension and other postretirement benefit plans - Note V.............................. (185) (197) (173) Other - Note B...................................................................................................................... (38) (40) (33) Total other expenses........................................................................................................ (1,464) (1,423) (1,418) Foreign currency transaction gains (losses) on non-trading activities...................................... (46) 53 (19) Income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value, grants to IDA and net gains and losses attributable to non-controlling interests........................................................................................................................... 500 855 1,782 Net unrealized losses on non-trading financial instruments accounted for at fair value - Note P................................................................................... (204) (106) (43) Income before grants to IDA............................................................................................ 296 749 1,739 Grants to IDA - Note O………………………………………………………………………………. (330) (340) (251) Net (loss) income …......................................................................................................... (34) 409 1,488 Net losses (gains) attributable to non-controlling interests....................................................... 1 36 (5) Net (loss) income attributable to IFC………………………………….…………………...... $ (33) $ 445 $ 1,483 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. 46 IFC FINANCIALS 2016 Page 46 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) for each of the three years ended June 30, 2016 (US$ millions) 2016 2015 2014 Net (loss) income attributable to IFC……………..……..……………..……………….. $ (33) $ 445 $ 1,483 Other comprehensive (loss) income Unrealized gains and losses on debt securities Net unrealized (losses) gains on available-for-sale debt securities arising during the period.......................................................................................... (77) (72) 61 Reclassification adjustment for realized gains included in net income (income from debt securities and realized gains and losses on debt securities and associated derivatives)...................................................... (35) (40) (29) Reclassification adjustment for other-than-temporary impairments included in net income (income from debt securities and realized gains and losses on debt securities and associated derivatives).......................... 45 33 13 Net unrealized (losses) gains on debt securities............................................. (67) (79) 45 Unrealized gains and losses on equity investments Net unrealized (losses) gains on equity investments arising during the period....................................................................................................... (516) 268 654 Reclassification adjustment for realized gains included in net income (income from equity investments and associated derivatives)................................. (641) (774) (473) Reclassification adjustment for other-than-temporary impairments included in net income (income from equity investments and associated derivatives).................................................................................... 360 381 161 Net unrealized (losses) gains on equity investments..................................... (797) (125) 342 Net unrecognized net actuarial losses and unrecognized prior service credits on benefit plans - Note V................................................... (764) 162 (269) Total other comprehensive (loss) income................................................................ (1,628) (42) 118 Total comprehensive (loss) income attributable to IFC....................................... $ (1,661) $ 403 $ 1,601 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2016 47 Page 47 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL for each of the three years ended June 30, 2016 (US$ millions) Attributable to IFC Accumulated other Undesignated Designated Total comprehensive Non- retained retained retained income (loss) - Capital Total IFC controlling Total earnings Earnings earnings Note O stock capital interests capital At June 30, 2013 $ 18,435 $ 278 $ 18,713 $ 1,121 $ 2,403 $ 22,237 $ 38 $ 22,275 Year ended June 30, 2014 Net income attributable to IFC 1,483 1,483 1,483 1,483 Other comprehensive income 118 118 118 Payments received for IFC capital stock subscribed 99 99 99 Designation of retained earnings - Note O (251) 251 - - - Expenditures against designated retained earnings - Note O 335 (335) - - - Non-controlling interests issued 10 10 Net gains attributable to non-controlling interests 5 5 At June 30, 2014 $ 20,002 $ 194 $ 20,196 $ 1,239 $ 2,502 $ 23,937 $ 53 $ 23,990 Year ended June 30, 2015 Net income attributable to IFC 445 445 445 445 Other comprehensive loss (42) (42) (42) Payments received for IFC capital stock Subscribed 64 64 64 Designations of retained earnings - Note O (398) 398 - - - Expenditures against designated retained earnings - Note O 408 (408) - - - Non-controlling interests issued 5 5 Net losses attributable to non-controlling interests (36) (36) At June 30, 2015 $ 20,457 $ 184 $ 20,641 $ 1,197 $ 2,566 $ 24,404 $ 22 $ 24,426 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. 48 IFC FINANCIALS 2016 Page 48 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL for each of the three years ended June 30, 2016 (US$ millions) Attributable to IFC Accumulated other Undesignated Designated Total comprehensive Non- retained retained retained income (loss) - Capital Total IFC controlling Total earnings Earnings earnings Note O stock capital interests capital At June 30, 2015 $ 20,457 $ 184 $ 20,641 $ 1,197 $ 2,566 $ 24,404 $ 22 $ 24,426 Year ended June 30, 2016 Net loss attributable to IFC (33) (33) (33) (33) Other comprehensive loss (1,628) (1,628) (1,628) Payments received for IFC capital stock Subscribed - - - Designations of retained earnings - Note O (344) 344 - - - Expenditures against designated retained earnings - Note O 395 (395) - - - Non-controlling interests issued 2 2 Net losses attributable to non-controlling interests (1) (1) At June 30, 2016 $ 20,475 $ 133 $ 20,608 $ (431) $ 2,566 $ 22,743 $ 23 $ 22,766 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2016 49 Page 49 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the three years ended June 30, 2016 (US$ millions) 2016 2015 2014 Cash flows from investing activities Loan disbursements ………………………..………………………………….…................... $ (7,248) $ (6,359) $ (6,702) Investments in equity securities ………………………………………………….…………… (1,929) (2,299) (1,528) Investments in debt securities ………………………………………………………………... (775) (600) (669) Loan repayments …………………………………………………………………………......... 5,988 6,269 4,925 Debt securities repayments ………………………………………………………………….... 292 256 244 Proceeds from sales of loans ……………………………………….……............................. - 19 2 Proceeds from sales of equity investments ……………………………………….……....... 2,297 2,301 1,810 Proceeds from sales of debt securities ……………………………………………….……… 141 110 13 Net cash used in investing activities.………………………...………………………… (1,234) (303) (1,905) Cash flows from financing activities Medium and long-term borrowings Issuance ………………………………………………………………………….…………… 15,462 15,462 15,515 Retirement ……………………………………………………………………………..……… (10,981) (9,290) (11,226) Medium and long-term borrowings related derivatives, net ……………………………… (1,189) (688) (137) Short-term borrowings, net ……………………………………………………..……………... (434) (286) (106) Capital subscriptions …………………………………………………………………………… - 64 99 Non-controlling interests issued …………………………………………….………………… 2 5 10 Net cash provided by financing activities ……………………………………..……… 2,860 5,267 4,155 Cash flows from operating activities Net (loss) income attributable to IFC…..………………………………………………...…… (33) 445 1,483 Add: Net (losses) gains attributable to non-controlling interests ………………...…..……. (1) (36) 5 Net (loss) income…...………………………………………………………………...………… (34) 409 1,488 Adjustments to reconcile net income or loss to net cash used in operating activities: Realized gains on loans and associated derivatives, net ………………………………… (2) (57) (9) Realized gains on debt securities and associated derivatives, net ……………………… (39) (46) (29) Gains on equity investments and related derivatives, net …………………………...…… (1,013) (886) (1,269) Provision for losses on loans, guarantees and other receivables………………...……… 359 171 88 Other-than-temporary impairments on debt securities …………………………………… 45 33 13 Other-than-temporary impairments on equity investments……………………………...... 744 732 268 Net premiums received at issuance of borrowings…………………………………..……. 4 13 4 Net discounts paid on retirement of borrowings……………………………………………. (83) (5) (5) Net realized gains on extinguishment of borrowings …………………………………....... (6) (2) (3) Foreign currency transaction gains and losses on non-trading activities ……...……….. 46 (53) 19 Net unrealized losses on non-trading financial instruments accounted for at fair value ………………………………………………………………… 204 106 43 Change in accrued income on loans, time deposits and securities …………..………… (61) (69) (45) Change in payables and other liabilities …………………………………………………… 743 (163) 1,179 Change in receivables and other assets …………………………………………………… (279) (197) (63) Change in trading securities and securities purchased and sold under resale and repurchase agreements ……………………………………………………… 2,504 (3,245) (3,418) Net cash provided by (used in) operating activities ………………………...……….. 3,132 (3,259) (1,739) Change in cash and cash equivalents……………………………………………………….… 4,758 1,705 511 Effect of exchange rate changes on cash and cash equivalents…………………………… 729 578 (281) Net change in cash and cash equivalents………………………………………………...…… 5,487 2,283 230 Beginning cash and cash equivalents………………………………………………………..… 9,018 6,735 6,505 Ending cash and cash equivalents………………………………………………………….. $ 14,505 $ 9,018 $ 6,735 Composition of cash and cash equivalents Cash and due from banks …………………………………………………………………..…. $ 1,391 $ 1,509 $ 819 Time deposits ………………………………………………………………………………..….. 13,114 7,509 5,916 Total cash and cash equivalents………………………………………………………..…… $ 14,505 $ 9,018 $ 6,735 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. 50 IFC FINANCIALS 2016 Page 50 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the three years ended June 30, 2016 (US$ millions) 2016 2015 2014 Supplemental disclosure Change in ending balances resulting from currency exchange rate fluctuations: Loans outstanding …………………………………………................................ $ (271) $ (1,076) $ 68 Debt securities ……………………………………………………………………. (49) (115) (8) Loan and debt security-related currency swaps ………………………………. 335 1,195 (19) Borrowings ………………………………………………………………………… 368 4,129 (269) Borrowing-related currency swaps ……………………………………………… (190) (3,895) 236 Charges on borrowings paid, net ………………………………………………….. $ 413 $ 237 $ 200 Non-cash items: Loan and debt security conversion to equity, net …………………………...... $ 52 $ 210 $ 18 The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2016 51 Page 51 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENT OF CAPITAL STOCK AND VOTING POWER as of June 30, 2016 (US$ thousands) Capital Stock Voting Power Capital Stock Voting Power Amount Percent Number Percent Amount Percent Number of Percent Members paid of total of votes of total Members paid of total votes of total Afghanistan............................. 111 * 931 0.03 Lesotho ………………………... 71 * 891 0.03 Albania.................................... 1,302 0.05 2,122 0.08 Liberia …………………………. 83 * 903 0.03 Algeria..................................... 5,784 0.23 6,604 0.24 Libya …………………………… 55 * 875 0.03 Angola..................................... 1,481 0.06 2,301 0.08 Lithuania ………………………. 2,341 0.09 3,161 0.12 Antigua and Barbuda............... 13 * 833 0.03 Luxembourg…………………… 2,139 0.08 2,959 0.11 Argentina................................. 42,405 1.65 43,225 1.59 Macedonia, FYR of …………... 536 0.02 1,356 0.05 Armenia................................... 992 0.04 1,812 0.07 Madagascar …………………... 432 0.02 1,252 0.05 Australia.................................. 47,329 1.84 48,149 1.77 Malawi …………………………. 1,822 0.07 2,642 0.10 Austria..................................... 19,741 0.77 20,561 0.76 Malaysia ………………………. 16,606 0.65 17,426 0.64 Azerbaijan............................... 2,367 0.09 3,187 0.12 Maldives ………………………. 16 * 836 0.03 Bahamas, The………………... 335 0.01 1,155 0.04 Mali …………………………….. 451 0.02 1,271 0.05 Bahrain………………………… 1,746 0.07 2,566 0.09 Malta …………………………… 1,615 0.06 2,435 0.09 Bangladesh…………………… 9,632 0.38 10,452 0.38 Marshall Islands ……………… 663 0.03 1,483 0.05 Barbados……………………… 361 0.01 1,181 0.04 Mauritania …………………….. 214 0.01 1,034 0.04 Belarus.................................... 5,267 0.21 6,087 0.22 Mauritius ………………………. 1,665 0.06 2,485 0.09 Belgium................................... 50,610 1.97 51,430 1.89 Mexico …………………………. 30,532 1.19 31,352 1.15 Belize...................................... 101 * 921 0.03 Micronesia, Fed. States of…… 744 0.03 1,564 0.06 Benin…………………………... 119 * 939 0.03 Moldova ……………………….. 1,192 0.05 2,012 0.07 Bhutan…………………………. 720 0.03 1,540 0.06 Mongolia ………………………. 144 0.01 964 0.04 Bolivia…………………………. 1,902 0.07 2,722 0.10 Montenegro …………………… 1,035 0.04 1,855 0.07 Bosnia and Herzegovina……. 620 0.02 1,440 0.05 Morocco ……………………….. 9,635 0.38 10,455 0.38 Botswana……………………… 113 * 933 0.03 Mozambique ………………….. 322 0.01 1,142 0.04 Brazil…………………………... 55,585 2.17 56,405 2.08 Myanmar ………………………. 666 0.03 1,486 0.05 Bulgaria……………………….. 4,934 0.19 5,754 0.21 Namibia ……………………….. 404 0.02 1,224 0.05 Burkina Faso........................... 836 0.03 1,656 0.06 Nepal …………………………... 822 0.03 1,642 0.06 Burundi.................................... 100 * 920 0.03 Netherlands …………………… 56,131 2.19 56,951 2.10 Cabo Verde…………………… 15 * 835 0.03 New Zealand ………………….. 3,583 0.14 4,403 0.16 Cambodia................................ 339 0.01 1,159 0.04 Nicaragua ……………………... 715 0.03 1,535 0.06 Cameroon............................... 885 0.03 1,705 0.06 Niger …………………………… 147 0.01 967 0.04 Canada………………………... 81,342 3.17 82,162 3.02 Nigeria …………………………. 27,672 1.08 28,492 1.05 Central African Republic……. 119 * 939 0.03 Norway ………………………… 17,599 0.69 18,419 0.68 Chad…………………………… 1,364 0.05 2,184 0.08 Oman ………………………….. 1,187 0.05 2,007 0.07 Chile…………………………… 12,647 0.49 13,467 0.50 Pakistan ……………………….. 21,292 0.83 22,112 0.81 China………………………….. 61,756 2.41 62,576 2.30 Palau …………………………... 25 * 845 0.03 Colombia……………………… 13,658 0.53 14,478 0.53 Panama ……………………….. 1,007 0.04 1,827 0.07 Comoros………………………. 14 * 834 0.03 Papua New Guinea ………….. 1,147 0.04 1,967 0.07 Congo, Dem. Rep. of……….. 2,159 0.08 2,979 0.11 Paraguay ……………………… 436 0.02 1,256 0.05 Congo, Republic of…………... 131 0.01 951 0.04 Peru ……………………………. 8,373 0.33 9,193 0.34 Costa Rica.............................. 952 0.04 1,772 0.07 Philippines …………………….. 13,658 0.53 14,478 0.53 Côte d'Ivoire............................ 3,544 0.14 4,364 0.16 Poland …………………………. 7,605 0.30 8,425 0.31 Croatia.................................... 2,882 0.11 3,702 0.14 Portugal ……………………….. 8,324 0.32 9,144 0.34 Cyprus…………………………. 2,139 0.08 2,959 0.11 Qatar …………………………... 1,650 0.06 2,470 0.09 Czech Republic………………. 8,913 0.35 9,733 0.36 Romania ………………………. 4,278 0.17 5,098 0.19 Denmark………………………. 18,554 0.72 19,374 0.71 Russian Federation ………….. 102,853 4.01 103,673 3.82 Djibouti………………………… 21 * 841 0.03 Rwanda ……………………….. 306 0.01 1,126 0.04 Dominica................................. 42 * 862 0.03 Samoa …………………………. 35 * 855 0.03 Dominican Republic................ 1,187 0.05 2,007 0.07 Sao Tome and Principe ……… 439 0.02 1,259 0.05 Ecuador................................... 2,161 0.08 2,981 0.11 Saudi Arabia ………………….. 51,038 1.99 51,858 1.91 Egypt, Arab Republic of.......... 13,380 0.52 14,200 0.52 Senegal ……………………….. 2,299 0.09 3,119 0.11 El Salvador.............................. 29 * 849 0.03 Serbia ………………………….. 1,803 0.07 2,623 0.10 Equatorial Guinea................... 43 * 863 0.03 Seychelles …………………….. 27 * 847 0.03 Eritrea..................................... 935 0.04 1,755 0.06 Sierra Leone ………………….. 223 0.01 1,043 0.04 Estonia.................................... 1,434 0.06 2,254 0.08 Singapore ……………………... 177 0.01 997 0.04 Ethiopia………………………... 127 * 947 0.03 Slovak Republic ………………. 4,457 0.17 5,277 0.19 Fiji……………………………… 287 0.01 1,107 0.04 Slovenia ……………………….. 1,585 0.06 2,405 0.09 Finland………………………… 15,697 0.61 16,517 0.61 Solomon Islands ……………… 37 * 857 0.03 France…………………………. 121,015 4.72 121,835 4.48 Somalia ………………………... 83 * 903 0.03 Gabon…………………………. 1,268 0.05 2,088 0.08 South Africa …………………… 17,418 0.68 18,238 0.67 Gambia, The………………….. 94 * 914 0.03 South Sudan ………………….. 1,880 0.07 2,700 0.10 Georgia………………………... 1,380 0.05 2,200 0.08 Spain …………………………... 37,026 1.44 37,846 1.39 Germany………………………. 128,908 5.02 129,728 4.77 Sri Lanka ……………………… 7,491 0.29 8,311 0.31 Ghana…………………………. 5,546 0.22 6,366 0.23 St. Kitts and Nevis …………… 638 0.02 1,458 0.05 Greece.................................... 6,898 0.27 7,718 0.28 St. Lucia ……………………….. 74 * 894 0.03 Grenada.................................. 74 * 894 0.03 Sudan ………………………….. 111 * 931 0.03 Guatemala.............................. 1,084 0.04 1,904 0.07 Suriname ……………………… 620 0.02 1,440 0.05 Guinea.................................... 339 0.01 1,159 0.04 Swaziland ……………………... 684 0.03 1,504 0.06 Guinea-Bissau........................ 18 * 838 0.03 Sweden ………………………... 26,876 1.05 27,696 1.02 Guyana………………………... 1,392 0.05 2,212 0.08 Switzerland ……………………. 44,063 1.72 44,883 1.65 Haiti……………………………. 822 0.03 1,642 0.06 Syrian Arab Republic ………… 194 0.01 1,014 0.04 Honduras……………………… 495 0.02 1,315 0.05 Tajikistan ……………………… 1,212 0.05 2,032 0.07 Hungary………………………. 11,771 0.46 12,591 0.46 Tanzania ………………………. 1,003 0.04 1,823 0.07 Iceland………………………… 42 * 862 0.03 Thailand ……………………….. 11,781 0.46 12,601 0.46 India……………………………. 102,947 4.01 103,767 3.82 Timor-Leste …………………… 777 0.03 1,597 0.06 Indonesia……………………… 31,602 1.23 32,422 1.19 Togo …………………………… 808 0.03 1,628 0.06 Iran, Islamic Republic of…….. 1,444 0.06 2,264 0.08 Tonga ………………………….. 34 * 854 0.03 Iraq…………………………….. 147 0.01 967 0.04 Trinidad and Tobago ………… 4,112 0.16 4,932 0.18 Ireland…………………………. 1,290 0.05 2,110 0.08 Tunisia ………………………… 3,566 0.14 4,386 0.16 Israel…………………………… 2,135 0.08 2,955 0.11 Turkey …………………………. 15,837 0.62 16,657 0.61 Italy……………………………. 81,342 3.17 82,162 3.02 Turkmenistan …………………. 810 0.03 1,630 0.06 Jamaica……………………….. 4,282 0.17 5,102 0.19 Uganda ………………………... 735 0.03 1,555 0.06 Japan………………………….. 162,534 6.33 163,354 6.01 Ukraine ………………………… 10,159 0.40 10,979 0.40 Jordan…………………………. 941 0.04 1,761 0.06 United Arab Emirates ………... 4,033 0.16 4,853 0.18 Kazakhstan…………………… 4,637 0.18 5,457 0.20 United Kingdom ………………. 121,015 4.72 121,835 4.48 Kenya…………………………. 4,041 0.16 4,861 0.18 United States …………………. 569,379 22.19 570,199 20.99 Kiribati………………………… 12 * 832 0.03 Uruguay ……………………….. 3,569 0.14 4,389 0.16 Korea, Republic of…………… 28,148 1.10 28,968 1.07 Uzbekistan ……………………. 3,873 0.15 4,693 0.17 Kosovo………………………… 1,454 0.06 2,274 0.08 Vanuatu ……………………….. 55 * 875 0.03 Kuwait…………………………. 15,073 0.59 15,893 0.58 Venezuela, Rep. Boliv. de ….. 27,588 1.08 28,408 1.05 Kyrgyz Republic……………… 1,720 0.07 2,540 0.09 Vietnam ……………………….. 446 0.02 1,266 0.05 Lao People's Dem. Rep.…….. 278 0.01 1,098 0.04 Yemen, Republic of ………….. 715 0.03 1,535 0.06 Latvia………………………….. 2,150 0.08 2,970 0.11 Zambia ………………………… 1,286 0.05 2,106 0.08 Lebanon……………………….. 135 0.01 955 0.04 Zimbabwe …………………….. 3,215 0.13 4,035 0.15 * Less than .005 percent Total June 30, 2016 2,566,199 100.00+ 2,717,079 100.00+ + May differ from the sum of the individual percentages shown because of rounding Total June 30, 2015 2,566,199 100.00+ 2,717,079 100.00+ The notes to the Consolidated Financial Statements are an integral part of these statements. The notes to the Consolidated Financial Statements are an integral part of these statements. 52 IFC FINANCIALS 2016 Page 52 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PURPOSE The International Finance Corporation (IFC), an international organization, was established in 1956 to further economic development in its member countries by encouraging the growth of private enterprise. IFC is a member of the World Bank Group (WBG), which also comprises the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). Each member is legally and financially independent. Transactions with other World Bank Group members are disclosed in the notes that follow. IFC’s activities are closely coordinated with and complement the overall development objectives of the other World Bank Group institutions. IFC, together with private investors, assists in financing the establishment, improvement and expansion of private sector enterprises by making loans, equity investments and investments in debt securities where sufficient private capital is not otherwise available on reasonable terms. IFC’s share capital is provided by its member countries. It raises most of the funds for its investment activities through the issuance of notes, bonds and other debt securities in the international capital markets. IFC also plays a catalytic role in mobilizing additional funding from other investors and lenders through parallel loans, loan participations, partial credit guarantees, securitizations, loan sales, risk sharing facilities, and fund investments through the IFC Asset Management Company, LLC and other IFC crisis initiatives. In addition to project finance and mobilization, IFC offers an array of financial and technical advisory services to private businesses in the developing world to increase their chances of success. It also advises governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING AND RELATED POLICIES The Consolidated Financial Statements include the financial statements of IFC and consolidated subsidiaries as detailed in Note B. The accounting and reporting policies of IFC conform with accounting principles generally accepted in the United States of America (US GAAP). In the opinion of management, the Consolidated Financial Statements reflect all adjustments necessary for the fair presentation of IFC’s financial position and results of operation. Consolidated Financial Statements presentation – Certain amounts in prior years have been changed to conform to the current year’s presentation. Advisory services – Funding received for IFC advisory services from governments and other donors are recognized as contribution revenue when the conditions on which they depend are substantially met. Advisory services expenses are recognized in the period incurred. Advisory client fees and administration fees are recognized as income when earned. See Notes L and N. Functional currency – IFC’s functional currency is the United States dollar (US dollars or $). Use of estimates – The preparation of the Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expense during the reporting periods. Actual results could differ from these estimates. A significant degree of judgment has been used in the determination of: the reserve against losses on loans and impairment of debt securities and equity investments; estimated fair values of financial instruments accounted for at fair value (including equity investments, debt securities, loans, trading securities and derivative instruments); projected benefit obligations, fair value of pension and other postretirement benefit plan assets, and net periodic pension income or expense. There are inherent risks and uncertainties related to IFC’s operations. The possibility exists that changing economic conditions could have an adverse effect on the financial position of IFC. IFC uses internal models to determine the fair values of derivative and other financial instruments and the aggregate level of the reserve against losses on loans and impairment of equity investments. IFC undertakes continuous review and analysis of these models with the objective of refining its estimates, consistent with evolving best practices appropriate to its operations. Changes in estimates resulting from refinements in the assumptions and methodologies incorporated in the models are reflected in net income in the period in which the enhanced models are first applied. Consolidation, non-controlling interests and variable interest entities – IFC consolidates: i) all majority-owned subsidiaries; ii) limited partnerships in which it is the general partner, unless the presumption of control is overcome by certain management participation or other rights held by minority shareholders/limited partners; and iii) variable interest entities (VIEs) for which IFC is deemed to be the VIE's primary beneficiary (together, consolidated subsidiaries). Significant intercompany accounts and transactions are eliminated in consolidation. Equity interests in consolidated subsidiaries held by third parties are referred to as non-controlling interests. Such interests and the amount of consolidated net income/loss attributable to those interests are identified within IFC's consolidated balance sheet and consolidated income statement as "non-controlling interests" and "net gains/losses attributable to non-controlling interests", respectively. An entity is a VIE if: i) its equity is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; ii) its equity investors do not have decision-making rights about the entity's operations; or iii) its equity investors do not absorb the expected losses or receive the expected returns of the entity proportionally to their voting rights. A variable interest is a contractual, ownership or other interest whose value changes as the fair value of the VIE's net assets change. IFC's variable interests in VIEs arise from financial instruments, service contracts, guarantees, leases or other monetary interests in those entities. IFC is considered to be the primary beneficiary of a VIE if it has the power to direct the VIE's activities that most significantly impact its economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. IFC FINANCIALS 2016 53 Page 53 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Prior to the adoption, effective July 1, 2015, of the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis, IFC was considered to be the primary beneficiary of a VIE if it had the power to direct the VIE's activities that most significantly impact its economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially have been significant to the VIE unless: i) the entity had the attributes of an investment company or for which it is industry practice to account for their assets at fair value through earnings; ii) IFC had an explicit or implicit obligation to fund losses of the entity that could potentially have been significant to that entity; and iii) the entity was a securitization vehicle, an asset-backed financing entity, or an entity that was formerly considered a qualifying special purpose entity, as well as entities that were required to comply with or operate in accordance with requirements that are similar to those included in Rule 2a-7 of the Investment Company Act of 1940. In those cases, IFC was considered to be the primary beneficiary if it would absorb the majority of the VIE’s expected losses or expected residual returns. See “Recently adopted accounting standards” in this Note A and Note M for more information regarding the adoption of ASU 2015-02. IFC has a number of investments in VIEs that it manages and supervises in a manner consistent with other portfolio investments. Fair Value Option and Fair Value Measurements – IFC has adopted FASB Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (ASC 820) and the Fair Value Option subsections of ASC Topic 825, Financial Instruments (ASC 825 or the Fair Value Option). ASC 820 defines fair value, establishes a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels and applies to all items measured at fair value, including items for which impairment measures are based on fair value. ASC 825 permits the measurement of eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis, that are not otherwise permitted to be accounted for at fair value under other accounting standards. The election to use the Fair Value Option is available when an entity first recognizes a financial asset or liability or upon entering into a firm commitment. The Fair Value Option IFC has elected the Fair Value Option for the following financial assets and financial liabilities: i) investees in which IFC has significant influence: a) direct investments in securities issued by the investee and, if IFC would have otherwise been required to apply equity method accounting, all other financial interests in the investee (e.g., loans); b) investments in Limited Liability Partnerships (LLPs), Limited Liability Companies (LLCs) and other investment fund structures that maintain specific ownership accounts and loans or guarantees to such; ii) direct equity investments representing 20 percent or more ownership but in which IFC does not have significant influence; iii) all equity interests in private equity funds; iv) certain hybrid instruments in the investment portfolio; v) all market borrowings that are economically hedged with financial instruments that are accounted for at fair value with changes therein reported in earnings; and vi) borrowings from IDA. All borrowings for which the Fair Value Option has been elected are economically hedged with derivative or other financial instruments that are accounted for at fair value with changes in fair value reported in earnings as such changes occur. Measuring at fair value those borrowings for which the Fair Value Option has been elected mitigates the earnings volatility that would otherwise occur, due to measuring the borrowings and related economic hedges differently, without having to apply ASC Topic 815’s, Derivatives and Hedging (ASC 815) complex hedge accounting requirements. Measuring at fair value those equity investments that would otherwise require equity method accounting simplifies the accounting and renders a carrying amount on the consolidated balance sheet based on a measure (fair value) that IFC considers preferable to equity method accounting. For the investments that otherwise would require equity method accounting for which the Fair Value Option is elected, ASC 825 requires the Fair Value Option to also be applied to all eligible financial interests in the same entity. IFC has disbursed loans to certain of such investees; therefore, the Fair Value Option is also applied to those loans. IFC elected the Fair Value Option for equity investments with 20% or more ownership where it does not have significant influence so that the same measurement method (fair value) will be applied to all equity investments with more than 20% ownership. The FVO has been elected for certain hybrid instruments in the investment portfolio that would otherwise require bifurcation of the host and embedded derivative. Election of the FVO for these instruments eliminates the bifurcation requirement. Equity securities held by consolidated subsidiaries that are investment companies Pursuant to ASC Topic 946, Financial Services - Investment Companies (ASC 946) and ASC Topic 810, Consolidation, equity securities held by consolidated subsidiaries that are investment companies are accounted for at fair value, with unrealized gains and losses reported in earnings. Fair Value Measurements ASC 820 defines fair value as the price that would be received to sell an asset or transfer a liability (i.e., an exit price) in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date assuming the transaction occurs in the entity’s principal (or most advantageous) market. Fair value must be based on assumptions market participants would use (inputs) in determining the price and measured assuming that market participants act in their economic best interest, therefore, their fair values are determined based on a transaction to sell or transfer the asset or liability on a standalone basis. Under ASC 820, fair value measurements are not adjusted for transaction costs. Notwithstanding the following paragraph, pursuant to ASC Topic 320, Investments - Debt and Equity Securities (ASC 320), IFC reports equity investments that are listed in markets that provide readily determinable fair values at fair value, with unrealized gains and losses being reported in other comprehensive income. 54 IFC FINANCIALS 2016 Page 54 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ASC 820 established a fair value hierarchy which gives the highest priority to unadjusted quoted prices in active markets for identical unrestricted assets and liabilities (Level 1), the next highest priority to observable market based inputs or unobservable inputs that are corroborated by market data from independent sources (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). Fair value measurements are required to maximize the use of available observable inputs. Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. It includes IFC’s debt securities and equity investments, which are listed in markets that provide readily determinable fair values, government issues and money market funds in the liquid assets portfolio, and market borrowings that are listed on exchanges. Level 2: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly for substantially the full term of the asset or liability. It includes financial instruments that are valued using models and other valuation methodologies. These models consider various assumptions and inputs, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity and current market and contractual pricing for the underlying asset, as well as other relevant economic measures. Substantially all of these inputs are observable in the market place, can be derived from observable data or are supported by observable levels at which market transactions are executed. Financial instruments categorized as Level 2 include non-exchange-traded derivatives such as interest rate swaps, cross-currency swaps, certain asset-backed securities, as well as the majority of trading securities in the liquid asset portfolio, and the portion of IFC’s borrowings accounted for at fair value not included in Level 1. Level 3: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. It consists of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are non-observable. It also includes financial instruments whose fair value is estimated based on price information from independent sources that cannot be corroborated by observable market data. Level 3 includes equity and debt securities in the investment portfolios that are not listed in markets that provide readily determinable fair values, all loans for which IFC has elected the Fair Value Option, and certain hard-to-price securities in the liquid assets portfolio. IFC estimates the fair value of its investments in private equity funds that do not have readily determinable fair value based on the funds’ net asset values (NAVs) per share as a practical expedient to the extent that a fund reports its investment assets at fair value and has all the attributes of an investment company, pursuant to ASC 946. If the NAV is not as of IFC’s measurement date, IFC adjusts the most recent NAV, as necessary, to estimate a NAV for the investment that is calculated in a manner consistent with the fair value measurement principles established by ASC 820. Remeasurement of foreign currency transactions – Assets and liabilities not denominated in US dollars, other than disbursed equity investments, are expressed in US dollars at the exchange rates prevailing at June 30, 2016 and June 30, 2015. Disbursed equity investments, other than those accounted for at fair value, are expressed in US dollars at the prevailing exchange rates at the time of disbursement. Income and expenses are recorded based on the rates of exchange prevailing at the time of the transaction. Transaction gains and losses are credited or charged to income. Loans – IFC originates loans to facilitate project finance, restructuring, refinancing, corporate finance, and/or other developmental objectives. Loans are recorded as assets when disbursed. Loans are generally carried at the principal amounts outstanding adjusted for net unamortized loan origination costs and fees. It is IFC’s practice to obtain collateral security such as, but not limited to, mortgages and third-party guarantees. Certain loans are carried at fair value in accordance with the Fair Value Option as discussed above. Unrealized gains and losses on loans accounted for at fair value under the Fair Value Option are reported in Net unrealized gains and losses on non-trading financial instruments accounted for at fair value on the consolidated income statement. Certain loans originated by IFC contain income participation, prepayment and conversion features. These features are bifurcated and separately accounted for in accordance with ASC 815 if IFC has not elected the Fair Value Option for the loan host contracts and the features meet the definition of a derivative and are not considered to be clearly and closely related to their host loan contracts. Otherwise, these features are accounted for as part of their host loan contracts in accordance with IFC’s accounting policies for loans as indicated herein. Loans held for sale are carried at the lower of cost or fair value. The excess, if any, of amortized cost over fair value is accounted for as a valuation allowance. Changes in the valuation allowance are recognized in net income as they occur. Revenue recognition on loans – Interest income and commitment fees on loans are recorded as income on an accrual basis. Loan origination fees and direct loan origination costs are deferred and amortized over the estimated life of the originated loan; such amortization is determined using the interest method unless the loan is a revolving credit facility in which case amortization is determined using the straight-line method. Prepayment fees are recorded as income when received. IFC does not recognize income on loans where collectability is in doubt or payments of interest or principal are past due more than 60 days unless management anticipates that collection of interest will occur in the near future. Any interest accrued on a loan placed in nonaccrual status is reversed out of income and is thereafter recognized as income only when the actual payment is received. Interest not previously recognized but capitalized as part of a debt restructuring is recorded as deferred income, included in the consolidated balance sheet in payables and other liabilities, and credited to income only when the related principal is received. Such capitalized interest is considered in the computation of the reserve against losses on loans in the consolidated balance sheet. Reserve against losses on loans – IFC recognizes impairment on loans not carried at fair value in the consolidated balance sheet through the reserve against losses on loans, recording a provision or release of provision for losses on loans in net income, which increases or decreases the reserve against losses on loans. Individually impaired loans are measured based on the present value of expected future cash flows to be received, observable market prices, or for loans that are dependent on collateral for repayment, the estimated fair value of the collateral. The reserve against losses on loans reflects management’s estimates of both identified probable losses on individual loans (specific reserves) and probable losses inherent in the portfolio but not specifically identifiable (portfolio reserves). The determination of identified probable losses represents management’s judgment of the creditworthiness of the borrower. Reserves against losses are established through a review of individual loans undertaken on a quarterly basis. IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be unable to collect all amounts due according to the loan’s contractual terms. Information and events, with respect to the borrower and/or the economic IFC FINANCIALS 2016 55 Page 55 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and political environment in which it operates, considered in determining that a loan is impaired include, but are not limited to, the borrower’s financial difficulties, breach of contract, bankruptcy/reorganization, credit rating downgrade as well as geopolitical conflict, financial/economic crisis, commodity price decline, adverse local government action and natural disaster. Unidentified probable losses are the losses incurred at the reporting date that have not yet been specifically identified. The risks inherent in the portfolio that are considered in determining unidentified probable losses are those proven to exist by past experience and include: country systemic risk; the risk of correlation or contagion of losses between markets; uninsured and uninsurable risks; nonperformance under guarantees and support agreements; and opacity of, or misrepresentation in, financial statements. There were no changes, during the periods presented herein, to IFC’s accounting policies and methodologies used to estimate its reserve against loan losses. For purposes of providing certain disclosures about IFC’s entire reserve against losses on loans, IFC considers its entire loan portfolio to comprise one portfolio segment. A portfolio segment is the level at which the method for estimating the reserve against losses on loans is developed and documented. Loans are written-off when IFC has exhausted all possible means of recovery, by reducing the reserve against losses on loans. Such reductions in the reserve are partially offset by recoveries, if any, associated with previously written-off loans. Equity investments – IFC invests primarily for developmental impact; IFC does not seek to take operational, controlling, or strategic equity positions within its investees. Equity investments are acquired through direct ownership of equity instruments of investees, as a limited partner in LLPs and LLCs, and/or as an investor in private equity funds. Revenue recognition on equity investments – Equity investments, which are listed in markets that provide readily determinable fair values, are accounted for as available-for-sale securities at fair value with unrealized gains and losses reported in other comprehensive income in accordance with ASC 320. As noted above under “Fair Value Option and Fair Value Measurements”, direct equity investments and investments in LLPs and LLCs that maintain separate ownership accounts in which IFC has significant influence, direct equity investments representing 20 percent or more ownership but in which IFC does not have significant influence and all new equity interests in funds are accounted for at fair value under the Fair Value Option. Direct equity investments in which IFC does not have significant influence and which are not listed in markets that provide readily determinable fair values are carried at cost, less impairment. Notwithstanding the foregoing, equity securities held by consolidated subsidiaries that are investment companies are accounted for at fair value, with unrealized gains and losses reported in earnings. IFC’s investments in certain private equity funds in which IFC is deemed to have a controlling financial interest, are fully consolidated by IFC, as the presumption of control by the fund manager or the general partner has been overcome. Certain equity investments, for which recovery of invested capital is uncertain, are accounted for under the cost recovery method, such that receipts are first applied to recovery of invested capital and then to income from equity investments. The cost recovery method is applied to IFC's investments in its oil and gas unincorporated joint ventures (UJVs). IFC’s share of conditional asset retirement obligations related to investments in UJVs are recorded when the fair value of the obligations can be reasonably estimated. The obligations are capitalized and systematically amortized over the estimated economic useful lives. Unrealized gains and losses on equity investments accounted for at fair value under the Fair Value Option are reported in income from equity investments and associated derivatives on the consolidated income statement. Unrealized gains and losses on equity investments listed in markets that provide readily determinable fair values which are accounted for as available-for-sale are reported in other comprehensive income. Realized gains on the sale or redemption of equity investments are measured against the average cost of the investments sold and are generally recorded as income from equity investments and associated derivatives when received. Capital losses are recognized when incurred. Dividends on listed equity investments are recorded on the ex-dividend date, and dividends on unlisted equity investments are recorded upon receipt of notice of declaration. Realized gains on listed equity investments are recorded upon trade date, and realized gains on unlisted equity investments are recorded upon incurring the obligation to deliver the applicable shares. Losses are recognized when incurred. IFC enters into put and call option and warrant agreements in connection with certain equity investments; these are accounted for in accordance with ASC 815 to the extent they meet the definition of a derivative. Gains and losses on debt conversions and exchanges of equity interests – Loan and debt security conversions to equity interests are based on the fair value of the equity interests received. Transfers of equity interests in exchange for equity interests in other entities and other non-cash transactions are generally accounted for based on the fair value of the asset relinquished unless the fair value of the asset received is more clearly evident in which case the accounting is based on the fair value of the asset received. The difference between the fair value of the asset received and the recorded amount of the asset relinquished is recorded as a gain or loss in the income statement. Impairment of equity investments – Equity investments accounted for at cost, less impairment and available-for-sale are assessed for impairment each quarter. When impairment is identified, it is generally deemed to be other-than-temporary, and the equity investment is written down to the impaired value, which becomes the new cost basis in the equity investment. Such other-than-temporary impairments are recognized in net income. Subsequent increases in the fair value of available-for-sale equity investments are included in other comprehensive income, while subsequent decreases in fair value, if not other-than-temporary impairment, also are included in other comprehensive income. Debt securities – Debt securities in the investment portfolio are classified as available-for-sale and carried at fair value on the consolidated balance sheet with unrealized gains and losses included in accumulated other comprehensive income until realized. Realized gains on sales of debt securities and interest on debt securities is included in income from debt securities and realized gains and losses on debt securities and associated derivatives on the consolidated income statement. Certain debt securities are carried at fair value in accordance with the Fair Value Option as discussed above. Unrealized gains and losses on debt securities accounted for at fair value under the Fair Value Option are reported in net unrealized gains and losses on non-trading financial instruments accounted for at fair value on the consolidated income statement. IFC invests in certain debt securities with conversion features; these features are accounted for in accordance with ASC 815 to the extent they meet the definition of a derivative. 56 IFC FINANCIALS 2016 Page 56 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impairment of debt securities – In determining whether an unrealized loss on debt securities is other-than-temporary, IFC considers all relevant information including the length of time and the extent to which fair value has been less than amortized cost, whether IFC intends to sell the debt security or whether it is more likely than not that IFC will be required to sell the debt security, the payment structure of the obligation and the ability of the issuer to make scheduled interest or principal payments, any changes to the ratings of a security, and relevant adverse conditions specifically related to the security, an industry or geographic sector. Debt securities in the investment portfolio are assessed for impairment each quarter. When impairment is identified, the entire impairment is recognized in net income if (1) IFC intends to sell the security, or (2) it is more likely than not that IFC will be required to sell the security before recovery. However, if IFC does not intend to sell the security and it is not more likely than not that IFC will be required to sell the security but the security has a credit loss, the impairment charge will be separated into the credit loss component, which is recognized in net income, and the remainder which is recorded in other comprehensive income. The impaired value becomes the new amortized cost basis of the debt security. Subsequent fair value increases and decreases in the fair value of debt securities, if not an additional other-than-temporary impairment, are included in other comprehensive income. The difference between the new amortized cost basis of debt securities for which an other-than-temporary impairment has been recognized in net income and the cash flows expected to be collected is accreted to interest income using the effective yield method. Significant subsequent increases in the expected or actual cash flows previously expected are recognized as a prospective adjustment of the yield. Guarantees – IFC extends financial guarantee facilities to its clients to provide credit enhancement for their debt securities and trade obligations. As part of these financial guarantee facilities, IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds or loans. Under the terms of IFC's guarantees, IFC agrees to assume responsibility for the client’s financial obligations in the event of default by the client (i.e., failure to pay when payment is due). Guarantees are regarded as issued when IFC commits to the guarantee. Guarantees are regarded as outstanding when the underlying financial obligation of the client is incurred, and this date is considered to be the “inception” of the guarantee. Guarantees are regarded as called when IFC’s obligation under the guarantee has been invoked. There are two liabilities associated with the guarantees: (i) the stand-ready obligation to perform and (ii) the contingent liability. The fair value of the stand-ready obligation to perform is recognized at the inception of the guarantee unless a contingent liability exists at that time or is expected to exist in the near term. The contingent liability associated with the financial guarantee is recognized when it is probable the guarantee will be called and when the amount of guarantee called can be reasonably estimated. When the guarantees are called, the amount disbursed is recorded as a new loan, and specific reserves against losses are established, based on the estimated probable loss. Guarantee fees are recorded in income as the stand-ready obligation to perform is fulfilled. Commitment fees on guarantees are recorded as income on an accrual basis. All liabilities associated with guarantees are included in payables and other liabilities, and the receivables are included in other assets on the consolidated balance sheet. Designations of retained earnings – IFC establishes funding mechanisms for specific Board approved purposes through designations of retained earnings. Designations of retained earnings for grants to IDA are recorded as a transfer from undesignated retained earnings to designated retained earnings when the designation is approved by the Board of Governors. All other designations are recorded as a transfer from undesignated retained earnings to designated retained earnings when the designation is noted with approval by the Board of Directors. Total designations of retained earnings are determined based on IFC’s annual income before expenditures against designated retained earnings and net unrealized gains and losses on non- trading financial instruments accounted for at fair value in excess of $150 million, and contemplating the financial capacity and strategic priorities of IFC. Expenditures resulting from such designations are recorded as expenses in IFC’s consolidated income statement in the year in which they are incurred and reduces the respective designated retained earnings for such purposes. Expenditures are deemed to have been incurred when IFC has ceded control of the funds to the recipient. If the recipient is deemed to be controlled by IFC, the expenditure is deemed to have been incurred only when the recipient disburses the funds to a non-related party. On occasion, recipients who are deemed to be controlled by IFC make investments. In such cases, IFC includes those assets on its consolidated balance sheet until the recipient disposes of or transfers the asset or IFC is deemed to no longer be in control of the recipient. These investments have had no material impact on IFC’s financial position, results of operations, or cash flows. Investments resulting from such designations are recorded on IFC’s consolidated balance sheet in the year in which they occur, also having the effect of reducing the respective designated retained earnings for such purposes. Liquid asset portfolio – The liquid asset portfolio, as defined by IFC, consists of: time deposits and securities; related derivative instruments; securities purchased under resale agreements and receivable for cash collateral pledged, securities sold under repurchase agreements and payable for cash collateral received; receivables from sales of securities and payables for purchases of securities; and related accrued income and charges. IFC’s liquid funds are invested in government, agency and government-sponsored agency obligations, time deposits and asset-backed, including mortgage-backed, securities. Government and agency obligations include positions in high quality fixed rate bonds, notes, bills, and other obligations issued or unconditionally guaranteed by governments of countries or other official entities including government agencies and instrumentalities or by multilateral organizations. Asset-backed and mortgage-backed securities include agency and non-agency residential mortgage-backed securities, commercial mortgage-backed securities, consumer, auto and student loan-backed securities, commercial real estate collateralized debt obligations and collateralized loan obligations. Securities and related derivative instruments within IFC’s liquid asset portfolio are classified as trading and are carried at fair value with any changes in fair value reported in income from liquid asset trading activities. Interest on securities and amortization of premiums and accretion of discounts are also reported in income from liquid asset trading activities. Gains and losses realized on the sale of trading securities are computed on a specific security basis. IFC classifies cash and due from banks and time deposits (collectively, cash and cash equivalents) as cash and as cash equivalents in the consolidated statement of cash flows because they are generally readily convertible to known amounts of cash within 90 days of acquisition generally when the original maturities for such instruments are under 90 days or in some cases are under 180 days. Repurchase, resale and securities lending agreements – Repurchase agreements are contracts under which a party sells securities and simultaneously agrees to repurchase the same securities at a specified future date at a fixed price. Resale agreements are contracts under which a party purchases securities and simultaneously agrees to resell the same securities at a specified future date at a fixed price. Securities lending agreements are similar to repurchase agreements except that the securities loaned are securities that IFC has received as collateral under unrelated IFC FINANCIALS 2016 57 Page 57 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS agreements and allowed by contract to rehypothecate. Amounts due under securities lending agreements are included in securities sold under repurchase agreements and payable for cash collateral received on the consolidated balance sheet. It is IFC’s policy to take possession of securities purchased under resale agreements, which are primarily liquid government securities. The market value of these securities is monitored and, within parameters defined in the agreements, additional collateral is obtained when their value declines. IFC also monitors its exposure with respect to securities sold under repurchase agreements and, in accordance with the terms of the agreements, requests the return of excess securities held by the counterparty when their value increases. Repurchase, resale and securities lending agreements are accounted for as collateralized financing transactions and recorded at the amount at which the securities were acquired or sold plus accrued interest. Borrowings – To diversify its access to funding, and reduce its borrowing costs, IFC borrows in a variety of currencies and uses a number of borrowing structures, including foreign exchange rate-linked, inverse floating rate and zero coupon notes. In managing the currency exposure inherent in borrowing in a variety of currencies, generally, IFC either simultaneously converts such borrowings into variable rate US dollar borrowings through the use of currency and interest rate swap transactions or utilizes liquid asset portfolio or debt investments denominated in the same currency to economically hedge changes in the fair value of certain borrowings. Under certain outstanding borrowing agreements, IFC is not permitted to mortgage or allow a lien to be placed on its assets (other than purchase money security interests) without extending equivalent security to the holders of such borrowings. Substantially all borrowings are carried at fair value under the Fair Value Option with changes in fair value reported in net unrealized gains and losses on non-trading financial instruments accounted for at fair value in the consolidated income statement. Interest on borrowings and amortization of premiums and accretion of discounts are reported in charges on borrowings. Risk management and use of derivative instruments – IFC enters into transactions in various derivative instruments primarily for financial risk management purposes in connection with its principal business activities, including lending, investing in debt securities and equity investments, client risk management, borrowing, liquid asset portfolio management and asset and liability management. There are no derivatives designated as accounting hedges. All derivative instruments are recorded on the consolidated balance sheet at fair value as derivative assets or derivative liabilities. Where they are not clearly and closely related to the host contract, certain derivative instruments embedded in loans, debt securities and equity investments are bifurcated from the host contract and recorded at fair value as derivative assets or liabilities unless the hybrid instrument is accounted for at fair value with any changes in fair value reported in income. The fair value at inception of such embedded derivatives is excluded from the carrying amount of the host contracts on the consolidated balance sheet. Changes in fair values of derivative instruments used in the liquid asset portfolio are recorded in income from liquid asset trading activities. Changes in fair values of derivative instruments other than those in the liquid asset portfolio and those associated with equity investments are recorded in net unrealized gains and losses on non-trading financial instruments accounted for at fair value. The risk management policy for each of IFC’s principal business activities and the accounting policies particular to them are described below. Lending activities IFC’s policy is to closely match the currency, interest rate basis, and maturity of its loans and borrowings. Derivative instruments are used to convert the cash flows from fixed rate US dollar or non-US dollar loans into variable rate US dollars. Client risk management activities IFC enters into derivatives transactions with its clients to help them hedge their own currency, interest rate, or commodity risk, which, in turn, improves the overall quality of IFC’s loan portfolio. To hedge the market risks that arise from these transactions with clients, IFC enters into offsetting derivative transactions with matching terms with authorized market counterparties. Changes in fair value of all derivatives associated with these activities are reported in net income in net unrealized gains and losses on non-trading financial instruments accounted for at fair value. Borrowing activities IFC issues debt securities in various capital markets with the objectives of minimizing its borrowing costs, diversifying funding sources, and developing member countries’ capital markets, sometimes using complex structures. These structures include borrowings payable in multiple currencies, or borrowings with principal and/or interest determined by reference to a specified index such as a stock market index, a reference interest rate, a commodity index, or one or more foreign exchange rates. IFC generally uses derivative instruments with matching terms, primarily currency and interest rate swaps, to convert certain of such borrowings into variable rate US dollar obligations, consistent with IFC’s matched funding policy. IFC elects to carry at fair value, under the Fair Value Option, all market borrowings for which a derivative instrument, liquid asset portfolio investment or debt investment is used to create an economic hedge. Changes in the fair value of such borrowings and the associated derivatives are reported in net unrealized gains and losses on non-trading financial instruments accounted for at fair value in the consolidated income statement. Liquid asset portfolio management activities IFC manages the interest rate, currency and other market risks associated with certain of the time deposits and securities in its liquid asset portfolio by entering into derivative transactions to convert the cash flows from those instruments into variable rate US dollars or by utilizing market borrowings denominated in the same currency to economically hedge changes in the fair value of certain liquid asset portfolio investments. The derivative instruments used include short-term, over-the-counter foreign exchange forwards (covered forwards), interest rate and currency swaps, and exchange-traded interest rate futures and options. As the entire liquid asset portfolio is classified as trading portfolio, all securities (including derivatives) are carried at fair value with changes in fair value reported in income from liquid asset trading activities. 58 IFC FINANCIALS 2016 Page 58 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Asset and liability management In addition to the risk managed in the context of its business activities detailed above, IFC faces residual market risk in its overall asset and liability management. Residual currency risk is managed by monitoring the aggregate position in each lending currency and reducing the net excess asset or liability position through sales or purchases of currency. Interest rate risk arising from mismatches due to write- downs, prepayments and re-schedulings, and residual reset date mismatches is monitored by measuring the sensitivity of the present value of assets and liabilities in each currency to each basis point change in interest rates. IFC monitors the credit risk associated with these activities by careful assessment and monitoring of prospective and actual clients and counterparties. In respect of liquid assets and derivatives transactions, credit risk is managed by establishing exposure limits based on the credit rating and size of the individual counterparty. In addition, IFC has entered into master agreements with its derivative market counterparties governing derivative transactions that contain close-out and netting provisions and collateral arrangements. Under these agreements, if the credit exposure to one of the parties to the agreement, on a mark-to-market basis, exceeds a specified level, that party must post collateral to cover the excess, generally in the form of liquid government securities or cash. IFC does not offset the fair value amounts of derivatives and obligations to return, or rights to receive, cash collateral associated with these master-netting agreements. Loan participations – IFC mobilizes funds from commercial banks and other financial institutions (Participants) by facilitating loan participations, without recourse. These loan participations are administered and serviced by IFC on behalf of the Participants. The disbursed and outstanding balances of loan participations that meet the applicable accounting criteria are accounted for as sales and are not included in IFC’s consolidated balance sheet. All other loan participations are accounted for as secured borrowings and are included in loans on IFC’s consolidated balance sheet, with the related secured borrowings included in payables and other liabilities on IFC’s consolidated balance sheet. Pension and other postretirement benefits – IBRD has a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and a Post-Employment Benefits Plan (PEBP) that cover substantially all of its staff members as well as the staff of IFC and of MIGA. The SRP provides regular pension benefits and includes a cash balance plan. The RSBP provides certain health and life insurance benefits to eligible retirees. The PEBP provides pension benefits administered outside the SRP. All costs associated with these plans are allocated between IBRD, IFC, and MIGA based upon their employees’ respective participation in the plans. In addition, IFC and MIGA reimburse IBRD for their share of any contributions made to these plans by IBRD. The net periodic pension and other postretirement benefit income or expense allocated to IFC is included in income or expense from pension and other postretirement benefit plans in the consolidated income statement. IFC includes a receivable from IBRD in receivables and other assets, representing prepaid pension and other postretirement benefit costs. Recently adopted accounting standards – In June 2013, the FASB issued ASU 2013-08, Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements (ASU 2013-08). Among other things, ASU 2013-08 amends the criteria for an entity to qualify as an investment company under ASC Topic 946, introduces new disclosure requirements applicable to investment companies, and amends the measurement criteria for certain investments by an investment company in another investment company. ASU 2013-08 is applicable for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2013 (which was the year ended June 30, 2015 for IFC). IFC adopted ASU 2013-08 on July 1, 2014 with no material impact on IFC's financial position, results of operations or cash flows. In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASU 2014-11). ASU 2014-11 requires secured borrowing accounting for repurchase-to-maturity transactions, eliminates current accounting guidance on linking repurchase financing transactions and expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and repurchase agreements, securities lending transactions and repurchase to maturity transactions accounted for as secured borrowings. The accounting changes and expanded disclosure requirements for certain transfers accounted as sales are applicable for the first interim or annual reporting period beginning after December 15, 2014 (which was the interim period ended March 31, 2015 for IFC). The disclosure requirements for certain transactions accounted for as secured borrowings are applicable for interim periods beginning after March 15, 2015 (which was the three months ended June 30, 2015 for IFC) and are reflected in Note P. IFC adopted ASU 2014-11’s accounting changes on January 1, 2015 with no material impact on IFC’s financial position, results of operations or cash flows. In May 2015, the FASB issued ASU No. 2015-07, Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (ASU 2015-07). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments whose fair values are measured at NAV (or its equivalent) under the practical expedient in the ASC, requires disclosure by reporting entities of the amount of investments measured at NAV (or its equivalent) under the practical expedient, and limits the disclosure requirements all investments eligible to be measured at NAV under the practical expedient to only those to which the practical expedient is applied. ASU 2015-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. As permitted, IFC early adopted ASU 2015-07 effective June 30, 2015 as reflected in Note R. In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 amends ASC Topic 810, Consolidation, by modifying the evaluation of whether limited partnerships and similar entities are VIEs; eliminating the presumption that a general partner should consolidate a limited partnership; modifying the consolidation assessment of reporting entities that are involved with VIEs, particularly those that have fee arrangements (with the VIE) and related party relationships; providing a scope exception from Topic 810 for reporting entities with interests in certain money market funds. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (which is the year ending June 30, 2017 for IFC). As permitted, IFC early adopted ASU 2015-02 on July 1, 2015, as reflected in Note M, with no material impact on IFC’s financial position, results of operations or cash flows. IFC FINANCIALS 2016 59 Page 59 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (ASU 2014-16). ASU 2014-16 requires, for purposes of evaluating embedded features for bifurcation under ASU 815, the determination of the nature of a host contract issued in share form to be based on the economic characteristics and risks of the entire hybrid instrument, including the embedded feature being evaluated. Further, the ASU stipulates that the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host. ASU 2014-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 (which is the year ending June 30, 2017 for IFC). As permitted, IFC early adopted ASU 2014-16 on January 1, 2016 with no material impact on IFC’s financial position, results of operations or cash flows. Accounting and financial reporting developments – In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) became law. The Act seeks to reform the U.S. financial regulatory system by introducing new regulators and extending regulation over new markets, entities, and activities. The implementation of the Act is dependent on the development of various rules to clarify and interpret its requirements. Pending the development of these rules, no impact on IFC has been determined as of June 30, 2016. IFC continues to evaluate the potential future implications of the Act. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 replaces most existing revenue recognition guidance by establishing a single recognition model for revenue arising from contracts with customers to deliver goods and services and requires additional disclosure regarding those revenues - it does not change current accounting guidance for derivative contracts, investments in and transfers of financial instruments or guarantees. ASU 2014-09 is currently applicable for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017 (which is the year ending June 30, 2019 for IFC). IFC is currently evaluating the impact of ASU 2014-09. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Instruments - Going Concern (ASU 2014-15). ASU 2014-15 requires reporting entities to perform interim and annual assessments of their ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements (or within one year of the date on which the financial statements are available to be issued). A reporting entity will be required to make certain disclosures if there is substantial doubt about the entity’s ability to continue to as a going concern. ASU 2014-15 is effective for annual periods ending after December 15, 2016 (which is the year ending June 30, 2017 for IFC) and for interim periods thereafter. In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities (ASU 2016-01). ASU 2016-01 requires all investments in equity securities to be accounted for at fair value through net income. However, entities may elect to account for equity investments that do not have readily determinable fair values at cost less impairment, as adjusted for observable price changes in orderly transactions for the identical and similar instrument of the issuer. ASU 2016-01 will require separate presentation in other comprehensive income (OCI) the portion of the total change in fair value resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value under the FVO. For public business entities, ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, (which is the year ending June 30, 2019 for IFC). ASC 2016-01’s requirements are to be adopted by means of a cumulative- effect adjustment of the balance sheet as of the beginning of the fiscal year of adoption. Entities may adopt ASU 2016-01’s guidance relative to OCI recognition of changes in fair value due to changes in the instrument-specific credit risk of liabilities measured under the FVO for financial statements of fiscal years or interim periods that have not yet been issued, as of the beginning of the fiscal year of adoption – otherwise early adoption is not permitted. IFC is currently evaluating the impact of ASU 2016-01. In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 introduces a new accounting model that will result in lessees recording most leases on the balance sheet, aligns many of the underlying profit recognition principles with those in ASU 2014-09 and eliminates the use of “bright line” tests currently required for determining lease classification. ASU 2016-02 is effective for fiscal years, and interim periods within the fiscal years, beginning after December 15, 2018, (which is the year ending June 30, 2020 for IFC). Earlier adoption is permitted. IFC is currently evaluating the impact of ASU 2016-02. In March 2016, the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments; ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting; and ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross Versus Net). ASU 2016-06 clarifies certain matters regarding the assessment required under ASC 815 of whether contingent puts and calls embedded in debt instruments require bifurcation. ASU 2016-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, (which is the year ended June 30, 2018 for IFC). Early adoption is permitted. ASU 2016-06 will have no material impact on IFC’s financial position, results of operations or cash flows. ASU 2016-07 simplifies the equity method of accounting by eliminating the requirement to retroactively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in ownership and/or degree of influence. Consequently, when an investment qualifies for equity method accounting, the cost of acquiring the additional ownership would be added to the investor’s previous cost basis and the equity method subsequently applied upon the date the investor obtains the ability to exercise significant influence over the investee. ASU 2016-07 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2016, (which is the year ended June 30, 2018 for IFC). Given IFC’s current election of the FVO for all investments that otherwise qualify for equity method accounting, ASU 2016-07 is not expected to materially impact IFC’s financial position, results of operations or cash flows. ASU 2016-08 amends ASU 2014-09’s principal-versus-agent guidance. It requires a reporting entity to evaluate whether it is a principal or agent for each specified good or service in a contract with a customer and clarifies the application of the related indicators in accordance with ASC 2014-09’s control principle. ASU 2016-08 has the same effective date as 2014-09, (which is the year ending June 30, 2019 for IFC). IFC is currently evaluating the impact of ASU 2016-08. In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires the measurement of estimated credit losses on financial instruments held at the balance sheet date based on historical loss experience, current conditions, and reasonable and supportable forecasts of future economic conditions. Contrary to the incurred impairment loss accounting model currently in place, this forward-looking approach is intended to result in the immediate recognition of all estimated credit losses expected to occur over the remaining life of the instruments. The resulting allowance for current expected credit losses (CECL) reduces the amortized cost basis of a financial asset to an amount expected to be collected. For future periods which cannot be forecasted in a reasonable and supportable manner, the reporting entity will revert to historical loss experience. Although ASU 2016-13 does not prescribe a specific methodology, it requires a collective assessment 60 IFC FINANCIALS 2016 Page 60 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for financial assets with similar risk characteristics. Credit losses for financial assets that do not share similar risk characteristics with other financial assets will be measured individually. Impairment of investments in available-for-sale debt securities will be recognized via the allowance method, which allows for immediate reversals of credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (which is the year ended June 30, 2021 for IFC). IFC is currently evaluating the impact of ASU 2016-13. In addition, during the year ended June 30, 2016, the FASB issued and/or approved various other ASUs. IFC analyzed and implemented the new guidance, as appropriate, with no material impact on the financial position, results of operations or cash flows of IFC. NOTE B – SCOPE OF CONSOLIDATION IFC Asset Management Company, LLC (AMC) and AMC Funds IFC, through its wholly owned subsidiary, AMC, mobilizes capital from outside IFC’s traditional investor pool and manages third-party capital. AMC is consolidated into IFC’s financial statements. At June 30, 2016, IFC has provided $2 million of capital to AMC ($2 million - June 30, 2015). As a result of the consolidation of AMC, amounts included in IFC’s consolidated balance sheet at June 30, 2016 and June 30, 2015 comprise (US$ millions): June 30, June 30, 2016 2015 Cash, receivables and other assets $ 55 $ 51 Equity investments * * Payables and other liabilities 2 3 * less than $0.5 million. As a result of the consolidation of AMC, amounts included in IFC’s consolidated statement of operations for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise (US$ millions): 2016 2015 2014 Other income $ 66 $ 59 $ 57 Other expenses 24 20 15 At June 30, 2016, AMC managed twelve funds (collectively referred to as the AMC Funds). All AMC Funds are investment companies and are required to report their investment assets at fair value through net income. IFC’s ownership interests in these AMC Funds are shown in the following table: AMC Funds IFC’s ownership interest ** IFC Capitalization (Equity) Fund, L.P. 61% IFC Capitalization (Subordinated Debt) Fund, L.P. 13% IFC African, Latin American and Caribbean Fund, LP 20% Africa Capitalization Fund, Ltd. - IFC Russian Bank Capitalization Fund, LP 45% *** IFC Catalyst Funds 18% IFC Global Infrastructure Fund, LP 17% China-Mexico Fund, LP - IFC Financial Institutions Growth Fund, LP 32% **** IFC Global Emerging Markets Fund of Funds 20% IFC Middle East and North Africa Fund, LP 37% Women Entrepreneurs Debt Fund, LP 33% ** By virtue of certain rights granted to non-IFC limited partner interests, IFC does not control or consolidate this fund. *** The ownership interest of 18% reflects IFC’s ownership interest taking into consideration the overall commitments for the IFC Catalyst Funds, which is comprised of IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, IFC Catalyst Funds). IFC does not have an ownership interest in either the IFC Catalyst Fund (UK), LP or the IFC Catalyst Fund (Japan), LP. **** The ownership interest of 20% reflects IFC’s ownership interest taking into consideration the current committed amounts for the IFC Global Emerging Markets Fund of Funds, which are comprised of IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds, (Japan Parallel) LP. IFC is the sole limited partner of IFC Global Emerging Markets Fund of Funds, LP. IFC does not have an ownership interest in the IFC Global Emerging Markets Fund of Funds, (Japan Parallel) LP. IFC’s investments in AMC Funds, except for the IFC Russian Bank Capitalization Fund, LP (RBCF) created in June 2012 and IFC Global Emerging Markets Fund of Funds, LP (IFC GEMFOF) created in June 2015, are accounted for at fair value under the Fair Value Option. RBCF and IFC GEMFOF are both VIEs and consolidated by IFC because IFC is deemed their primary beneficiary. As a result of consolidating RBCF, IFC’s consolidated balance sheet at June 30, 2016 includes $41 million of equity investments ($41 million - June 30, 2015), and non-controlling interests of $23 million ($22 million - June 30, 2015). These non-controlling interests meet the FASB's definition of mandatorily redeemable financial instruments because the terms of the underlying partnership agreement provide for a termination date at which time its remaining assets are to be sold, its liabilities settled and the remaining net proceeds distributed to the non-controlling interest holders and IFC. RBCF's termination date is 2021 with a possible extension to 2023. As RBCF is considered an investment company, its investment securities (equity investments) are measured at fair value in IFC's consolidated balance sheet; therefore, the settlement value or estimate of cash that would IFC FINANCIALS 2016 61 Page 61 INTERNATIONAL FINANCE CORPORATION Page 61 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE be dueB – SCOPE and OF payable toCONSOLIDATION (continued) settle these non-controlling interests, assuming an orderly liquidation of RBCF on June 30, 2016, approximates the $23 million of non-controlling interests reflected on IFC's consolidated balance sheet at June 30, 2016. be due and payable to settle these non-controlling interests, assuming an orderly liquidation of RBCF on June 30, 2016, approximates the $23 million IFC of is the sole limited non-controlling partner interests of IFCon reflected GEMFOF and hence balance IFC's consolidated there are no non-controlling sheet interests in this entity. As of June 30, 2016, IFC GEMFOF at June 30, 2016. had $5 million of equity investments ($0 - June 30, 2015) included in IFC’s consolidated balance sheet. IFC is the sole limited partner of IFC GEMFOF and hence there are no non-controlling interests in this entity. As of June 30, 2016, IFC GEMFOF had $5Consolidated Other entities million of equity investments ($0 - June 30, 2015) included in IFC’s consolidated balance sheet. In August Other entities a special purpose vehicle, IFC Sukuk Company, to facilitate a $100 million Sukuk under IFC’s borrowings program. 2015, IFC created Consolidated The Sukuk is scheduled to mature in September 2020. IFC Sukuk Company is a VIE and has been consolidated into these Consolidated Financial In August 2015, Statements IFC created because a special IFC is the purposebeneficiary. VIE’s primary vehicle, IFC The Sukuk Company, collective to facilitate impact a $100 of this and million other Sukuk entities under IFC’s consolidated intoborrowings program. these Consolidated The Sukuk Financial is scheduled Statements to mature under the VIE September inor 2020. voting interest IFC Sukuk model Company is a VIE and has been consolidated into these Consolidated Financial is insignificant. Statements because IFC is the VIE’s primary beneficiary. The collective impact of this and other entities consolidated into these Consolidated NOTE C– Financial underPORTFOLIO LIQUID ASSET Statements the VIE or voting interest model is insignificant. NOTE Cfrom Income liquid – LIQUID asset trading ASSET activities PORTFOLIO fromliquid Income from Income asset liquid trading asset activities trading for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprises (US$ millions): activities Income from liquid asset trading activities for the years ended June 30, 2016, June 30, 2015 2016and June 30, 2014 2015comprises (US$ millions): 2014 Interest income, net $ 561 $ 614 $ 533 Net gains and losses on trading activities (realized and unrealized) 2016 (57) 2015 (147) 2014 66 Interest income, net $ 561 $ 614 $ 533 Net gains Total and losses income on trading from liquid assetactivities trading(realized and unrealized) activities $ (57) 504 $ (147) 467 $ 66 599 Total Net income gains from liquid and losses asset trading on trading activities activities comprise net losses on asset-backed 504 $ and mortgage-backed$ securities 467 $ of $70 million 599 for the year ended June 30, 2016 ($38 million losses - year ended June 30, 2015; $67 million gains – year ended June 30, 2014) and net gains on other Net gains trading and losses securities tradingfor on million of $13 activities the yearcomprise net losses ended June on ($109 30, 2016 asset-backed and mortgage-backed million losses securities - year ended June of $70 30, 2015; millionlosses for the $1 million - year year ended June 30, 2016 ended June 30, 2014). ($38 million losses - year ended June 30, 2015; $67 million gains – year ended June 30, 2014) and net gains on other trading securities of $13 million for the year ended June 30, 2016 ($109 million losses - year ended June 30, 2015; $1 million losses - year ended June 30, 2014). The annualized rate of return on the liquid asset trading portfolio, calculated as total income from the liquid asset trading activities divided by fair value average daily balance of total trading securities, during the year ended June 30, 2016, was 1.4% (1.3% - year ended June 30, 2015; The 1.8% annualized rate - year ended of return June on the 30, 2014). liquid After asset the trading effect portfolio,derivative of associated calculated as total income instruments, from asset the liquid the liquid asset portfolio trading activities generally reprices divided by within one fair year.value average daily balance of total trading securities, during the year ended June 30, 2016, was 1.4% (1.3% - year ended June 30, 2015; 1.8% - year ended June 30, 2014). After the effect of associated derivative instruments, the liquid asset portfolio generally reprices within one Composition of liquid asset portfolio year. The composition Composition of IFC’s of liquid liquid asset asset portfolio included in the consolidated balance sheet captions is as follows (US$ millions): portfolio (US$ 30, The composition of IFC’s liquid asset portfolio included in the consolidated balance sheet captions is as follows June millions): 2016 June 30, 2015 Assets Cash and due from banks $ 30, 2016 June 886 $ 30, 2015 June 980 Assets Time deposits 13,114 7,509 Cash and Trading due from banks securities $ 886 31,212 $ 980 34,731 Time deposits Securities purchased under resale agreements and receivable for cash collateral pledged 13,114 495 7,509 68 Trading securities Derivative assets 31,212 489 34,731 850 Securities Receivables purchased and other under resale agreements and receivable for cash collateral pledged assets: 495 68 Derivative assets Receivables from unsettled security trades 489 775 850 505 Receivables and other Accrued interest assets: income on time deposits and securities 168 171 Receivables Accrued from income unsettled on security derivative trades instruments 775 19 505 13 Accrued interest income on time deposits and securities Total assets 168 47,158 171 44,827 Accrued income on derivative instruments 19 13 Total assets Liabilities 47,158 44,827 Securities sold under repurchase agreements and payable for cash collateral received 4,143 4,695 Liabilities Derivative liabilities 439 244 Securities Payables andsold under other repurchase agreements and payable for cash collateral received liabilities: 4,143 4,695 Derivative Payables liabilities for unsettled security trades 439 1,099 244 349 Payables and other Short-Term liabilities: Borrowings 36 9 Payables Liability forfor unsettled short security trades sold securities 1,099 10 349 - Short-Term Borrowings Accrued charges on derivative instruments 36 58 9 55 Liability for short sold securities Total liabilities 10 5,785 - 5,352 Accrued charges on derivative instruments 58 55 Total Totalliabilities net liquid asset portfolio $ 5,785 41,373 $ 5,352 39,475 Total net liquid asset portfolio $ 41,373 $ 39,475 The liquid asset portfolio is denominated primarily in US dollars; investments in other currencies, net of the effect of associated derivative instruments that convert non-US dollar securities into US dollar securities, represent 6.3% of the portfolio at June 30, 2016 (7.8% - June 30, 2015). The liquid asset portfolio is denominated primarily in US dollars; investments in other currencies, net of the effect of associated derivative instruments that convert non-US dollar securities into US dollar securities, represent 6.3% of the portfolio at June 30, 2016 (7.8% - June 30, 2015). 62 IFC FINANCIALS 2016 Page 62 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C – LIQUID ASSET PORTFOLIO (continued) Trading securities comprises: Year ended June 30, 2016 At June 30, 2016 Fair value average Weighted average daily balance Fair value contractual (US$ million) (US$ millions) maturity (years) Government, agency and government-sponsored agency obligations $ 11,942 $ 11,083 2.2 Asset-backed securities 12,389 11,860 17.1 Corporate securities 6,882 7,842 1.8 Money market funds 916 427 n/a Total trading securities $ 32,129 $ 31,212 Year ended June 30, 2015 At June 30, 2015 Fair value average Weighted average daily balance Fair value contractual (US$ million) (US$ millions) maturity (years) Government, agency and government-sponsored agency obligations $ 16,679 $ 15,088 2.2 Asset-backed securities 13,133 12,793 17.4 Corporate securities 5,918 5,757 3.0 Money market funds 1,163 1,093 n/a Total trading securities $ 36,893 $ 34,731 The expected maturity of the asset-backed securities may be significantly shorter than the contractual maturity, as reported above, due to prepayment features. NOTE D – INVESTMENTS The carrying amount of investments at June 30, 2016 and June 30, 2015 comprises (US$ millions): June 30, 2016 June 30, 2015 Loans Loans at amortized cost $ 22,681 $ 22,295 Less: Reserve against losses on loans (1,775) (1,743) Loans at amortized cost less reserve against losses 20,906 20,552 Loans accounted for at fair value under the Fair Value Option (outstanding principal balance $1,093 at June 30, 2016, $802 – June 30, 2015) 962 784 Total loans 21,868 21,336 Equity investments Equity investments at cost less impairment* 3,145 3,250 Equity investments accounted for at fair value as available-for-sale (cost $2,278 at June 30, 2016, $2,505 – June 30, 2015) 3,526 4,557 Equity investments accounted for at fair value (cost $5,331 at June 30, 2016, $4,800 – June 30, 2015) 5,917 5,696 Total equity investments 12,588 13,503 Debt securities Debt securities accounted for at fair value as available-for-sale (amortized cost $2,553 at June 30, 2016, $2,329 - June 30, 2015) 2,474 2,317 Debt securities accounted for at fair value under the Fair Value Option (amortized cost $442 at June 30, 2016, $408 – June 30, 2015) 426 422 Total debt securities 2,900 2,739 Total carrying amount of investments $ 37,356 $ 37,578 * Equity investments at cost less impairment at June 30, 2016 includes unrealized gains of $7 million ($0 – June 30, 2015) related to equity investments accounted for as available-for-sale in previous periods and for which readily determinable fair vales are no longer available. IFC FINANCIALS 2016 63 Page 63 INTERNATIONAL FINANCE CORPORATION Page 63 INTERNATIONAL FINANCE CORPORATION TOCONSOLIDATED NOTESTO NOTES CONSOLIDATED FINANCIAL FINANCIAL STATEMENTS STATEMENTS NOTE D – INVESTMENTS (continued) NOTE D – INVESTMENTS (continued) The distribution of the investment portfolio by industry sector and by geographical region and a reconciliation of total disbursed portfolio to carrying The distribution of the investment portfolio by industry sector and by geographical region and a reconciliation of total disbursed portfolio to carrying amount of investments is as follows (US$ millions): amount of investments is as follows (US$ millions): June 30,30, June 2016 2016 June June 30, 2015 30, 2015 Equity Equity Debt Debt Equity Debt Debt Equity Sector Sector investmentssecurities Loans investments Loans securities Total Total Loans Loans investments investments securitiesTotal Total securities agribusiness Manufacturing,agribusiness Manufacturing, and and services services Asia Asia $$ $ $ 1,497 1,497 759 759 $ $ 288288 2,544$ $ $ 2,544 $ 1,933 1,933 $ 820 $ 190 $ $ 820 $ 190 $ 2,943 2,943 Europe,Middle Europe, MiddleEast East and and North North Africa Africa 2,707 2,707 665 665 126126 3,498 3,498 2,915 2,915 784 784 134 134 3,833 3,833 Africa, Sub-SaharanAfrica, Sub-Saharan Latin Latin America America Caribbean andCaribbean and 2,505 2,505 561 561 77 77 3,143 3,143 2,517 2,517 547 547 110 110 3,174 3,174 Other Other 353 353 247 247 - - 600 600 171 171 227 227 - - 398 398 Totalmanufacturing, Total manufacturing, agribusiness agribusiness andservices and services 7,062 7,062 2,232 2,232 491491 9,785 9,785 7,536 7,536 2,3782,378 434 434 10,348 10,348 Financialmarkets Financial markets Asia Asia 1,700 1,700 1,281 1,281 807807 3,788 3,788 2,153 2,153 1,0971,097 491 491 3,741 3,741 Europe,Middle Europe, MiddleEast Eastand andNorth Africa North Africa 2,031 2,031 1,352 1,352 450450 3,833 3,833 2,056 2,056 1,4821,482 508 508 4,046 4,046 Sub-SaharanAfrica, Sub-Saharan Latin Africa, America Latin America and Caribbean and Caribbean 2,949 2,949 988 988 319319 4,256 4,256 2,697 2,697 1,1291,129 364 364 4,190 4,190 Other Other 743 743 245 245 217217 1,205 1,205 501 501 175 175 220 220 896 896 Total financial markets 7,423 3,866 1,793 13,082 7,407 3,883 1,583 12,873 Total financial markets 7,423 3,866 1,793 13,082 7,407 3,883 1,583 12,873 Infrastructure and natural resources Infrastructure Asia and natural resources 1,943 582 77 2,602 1,646 620 63 2,329 Asia Europe, Middle East and North Africa 1,943 2,144 582 733 99 77 2,602 2,976 1,646 1,810 507 620 126 63 2,443 2,329 Europe, Middle Sub-Saharan East Africa, and America Latin North Africa 2,144 733 99 2,976 1,810 507 126 2,443 Sub-Saharan and Caribbean Africa, Latin America 3,916 661 116 4,693 3,643 700 136 4,479 and Caribbean Other 3,916 200 661 5 -116 4,693 205 3,643 156 11 700 - 136 167 4,479 Other Total infrastructure and natural 200 5 - 205 156 11 - 167 Total infrastructure and natural resources 8,203 1,981 292 10,476 7,255 1,838 325 9,418 resources 8,203 1,981 292 10,476 7,255 1,838 325 9,418 Telecom, media & technology, and Telecom, media venture & technology, and investing Asiaventure investing 407 584 159 1,150 252 509 98 859 Asia Europe, Middle East and North Africa 407 152 542584 31159 1,150 725 197 252 455 509 35 98 687 859 Sub-Saharan Europe, MiddleAfrica, East and America Latin North Africa 360 152 960542 57 31 1,377 725 292 197 895 455 64 35 1,251 687 and Caribbean Sub-Saharan Africa, Latin America 360 960 57 1,377 292 895 64 1,251 Other and Caribbean 303 628 28 959 313 623 29 965 Total Telecom, media & technology, and Other 303 628 28 959 313 623 29 965 venture investing Total Telecom, media & technology, and 1,222 2,714 275 4,211 1,054 2,482 226 3,762 venture investing 1,222 2,714 275 4,211 1,054 2,482 226 3,762 Total disbursed investment portfolio $ 23,910 $ 10,793 $ 2,851 $ 37,554 $ 23,252 $ 10,581 $ 2,568 $ 36,401 Total disbursed investment portfolio $ 23,910 $ 10,793 $ 2,851 $ 37,554 $ 23,252 $ 10,581 $ 2,568 $ 36,401 Reserve against losses on loans (1,775) - - (1,775) (1,743) - - (1,743) Unamortized deferred loan origination Reserve against losses on loans (1,775) - - (1,775) (1,743) - - (1,743) fees, net and other (125) - - (125) (119) - - (119) Unamortized deferred loan origination Disbursed amount allocated to a related fees, net and other (125) - - (125) (119) - - (119) financial instrument reported separately Disbursed amount allocated to a related in other assets or derivative assets (11) (41) - (52) (36) (47) - (83) financial instrument Adjustments to disbursed reported separately investment in other portfolio assets or derivative assets (11) - (41) 10 (22) - (12)(52) - (36) 28 (47) (5) - 23 (83) Adjustments Unrealized on equityinvestment to disbursed losses investments portfolio held by consolidated VIEs - - (8) 10 -(22) (8)(12) - - (7) 28 - (5) (7) 23 losses Unrealizedgains Unrealized on on equity investments investments held by consolidated accounted VIEs for at fair value as available- - (8) - (8) - (7) - (7) for-sale gains on investments Unrealized - 1,248 87 1,335 - 2,052 162 2,214 accounted Unrealized at fair value for (losses) gains as available- on investments (131) 586 (16) 439 (18) 896 14 892 for-sale - 1,248 87 1,335 - 2,052 162 2,214 Unrealized Carrying gains (losses) amount on investments of investments $ (131) 21,868 $ 12,588586$ 2,900 (16) $ 37,356 439 $ 21,336 (18) $ 13,503 896 $ 2,739 $ 14 37,578 892 Carrying amount of investments $ 21,868 $ 12,588 $ 2,900 $ 37,356 $ 21,336 $ 13,503 $ 2,739 $ 37,578 64 IFC FINANCIALS 2016 Page 64 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES Loans Income from Loans and guarantees, including realized gains and losses on loans and associated derivatives for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise the following (US$ millions): 2016 2015 2014 Interest income $ 1,026 $ 957 $ 936 Commitment fees 34 38 43 Other financial fees 64 71 77 Realized gains on loans, guarantees and associated derivatives 2 57 9 Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,126 $ 1,123 $ 1,065 The currency composition and average contractual rate of the disbursed loan portfolio are summarized below: June 30, 2016 June 30, 2015 Average Average Amount contractual Amount contractual (US$ millions) rate (%) (US$ millions) rate (%) US dollar $ 18,565 4.6 $ 17,339 4.2 Euro 2,708 3.5 2,636 3.9 Brazilian real 424 16.7 434 15.2 Indian rupee 397 10.2 438 10.5 Chinese renminbi 355 5.9 828 5.6 South African rand 196 10.6 165 9.9 Philippine peso 180 6.7 188 6.7 Colombian peso 157 9.2 81 10.5 Mexican peso 152 7.0 262 7.1 Indonesian rupiah 149 10.9 293 8.9 Russian ruble 140 12.1 190 12.4 Peruvian soles nuevos 97 8.5 95 7.8 New Romanian Lei 94 4.1 40 6.4 Hong Kong dollars 60 2.0 - - Dominican pesos 57 11.6 12 13.6 Other currencies OECD currencies 44 10.5 63 9.9 Non-OECD currencies 135 12.3 188 9.7 Total disbursed loan portfolio $ 23,910 5.1 $ 23,252 4.9 After the effect of interest rate swaps and currency swaps, IFC’s loans are principally denominated in variable rate US dollars. Loans in all currencies are repayable during the years ending June 30, 2017 through June 30, 2021 and thereafter, as follows (US$ millions): 2017 2018 2019 2020 2021 Thereafter Total Fixed rate loans $ 959 $ 689 $ 670 $ 863 $ 588 $ 983 $ 4,752 Variable rate loans 3,854 2,708 2,549 2,961 1,792 5,294 19,158 Total disbursed loan portfolio $ 4,813 $ 3,397 $ 3,219 $ 3,824 $ 2,380 $ 6,277 $ 23,910 At June 30, 2016, 20% of the disbursed loan portfolio consisted of fixed rate loans (22% - June 30, 2015), while the remainder was at variable rates. At June 30, 2016, the disbursed loan portfolio included $122 million of loans serving as collateral under secured borrowing arrangements ($223 million - June 30, 2015). IFC’s disbursed variable rate loans generally reprice within one year. IFC FINANCIALS 2016 65 Page 65 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Reserve against losses on loans and provision for losses on loans Changes in the reserve against losses on loans for the years ended June 30, 2016, June 30, 2015 and June 30, 2014, as well as the related recorded investment in loans evaluated for impairment individually (specific reserves) and on a pool basis (portfolio reserves) respectively, are summarized below (US$ millions): Year ended June 30, 2016 Specific Portfolio Total reserves reserves reserves Beginning balance $ 962 $ 781 $ 1,743 Provision (release of provision) for losses on loans, net 319 36 355 Write-offs (310) - (310) Recoveries of previously written-off loans 18 - 18 Foreign currency transaction adjustments (18) (7) (25) Other adjustments* (6) - (6) Ending balance $ 965 $ 810 $ 1,775 Related recorded investment in loans at June 30, 2016 evaluated for impairment** $ 22,681 $ 20,929 $ 22,681 Recorded investment in loans with specific reserves $ 1,752 Year ended June 30, 2015 Specific Portfolio Total reserves reserves reserves Beginning balance $ 838 $ 848 $ 1,686 Provision (release of provision) for losses on loans, net 199 (30) 169 Write-offs (34) - (34) Recoveries of previously written-off loans 4 - 4 Foreign currency transaction adjustments (43) (37) (80) Other adjustments* (2) - (2) Ending balance $ 962 $ 781 $ 1,743 Related recorded investment in loans at June 30, 2015 evaluated for impairment** $ 22,295 $ 20,573 $ 22,295 Recorded investment in loans with specific reserves $ 1,722 Year ended June 30, 2014 Specific Portfolio Total reserves reserves reserves Beginning balance $ 741 $ 887 $ 1,628 Provision (release of provision) for losses on loans, net 127 (44) 83 Write-offs (44) - (44) Recoveries of previously written-off loans 1 - 1 Foreign currency transaction adjustments 1 5 6 Other adjustments* 12 - 12 Ending balance $ 838 $ 848 $ 1,686 Related recorded investment in loans at June 30, 2014 evaluated for impairment** $ 23,562 $ 21,837 $ 23,562 Recorded investment in loans with specific reserves $ 1,725 *Other adjustments comprise reserves against interest capitalized as part of a debt restructuring. **IFC individually evaluates all loans for impairment. Portfolio reserves are established for losses incurred, but not specifically identifiable, on loans for which no specific reserve is established. 66 IFC FINANCIALS 2016 Page 66 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Reserve for losses on guarantees and other receivables and provision for losses on guarantees and other receivables Changes in the reserve against losses on guarantees for the years ended June 30, 2016, June 30, 2015 and June 30, 2014, are summarized below (US$ millions): 2016 2015 2014 Beginning balance $ 20 $ 22 $ 17 Provision (release of provision) for losses on guarantees 3 (2) 5 Ending balance $ 23 $ 20 $ 22 Changes in the reserve against losses on other receivables for the years ended June 30, 2016, June 30, 2015 and June 30, 2014, are summarized below (US$ millions): 2016 2015 2014 Beginning balance $ 7 $ 3 $ 3 Provision (release of provision) for losses on other receivables 1 4 - Ending balance $ 8 $ 7 $ 3 Impaired loans The average recorded investment and the recorded investment in loans at amortized cost that are impaired at June 30, 2016 and June 30, 2015 are as follows (US$ millions): June 30, 2016 June 30, 2015 Average recorded investment in loans at amortized cost that are impaired $ 1,835 $ 1,771 Recorded investment in loans at amortized cost that are impaired 1,752 1,722 IFC FINANCIALS 2016 67 Page 67 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Loans at amortized cost that are impaired with specific reserves are summarized by industry sector and geographic region as follows (US$ millions): June 30, 2016 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Manufacturing, agribusiness and services Asia $ 102 $ 154 $ 72 $ 139 $ 1 Europe, Middle East and North Africa 672 724 391 712 11 Sub-Saharan Africa, Latin America and Caribbean 183 206 108 179 2 Other 14 14 14 14 - Total manufacturing, agribusiness and services 971 1,098 585 1,044 14 Financial markets Asia - 2 - - - Europe, Middle East and North Africa 10 11 8 13 1 Sub-Saharan Africa, Latin America and Caribbean 32 56 9 24 1 Other 1 1 1 1 - Total financial markets 43 70 18 38 2 Infrastructure and natural resources Asia 121 121 68 121 (1) Europe, Middle East and North Africa 213 221 135 216 4 Sub-Saharan Africa, Latin America and Caribbean 398 410 156 410 16 Total infrastructure and natural resources 732 752 359 747 19 Telecom, media & technology, and venture investing Sub-Saharan Africa, Latin America and Caribbean 6 6 3 6 1 Total Telecom, media & technology, and venture investing 6 6 3 6 1 Total $ 1,752 $ 1,926 $ 965 $ 1,835 $ 36 All impaired loans at June 30, 2016 had specific reserves. 68 IFC FINANCIALS 2016 Page 68 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2015 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Manufacturing, agribusiness and services Asia $ 126 $ 128 $ 82 $ 126 $ 1 Europe, Middle East and North Africa 673 676 408 684 (10) Sub-Saharan Africa, Latin America and Caribbean 251 299 149 278 6 Other 15 15 14 15 - Total manufacturing, agribusiness and services 1,065 1,118 653 1,103 (3) Financial markets Asia - 2 - - - Europe, Middle East and North Africa 15 15 9 16 1 Sub-Saharan Africa, Latin America and Caribbean 37 63 36 42 3 Other 1 1 1 1 - Total financial markets 53 81 46 59 4 Infrastructure and natural resources Asia 166 166 68 171 9 Europe, Middle East and North Africa 160 160 93 172 3 Sub-Saharan Africa, Latin America and Caribbean 137 137 79 136 (1) Total infrastructure and natural resources 463 463 240 479 11 Telecom, media & technology, and venture investing Sub-Saharan Africa, Latin America and Caribbean 29 29 7 29 2 Other 112 112 16 101 1 Total Telecom, media & technology, and venture investing 141 141 23 130 3 Total $ 1,722 $ 1,803 $ 962 $ 1,771 $ 15 All impaired loans at June 30, 2015 had specific reserves. Nonaccruing loans Loans on which the accrual of interest has been discontinued amounted to $1,646 million at June 30, 2016 ($1,534 million – June 30, 2015). The interest income on such loans for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 is summarized as follows (US$ millions): 2016 2015 2014 Interest income not recognized on nonaccruing loans 157 139 104 Interest income recognized on loans in nonaccrual status related to current and prior years, on a cash basis 34 31 19 The recorded investment in nonaccruing loans at amortized cost at June 30, 2016 and June 30, 2015 is summarized by industry sector and geographic region as follow (US$ millions): June 30, 2016 Telecom, Total media & recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture nonaccruing and services markets resources investing loans Asia $ 87 $ - $ 121 $ - $ 208 Europe, Middle East and North Africa 610 10 195 - 815 Sub-Saharan Africa, Latin America and Caribbean 233 1 220 16 470 Other 15 1 - - 16 Total disbursed loans at amortized cost $ 945 $ 12 $ 536 $ 16 $ 1,509 IFC FINANCIALS 2016 69 Page 69 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2015 Telecom, Total media & recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture nonaccruing and services markets resources investing loans Asia $ 125 $ - $ 122 $ - $ 247 Europe, Middle East and North Africa 597 12 129 - 738 Sub-Saharan Africa, Latin America and Caribbean 250 30 135 45 460 Other 15 - - - 15 Total disbursed loans at amortized cost $ 987 $ 42 $ 386 $ 45 $ 1,460 Past due loans An age analysis, based on contractual terms, of IFC’s loans at amortized cost by industry sector and geographic region follows (US$ millions): June 30, 2016 30-59 60-89 90 days days days or greater Total Total past due past due past due past due Current loans Manufacturing, agribusiness and services Asia $ 14 $ - $ 74 $ 88 $ 1,351 $ 1,439 Europe, Middle East and North Africa - 8 564 572 2,096 2,668 Sub-Saharan Africa, Latin America and Caribbean 6 15 194 215 2,211 2,426 Other - - 15 15 336 351 Total manufacturing, agribusiness and services 20 23 847 890 5,994 6,884 Financial markets Asia - - - - 1,644 1,644 Europe, Middle East and North Africa - - 7 7 1,963 1,970 Sub-Saharan Africa, Latin America and Caribbean - - 2 2 2,856 2,858 Other - - 1 1 742 743 Total financial markets - - 10 10 7,205 7,215 Infrastructure and natural resources Asia - - 121 121 1,793 1,914 Europe, Middle East and North Africa - 10 124 134 1,667 1,801 Sub-Saharan Africa, Latin America and Caribbean - - 82 82 3,768 3,850 Other - - - - 200 200 Total infrastructure and natural resources - 10 327 337 7,428 7,765 Telecom, media & technology, and venture investing Asia - - - - 406 406 Europe, Middle East and North Africa - - - - 144 144 Sub-Saharan Africa, Latin America and Caribbean 11 - 16 27 237 264 Other - - - - 139 139 Total Telecom, media & technology, and venture investing 11 - 16 27 926 953 Total disbursed loans at amortized cost $ 31 $ 33 $ 1,200 $ 1,264 $ 21,553 $ 22,817 Unamortized deferred loan origination fees, net and other (125) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (11) Recorded investment in loans at amortized cost $ 22,681 At June 30, 2016, loans 90 days or greater past due still accruing were insignificant. 70 IFC FINANCIALS 2016 Page 70 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2015 30-59 60-89 90 days days days or greater Total Total past due past due past due past due Current loans Manufacturing, agribusiness and services Asia $ - $ - $ 125 $ 125 $ 1,747 $ 1,872 Europe, Middle East and North Africa 6 16 581 603 2,258 2,861 Sub-Saharan Africa, Latin America and Caribbean - 15 211 226 2,209 2,435 Other - - 15 15 156 171 Total manufacturing, agribusiness and services 6 31 932 969 6,370 7,339 Financial markets Asia - - - - 2,089 2,089 Europe, Middle East and North Africa - - 5 5 2,010 2,015 Sub-Saharan Africa, Latin America and Caribbean - - 30 30 2,585 2,615 Other - - - - 501 501 Total financial markets - - 35 35 7,185 7,220 Infrastructure and natural resources Asia - - 122 122 1,502 1,624 Europe, Middle East and North Africa - - 96 96 1,648 1,744 Sub-Saharan Africa, Latin America and Caribbean - - 42 42 3,557 3,599 Other - - - - 156 156 Total infrastructure and natural resources - - 260 260 6,863 7,123 Telecom, media & technology, and venture investing Asia - - - - 252 252 Europe, Middle East and North Africa - - - - 196 196 Sub-Saharan Africa, Latin America and Caribbean - 16 29 45 152 197 Other - - - - 123 123 Total Telecom, media & technology, and venture investing - 16 29 45 723 768 Total disbursed loans at amortized cost $ 6 $ 47 $ 1,256 $ 1,309 $ 21,141 $ 22,450 Unamortized deferred loan origination fees, net and other (119) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (36) Recorded investment in loans at amortized cost $ 22,295 At June 30, 2015, there are no loans 90 days or greater past due still accruing. IFC FINANCIALS 2016 71 Page 71 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Loan Credit Quality Indicators IFC utilizes a rating system to classify loans according to credit worthiness and risk. Each loan is categorized as very good, good, average, watch, substandard, doubtful or loss. A description of each category (credit quality indicator), in terms of the attributes of the borrower, the business environment in which the borrower operates or the loan itself, follows: Credit quality indicator Description Very good Excellent debt service capacity; superior management; market leader; very favorable operating environment; may also have strong collateral and/or guarantee arrangements. Good Strong debt service capacity: good liquidity; stable performance, very strong management, high market share; minimal probability of financial deterioration. Average Satisfactory balance sheet ratios, average liquidity; good debt service capacity; good management; average size and market share. Watch Tight liquidity; financial performance below expectations; higher than average leverage ratio; weak management in certain aspects; uncompetitive products and operations; unfavorable or unstable macroeconomic factors. Substandard Poor financial performance; difficulty servicing debt; inadequate net worth and debt service capacity; loan not fully secured: partial past due amounts of interest and/or principal; well-defined weaknesses may adversely impact collection but no loss of principal is expected. Doubtful Bad financial performance; serious liquidity and debt service capacity issues: large and increasing past due amounts: partial loss is very likely. Loss Close to or already in bankruptcy; serious regional geopolitical issues/conflicts; default and total loss highly likely. 72 IFC FINANCIALS 2016 Page 72 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) A summary of IFC’s loans at amortized cost by credit quality indicator effective June 30, 2016 and June 30, 2015 respectively, as well as by industry sector and geographic region follows (US$ millions): June 30, 2016 Very good Good Average Watch Substandard Doubtful Loss Total Manufacturing, agribusiness and services Asia $ - $ 429 $ 495 $ 399 $ 43 $ 8 $ 65 $ 1,439 Europe, Middle East and North Africa - 457 659 642 209 244 457 2,668 Sub-Saharan Africa, Latin America and Caribbean 100 248 589 1,083 253 40 113 2,426 Other 75 54 157 50 - 15 - 351 Total manufacturing, agribusiness and services 175 1,188 1,900 2,174 505 307 635 6,884 Financial markets Asia - 631 749 256 8 - - 1,644 Europe, Middle East and North Africa - 481 1,139 324 16 - 10 1,970 Sub-Saharan Africa, Latin America and Caribbean - 886 1,456 448 36 30 2 2,858 Other - 250 492 - - - 1 743 Total financial markets - 2,248 3,836 1,028 60 30 13 7,215 Infrastructure and natural resources Asia - 243 389 1,109 68 39 66 1,914 Europe, Middle East and North Africa - 133 283 1,032 149 85 119 1,801 Sub-Saharan Africa, Latin America and Caribbean 300 155 987 1,113 1,116 174 5 3,850 Other - - 200 - - - - 200 Total infrastructure and natural resources 300 531 1,859 3,254 1,333 298 190 7,765 Telecom, media & technology, and venture investing Asia - 338 68 - - - - 406 Europe, Middle East and North Africa - 45 - 23 76 - - 144 Sub-Saharan Africa, Latin America and Caribbean - - 89 153 6 16 - 264 Other - - - 139 - - - 139 Total telecom, media & technology, and venture investing - 383 157 315 82 16 - 953 Total disbursed loans at amortized cost $ 475 $ 4,350 $ 7,752 $ 6,771 $ 1,980 $ 651 $ 838 $ 22,817 Unamortized deferred loan origination fees, net and other (125) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (11) Recorded investment in loans at amortized cost $ 22,681 IFC FINANCIALS 2016 73 Page 73 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2015 Very good Good Average Watch Substandard Doubtful Loss Total Manufacturing, agribusiness and services Asia $ - $ 531 $ 601 $ 546 $ 69 $ 9 $ 116 $ 1,872 Europe, Middle East and North Africa - 276 865 779 328 94 519 2,861 Sub-Saharan Africa, Latin America and Caribbean 60 236 730 978 213 51 167 2,435 Other - 57 49 50 - 15 - 171 Total manufacturing, agribusiness and services 60 1,100 2,245 2,353 610 169 802 7,339 Financial markets Asia - 1,036 899 148 6 - - 2,089 Europe, Middle East and North Africa - 455 1,102 350 22 74 12 2,015 Sub-Saharan Africa, Latin America and Caribbean - 596 1,613 334 35 7 30 2,615 Other - 250 - 250 1 - - 501 Total financial markets - 2,337 3,614 1,082 64 81 42 7,220 Infrastructure and natural resources Asia - 298 381 719 54 111 61 1,624 Europe, Middle East and North Africa - 118 458 823 293 30 22 1,744 Sub-Saharan Africa, Latin America and Caribbean 300 154 1,245 1,332 426 115 27 3,599 Other - 6 150 - - - - 156 Total infrastructure and natural resources 300 576 2,234 2,874 773 256 110 7,123 Telecom, media & technology, and venture investing Asia - 165 85 2 - - - 252 Europe, Middle East and North Africa - 71 38 87 - - - 196 Sub-Saharan Africa, Latin America and Caribbean - 5 73 70 4 45 - 197 Other - - - - 123 - - 123 Total telecom, media & technology, and venture investing - 241 196 159 127 45 - 768 Total disbursed loans at amortized cost $ 360 $ 4,254 $ 8,289 $ 6,468 $ 1,574 $ 551 $ 954 $ 22,450 Unamortized deferred loan origination fees, net and other (119) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (36) Recorded investment in loans at amortized cost $ 22,295 74 IFC FINANCIALS 2016 Page 74 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Loan modifications, including past due amounts capitalized and written off, during the year ended June 30, 2016 considered troubled debt restructurings totaled $232 million ($167 million – year ended June 30, 2015). There were two loans that defaulted during the year ended June 30, 2016 that had been modified in a troubled debt restructuring within 12 months prior to the date of default with a combined outstanding balance of $41 million. One of the loans with an outstanding balance of $25 million was brought current prior to June 30, 2016. The remaining loan was evaluated and included as part of the specific reserve. Guarantees IFC extends financial guarantee facilities to its clients to provide full or partial credit enhancement for their debt securities and trade obligations. Under the terms of IFC’s guarantees, IFC agrees to assume responsibility for the client’s financial obligations in the event of default by the client, where default is defined as failure to pay when payment is due. Guarantees entered into by IFC generally have maturities consistent with those of the loan portfolio. Guarantees signed at June 30, 2016 totaled $4,250 million ($4,091 million – June 30, 2015). Guarantees of $3,478 million that were outstanding (i.e., not called) at June 30, 2016 ($3,168 million – June 30, 2015), were not included in loans on IFC’s consolidated balance sheet. The outstanding amount represents the maximum amount of undiscounted future payments that IFC could be required to make under these guarantees. NOTE F – DEBT SECURITIES Income from debt securities, including realized gains and losses on debt securities and associated derivatives for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise the following (US$ millions): 2016 2015 2014 Interest income $ 125 $ 107 $ 62 Dividends 10 12 11 Realized gains on debt securities and associated derivatives 39 46 29 Other-than-temporary impairments (45) (33) (13) Total income from debt securities, including realized gains and losses on debt securities and associated derivatives $ 129 $ 132 $ 89 Debt securities accounted for as available-for-sale at June 30, 2016 and June 30, 2015 comprise (US$ millions): June 30, 2016 Foreign currency Unrealized Unrealized transaction Amortized cost gains losses losses Fair value Corporate debt securities $ 1,943 $ 81 $ (40) $ (150) $ 1,834 Preferred shares 483 45 (2) 2 528 Asset-backed securities 127 3 - (18) 112 Total $ 2,553 $ 129 $ (42) $ (166) $ 2,474 June 30, 2015 Foreign currency Unrealized Unrealized transaction Amortized cost gains losses losses Fair value Corporate debt securities $ 1,642 $ 125 $ (30) $ (126) $ 1,611 Preferred shares 543 64 (2) (21) 584 Asset-backed securities 144 5 - (27) 122 Total $ 2,329 $ 194 $ (32) $ (174) $ 2,317 The following table shows the unrealized losses and fair value of debt securities at June 30, 2016 and June 30, 2015 by length of time that individual securities had been in a continuous loss position where the fair value of securities declined below their cost basis (US$ millions): June 30, 2016 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 463 $ (15) $ 104 $ (25) $ 567 $ (40) Preferred shares 144 (2) - - 144 (2) Total $ 607 $ (17) $ 104 $ (25) $ 711 $ (42) IFC FINANCIALS 2016 75 Page 75 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F – DEBT SECURITIES (continued) June 30, 2015 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 189 $ (23) $ 152 $ (7) $ 341 $ (30) Preferred shares 42 (1) 8 (1) 50 (2) Total $ 231 $ (24) $ 160 $ (8) $ 391 $ (32) Corporate debt securities comprise investments in bonds and notes. Unrealized losses associated with corporate debt securities are primarily attributable to movements in the credit default swap spread curve applicable to the issuer. Based upon IFC’s assessment of expected credit losses, IFC has determined that the issuer is expected to make all contractual principal and interest payments. Accordingly, IFC expects to recover the cost basis of these securities. Preferred shares comprise investments in preferred equity investments that are redeemable at the option of IFC or mandatorily redeemable by the issuer. Unrealized losses associated with preferred shares are primarily driven by changes in discount rates associated with changes in credit spreads or interest rates, minor changes in exchange rates and comparable market valuations in the applicable sector. Based upon IFC’s assessment of the expected credit losses, IFC expects to recover the cost basis of these securities. Debt securities with contractual maturities that are accounted for as available-for-sale have contractual maturities during the years ending June 30, 2017 through June 30, 2021 and thereafter, as follows (US$ millions): 2017 2018 2019 2020 2021 Thereafter Total Corporate debt securities $ 76 $ 326 $ 197 $ 195 $ 386 $ 636 $ 1,816 Preferred shares - - - 86 - 56 142 Asset-backed securities 39 3 34 23 10 - 109 Total disbursed portfolio of debt securities with contractual maturities $ 115 $ 329 $ 231 $ 304 $ 396 $ 692 $ 2,067 The expected maturity of asset-backed securities may differ from the contractual maturity, as reported above, due to prepayment features. In addition, IFC has $343 million of redeemable preferred shares and other debt securities with undefined maturities ($347 million - June 30, 2015). The currency composition and average contractual rate of debt securities with contractual maturities that are accounted for as available-for-sale are summarized below: June 30, 2016 June 30, 2015 Average Average Amount contractual Amount contractual (US$ millions) rate (%) (US$ millions) rate (%) US dollar $ 1,025 4.4 $ 904 4.5 Indian rupee 624 9.4 381 11.1 South African rand 105 8.9 114 7.3 Euro 86 2.2 134 2.4 New Romanian Lei 53 5.9 54 5.9 Colombian peso 50 9.1 39 11.2 Chinese renminbi 47 5.1 - - Chilean peso 37 7.7 39 7.7 Turkish lira 3 8.1 56 7.9 Brazilian real 2 15.4 51 12.5 Other currencies 35 9.0 40 7.7 Total disbursed portfolio of debt securities with contractual maturities $ 2,067 6.4 $ 1,812 6.6 After the effect of interest rate swaps and currency swaps, IFC’s debt securities with contractual maturities that are accounted for as available-for- sale are principally denominated in variable rate US dollars. Nonaccruing debt securities Debt securities on which the accrual of interest has been discontinued amounted to $66 million at June 30, 2016 ($44 million – June 30, 2015). The interest income on such loans for the year ended June 30, 2016, June 30, 2015 and June 30, 2014 is summarized as follows (US$ millions): 2016 2015 2014 Interest income not recognized on nonaccruing debt securities 4 3 - Interest income recognized on debt securities in nonaccrual status related to current and prior years, on a cash basis 2 1 - 76 IFC FINANCIALS 2016 Page 76 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G – EQUITY INVESTMENTS AND ASSOCIATED DERIVATIVES Income from equity investments and associated derivatives for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprises the following (US$ millions): 2016 2015 2014 Gains on equity investments and associated derivatives, net $ 1,013 $ 886 $ 1,269 Dividends 241 272 274 Other-than-temporary impairments: Equity investments at cost less impairment (384) (351) (107) Equity investments available-for-sale (360) (381) (161) Total other-than-temporary impairments (744) (732) (268) Custody, fees and other 8 1 14 Total income from equity investments and associated derivatives $ 518 $ 427 $ 1,289 Gains on equity investments and associated derivatives includes realized gains and losses on equity investments and associated derivatives of $1,217 million for the year ended June 30, 2016 ($1,288 million – year ended June 30, 2015, $1,013 million – year ended June 30, 2014). Dividends include $11 million for the year ended June 30, 2016 ($23 million – year ended June 30, 2015, $19 million – year ended June 30, 2014) of receipts, net of cash disbursements, related to investments accounted for under the cost recovery method, for which cost has been fully recovered. Equity investments include several private equity funds that invest primarily in emerging markets across a range of sectors and that are accounted for at fair value under the Fair Value Option. These investments cannot be redeemed. Instead distributions are received through the liquidation of the underlying assets of the funds. IFC estimates that the underlying assets of the funds will be liquidated over five to eight years. The fair values of these funds have been determined using the net asset value of IFC’s ownership interest in partners’ capital and totaled $3,179 million as of June 30, 2016 ($3,409 million – June 30, 2015). NOTE H – INVESTMENT TRANSACTIONS COMMITTED BUT NOT DISBURSED OR UTILIZED Loan, equity and debt security commitments signed but not yet disbursed, and guarantee and client risk management facilities signed but not yet utilized are summarized below (US$ millions): June 30, 2016 June 30, 2015 Investment transactions committed but not disbursed: Loans, equity investments and debt securities $ 9,828 $ 9,529 Investment transactions committed but not utilized: Guarantees 772 923 Client risk management facilities 127 233 Total investment transactions committed but not disbursed or utilized $ 10,727 $ 10,685 The disbursements of investment transactions committed but not disbursed or utilized are generally subject to fulfillment of conditions of disbursement. NOTE I – LOAN PARTICIPATIONS Loan participations signed as commitments for which disbursement has not yet been made and loan participations disbursed and outstanding which are serviced by IFC for participants are as follows (US$ millions): June 30, 2016 June 30, 2015 Loan participations signed as commitments but not disbursed $ 2,046 $ 2,062 Loan participations disbursed and outstanding which are serviced by IFC $ 8,608 $ 6,747 NOTE J – RECEIVABLES AND OTHER ASSETS Receivables and other assets are summarized below (US$ millions): June 30, 2016 June 30, 2015 Receivables from unsettled security trades $ 775 $ 505 Accrued interest income on time deposits and securities 168 171 Accrued income on derivative instruments 399 371 Accrued interest income on loans 247 227 Headquarters building: Land 89 89 Building 247 244 Less: Accumulated building depreciation (173) (155) Headquarters building, net 163 178 Deferred charges and other assets 1,419 1,446 Total receivables and other assets $ 3,171 $ 2,898 IFC FINANCIALS 2016 77 Page 77 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K – BORROWINGS Market borrowings and associated derivatives IFC's borrowings outstanding from market sources and currency and interest rate swaps, net of unamortized issue premiums and discounts, are summarized below: June 30, 2016 Interest rate swaps Currency swaps notional principal Market borrowings payable (receivable) payable (receivable) Net currency obligation Weighted Amount Weighted Notional Weighted Amount Weighted Amount average (US$ average amount average (US$ average (US$ millions) rate (%) millions) rate (%) (US$ millions) rate (%) millions) rate (%) US dollar $ 31,670 1.4 $ 19,803 0.8 $ 33,781 0.9 $ 51,290 0.8 (33,964) (1.4) Australian dollar 7,411 3.9 (7,038) 3.9 298 2.3 373 2.3 (298) (3.5) Brazilian real 2,234 7.7 (2,234) (7.7) - - - - - - Japanese yen 2,220 3.5 (2,220) (3.5) - - - - New Zealand dollar 2,005 3.8 (2,005) (3.8) - - - - - - Indian rupee 1,708 7.5 - - - - - - 1,708 7.5 Chinese renminbi 1219 1.8 (767) (1.5) - - - - 452 2.4 Turkish lira 1147 8.6 (1,147) (8.6) - - - - - - Russian ruble 481 7.3 (468) (7.4) - - - - 13 2.9 South African rand 449 5.6 (449) (5.6) - - - - - - Euro 438 3.7 (438) (3.7) - - - - Hong Kong dollar 381 2.4 (381) (2.4) - - - - - - Mexican peso 339 4.2 (339) (4.2) - - - - - - Pound sterling 126 5.4 (126) (5.4) - - - - - - Costa Rican colon 67 8.0 (67) (8.0) - - - - - - Nigerian naira 50 11.7 (35) (12.4) - - - - 15 10.2 Uruguayan peso 39 10.1 (39) (10.1) - - - - - - Peruvian soles nuevos 36 5.3 (36) (5.3) - - - - - - Rwandan franc 25 11.6 (5) (9.0) - - - - 20 12.3 Chilean pesos 22 4.2 (22) (4.2) - - - - Zambian kwacha 15 15.0 - - - - - - 15 15.0 Georgian Lari 13 6.9 (13) (6.9) - - - - - - Namibia dollar 12 9.8 - - - - 12 9.8 Dominican peso 8 10.5 - - - - - - 8 10.5 Colombian pesos 8 5.3 (8) 5.3 - - - - Ghanaian cedi 6 14.9 (6) 14.9 - - - - - - Armenian dram 4 9.7 (4) 9.8 - - - - - - Principal at face value 52,133 $ 1,956 $ (183) $ 53,906 1.1 Short-term borrowings from market and other sources 1,873 54,006 Unamortized discounts, net (863) Total market borrowings 53,143 Fair value adjustments 695 Carrying amount of market borrowings $ 53,838 78 IFC FINANCIALS 2016 Page 78 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K – BORROWINGS (continued) June 30, 2015 Interest rate swaps Currency swaps notional principal Market borrowings payable (receivable) payable (receivable) Net currency obligation Notional Amount Weighted Amount Weighted amount Weighted Amount Weighted (US$ average (US$ average (US$ average (US$ average millions) rate (%) millions) rate (%) millions) rate (%) millions) rate (%) US dollar $ 29,376 1.4 $ 19,573 0.2 $ 33,548 0.3 $ 48,754 0.2 (33,743) (1.3) Australian dollar 6,393 4.0 (6,010) 4.0 307 2.4 383 2.4 (307) (3.5) Brazilian real 1,988 8.1 (1,988) (8.1) - - - - New Zealand dollar 1,614 4.1 (1,614) (4.1) - - - - Indian rupee 1,606 7.5 - - - - 1,606 7.5 Japanese yen 1,454 5.7 (1,454) (5.7) - - - - Chinese renminbi 1,142 2.3 (452) (1.8) - - 690 2.6 Pound sterling 933 1.4 (775) (1.5) 157 0.9 158 0.9 (157) (0.6) Euro 880 1.7 (880) (1.7) - - - - Turkish lira 837 6.3 (837) (6.3) - - - - Russian ruble 490 6.6 (436) (7.0) - - 54 3.0 Mexican peso 471 4.6 (471) (4.6) - - - - South African rand 396 6.1 (396) (6.1) - - - - Norwegian kroner 335 4.0 (335) (4.0) - - - - Hong Kong dollar 128 5.1 (128) (5.1) - - - - Canadian dollars 94 3.3 (94) (3.3) - - - - Costa Rican colon 65 7.9 (56) (7.9) - - 9 7.9 Nigerian naira 62 10.7 (41) (10.9) - - 21 10.2 Uruguayan peso 44 10.1 (44) (10.1) - - - - Peruvian soles nuevos 37 5.3 (37) 5.3 - - - - Rwandan franc 26 11.6 - - - - 26 11.6 Zambian kwacha 20 15.0 - - - - 20 15.0 Georgian Lari 13 6.9 - - - - 13 6.9 Dominican peso 9 10.5 - - - - 9 10.5 Ghanaian cedi 5 14.9 (5) (14.9) - - - - Armenian dram 4 9.7 - - - - 4 9.7 Principal at face value 48,422 $ 3,520 $ (195) $ 51,747 0.5 Short-term borrowings from market and other sources 1,352 49,774 Unamortized discounts, net (356) Total market borrowings 49,418 Fair value adjustments 498 Carrying amount of market borrowings $ 49,916 The net currency obligations not fully hedged by borrowings related swaps have generally been invested and/or on-lent to clients in such currencies. The weighted average remaining maturity of IFC’s borrowings from market sources was 4.1 years at June 30, 2016 (3.3 years - June 30, 2015). Charges on borrowings for the year ended June 30, 2016 include $2 million of interest expense on secured borrowings ($3 million - years ended June 30, 2015 and 2014) and is net of $6 million of gains on buybacks of market borrowings ($2 million – year ended June 30, 2015; $3 million - year ended June 30, 2014). The net nominal amount payable from currency swaps of $1,956 million and the net notional amount receivable from interest rate swaps of $183 million at June 30, 2016 (payable of $3,520 million from currency swaps and receivable of $195 million from interest rate swaps - June 30, 2015), shown in the above table, are represented by currency and interest rate swap assets at fair value of $1,254 million and currency and interest rate swap liabilities at fair value of $3,013 million ($619 million and $3,721 million - June 30, 2015), included in derivative assets and derivative liabilities, respectively, on the consolidated balance sheet. IFC FINANCIALS 2016 79 Page 79 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K – BORROWINGS (continued) Short-term market borrowings IFC’s short-term Discount Note Program has maturities ranging from overnight to one year. The amount outstanding under the program at June 30, 2016 is $1,838 million ($1,343 million - June 30, 2015). Charges on borrowings for the year ended June 30, 2016, include $7 million in respect of this program ($4 million - June 30, 2015 and 2014). Borrowings from IBRD Borrowings outstanding from IBRD and currency are summarized below: June 30, 2016 June 30, 2015 Principal Weighted Principal Weighted amount average amount average (US$ millions) cost (%) (US$ millions) cost (%) Saudi Arabian riyal $ 9 4.0 $ 17 4.0 US dollar 196 0.7 196 0.2 Total borrowings outstanding from IBRD $ 205 $ 213 The weighted average remaining maturity of borrowings from IBRD was 1.1 years at June 30, 2016 (2.0 years - June 30, 2015). Charges on borrowings for the year ended June 30, 2016, includes $1 million ($1 million - year ended June 30, 2015 and 2014) in respect of borrowings from IBRD. Borrowings from IDA Borrowings outstanding from IDA are summarized below: June 30, 2016 Interest rate swap notional principal IDA Borrowings payable (receivable) Net currency obligation Notional Notional Principal Weighted amount Weighted amount Weighted amount average (US$ average (US$ average (US$ millions) cost (%) millions) cost (%) millions) cost (%) US dollar $ 1,082 1.8 $ 1,082 0.9 $ 1,082 0.9 (1,082) (1.8) Total IDA borrowings outstanding 1,082 $ - $ 1,082 0.9 Fair value adjustments 17 Carrying amount of IDA borrowings $ 1,099 June 30, 2015 Interest rate swap notional principal IDA Borrowings payable (receivable) Net currency obligation Notional Notional Principal Weighted amount Weighted amount Weighted amount average (US$ average (US$ average (US$ millions) cost (%) millions) cost (%) millions) cost (%) US dollar $ 1,154 1.8 $ 1,154 0.2 $ 1,154 0.2 (1,154) (1.8) Total IDA borrowings outstanding 1,154 $ - $ 1,154 0.2 Fair value adjustments (18) Carrying amount of IDA borrowings $ 1,136 The weighted average remaining maturity of borrowings from IDA was 5.1 years at June 30, 2016 (5.7 years - June 30, 2015). Charges on borrowings for the year ended June 30, 2016, includes $21 million ($18 - year ended June 30, 2015; $0 - year ended June 30, 2014) in respect of borrowings from IDA. 80 IFC FINANCIALS 2016 Page 80 INTERNATIONAL FINANCE CORPORATION Page 80 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Maturity NOTE K – of borrowings (continued) BORROWINGS The principal Maturity amounts repayable on borrowings outstanding in all currencies, gross of any premiums or discounts, during the years ending June 30, of borrowings 2017, through June 30, 2021, and thereafter are summarized below (US$ millions): The principal amounts repayable on borrowings outstanding in all currencies, gross of any premiums or discounts, during the years ending June 30, are summarized 2017, through June 30, 2021, and thereafter 2017 below (US$ millions): 2018 2019 2020 2021 Thereafter Total Borrowings from market sources $ 12,556 $ 10,275 $ 9,403 $ 6,814 $ 6,734 $ 6,351 $ 52,133 Short-term borrowings from 2017 2018 2019 2020 2021 Thereafter Total Borrowings from market and market other sources sources $ 12,556 1,873 $ 10,275 - $ 9,403- $ 6,814 - $ 6,734- $ 6,351- $ 52,133 1,873 Borrowingsborrowings Short-term from IBRD from 9 196 - - - - 205 Borrowings from market and IDA sources other 113 1,873 126- 122- 124 - 125- 472- 1,082 1,873 Borrowings from IBRD 9 196 - - - - 205 Borrowings from IDA gross Total borrowings, 113 $ 14,551 $ 10,597126 $ 122 9,525 $ 124 6,938 $ 125 6,859 $ 472 6,823 $ 1,082 55,293 Unamortized discounts, net (863) valueborrowings, FairTotal adjustments gross $ 14,551 $ 10,597 $ 9,525 $ 6,938 $ 6,859 $ 6,823 $ 55,293 712 Unamortized discounts, net (863) value adjustments FairCarrying amount of borrowings $ 712 55,142 Carrying After amount the effect of borrowings of interest rate and currency swaps, IFC’s borrowings generally reprice within one year. $ 55,142 NOTE L– After the PAYABLES effect AND of interest rateOTHER LIABILITIES and currency swaps, IFC’s borrowings generally reprice within one year. Payables and other liabilities are NOTE L – PAYABLES AND OTHER LIABILITIESsummarized below (US$ millions): Payables and other liabilities are summarized below (US$ millions): June 30, 2016 June 30, 2015 Accrued charges on borrowings $ 340 $ 356 Accrued charges on derivative instruments June 30, 2016254 June 30, 2015 173 Payablescharges Accrued on borrowings for unsettled security trades $ 340 1,099 $ 356 350 borrowings Secured charges Accrued on & short sold derivative securities instruments 132 254 223 173 Payables Liabilities for unsettled under security retirement trades benefit plans 1,099 985 350 277 Accountsborrowings Secured & shortexpenses payable, accrued sold securities and other liabilities 132 1,474 223 1,419 Deferred income Liabilities under retirement benefit plans 147 985 139 277 Accounts payable, accrued expenses and other liabilities 1,474 1,419 Total income Deferred payables and other liabilities $ 147 4,431 $ 139 2,937 NOTE M– Total CAPITAL payables TRANSACTIONS and other liabilities $ 4,431 $ 2,937 During NOTE M the– year June 30, 2016, no shares were subscribed and paid by member countries (63,749 shares, at a par value of $1,000 each - year endedTRANSACTIONS CAPITAL ended June 30, 2015; 99,233 shares at a par value of $1,000 each - year ended June 30, 2014). During the year ended June 30, 2016, no shares were subscribed and paid by member countries (63,749 shares, at a par value of $1,000 each - year Under Articles IFC’s 30, ended June 2015;of Agreement, 99,233 sharesin at the event a par a of value member $1,000withdraws each - year from IFC, ended IFC30, June and the member may negotiate on the repurchase of the 2014). member’s capital stock on such terms as may be appropriate under the circumstances. Such agreement may provide, among other things, for a final Under settlement obligations of all of IFC’s Articles Agreement,of the member in the eventtoa IFC. If such member an agreement withdraws is not from IFC, IFCmade and within six months the member may after the member on the withdraws negotiate repurchase orofsuch the other time as member’s IFC and capital stockthe onmember mayas such terms may the agree, appropriate price be repurchase under of member’s capital thecircumstances. the Suchstock shall be the agreement may value thereof provide, shown among by the other books things, for of a final on IFC the day when settlement of all the memberof obligations withdraws. the member Thetorepurchase IFC. If suchofancapital stock is agreement issubject not made to certain within conditions six monthsincluding after the payments in installments, member withdraws or such at other times such time as and IFC such inand the member currency available may agree, or the currencies as IFC repurchase pricereasonably determines, of the member’s capital stock into taking shallaccount the financial be the value position byof thereof shown IFC. the IFC’s books of Articles IFC on the of Agreement day when the also for the withdrawing providewithdraws. member member The repurchase ofto repaystock capital losses is on loansto subject and equity certain investments conditions in excess including of reserves payments provided on in installments, at the suchdate timesof withdrawal. and in such available currency or currencies as IFC reasonably determines, taking into account the financial position of IFC. IFC’s Articles of Agreement also provide for the withdrawing member to repay losses on loans and equity investments in excess of reserves provided on NOTE N – OTHER the date of withdrawal. INCOME NOTEincome Other for the N – OTHER years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise the following (US$ millions): INCOME June Other income for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise 30, the 2016 (US$ following June 30, 2015 millions): June 30, 2014 Income from consolidated entities $ 66 $ 59 $ 57 Fees collected from clients June 30, 2016 22 June 30, 201522 June 30, 2014 25 Other reimbursable Income arrangements from consolidated entities $ 19 66 $ 19 59 $ 8 57 Fees Otherscollected from clients 22 11 22 24 25 42 Other reimbursable arrangements 19 19 8 Others Total Other Income $ 11 118 $ 24 124 $ 42 132 Total Other Income $ 118 $ 124 $ 132 IFC FINANCIALS 2016 81 Page 81 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE O – RETAINED EARNINGS DESIGNATIONS AND RELATED EXPENDITURES AND ACCUMULATED OTHER COMPREHENSIVE INCOME Designated retained earnings The components of designated retained earnings and related expenditures are summarized below (US$ millions): Global SME Infrastructure Total Ventures Project designated Grants to Advisory Performance- for IDA Development retained IDA services based grants countries Fund earnings At June 30, 2013 $ - $ 199 $ 31 $ 28 $ 20 $ 278 Year ended June 30, 2014 Designations of retained earnings 251 - - - - 251 Expenditures against designated retained earnings (251) (68) (10) (3) (3) (335) At June 30, 2014 $ - $ 131 $ 21 $ 25 $ 17 $ 194 Year ended June 30, 2015 Designations of retained earnings 340 58 - - - 398 Expenditures against designated retained earnings (340) (52) (5) (4) (7) (408) At June 30, 2015 $ - $ 137 $ 16 $ 21 $ 10 $ 184 Year ended June 30, 2016 Designations of retained earnings 330 14 - - - 344 Expenditures against designated retained earnings (330) (53) (4) (1) (7) (395) At June 30, 2016 $ - $ 98 $ 12 $ 20 $ 3 $ 133 On August 6, 2015, the Board of Directors approved a designation of $330 million of IFC’s retained earnings for grants to IDA and a designation of $14 million of IFC’s retained earnings for Advisory Services. On October 9, 2015, the Board of Governors noted with approval the designations approved by the Board of Directors. IFC recognizes designation of retained earnings for advisory services when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. On January 15, 2016, IFC recognized grants to IDA of $330 million on the signing of a grant agreement between IDA and IFC concerning the transfer to IDA and use of funds corresponding to the designation of retained earnings for grants to IDA approved by IFC’s Board of Directors on August 6, 2015 and noted with approval by IFC’s Board of Governors on October 9, 2015. Accumulated other comprehensive (loss) income The components of accumulated other comprehensive (loss) income at June 30, 2016 and June 30, 2015 are summarized as follows (US$ millions): June 30, 2016 June 30, 2015 Net unrealized losses on available-for-sale debt securities $ (79) $ (12) Net unrealized gains on available-for-sale equity investments 1,255 2,052 Unrecognized net actuarial losses and unrecognized prior service costs on benefit plans (1,607) (843) Total accumulated other comprehensive (loss) income $ (431) $ 1,197 82 IFC FINANCIALS 2016 Page 82 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE P – NET UNREALIZED GAINS AND LOSSES ON NON-TRADING FINANCIAL INSTRUMENTS ACCOUNTED FOR AT FAIR VALUE Net unrealized gains and losses on non-trading financial instruments accounted for at fair value for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 comprise (US$ millions): 2016 2015 2014 Unrealized gains and losses on loans, debt securities and associated derivatives: Unrealized (losses) gains on loans and associated derivatives $ (229) $ (51) $ 31 Unrealized (losses) on debt securities and associated derivatives (37) (3) - Total net unrealized (losses) gains on loans, debt securities and associated derivatives (266) (54) 31 Unrealized gains and losses on borrowings from market, IDA and associated derivatives: Unrealized gains (losses) on market borrowings accounted for at fair value: Credit spread component 239 15 (64) Interest rate, foreign exchange and other components (436) (63) (208) Total unrealized (losses) gains on market borrowings (197) (48) (272) Unrealized gains (losses) on derivatives associated with market borrowings 295 (22) 198 Unrealized (losses) gains on borrowings from IDA accounted for at fair value (36) 18 - Total net unrealized gains (losses) on borrowings from market, IDA and associated derivatives 62 (52) (74) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value $ (204) $ (106) $ (43) As discussed in Note A, “Summary of significant accounting and related policies”, market borrowings economically hedged with financial instruments, including derivatives, accounted for at fair value with changes therein reported in earnings are accounted for at fair value under the Fair Value Option. Differences arise between the movement in the fair value of market borrowings and the fair value of the associated derivatives primarily due to the different credit characteristics. The change in fair value reported in “Unrealized gains and losses on borrowings from market, IDA and associated derivatives” includes the impact of changes in IFC’s own credit spread. As credit spreads widen, unrealized gains are recorded and when such credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but they do not alter the timing of the cash flows on the market borrowings. NOTE Q – DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS As discussed in Note A, “Summary of significant accounting and related policies”, IFC enters into transactions in various derivative instruments for financial risk management purposes in connection with its principal business activities, including lending, investing in debt securities, equity investments, client risk management, borrowing, liquid asset management and asset and liability management. None of these derivative instruments are designated as hedging instruments under ASC Topic 815. Note A describes IFC’s risk management and use of derivative instruments. The fair value of derivative instrument assets and liabilities by risk type at June 30, 2016 and June 30, 2015 is summarized as follows (US$ millions): Consolidated balance sheet location June 30, 2016 June 30, 2015 Derivative assets Interest rate $ 646 $ 426 Foreign exchange 307 221 Interest rate and currency 2,361 2,319 Equity and other 381 289 Total derivative assets $ 3,695 $ 3,255 Derivative liabilities Interest rate $ 454 $ 268 Foreign exchange 96 154 Interest rate and currency 3,396 3,799 Equity and other 6 4 Total derivative liabilities $ 3,952 $ 4,225 IFC FINANCIALS 2016 83 Page 83 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE Q – DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS (continued) The effect of derivative instrument contracts on the consolidated statement of operations for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 is summarized as follows (US$ millions): Derivative risk category Income statement location 2016 2015 2014 Interest rate Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ (24) $ (31) $ (35) Income from debt securities, including realized gains and losses on debt securities and associated derivatives (1) (3) (2) Income from liquid asset trading activities (241) (181) (157) Charges on borrowings 313 423 401 Other income (1) 1 1 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 88 (66) 5 Foreign Income from equity investments and associated derivatives - - 1 exchange Income from liquid asset trading activities (25) (188) (111) Foreign currency transaction gains and losses on non-trading activities 8 177 111 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 1 2 - Interest rate and Income from loans and guarantees, including realized gains and currency losses on loans and associated derivatives (184) (189) (172) Income from debt securities, including realized gains and losses on debt securities and associated derivatives (16) (21) (23) Income from liquid asset trading activities 103 57 (71) Charges on borrowings 653 776 685 Foreign currency transaction gains and losses on non-trading activities 200 (1,906) 30 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 87 58 189 Equity Income (loss) from equity investments and associated derivatives 95 (229) 48 Income from loans and guarantees, including realized gains and losses on loans and associated derivatives - 3 - Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (4) (33) 24 Other derivative Net unrealized gains and losses on non-trading financial instruments contracts accounted for at fair value - - (1) Total $ 1,052 $ (1,350) $ 923 The income related to each derivative risk category includes realized and unrealized gains and losses. At June 30, 2016, the outstanding volume, measured by US$ equivalent notional, of interest rate contracts was $64,504 million ($55,792 million at June 30, 2015), foreign exchange contracts was $14,106 million ($12,020 million at June 30, 2015) and interest rate and currency contracts was $35,032 million ($33,034 million at June 30, 2015). At June 30, 2016, there were 278 equity contracts related to IFC’s loan and equity investment portfolio and 2 other derivative contracts recognized as derivatives assets or liabilities under ASC Topic 815 (290 equity risk and other contracts at June 30, 2015). NOTE R – FAIR VALUE MEASUREMENTS Many of IFC’s financial instruments are not actively traded in any market. Accordingly, estimates and present value calculations of future cash flows are used to estimate the fair values. Determining future cash flows for fair value estimation is subjective and imprecise, and minor changes in assumptions or methodologies may materially affect the estimated values. The excess or deficit resulting from the difference between the carrying amounts and the fair values presented does not necessarily reflect the values which will ultimately be realized, since IFC generally holds loans, borrowings and other financial instruments with contractual maturities with the aim of realizing their contractual cash flows. The estimated fair values as of June 30, 2016 and June 30, 2015 reflect multiple factors such as interest rates, credit risk, foreign currency exchange rates and commodity prices. Reasonable comparability of fair values among financial institutions is not likely because of the wide range of permitted valuation techniques and numerous estimates that must be made in the absence of secondary market prices. This lack of objective pricing standard in the market introduces a greater degree of subjectivity and volatility to these derived or estimated fair values. Therefore, while disclosure of estimated fair values of financial instruments is required, readers are cautioned in using these data for purposes of evaluating the financial condition of IFC. The fair values of the individual financial instruments do not represent the fair value of IFC taken as a whole. 84 IFC FINANCIALS 2016 Page 84 INTERNATIONAL FINANCE CORPORATION Page 84 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All NOTEof IFC’s financial R – FAIR VALUEinstruments in its liquid (continued) MEASUREMENTS assets portfolio are managed according to an investment authority approved by the Board of Directors and investment guidelines approved by IFC’s Corporate Risk Committee (CRC), a subcommittee of IFC’s Management Team. Third party independent All of IFC’s vendor financial prices instruments are used in its to price the liquid vast assetsof majority portfolio managed areassets. the liquid The according to an investment vendor prices are evaluated authority approved by IFC’s by department Treasury the Board ofand Directors IFC’s Corporate and and Portfolio investment guidelinesRisk Management approved by IFC’s department Corporatemaintains oversight Risk Committee for the (CRC), pricing of liquid a subcommittee of assets. IFC’s Management Team. Third party independent vendor prices are used to price the vast majority of the liquid assets. The vendor prices are evaluated by IFC’s Treasury department and IFC’s IFC’s regional Corporate and and industry Portfolio Riskdepartments Management are primarily responsible department for fair valuing maintains oversight for theIFC’s pricinginvestment portfolio (equity investments, debt securities, loan of liquid assets. investments and related derivatives). IFC’s Portfolio Valuation Unit, in Corporate Risk & Sustainability, and Portfolio Review Unit, in Finance and Accounting, IFC’s provide regional oversight and industry over the fair departments valuation are process primarily by monitoring responsible and reviewing for fair valuing the fair values IFC’s investment of IFC’s portfolio investment (equity portfolio. debtPrior investments, to October securities, loan 1, 2014, IFC’s investments andValuation Oversight Subcommittee related derivatives). IFC’s Portfolio (VOS), which Valuation was Unit, in a subcommittee Corporate Risk &of CRC, reviewed Sustainability, andsignificant valuation Portfolio Review principles Unit, and and in Finance the reasonableness Accounting, of high provide exposure oversight over valuations quarterly. the fair valuation Pursuant process to a simplification by monitoring and reviewingof IFC’s organizational the fair values of IFC’sstructure effective investment October portfolio. 1,to Prior 2014, the October committees 1, of IFC’s 2014, IFC’s Management Valuation OversightTeam, including the Subcommittee VOS,which are continuing (VOS), to be reassessed. was a subcommittee of CRC, reviewed significant valuation principles and the reasonableness of high exposure valuations quarterly. Pursuant to a simplification of IFC’s organizational structure effective October 1, 2014, the IFC’s borrowings committees fair valued byTeam, areManagement of IFC’s the Quantitative Analysis including the andcontinuing VOS, are Modeling Group in IFC’s Treasury department under the oversight of the Corporate to be reassessed. Portfolio and Risk Management department. IFC’s borrowings are fair valued by the Quantitative Analysis and Modeling Group in IFC’s Treasury department under the oversight of the Corporate The methodologies Portfolio used and key and Risk Management assumptions made to estimate fair values as of June 30, 2016, and June 30, 2015, are summarized below. department. Liquid The assets – The methodologies primary used and keypricing source for assumptions madethe liquid assets to estimate is values fair valuations as ofobtained June 30,from 2016, external and June pricing services 30, 2015, (vendor prices). are summarized The most below. liquid securities in the liquid asset portfolio are exchange traded futures, options, and US Treasuries. For exchange traded futures and options, exchange Liquid assetsquoted prices – The are obtained primary and these pricing source classified are liquid for the assetsas Level 1 in accordance is valuations obtained with from ASC 820.pricing external assets valued Liquid services (vendorusing quoted prices). Themarket most prices are also classified liquid securities asset 1. as Level in the liquid Securities portfolio valued using are exchange vendor traded prices futures, for which options, andthere is evidenceFor US Treasuries. of high market exchange trade futures activity may traded also be and options, classified as exchange 1. US are Levelprices quoted Treasuries obtained are andvalued theseusing index prices are classified and also as Level 1 in classified accordance Level as with 1. The ASC 820.remaining liquid valued Liquid assets assets using valued using vendor quoted market classified prices are also as Level classified 2 or Level as Level 3 based 1. Securities on the valued results using of IFC’s vendor evaluation prices for which ofthere the vendor’s is evidencepricing methodologies of high market trade and individual activity may security also be facts and circumstances. classified Most vendor as Level 1. US Treasuries prices are valueduse some using form prices index of matrixand pricing methodology also classified to derive as Level 1. Thethe inputs forliquid remaining projecting assets cash flows valued or tovendor derive using prices. are prices When vendor as classified prices Levelare2not available, or Level liquidon 3 based assets are valued the results internally of IFC’s by IFCof evaluation using yield-pricing the vendor’s approach pricing or comparables methodologies model approach and individual security and these facts are classified as and circumstances. Level Most 2 or Level vendor prices 3 use depending some formon the degreepricing of matrix that the inputs are observable methodology to derive the in the market. inputs for projecting cash flows or to derive prices. When vendor prices are not available, liquid assets are valued internally by IFC using yield-pricing approach or comparables model approach The critical factors in valuing liquid assets in both Level 2 and Level 3 are the estimation and these are classified as Level 2 or Level 3 depending on the degree that the inputs are observable in the market. of cash flows and yield. Other significant inputs for valuing corporate securities, quasi-government securities and sovereign or sovereign-guaranteed securities include reported trades, broker/dealer quotes, benchmark securities, The critical factors option adjusted in valuing spread liquid assets curve, in both volatilities, Level 2 and Level 3 arereference and other data. of the estimation addition In cash to these flows inputs, and yield. valuation Other models significant for securitized inputs for valuing or collateralized corporate securities securities, use collateral quasi-government performance securities inputs, such and sovereign as weighted average or sovereign-guaranteed coupon include securities rate, weighted reportedaverage maturity, conditional trades, broker/dealer quotes, rate, constant prepaymentsecurities, benchmark optiondefault rate, adjusted vintage, spread and volatilities, curve, credit enhancements. and other reference data. In addition to these inputs, valuation models for securitized or collateralized securities use collateral performance inputs, such as weighted average coupon rate, weighted average maturity, conditional Loans and debt prepayment rate, securities – Loans constant default and rate, debt securities vintage, and credit IFC’s investment portfolio that do not have available market prices are primarily valued inenhancements. using discounted cash flow approaches. All loans measured at fair value are classified as Level 3. Certain loans contain embedded conversion and/or income and Loans debt securities participation features. not bifurcated –IfLoans and debtas standalone securities derivatives, in IFC’s these investment features portfolio aredo that not have in considered determining available market loans’are theprices fairprimarily value based on valued the quoted using market discounted prices cash flowor other calculated approaches. values All loans of the equity measured at fairinvestments into which value are classified the loans as Level are convertible 3. Certain loans containand embedded the discounted cash flows conversion of and/or the income income participation participation features. features. The If not valuation bifurcated as techniques standalone and significant derivatives, unobservable these features areinputs for loans considered inand debt securities determining classified the loans’ as Level fair value based as 3 on of June the quoted30, market 2016 and June prices or30, 2015 other are presented valuesbelow: calculated of the equity investments into which the loans are convertible and the discounted cash flows of the income participation features. The valuation techniques and significant unobservable inputs for loans and debt securities classified as Level 3 as of June 30, 2016 and June 30, 2015 are presented below: June 30, 2016 Fair value Weighted June 30, 2016 (US$ Range average Valuation technique Fair value millions) Significant inputs (%) Weighted (%) Debt securities – preferred shares Discounted cash flows $ (US$224 Discount rate Range 7.5 – 30.0 average 11.6 Valuation Relative technique valuations millions)82 Valuation Significant multiples*inputs (%) (%) Debt securities – preferred shares Discounted cash flows Recent transactions $ 224 216 Discount rate 7.5 – 30.0 11.6 Other techniques Relative valuations 27 Valuation multiples* 82 Recent transactions 216 Total preferred shares Other techniques 27 549 Total Loans andpreferred shares other debt securities Discounted cash flows 549 1,903 Credit default swap spreads 1.0 – 20.0 4.6 Expected recovery rates 10.0 – 85.0 42.4 Loans and other debt securities Recent transactions Discounted cash flows 457 1,903 Credit default swap spreads 1.0 – 20.0 4.6 Other techniques 235 Expected recovery rates 10.0 – 85.0 42.4 Recent transactions 457 Total loans and other debt securities Other techniques 235 2,595 Total loans and other debt securities Total $ 2,595 3,144 Total * In case $ of valuation techniques with multiple significant inputs, the range and weighted 3,144 average are not provided. * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. IFC FINANCIALS 2016 85 Page 85 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2015 Fair value Weighted (US$ Range average Valuation technique millions) Significant inputs (%) (%) Debt securities – preferred shares Discounted cash flows $ 274 Discount rate 6.9 – 30.0 10.4 Relative valuations 126 Valuation multiples* Recent transactions 140 Other techniques 15 Total preferred shares 555 Loans and other debt securities Discounted cash flows 1,724 Credit default swap spreads 1.2 – 20.0 3.0 Expected recovery rates 10.0 – 85.0 41.6 Recent transactions 495 Other techniques 60 Total loans and other debt securities 2,279 Total $ 2,834 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. Borrowings – Fair values derived by using quoted prices in active markets are classified as Level 1. Fair values derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate are classified as Level 2. The significant inputs used in valuing borrowings classified as Level 2 are presented below: Classes Significant Inputs Structured bonds Foreign exchange rate and inter-bank yield curves, IFC’s credit curve and swaption volatility matrix, foreign exchange rate volatility, equity spot price, volatility and dividend yield. Unstructured bonds Inter-bank yield curve and IFC’s credit curve. As of June 30, 2016, IFC had bond issuances with a total fair value of $155 million classified as level 3 in Armenian dram, Costa Rican colones, Georgian Lari, Nigerian naira and Rwandan francs, where the significant unobservable inputs were yield curve data. Derivative instruments – The various classes of derivative instruments include interest rate contracts, foreign exchange contracts, interest rate and currency contracts, equity contracts and other derivative contracts. Certain over the counter derivatives in the liquid asset portfolio priced in-house are classified as Level 2, while certain over the counter derivatives priced using external manager prices are classified as Level 3. Fair values for derivative instruments are derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate. The significant inputs used in valuing the various classes of derivative instruments classified as Level 2 and significant unobservable inputs for derivative instruments classified as Level 3 as of June 30, 2016 and June 30, 2015 are presented below: Level 2 derivatives Significant Inputs Interest rate Inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. Foreign exchange Foreign exchange rate, inter-bank yield curves and foreign exchange basis curve. Interest rate and currency Foreign exchange rate, inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. June 30, 2016 Weighted Fair value Range average Level 3 derivatives Type (US$ millions) Significant inputs (%) (%) Equity related derivatives Fixed strike price options $ 41 Volatilities 11.8 – 48.8 28.6 Variable strike price options 333 Contractual strike price* Other 1 Interest rate and Yield curve points, currency swap assets Vanilla swaps 34 exchange rates Interest rate and Yield curve points, currency swap liabilities Vanilla swaps (31) exchange rates Total $ 378 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. 86 IFC FINANCIALS 2016 Page 86 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2015 Weighted Fair value Range average Level 3 derivatives Type (US$ millions) Significant inputs (%) (%) Equity related derivatives Fixed strike price options $ 34 Volatilities 12.0 – 50.2 24.7 Variable strike price options 249 Contractual strike price* Other 2 Interest rate and Yield curve points, currency swap assets Vanilla swaps 40 exchange rates Interest rate and Yield curve points, currency swap liabilities Vanilla swaps (30) exchange rates Total $ 295 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. Equity investments – Equity investments valued using quoted prices in active markets are classified as Level 1. Equity investments classified as Level 2 were valued using quoted prices in inactive markets. The valuation techniques and significant unobservable inputs for equity investments classified as Level 3 as of June 30, 2016 and June 30, 2015 are presented below: June 30, 2016 Fair value Weighted Sector Valuation technique (US$ millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 707 Cost of equity (%) 10.3 – 22.3 14.5 Institutions Asset growth rate (%) (33.6) – 187.0 11.0 Return on assets (%) (9.7) – 5.0 1.9 Perpetual growth rate (%) 2.4 – 11.0 4.5 Relative valuations 41 Price to book value 1.0 – 2.4 1.7 Listed price (adjusted) 127 Discount for lock-up (%) 0.0 – 10.4 7.3 Recent transactions 193 Other techniques 32 Total banking and other financial institutions 1,100 Funds Recent transactions 98 Total funds 98 Weighted average 7.8 – 21.5 13.1 Others Discounted cash flows 647 cost of capital (%) Cost of equity (%) 10.5 – 15.0 15.5 Relative valuations 230 Valuation multiples* Listed price (adjusted) 144 Discount for lock-up (%) 0.0 – 15.2 12.9 Recent transactions 669 Other techniques 43 Total others 1,733 Total $ 2,931 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. IFC FINANCIALS 2016 87 Page 87 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2015 Fair value Weighted Sector Valuation technique (US$ millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 580 Cost of equity (%) 10.2 – 22.6 15.1 Institutions Asset growth rate (%) (18.2) – 392.0 11.6 Return on assets (%) (8.9) – 6.8 1.8 Perpetual growth rate (%) 2.5 – 11.0 5.0 Relative valuations 17 Valuation multiples* Listed price (adjusted) 36 Discount for lock-up (%) 0.0 – 10.2 6.0 Recent transactions 216 Other techniques 52 Total banking and other financial institutions 901 Funds Recent transactions 55 Total funds 55 Weighted average 6.6 – 23.2 12.0 Others Discounted cash flows 522 cost of capital (%) Cost of equity (%) 12.3 – 15.0 14.6 Relative valuations 338 Valuation multiples* Listed price (adjusted) 201 Discount for lock-up (%) 1.0 - 10.6 7.6 Recent transactions 517 Other techniques 94 Total others 1,672 Total $ 2,628 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. 88 IFC FINANCIALS 2016 Page 88 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Fair value of assets and liabilities Estimated fair values of IFC’s financial assets and liabilities and off-balance sheet financial instruments at June 30, 2016 and June 30, 2015 are summarized below (US$ millions): June 30, 2016 June 30, 2015 Carrying Fair Carrying Fair amount value amount value Financial assets Cash and due from banks, time deposits, trading securities and securities purchased under resale agreements and receivable for cash collateral pledged $ 46,212 $ 46,212 $ 43,817 $ 43,817 Investments: Loans at amortized cost, net of reserves against losses 20,906 20,281 20,552 21,758 Loans accounted for at fair value under the Fair Value Option 962 962 784 784 Total loans 21,868 21,243 21,336 22,542 Equity investments at cost less impairment 3,145 4,221 3,250 4,581 Equity investments accounted for at fair value as available-for-sale 3,526 3,526 4,557 4,557 Equity investments accounted for at fair value 5,917 5,917 5,696 5,696 Total equity investments 12,588 13,664 13,503 14,834 Debt securities accounted for at fair value as available-for-sale 2,474 2,474 2,317 2,317 Debt securities accounted for at fair value under the Fair Value Option 426 426 422 422 Total debt securities 2,900 2,900 2,739 2,739 Total investments 37,356 37,807 37,578 40,115 Derivative assets: Borrowings-related 1,255 1,255 620 620 Liquid asset portfolio-related and other 489 489 851 851 Investment-related 1,680 1,680 1,615 1,615 Client risk management-related 271 271 169 169 Total derivative assets 3,695 3,695 3,255 3,255 Other investment-related financial assets 1 96 1 75 Financial liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 4,143 $ 4,143 $ 4,695 $ 4,695 Market, IBRD, IDA and other borrowings outstanding 55,142 55,141 51,265 51,264 Trading securities - short sold bonds 10 10 - - Derivative liabilities: Borrowings-related 3,014 3,014 3,722 3,722 Liquid asset portfolio-related and other 439 439 244 244 Investment-related 183 183 82 82 Client risk management-related 316 316 177 177 Total derivative liabilities 3,952 3,952 4,225 4,225 Other investment-related financial assets comprise standalone options and warrants that do not meet the definition of a derivative. The fair value of loan commitments amounted to $33 million at June 30, 2016 ($34 million - June 30, 2015). Fair values of loan commitments are based on present value of loan commitment fees. IFC FINANCIALS 2016 89 Page 89 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Fair value hierarchy The following tables provide information as of June 30, 2016 and June 30, 2015, about IFC’s financial assets and financial liabilities measured at fair value on a recurring basis. As required by ASC 820, financial assets and financial liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement (US$ millions): June 30, 2016 Level 1 Level 2 Level 3 Total Trading securities: $ $ $ $ Asset-backed securities $ - $ 11,860 $ $ - 11,860 Corporate securities 5,125 2,670 47 7,842 Government and agency obligations 10,162 900 21 11,083 Money market funds 427 - - 427 Total trading securities 15,714* 15,430 68 31,212 Loans (outstanding principal balance $1,093) - - 962 962 Equity investments: Banking and other financial institutions 1,656 136 1,100 2,892 Funds - - 98 98 Others 1,515 26 1,733 3,274 Equity investments measured at net asset value*** 3,179 Total equity investments 3,171 162 2,931 9,443 Debt securities: Corporate debt securities 249 144 1,518 1,911 Preferred shares - - 549 549 Asset-backed securities - - 113 113 Other debt securities - - 2 2 Debt securities measured at net asset value*** 325 Total debt securities 249 144 2,182 2,900 Derivative assets: Interest rate - 646 - 646 Foreign exchange - 307 - 307 Interest rate and currency - 2,327 34 2,361 Equity and other - - 381 381 Total derivative assets - 3,280 415 3,695 Total assets at fair value $ 19,134 $ 19,016 $ 6,558 $ 48,212 Borrowings: Structured bonds $ $ - $ $ 5,179 $ $ $ - $ 5,179 Unstructured bonds 42,213 5,328 155 47,696 Total borrowings (outstanding principal balance $53,027**) 42,213 10,507 155 52,875 Trading securities - short sold bonds 10 - - 10 Derivative liabilities: Interest rate - 454 - 454 Foreign exchange - 96 - 96 Interest rate and currency - 3,365 31 3,396 Equity and other - - 6 6 Total derivative liabilities - 3,915 37 3,952 Total liabilities at fair value $ 42,223 $ 14,422 $ 192 $ 56,837 * includes securities priced at par plus accrued interest, which approximates fair value. ** includes discount notes (not under the short-term Discount Note Program), with original maturities greater than one year, with principal due at maturity of $2,299 million, with a fair value of $1,390 million as of June 30, 2016. ***In accordance with ASC 820, investments that are measured at fair value using net asset value per share have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in consolidated balance sheet. Note: For the year ended June 30, 2016: Trading securities with fair value of $154 million transferred from level 1 to level 2 and $824 million from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $9 million transferred from level 1 to level 2 and $107 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $716 million transferred from level 1 to level 2, while bonds with a fair value of $360 million were transferred from level 2 to level 1 due to change in quality of market price information. 90 IFC FINANCIALS 2016 Page 90 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2015 Level 1 Level 2 Level 3 Total Trading securities: Government and agency obligations $ 10,725 $ 4,342 $ 22 $ 15,089 Asset-backed securities - 12,793 - 12,793 Corporate securities 3,613 2,080 64 5,757 Money market funds 1,092 - - 1,092 Total trading securities 15,430* 19,215 86 34,731 Loans (outstanding principal balance $802) - - 784 784 Equity investments: Banking and other financial institutions 2,387 176 901 3,464 Funds - - 55 55 Others 1,561 92 1,672 3,325 Equity investments measured at net asset value*** 3,409 Total equity investments 3,948 268 2,628 10,253 Debt securities: Corporate debt securities 326 - 1,371 1,697 Preferred shares - - 555 555 Asset-backed securities - - 122 122 Other debt securities - - 2 2 Debt securities measured at net asset value*** 363 Total debt securities 326 - 2,050 2,739 Derivative assets: Interest rate - 426 - 426 Foreign exchange - 221 - 221 Interest rate and currency - 2,279 40 2,319 Equity and other - - 289 289 Total derivative assets - 2,926 329 3,255 Total assets at fair value $ 19,704 $ 22,409 $ 5,877 $ 51,762 Borrowings: Structured bonds $ - $ 4,732 $ - $ 4,732 Unstructured bonds 39,671 4,959 103 44,733 Total borrowings (outstanding principal balance $49,342**) 39,671 9,691 103 49,465 Derivative liabilities: Interest rate - 268 - 268 Foreign exchange - 154 - 154 Interest rate and currency - 3,769 30 3,799 Equity and other - - 4 4 Total derivative liabilities - 4,191 34 4,225 Total liabilities at fair value $ 39,671 $ 13,882 $ 137 $ 53,690 * includes securities priced at par plus accrued interest, which approximates fair value. ** includes discount notes (not under the short-term Discount Note Program), with original maturities greater than one year, with principal due at maturity of $1,755 million, with a fair value of $1,364 million as of June 30, 2015. ***In accordance with ASC 820, investments that are measured at fair value using net asset value per share have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in consolidated balance sheet. Note: For the year ended June 30, 2015: Trading securities with fair value of $1,447 million transferred from level 1 to level 2 and $615 million from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $92 million transferred from level 1 to level 2 and $8 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $13 million transferred from level 1 to level 2, while bonds with a fair value of $428 million were transferred from level 2 to level 1 due to change in quality of market price information. IFC FINANCIALS 2016 91 91 91 Page Page INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION CONSOLIDATEDFINANCIAL NOTES TO CONSOLIDATED NOTES FINANCIALSTATEMENTS STATEMENTS NOTE NOTE RR–– VALUE MEASUREMENTS FAIRVALUE FAIR MEASUREMENTS (continued) (continued) The The following following tablespresent tables present the changes in the changes thecarrying in the carryingvalue value ofof IFC’s IFC’sLevel 3 financial Level assets 3 financial and assets financial and liabilities financial for the liabilities foryears ended the years June June ended 30, 30, 2016 2016 and and 2015(US$ 2015 millions). IFC’s (US$millions). policy is IFC’s policy torecognize is to recognize transfers transfersinin and transfers and out transfers at the out beginning at the of the beginning of reporting period. the reporting period. Year ended June 30, 2016 Year ended June 30, 2016 Net unrealized Net gains and losses (realized Net unrealized gains/losses Net unrealized) and gains and losses (realized included in Purchases, included gains/losses in net and unrealized) included in Purchases, issuances, Transfers related in net income included Balance as Other issuances, sales, Transfers out Transfers of Balance as income to assets / related of as Balance Net Other comprehensive sales, settlements Transfers Level 3 into Balance out of of June 30, as liabilities to assets / held July 1,of 2015 Net Income comprehensive income and settlements others into Level 3 (*) (**) Level 3 of June 30, at year 2016 liabilities end held Trading securities: July 1, 2015 Income income and others Level 3 (*) (**) 2016 at year end Trading securities: Asset-backed securities $ - $ - $ - $ - $ - $ - $ - $ - Asset-backed securities Corporate securities $ 64 - $ (6) - $ - - $ (11) - $ - - $ - - $ 47 - $ - - Corporate securities Government and agency obligations 64 22 (6) (1) - - (11) - - - - - 21 47 (1) - Government and agency obligations 22 (1) - - - - 21 (1) Total trading securities 86 (7) - (11) - - 68 (1) Total trading securities 86 (7) - (11) - - 68 (1) Loans 784 (114) - 292 - - 962 (121) Loans Equity investments: 784 (114) - 292 - - 962 (121) Banking Equity and other financial institutions investments: 901 48 3 (16) 342 (178) 1,100 3 Funds and other financial institutions Banking 55 901 1 48 - 3 42 (16) -342 - (178) 98 1,100 3 3 Others Funds 1,672 55 49 1 (38) - 252 42 60 - (262) - 1,733 98 (13) 3 Others 1,672 49 (38) 252 60 (262) 1,733 (13) Total equity investments 2,628 98 (35) 278 402 (440) 2,931 (7) Total equity investments 2,628 98 (35) 278 402 (440) 2,931 (7) Debt securities: Corporate debt securities 1,371 (37) (68) 365 83 (196) 1,518 (24) Debt securities: Preferred shares 555 (6) (22) 22 - - 549 2 Corporate debt securities Asset-backed securities 1,371 122 (37) (17) (68) 8 365 - - 83 (196) - 1,518 113 - (24) Preferred Other debtshares securities 555 2 (6) - (22) - - 22 - - - - 2 549 - 2 Asset-backed securities 122 (17) 8 - - - 113 - Other Total debt debt securities securities 2,0502 (60) - (82) - 387 - 83 - (196) - 2,182 2 (22) - Total debt securities Derivative assets: 2,050 (60) (82) 387 83 (196) 2,182 (22) Interest rate and currency 40 18 - 8 - (32) 34 17 Derivative assets: Equity and other 289 94 - (2) - - 381 102 Interest rate and currency 40 18 - 8 - (32) 34 17 Total Equityderivative and otherassets 329 289 112 94 - - 6 (2) - - (32) - 415 381 119 102 Total Total assets at derivative fair value assets $ 5,877 329 $ 29 112 $ (117) -$ 952 6 $ 485 $ - $ (668) (32) $ 6,558 415 (32) 119 Borrowings: Total assets at Structured fair value bonds $ $ - $$ 5,877 29 - $$ (117) - $ $ 952 - $ $ -485 $ $ (668) - $ $ 6,558 - $ $ - (32) Unstructured bonds (103) (1) - (10) (41) - (155) (1) Borrowings: Structured bonds $ - $ - $ - $ - $ - $ - $ - $ - Total borrowings (103) (1) - (10) (41) - (155) (1) Unstructured bonds (103) (1) - (10) (41) - (155) (1) Derivative liabilities: Total borrowings Interest rate (103) (1) - (10) (41) - (155) (1) - - - - - - - - Interest rate and currency (30) (31) - - - 30 (31) (12) Derivative liabilities: Equity and other (4) (3) - 1 - - (6) (3) Interest rate - - - - - - - - Interest Total rate and derivative currency liabilities (30) (34) (31) (34) - - 1 - - - 30 30 (37) (31) (15) (12) Equity and other (4) (3) - 1 - - (6) (3) Total liabilities at fair value $ (137) $ (35) $ - $ (9) $ (41) $ 30 $ (192) $ (16) Total derivative liabilities (34) (34) - 1 - 30 (37) (15) (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of June 30, 2016. (**)Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of July 1, 2015 Total liabilities at fair value $ (137) $ (35) $ - $ (9) $ (41) $ 30 $ (192) $ (16) beginning balance as of June 30, 2016. (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of June 30, 2016. (**)Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of July 1, 2015 beginning balance as of June 30, 2016. 92 IFC FINANCIALS 2016 Page 92 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Year ended June 30, 2015 Net gains and losses (realized Net unrealized and unrealized) included in gains/losses Purchases, included in net issuances, Transfers income related Balance as Other sales, Transfers out of Balance as to assets / of Net comprehensive settlements into Level 3 of June 30, liabilities held July 1, 2014 Income income and others Level 3 (*) (**) 2015 at year end Trading securities: Asset-backed securities $ 20 $ - $ - $ (20) $ - $ - $ - $ - Corporate securities 146 (35) - 34 11 (92) 64 (66) Government and agency obligations 22 - - - - - 22 - Total trading securities 188 (35) - 14 11 (92) 86 (66) Loans 683 (85) - 186 - - 784 (80) Equity investments: Banking and other financial institutions 1,312 110 (57) (273) 81 (272) 901 (106) Funds 45 1 - 9 - - 55 2 Others 1,010 62 76 523 116 (115) 1,672 38 Total equity investments 2,367 173 19 259 197 (387) 2,628 (66) Debt securities: Corporate debt securities 1,410 18 (45) 97 - (109) 1,371 4 Preferred shares 760 16 (12) (209) - - 555 (23) Asset-backed securities 144 - (16) (6) - - 122 - Other debt securities 1 1 - - - - 2 1 Total debt securities 2,315 35 (73) (118) - (109) 2,050 (18) Derivative assets: Interest rate and currency 5 40 - 12 - (17) 40 19 Equity and other 559 (271) - 1 - - 289 10 Total derivative assets 564 (231) - 13 - (17) 329 29 Total assets at fair value $ 6,117 $ (143) $ (54) $ 354 $ 208 $ (605) $ 5,877 $ (201) Borrowings: Structured bonds $ (361) $ 189 $ - $ - $ - $ 172 $ - $ - Unstructured bonds (70) (14) - (19) - - (103) (14) Total borrowings (431) 175 - (19) - 172 (103) (14) Derivative liabilities: Interest rate - (7) - (5) - 12 - - Interest rate and currency (63) (167) - (4) - 204 (30) (32) Equity and other (18) 11 - 3 - - (4) 11 Total derivative liabilities (81) (163) - (6) - 216 (34) (21) Total liabilities at fair value $ (512) $ 12 $ - $ (25) $ - $ 388 $ (137) $ (35) (*) Transfers into Level 3 are due to lack of observable market data resulting from a decrease in market activity for these securities as of June 30, 2015. (**) Transfers out of Level 3 are due to availability of observable market data resulting from an increase in market activity for these securities that were part of July 1, 2014 beginning balance as of June 30, 2015. IFC FINANCIALS 2016 93 Page 93 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) The following tables present gross purchases, sales, issuances and settlements related to the changes in the carrying value of IFC’s Level 3 financial assets and financial liabilities for the years ended June 30, 2016 and 2015 (US$ millions). Year ended June 30, 2016 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ - $ - $ - $ - $ - Corporate securities - (8) - (3) (11) Total trading securities - (8) - (3) (11) Loans - - 403 (111) 292 Equity investments: Banking and other financial institutions 75 (137) - 46 (16) Funds 116 (1) - (73) 42 Others 377 (167) - 42 252 Total equity investments 568 (305) - 15 278 Debt securities: Corporate debt securities 547 (29) - (153) 365 Preferred shares 178 (88) - (68) 22 Asset-backed securities 51 - - (51) - Total debt securities 776 (117) - (272) 387 Derivative assets: Interest rate and currency - - 7 1 8 Equity and other - - - (2) (2) Total derivative assets - - 7 (1) 6 Total assets at fair value $ 1,344 $ (430) $ 410 $ (372) $ 952 Borrowings: Structured Bonds - - - - - Unstructured Bonds - - (10) - (10) Total Borrowings - - (10) - (10) Derivative liabilities: Interest rate - - - - - Interest rate and currency - - (1) 1 - Equity and other - - - 1 1 Total derivative liabilities - - (1) 2 1 Total liabilities at fair value $ - $ - $ (11) $ 2 $ (9) 94 IFC FINANCIALS 2016 Page 94 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Year ended June 30, 2015 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ - $ (15) $ - $ (5) $ (20) Corporate securities 131 (89) - (8) 34 Total trading securities 131 (104) - (13) 14 Loans - - 248 (62) 186 Equity investments: Banking and other financial institutions 199 (467) - (5) (273) Funds 97 - - (88) 9 Others 476 (63) - 110 523 Total equity investments 772 (530) - 17 259 Debt securities: Corporate debt securities 369 - - (272) 97 Preferred shares 56 (110) - (155) (209) Asset-backed securities 2 - - (8) (6) Total debt securities 427 (110) - (435) (118) Derivative assets: Interest rate and currency - - 12 - 12 Equity and other - - 12 (11) 1 Total derivative assets - - 24 (11) 13 Total assets at fair value $ 1,330 $ (744) $ 272 $ (504) $ 354 Borrowings: Structured Bonds - - - - - Unstructured Bonds - - (19) - (19) Total Borrowings - - (19) - (19) Derivative liabilities: Interest rate - - - (5) (5) Interest rate and currency - - (9) 5 (4) Equity and other - - - 3 3 Total derivative liabilities - - (9) 3 (6) Total liabilities at fair value $ - $ - $ (28) $ 3 $ (25) Gains and losses (realized and unrealized) from trading securities, loans, equity investments and debt securities included in net income for the period are reported on the consolidated income statement in income from liquid asset trading activities, Income from Loans and guarantees, including realized gains and losses on loans and associated derivatives, income from equity investments and associated derivatives, income from debt securities and realized gains and losses on debt securities and associated derivatives and net unrealized gains and losses on non-trading financial instruments accounted for at fair value. As of June 30, 2016, equity investments, accounted for at cost less impairment, with a carrying amount of $1,828 million were written down to their fair value of $1,444 million ($1,401 million and $1,050 million – June 30, 2015), resulting in a loss of $384 million, which was included in income from equity investments and associated derivatives in the consolidated statements of operations during the year ended June 30, 2016 (loss of $351 million – year ended June 30, 2015). The amount of the write-down was based on a Level 3 measure of fair value. IFC FINANCIALS 2016 95 Page 95 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE S – SEGMENT REPORTING For management purposes, IFC’s business comprises three segments: investment services, treasury services and advisory services. The investment services segment consists primarily of lending and investing in debt and equity securities. The investment services segment also includes AMC, which is not separately disclosed due to its immaterial impact. Further information about the impact of AMC on IFC’s consolidated balance sheets and income statements can be found in Note B. Operationally, the treasury services segment consists of the borrowing, liquid asset management, asset and liability management and client risk management activities. Advisory services provide consultation services to governments and the private sector. Consistent with internal reporting, net income or expense from asset and liability management and client risk management activities in support of investment services is allocated from the treasury segment to the investment services segment. The performance of investment services, treasury services and advisory services is assessed by senior management on the basis of net income for each segment, return on assets, and return on capital employed. Advisory services are primarily assessed based on the level and adequacy of its funding sources (See Note U). IFC’s management reporting system and policies are used to determine revenues and expenses attributable to each segment. Consistent with internal reporting, administrative expenses are allocated to each segment based largely upon personnel costs and segment headcounts. Transactions between segments are immaterial and, thus, are not a factor in reconciling to the consolidated data. The methodology for allocating foreign currency transaction gains and losses on non-trading activities between the investment services segment and the treasury services segment was revised during FY16 Q1 to more closely align with management reporting. This change has been reflected in the segment results for the years ended June 30, 2016, 2015 and 2014. An analysis of IFC’s major components of income and expense by business segment for the years ended June 30, 2016, June 30, 2015 and June 30, 2014, is provided below (US$ millions): Investment Treasury Advisory June 30, 2016 services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,126 $ - $ - $ 1,126 Provision for losses on loans, guarantees and other receivables (359) - - (359) Income from equity investments and associated derivatives 518 - - 518 Income from debt securities, including realized gains and losses on 129 - - 129 debt securities and associated derivatives Income from liquid asset trading activities - 504 - 504 Charges on borrowings (115) (294) - (409) Advisory services income - - 266 266 Service fees and other income 235 - - 235 Administrative expenses (850) (22) (61) (933) Advisory services expenses - - (308) (308) Expense from pension and other postretirement benefit plans (131) (8) (46) (185) Other expenses (38) - - (38) Foreign currency transaction gains and losses on non-trading activities (91) 45 - (46) Income (loss) before net unrealized gains and losses on non- trading financial instruments accounted for at fair value and grants to IDA 424 225 (149) 500 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (266) 62 - (204) Income (loss) before grants to IDA 158 287 (149) 296 Grants to IDA (330) - - (330) Net (loss) income (172) 287 (149) (34) Net losses attributable to non-controlling interests 1 - - 1 Net (loss) income attributable to IFC $ (171) $ 287 $ (149) $ (33) 96 IFC FINANCIALS 2016 Page 96 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE S – SEGMENT REPORTING (continued) Investment Treasury Advisory June 30, 2015 services services services Total Income from loans and guarantees, realized gains and losses on loans and associated derivatives $ 1,123 $ - $ - $ 1,123 Provision for losses on loans, guarantees and other receivables (171) - - (171) Income from equity investments and associated derivatives 427 - - 427 Income from debt securities, including realized gains and losses on 132 - - 132 debt securities and associated derivatives Income from liquid asset trading activities - 467 - 467 Charges on borrowings (62) (196) - (258) Advisory services income - - 244 244 Other income 261 - - 261 Administrative expenses (821) (21) (59) (901) Advisory services expenses - - (285) (285) Expense from pension and other postretirement benefit plans (139) (8) (50) (197) Other expenses (40) - - (40) Foreign currency transaction gains and losses on non-trading activities (51) 104 - 53 Income (loss) before net unrealized gains and losses on non- trading financial instruments accounted for at fair value and grants to IDA 659 346 (150) 855 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (54) (52) - (106) Income (loss) before grants to IDA 605 294 (150) 749 Grants to IDA (340) - - (340) Net income (loss) 265 294 (150) 409 Less: Net losses (gains) attributable to non-controlling interests 36 - - 36 Net income (loss) attributable to IFC $ 301 $ 294 $ (150) $ 445 Investment Treasury Advisory June 30, 2014 services services services Total Income from loans and guarantees, realized gains and losses on loans and associated derivatives $ 1,065 $ - $ - $ 1,065 Provision for losses on loans, guarantees and other receivables (88) - - (88) Income from equity investments and associated derivatives 1,289 - - 1,289 Income from debt securities, including realized gains and losses on 89 - 89 debt securities and associated derivatives - Income from liquid asset trading activities - 599 - 599 Charges on borrowings (91) (105) - (196) Advisory services income - - 254 254 Service fees 75 - - 75 Other income 132 - - 132 Administrative expenses (801) (24) (63) (888) Advisory services expenses - - (324) (324) Expense from pension and other postretirement benefit plans (119) (6) (48) (173) Other expenses (33) - - (33) Foreign currency transaction gains and losses on non-trading activities 2 (21) - (19) Income (loss) before net unrealized gains and losses on non- trading financial instruments accounted for at fair value and grants to IDA 1,520 443 (181) 1,782 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 31 (74) - (43) Income (loss) before grants to IDA 1,551 369 (181) 1,739 Grants to IDA (251) - - (251) Net income (loss) 1,300 369 (181) 1,488 Less: Net gains (losses) attributable to non-controlling interests (5) - - (5) Net income (loss) attributable to IFC $ 1,295 $ 369 $ (181) $ 1,483 IFC FINANCIALS 2016 97 Page 97 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE T – VARIABLE INTEREST ENTITIES Significant variable interests IFC has identified investments in 219 VIEs (43 of which were identified as such due to the adoption of ASU 2015-02 on July 1, 2015) which are not consolidated by IFC but in which it is deemed to hold significant variable interests at June 30, 2016 (163 investments - June 30, 2015). The majority of these VIEs do not involve securitizations or other types of structured financing. IFC is usually the minority investor in these VIEs. These VIEs are mainly: (a) investment funds, where the general partner or fund manager does not have substantive equity at risk, which IFC does not consolidate because it does not absorb the majority of funds’ expected losses or expected residual returns and (b) entities whose total equity investment is considered insufficient to permit such entity to finance its activities without additional subordinated financial support or whose activities are so narrowly defined by contracts that equity investors are considered to lack decision making ability, which IFC does not consolidate because it does not have the power to control the activities that most significantly impact their economic performance. IFC’s involvement with these VIEs includes investments in equity interests and senior or subordinated interests, guarantees and risk management arrangements. IFC’s interests in these VIEs are recorded on IFC’s consolidated balance sheet primarily in equity investments, loans, debt securities, and other liabilities, as appropriate. Based on the most recent available data of these VIEs, the balance sheet size, including committed funding, in which IFC is deemed to hold significant variable interests, totaled $32,122 million at June 30, 2016 ($26,173 million - June 30, 2015). IFC’s maximum exposure to loss as a result of its investments in these VIEs, comprising both carrying value of investments and amounts committed but not yet disbursed, was $6,058 million at June 30, 2016 ($4,096 million - June 30, 2015). The industry sector and geographical regional analysis of IFC’s maximum exposures as a result of its investment in these VIEs at June 30, 2016 and June 30, 2015 is as follows (US$ millions): June 30, 2016 Equity Debt Risk Loans investments securities Guarantees management Total Manufacturing, agribusiness and services Asia $ 161 $ 21 $ 21 $ - $ - $ 203 Europe, Middle East and North Africa 367 64 - - - 431 Sub-Saharan Africa, Latin America and Caribbean 197 98 - - - 295 Other - 30 - - - 30 Total manufacturing, agribusiness and services 725 213 21 - - 959 Financial markets Asia 147 10 - - 10 167 Europe, Middle East and North Africa 66 - 184 - - 250 Sub-Saharan Africa, Latin America and Caribbean 38 26 255 - - 319 Other 2 95 225 - 9 331 Total financial markets 253 131 664 - 19 1,067 Infrastructure and natural resources Asia 535 187 3 - 3 728 Europe, Middle East and North Africa 570 308 3 - 19 900 Sub-Saharan Africa, Latin America and Caribbean 1,121 204 15 - 77 1,417 Other 220 - - - - 220 Total infrastructure and natural resources 2,446 699 21 - 99 3,265 Telecom, media & technology, and venture investing Asia - 223 - - - 223 Europe, Middle East and North Africa - 124 5 - - 129 Sub-Saharan Africa, Latin America and 28 198 7 - 1 234 Caribbean Other 143 38 - - - 181 Total telecom, media & technology, and 171 583 12 - 1 767 venture investing Maximum exposure to VIEs $ 3,595 $ 1,626 $ 718 $ - $ 119 $ 6,058 of which: Carrying value 3,110 1,122 491 - 78 4,801 Committed but not disbursed 485 504 227 - 41 1,257 98 IFC FINANCIALS 2016 Page 98 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE T – VARIABLE INTEREST ENTITIES (continued) June 30, 2015 Equity Debt Risk Loans investments securities Guarantees management Total Manufacturing, agribusiness and services Asia $ 164 $ 13 $ - $ - $ - $ 177 Europe, Middle East and North Africa 328 37 - - - 365 Sub-Saharan Africa, Latin America and Caribbean 181 97 - - 1 279 Total manufacturing, agribusiness and services 673 147 - - 1 821 Financial markets Asia 167 - - - 10 177 Europe, Middle East and North Africa 23 13 118 2 - 156 Sub-Saharan Africa, Latin America and 6 1 124 - - 131 Caribbean Other 3 - 218 - 9 230 Total financial markets 199 14 460 2 19 694 Infrastructure and natural resources Asia 450 57 2 - - 509 Europe, Middle East and North Africa 439 31 51 - 19 540 Sub-Saharan Africa, Latin America and Caribbean 1,059 25 1 4 44 1,133 Other - 1 - - - 1 Total infrastructure and natural resources 1,948 114 54 4 63 2,183 Telecom, media & technology, and venture investing Asia 2 71 13 - - 86 Europe, Middle East and North Africa - 25 17 - - 42 Sub-Saharan Africa, Latin America and 44 99 9 - 1 153 Caribbean Other - 109 8 - - 117 Total telecom, media & technology, and venture investing 46 304 47 - 1 398 Maximum exposure to VIEs $ 2,866 $ 579 $ 561 $ 6 $ 84 $ 4,096 of which: Carrying value 2,553 368 507 6 54 3,488 Committed but not disbursed 313 211 54 - 30 608 The carrying value of investments and maximum exposure to VIEs at June 30, 2016 and June 30, 2015 is as follows (US$ millions): June 30, 2016 Carrying value Committed but Maximum Investment category of investments not yet disbursed exposure Loans $ 3,110 $ 485 $ 3,595 Equity investments 1,122 504 1,626 Debt securities 491 227 718 Guarantees - - - Risk management 78 41 119 Maximum exposure to VIEs $ 4,801 $ 1,257 $ 6,058 June 30, 2015 Carrying value Committed but Maximum Investment category of investments not yet disbursed exposure Loans $ 2,553 $ 313 $ 2,866 Equity investments 368 211 579 Debt securities 507 54 561 Guarantees 6 - 6 Risk management 54 30 84 Maximum exposure to VIEs $ 3,488 $ 608 $ 4,096 IFC FINANCIALS 2016 99 Page 99 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE U – ADVISORY SERVICES IFC provides advisory services to government and private sector clients. Since July 1, 2014, IFC advisory services to governments on investment climate and financial sector development have been delivered in partnership with IBRD through WBG Global Practices. IFC funds this business line by a combination of cash received from government and other donors and IFC’s operations via retained earnings and operating budget allocations as well as fees received from the recipients of the services. IFC administers donor funds through trust funds. Donor funds are restricted for purposes specified in agreements with the donors. Donor funds under administration and IFC’s funding can be comingled in accordance with administration agreements with donors. The comingled funds are held in a separate liquid asset investment portfolio managed by IBRD, which is not commingled with IFC’s other liquid assets and is reported at fair value in other assets. Donor funds are refundable until expended for their designated purpose. As of June 30, 2016, other assets include undisbursed donor funds of $512 million ($467 million - June 30, 2015) and IFC’s advisory services funding of $191 million ($165 million - June 30, 2015). Included in other liabilities as of June 30, 2016 is $512 million ($467 million - June 30, 2015) of refundable undisbursed donor funds. NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan and Trust (RSBP) and a Post- Employment Benefits Plan (PEBP) that cover substantially all of their staff members. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC and MIGA based upon their employees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing ratio. The expenses for the SRP, RSBP, and PEBP are included in expense from pension and other postretirement benefit plans. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP allocated to IFC for the years ended June 30, 2016, June 30, 2015 and June 30, 2014 (US$ millions): SRP RSBP PEBP 2016 2015 2014 2016 2015 2014 2016 2015 2014 Benefit cost Service cost $ 138 $ 139 $ 121 $ 33 $ 35 $ 26 $ 24 $ 21 $ 14 Interest cost 136 131 121 23 23 21 15 13 9 Expected return on plan assets (188) (185) (155) (29) (27) (21) - - - Amortization of unrecognized prior service costs 1 1 1 3 3 3 2 2 * Amortization of unrecognized net actuarial losses 15 21 21 - 6 6 12 14 6 Net periodic pension cost $ 102 $ 107 $ 109 $ 30 $ 40 $ 35 $ 53 $ 50 $ 29 * Less than $0.5 million The expenses for the SRP, RSBP, and PEBP are included in expense from pension and other postretirement benefit plans. For the years ended June 30, 2016, June 30, 2015 and June 30, 2014, expenses for these plans of $185 million, $197 million and $173 million, respectively, were allocated to IFC. 100 IFC FINANCIALS 2016 Page 100 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) The following table summarizes the Projected Benefit Obligations (PBO), fair value of plan assets, and funded status associated with the SRP, RSBP and PEBP for IFC for the years ended June 30, 2016 and June 30, 2015 (US$ millions). Since the assets for the PEBP are not held in an irrevocable trust separate from the assets of IBRD, they do not qualify for off-balance sheet accounting and are therefore included in IBRD's investment portfolio. IFC has recognized a receivable (prepaid asset) from IBRD and a payable (liability) to IBRD equal to the amount required to support the plan. The assets of the PEBP are mostly invested in fixed income, equity instruments and alternative investments. SRP RSBP PEBP 2016 2015 2016 2015 2016 2015 Projected benefit obligations Beginning of year $ 3,253 $ 3,188 $ 506 $ 531 $ 345 $ 326 Service cost 138 139 33 35 24 21 Interest cost 136 131 23 23 15 14 Net entity transfers (2) (32) 1 (5) - - Participant contributions 44 41 3 2 4 9 Federal subsidy received - - * * - - Plan amendments - - 5 - - - Benefits paid (135) (124) (9) (8) (7) (6) Actuarial loss (gain) 464 (90) 74 (72) 103 (19) End of year 3,898 3,253 636 506 484 345 Fair value of plan assets Beginning of year 3,027 2,939 455 412 - - Net entity transfers (2) (32) 1 (5) - - Participant contributions 44 41 2 2 - - Actual return on assets 58 126 9 21 - - Employer contributions 73 77 26 33 - - Benefits paid (135) (124) (9) (8) - - End of year 3,065 3,027 484 455 - - Funded status** (833) (226) (152) (51) (484) (345) Accumulated benefit obligations $ 3,343 $ 2,786 $ 636 $ 506 $ 369 $ 258 * Less than $0.5 million ** Negative funded status is included in Payables and other liabilities under liabilities under retirement benefits plans, in Note L. During the fiscal year ended June 30, 2016, IFC amended the plan to reflect the increase of the mandatory retirement age from 62 to 67 for the life insurance benefits. The effect of this change was a $5 million increase to the projected benefit obligation at June 30, 2016. During the fiscal year ended June 30, 2015, there were no amendments made to the retirement benefit plans. During the fiscal year ended June 30, 2014, several amendments were made to the SRP. The primary amendments that resulted in an overall increase in SRP and PEBP PBO are as follows: (i) Improvements to the survivors' benefits, (ii) Increasing the Mandatory Retirement Age for all current and future participants from age 62 to age 67 for all staff on board on or after December 31, 2015, (iii) Increasing the Normal Retirement Age (NRA) to age 65 for all participants entering the SRP on or after December 31, 2015, the NRA remains at age 62 for all other participating in the SRP before that date, and (iv) Ceasing pension accrual for certain participants after the age of 62. The following tables present the amounts included in Accumulated Other Comprehensive Income relating to Pension and Other Postretirement Benefits (US$ millions): Amounts included in Accumulated other comprehensive loss in the year ended June 30, 2016: SRP RSBP PEBP Total Net actuarial loss $ 1,139 $ 165 $ 255 $ 1,559 Prior service cost 11 23 14 48 Net amount recognized in accumulated other comprehensive loss $ 1,150 $ 188 $ 269 $ 1,607 Amounts included in Accumulated other comprehensive loss in the year ended June 30, 2015: SRP RSBP PEBP Total Net actuarial loss $ 560 $ 71 $ 165 $ 796 Prior service cost 12 20 15 47 Net amount recognized in accumulated other comprehensive loss $ 572 $ 91 $ 180 $ 843 IFC FINANCIALS 2016 101 Page 101 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) The estimated amounts that will be amortized from Accumulated Other Comprehensive Income into net periodic benefit cost in the year ending June 30, 2017 are as follows (US$ millions): SRP RSBP PEBP Total Net actuarial loss $ 56 $ 5 $ 20 $ 81 Prior service cost 1 3 2 6 Net amount recognized in accumulated other comprehensive loss $ 57 $ 8 $ 22 $ 87 Assumptions The actuarial assumptions used are based on financial market interest rates, inflation expectations, past experience, and management’s best estimate of future benefit changes and economic conditions. Changes in these assumptions will impact future benefit costs and obligations. The expected long-term rate of return for the SRP assets is a weighted average of the expected long-term (10 years or more) returns for the various asset classes, weighted by the portfolio allocation. Asset class returns are developed using a forward-looking building block approach and are not strictly based on historical returns. Equity returns are generally developed as the sum of expected inflation, expected real earnings growth and expected long-term dividend yield. Bond returns are generally developed as the sum of expected inflation, real bond yield, change in yields and risk premium/spread (as appropriate). Other asset class returns are derived from their relationship to equity and bond markets. The expected long-term rate of return for the RSBP is computed using procedures similar to those used for the SRP. The discount rate used in determining the benefit obligation is selected by reference to the year-end yield of AA corporate bonds. Actuarial gains and losses occur when actual results are different from expected results. Amortization of these unrecognized gains and losses will be included in income if, at the beginning of the fiscal year, they exceed 10 percent of the greater of the projected benefit obligation or the market-related value of plan assets. If required, the unrecognized gains and losses are amortized over the expected average remaining service lives of the employee group. The following tables present the weighted-average assumptions used in determining the projected benefit obligations and the net periodic pension costs for the years ended June 30, 2016, June 30, 2015, and June 30, 2014: Weighted average assumptions used to determine projected benefit obligation (%), except years SRP RSBP PEBP 2016 2015 2014 2016 2015 2014 2016 2015 2014 Discount rate 3.40 4.30 4.20 3.60 4.50 4.40 3.50 4.40 4.30 Rate of compensation increase 5.30 5.40 5.40 5.30 5.40 5.40 Health care growth rates - at end of fiscal year 5.30 4.90 5.30 Ultimate health care growth rate 4.00 4.10 4.10 Year in which ultimate rate is reached 2030 2030 2022 Weighted average assumptions used to determine net periodic pension cost (%), except years SRP RSBP PEBP 2016 2015 2014 2016 2015 2014 2016 2015 2014 Discount rate 4.30 4.20 4.60 4.50 4.40 4.80 4.40 4.30 4.50 Expected return on plan assets 6.20 6.30 5.90 6.20 6.30 6.00 Rate of compensation increase 5.40 5.40 5.70 5.40 5.40 5.70 Health care growth rates - at end of fiscal year 4.90 5.30 5.90 Ultimate health care growth rate 4.10 4.10 3.90 Year in which ultimate rate is reached 2030 2022 2022 102 IFC FINANCIALS 2016 Page 102 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) The medical cost trend rate can significantly affect the reported postretirement benefit income or costs and benefit obligations for the RSBP. The following table shows the effects of a one-percentage-point change in the assumed healthcare cost trend rate (US$ millions): One-percentage-point increase One-percentage-point decrease Effect on total service and interest cost $ 21 $ (14) Effect on postretirement benefit obligation $ 204 $ (142) Investment Strategy The investment policies establish the framework for investment of the plan assets based on long-term investment objectives and the trade-offs inherent in seeking adequate investment returns within acceptable risk parameters. A key component of the investment policy is to establish a Strategic Asset Allocation (SAA) representing the policy portfolio (i.e., policy mix of assets) around which the plans are invested. The SAA for the plans is reviewed in detail and reset about every three to five years, with more frequent reviews and changes if and as needed based on market conditions. The key long-term objective is to generate asset performance that is reasonable in relation to the growth rate of the underlying liabilities and the assumed sponsor contribution rates, without taking undue risks. Given the relatively long investment horizons of the SRP and RSBP, and the relatively modest liquidity needs over the short-term to pay benefits and meet other cash requirements, the focus of the investment strategy is on generating sustainable long-term investment returns through a globally diversified set of strategies including public and private equity and real estate. The SAA is derived using a mix of quantitative analysis that incorporates expected returns and volatilities by asset class as well as correlations across the asset classes, and qualitative considerations such as the liquidity needs of the plans. The SAA is comprised of a diversified portfolio drawn from among fixed-income, equity, real assets and absolute return strategies. The following table presents the policy asset allocation at June 30, 2016 and the actual asset allocation at June 30, 2016 and June 30, 2015 by asset category for the SRP and RSBP. SRP RSBP Policy % of Plan Assets Policy % of Plan Assets Allocation Allocation 2016 (%) 2016 2015 2016 (%) 2016 2015 Asset class Public equity 33 34 35 33 34 35 Fixed income & cash 26 20 22 26 22 24 Private equity 20 17 17 20 19 18 Hedge funds 8 11 10 8 10 9 Real assets* 13 14 13 13 12 11 Other** - 4 3 - 3 3 Total 100 100 100 100 100 100 * Real assets include public and private real estate, infrastructure and timber. ** Includes investments that are outside the policy allocations such as directional hedge funds and long-term private debt funds. Significant concentrations of risk in plan assets The assets of the SRP and RSBP are diversified across a variety of asset classes. Investments in these asset classes are further diversified across funds, managers, strategies, geographies and sectors, to limit the impact of any individual investment. In spite of such level of diversification, equity market risk remains the primary source of the overall return volatility of the Plans. As of June 30, 2016, the largest exposure to a single counterparty was 6% and 5% of the plan assets in SRP and RSBP, respectively. Risk management practices Managing investment risk is an integral part of managing the assets of the Plans. Asset diversification and consideration of the characteristics of the liabilities are central to the overall investment strategy and risk management approach for the SRP. Absolute risk indicators such as the overall return volatility and drawdown of the Plans are the primary measures used to define the risk tolerance level and establish the overall level of investment risk. In addition, the level of active risk (defined as the annualized standard deviation of portfolio returns relative to those of the policy portfolio) is closely monitored and managed on ongoing basis. Market risk is regularly monitored at the absolute level, as well as at the relative levels with respect to the investment policy, manager benchmarks, and liabilities of the Plans. Stress tests are performed periodically using relevant market scenarios to assess the impact of extreme market events. Monitoring of performance (at both manager and asset class levels) against benchmarks, and compliance with investment guidelines, is carried out on a regular basis as part of the risk monitoring process. Risk management for different asset classes is tailored to their specific characteristics and is an integral part of the external managers’ due diligence and monitoring processes. IFC FINANCIALS 2016 103 Page 103 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) Credit risk is monitored on a regular basis and assessed for possible credit event impacts. The liquidity position of the Plans is analyzed at regular intervals and periodically tested using various stress scenarios to ensure that the Plans have sufficient liquidity to meet all cash flow requirements. In addition, the long-term cash flow needs of the Plans are considered during the SAA exercise and are one of the main drivers in determining maximum allocation to the illiquid investment vehicles. The plans mitigate operational risk by maintaining a system of internal controls along with other checks and balances at various levels. Fair value measurements and disclosures All plan assets are measured at fair value on a recurring basis. The following table presents the fair value hierarchy of major categories of plan assets as of June 30, 2016 and June 30, 2015 (US$ millions): June 30, 2016 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Time deposits $ 2 $ - $ - $ 2 $ * $ - $ - $ * Securities purchased under resale agreements 44 - - 44 8 - - 8 Government and agency securities 361 95 - 456 69 17 - 86 Corporate and convertible bonds - 53 - 53 - 9 - 9 Asset-backed securities - 24 - 24 - 4 - 4 Mortgage-backed securities - 46 - 46 - 7 - 7 Total debt securities 407 218 - 625 77 37 - 114 Equity securities US common stocks 143 - - 143 18 - - 18 Non-US common stocks 501 - - 501 73 - - 73 Mutual funds 48 - - 48 8 - - 8 Real estate investment trusts 85 - - 85 11 - - 11 Total equity securities 777 - - 777 110 - - 110 Other funds at NAV** Commingled funds - - - 337 - - - 56 Private equity - - - 599 - - - 102 Hedge funds - - - 365 - - - 53 Real estate (including infrastructure and timber) - - - 361 - - - 49 Total other funds 1,662 260 Derivative assets/ liabilities * 1 - 1 * * - * Other assets/ liabilities***, net - - - * - - - * Total Assets $ 1,184 $ 219 $ - $ 3,065 $ 187 $ 37 $ - $ 484 * Less than $0.5 million. ** Investments measured at fair value using NAV, have not been classified under the fair value hierarchy. *** Includes receivables and payables carried at amounts that approximate fair value. 104 IFC FINANCIALS 2016 Page 104 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) June 30, 2015 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Time deposits $ 2 $ - $ - $ 2 $ * $ - $ - $ * Securities purchased under resale agreements 31 - - 31 9 - - 9 Government and agency securities 476 114 - 590 70 35 - 105 Corporate and convertible bonds - 31 - 31 - 5 - 5 Asset-backed securities - 18 - 18 - 3 - 3 Mortgage-backed securities - 26 - 26 - 3 - 3 Total debt securities 509 189 - 698 79 46 - 125 Equity securities US common stocks 100 - - 100 11 - - 11 Non-US common stocks 523 - - 523 75 - - 75 Mutual funds 60 - - 60 14 - - 14 Real estate investment trusts 80 - - 80 9 - - 9 Total equity securities 763 - - 763 109 - - 109 Other funds at NAV** Commingled funds - - - 340 - - - 46 Private equity - - - 543 - - - 89 Hedge funds - - - 356 - - - 50 Real estate (including infrastructure and timber) - - - 319 - - - 40 Total other funds 1,558 225 Derivative assets/ liabilities * 2 - 2 * * - * Other assets/ liabilities***, net - - - 6 - - - (4) Total Assets $ 1,272 $ 191 $ - $ 3,027 $ 188 $ 46 $ - $ 455 * Less than $0.5 million. ** Investments measured at fair value using NAV, have not been classified under the fair value hierarchy. *** Includes receivables and payables carried at amounts that approximate fair value. Valuation methods and assumptions The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of Plan assets. It is important to note that the investment amounts in the asset categories shown in the table above may be different from the asset category allocation shown in the Investment Strategy section of the note. Asset classes in the table above are grouped by the characteristics of the investments held. The asset class break-down in the Investment Strategy section is based on management’s view of the economic exposures after considering the impact of derivatives and certain trading strategies. Debt securities Debt securities include time deposits, U.S. treasuries and agencies, debt obligations of foreign governments and debt obligations in corporations of domestic and foreign issuers. Fixed income also includes investments in ABS such as collateralized mortgage obligations and mortgage backed securities. These securities are valued by independent pricing vendors at quoted market prices for the same or similar securities, where available. If quoted market prices are not available, fair values are based on discounted cash flow models using market-based parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves. Some debt securities are valued using techniques which require significant unobservable inputs. The selection of these inputs may involve some judgment. Management believes its estimates of fair value are reasonable given its processes for obtaining securities prices from multiple independent third-party vendors, ensuring that valuation models are reviewed and validated, and applying its approach consistently from period to period. Unless quoted prices are available, money market instruments and securities purchased under resale agreements are reported at face value which approximates fair value. Equity securities Equity securities (including REITs) are invested in companies in various industries and countries. Investments in public equity listed on securities exchanges are valued at the last reported sale price on the last business day of the fiscal year. Commingled funds Commingled funds are typically common or collective trusts reported at NAV as provided by the investment manager or sponsor of the fund based on valuation of underlying investments. IFC FINANCIALS 2016 105 Page 105 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) Private equity Private equity includes investments primarily in leveraged buyouts, distressed investments and venture capital funds across North America, Europe and Asia in a variety of sectors. A large number of these funds are in the investment phase of their life cycle. Private Equity investments do not have a readily determinable fair market value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. The underlying investments are valued using inputs such as cost, operating results, discounted future cash flows and trading multiples of comparable public securities. Real estate Real estate includes several funds which invest in core real estate as well as non-core type of real estate investments such as debt, value add, and opportunistic equity investments. Real estate investments do not have a readily determinable fair market value and are reported at NAV provided by the fund managers, taking into consideration the latest audited financial statements of the funds. The valuations of underlying investments are based on income and/or cost approaches or comparable sales approach, and taking into account discount and capitalization rates, financial conditions, local market conditions among others. Hedge fund investments Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Hedge Funds include investments in equity, event driven, fixed income, multi strategy and macro relative value strategies. These investments do not have a readily determinable fair market value and are reported at NAV provided by external managers or fund administrators (based on the valuations of underlying investments) on a monthly basis, taking into consideration the latest audited financial statements of the funds. Investments in hedge funds and commingled funds can typically be redeemed at NAV within the near term while investments in private equity and most real estate are inherently long term and illiquid in nature with a quarter lag in reporting by the fund managers. Reporting of those asset classes with a reporting lag, management estimates are based on the latest available information taking into account underlying market fundamentals and significant events through the balance sheet date. Investment in derivatives Investment in derivatives such as equity or bond futures, TBA securities, swaps, options and currency forwards are used to achieve a variety of objectives that include hedging interest rates and currency risks, gaining desired market exposure of a security, an index or currency exposure and rebalancing the portfolio. Over-the-counter derivatives are reported using valuations based on discounted cash flow methods incorporating market observable inputs. Estimated future benefits payments The following table shows the benefit payments expected to be paid in each of the next five years and subsequent five years. The expected benefit payments are based on the same assumptions used to measure the benefit obligation at June 30, 2016 (US$ millions): SRP RSBP PEBP July 1, 2016 - June 30, 2017 $ 123 $ 7 $ 11 July 1, 2017 - June 30, 2018 132 8 12 July 1, 2018 - June 30, 2019 140 9 13 July 1, 2019 - June 30, 2020 148 10 15 July 1, 2020 - June 30, 2021 158 12 16 July 1, 2021 - June 30, 2026 952 82 104 Expected contributions IFC’s contribution to the SRP and RSBP varies from year to year, as determined by the Pension Finance Committee, which bases its judgment on the results of annual actuarial valuations of the assets and liabilities of the SRP and RSBP. The best estimate of the amount of contributions expected to be paid to the SRP and RSBP for IFC during the year beginning July 1, 2016 is $73 million and $25 million, respectively. 106 IFC FINANCIALS 2016 Page 106 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE W – OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL IFC does not present derivative assets and liabilities or amounts due or owed under resale, repurchase and securities lending transactions related to contracts entered into with the same counterparty under a legally enforceable netting agreement on a net basis on its consolidated balance sheet. The following table provides the gross and net positions of IFC’s derivative contracts, resale, repurchase and securities lending agreements considering amounts and collateral held or pledged that are subject to enforceable counterparty credit support and netting agreements described below (US$ millions). Collateral amounts are included only to the extent of the related net derivative fair values or net resale, repurchase and securities lending agreements amounts. June 30, 2016 Gross amount of Gross amounts not offset in Assets assets presented in the consolidated balance sheet the consolidated Financial Collateral Net amount balance sheet instruments received Derivative assets $ 4,094* $ 2,467 $ 618*** $ 1,009 Resale agreements - - - - Total assets $ 4,094 $ 2,467 $ 618 $ 1,009 June 30, 2016 Gross amounts not offset in Liabilities Gross amount of the consolidated balance sheet liabilities presented in Cash the consolidated Financial Collateral Net amount balance sheet instruments pledged Derivative liabilities $ 4,206** $ 2,467 $ 473 $ 1,266 Repurchase and securities lending agreements 3,842 3,842 - - Total liabilities $ 8,048 $ 6,309 $ 473 $ 1,266 June 30, 2015 Gross amount of Gross amounts not offset in Assets assets presented in the the consolidated balance sheet consolidated Financial Collateral Net amount balance sheet instruments received Derivative assets $ 3,626* $ 1,759 $ 966*** $ 901 Resale agreements 68 67 - 1 Total assets $ 3,694 $ 1,826 $ 966 $ 902 June 30, 2015 Gross amount of Gross amounts not offset in Liabilities liabilities presented in the consolidated balance sheet the consolidated Financial Collateral Net amount balance sheet instruments pledged Derivative liabilities $ 4,398** $ 1,759 $ - $ 2,639 Repurchase and securities lending agreements 4,458 4,418 - 40 Total liabilities $ 8,856 $ 6,177 $ - $ 2,679 * Includes accrued income of $399 million and $371 million as of June 30, 2016 and June 30, 2015 respectively. ** Includes accrued charges of $254 million and $173 million as of June 30, 2016 and June 30, 2015 respectively. *** Includes cash collateral of $286 million and $216 million as of June 30, 2016 and June 30, 2015 respectively. The remaining amounts of collateral received consist of off-balance-sheet US Treasury securities reported in the above table at fair value. IFC’s derivative contracts with market counterparties are entered into under standardized master agreements published by the International Swaps and Derivatives Association (“ISDA” Agreements). ISDA Agreements provide for a single lump sum settlement amount upon the early termination of transactions following a default or termination event whereby amounts payable by the non-defaulting party to the other party may be applied to reduce any amounts that the other party owes the non-defaulting party. This setoff effectively reduces any amount payable by the non-defaulting party to the defaulting party. IFC FINANCIALS 2016 107 Page 107 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE W – OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL (continued) IFC’s ISDA Agreements are appended by a Credit Support Annex (“CSA”) that provides for the receipt, and in some cases, posting, of collateral in the form of cash, U.S. Treasury securities or U.K. gilts to reduce mark-to market exposure among derivative market counterparties. IFC recognizes cash collateral received and a corresponding liability on its balance sheet for the obligation to return it. Securities received as collateral are not recognized on IFC’s balance sheet. As of June 30, 2016, $495 million of cash collateral was posted under CSAs ($0 June 30, 2015). IFC recognizes a receivable on its balance sheet for its rights to cash collateral posted. In accordance with the CSAs, IFC may rehypothecate securities received as collateral, subject to the obligation to return such collateral and any related distributions received. In the event of a counterparty default, IFC may exercise certain rights and remedies, including the right to set off any amounts payable by the counterparty against any collateral held by IFC and the right to liquidate any collateral held. As of June 30, 2016, IFC had $303 million ($237 million at June 30, 2015) of outstanding obligations to return cash collateral under CSAs. The estimated fair value of all securities received and held as collateral under CSAs of June 30, 2016, all of which may be rehypothecated was $415 million ($756 million - June 30, 2015). As of June 30, 2016, $279 million of such collateral was rehypothecated under securities lending agreements ($210 million - June 30, 2015). Collateral posted by IFC in connection with repurchase agreements approximates the amounts classified as Securities sold under repurchase agreements. At June 30, 2016, trading securities with a carrying amount (fair value) of $197 million ($171 million - June 30, 2015) were pledged in connection with borrowings under a short-term discount note program, the carrying amount of which was $1,838 million ($1,343 million - June 30, 2015). Under certain CSA’s IFC is not required to pledge collateral unless its credit rating is downgraded from its current AAA/Aaa. The aggregate fair value of derivatives containing such a credit risk-linked contingent feature in a net liability position was $900 million at June 30, 2016 ($1,862 million at June 30, 2015). At June 30, 2016, IFC had no collateral posted under these agreements. If IFC’s credit rating were to be downgraded from its current AAA/Aaa to AA+/Aa1 or below, then collateral in the amount of $456 million would be required to be posted against net liability positions with counterparties at June 30, 2016 ($1,097 million at June 30, 2015). IFC’s resale, repurchase and securities lending transactions are entered into with counterparties under industry standard master netting agreements which generally provide the right to offset amounts owed one another with respect to multiple transactions under such master netting agreement and liquidate the purchased or borrowed securities in the event of counterparty default. The estimated fair value of all securities received and held as collateral under these master netting agreements as of June 30, 2016 was $0 ($68 million - June 30, 2015). The following table presents an analysis of IFC’s repurchase and securities lending transactions by (1) class of collateral pledged and (2) their remaining contractual maturity as of June 30, 2016 and June 30, 2015 (US$ millions): Remaining Contractual Maturity of the Agreements - June 30, 2016 Overnight and Up to 30 30-90 Greater than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ - $ 3,564 $ - $ - $ 3,564 Agency securities - - - - - Municipal securities and other - - - - - Total Repurchase agreements - 3,564 - - 3,564 Securities lending transactions U.S. Treasury securities $ 278 $ - $ - $ - $ 278 Total Securities lending transactions 278 - - - 278 Total Repurchase agreements and Securities lending transactions $ 278 $ 3,564 $ - $ - $ 3,842 As of June 30, 2016, IFC has no repurchase-to-maturity transactions outstanding. 108 IFC FINANCIALS 2016 Page 108 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE W – OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL (continued) Remaining Contractual Maturity of the Agreements - June 30 2015 Overnight and Up to 30 30-90 Greater than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ 8 $ 3,409 $ 11 $ - $ 3,428 Agency securities - 70 95 64 229 Municipal securities and other 18 394 141 - 553 Total Repurchase agreements 26 3,873 247 64 4,210 Securities lending transactions U.S. Treasury securities $ 209 $ - $ - $ - $ 209 Total Securities lending transactions 209 - - - 209 Total Repurchase agreements and Securities lending transactions $ 235 $ 3,873 $ 247 $ 64 $ 4,419 As of June 30, 2015, IFC has no repurchase-to-maturity transactions outstanding. NOTE X – SERVICE AND SUPPORT PAYMENTS IFC obtains certain administrative and overhead services from IBRD in those areas where common services can be efficiently provided by IBRD. This includes shared costs of the Boards of Governors and Directors, and other services such as communications, internal auditing, administrative support, supplies, and insurance. IFC makes payments for these services to IBRD based on negotiated fees, chargebacks and allocated charges, where chargeback is not feasible. Expenses allocated to IFC for the year ended June 30, 2016, were $113 million ($118 million - year ended June 30, 2015; $97 million - year ended June 30, 2014). Other chargebacks include $18 million for the year ended June 30, 2016 ($17 million - year ended June 30, 2015; $20 million - year ended June 30, 2014). NOTE Y – RELATED PARTY TRANSACTIONS During FY16 Q2, IFC sold a portion of its building in Accra, Ghana to IBRD for $13 million that generated a gain of $3 million that is included in Other income. During FY15 Q1, IFC issued an amortizing, non-interest bearing promissory note, maturing September 15, 2039, to IDA (the Note) in exchange for $1,179 million. The Note requires payments totaling $1,318 million, resulting in an effective interest rate of 1.84%. With IFC’s consent, IDA may redeem the Note after September 2, 2019, upon an adverse change in its financial condition or outlook. The amount due to IDA upon such redemption is equal to the present value of the all unpaid amounts discounted at the effective interest rate. IDA may transfer the Note; however, its redemption right is not transferrable. IFC has elected the Fair Value Option for the Note. NOTE Z – CONTINGENCIES In the normal course of its business, IFC is from time to time named as a defendant or co-defendant in various legal actions on different grounds in various jurisdictions. Although there can be no assurances, based on the information currently available, IFC’s Management does not believe the outcome of any of the various existing legal actions will have a material adverse effect on IFC’s financial position, results of operations or cash flows. IFC FINANCIALS 2016 109 Page 109 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. 110 IFC FINANCIALS 2016 IFC FINANCIALS 2016 111 STATEMENT OF CUMULATIVE GROSS COMMITMENTS (AT JUNE 30, 2016) Investment Portfolio NUMBER OF LOAN & GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL SUB-SAHARAN AFRICA Angola 9 439,287.49 0.00 439,287.49 Benin 11 265,694.53 0.00 265,694.53 Botswana 6 35,451.60 0.00 35,451.60 Burkina Faso 19 356,346.17 0.00 356,346.17 Burundi 10 53,648.14 0.00 53,648.14 Cameroon 41 698,682.12 471,500.00 1,170,182.12 Cape Verde 6 15,901.91 0.00 15,901.91 Central African Republic 1 9,880.62 0.00 9,880.62 Chad 10 139,265.59 13,900.00 153,165.59 Congo, Democratic Republic of 28 509,432.37 94,000.00 603,432.37 Congo, Republic of 9 154,232.40 25,000.00 179,232.40 Cote D'Ivoire 57 877,538.74 70,963.80 948,502.54 Djibouti 1 4,000.00 0.00 4,000.00 Eritrea 1 949.22 0.00 949.22 Ethiopia 15 501,181.96 11,149.00 512,330.96 Gabon 6 249,620.01 110,000.00 359,620.01 Gambia, The 10 42,618.44 0.00 42,618.44 Ghana 79 2,551,655.94 904,750.00 3,456,405.94 Guinea 16 340,327.82 11,000.00 351,327.82 Guinea-Bissau 4 7,245.99 0.00 7,245.99 Kenya 108 2,102,540.36 115,662.05 2,218,202.41 Lesotho 2 454.00 0.00 454.00 Liberia 12 155,585.92 0.00 155,585.92 Madagascar 22 270,158.58 21,000.00 291,158.58 Malawi 22 196,196.95 9,500.00 205,696.95 Mali 27 284,413.43 40,000.00 324,413.43 Mauritania 14 275,266.04 9,502.61 284,768.64 Mauritius 20 158,523.00 96.00 158,619.00 Mozambique 31 425,987.79 0.00 425,987.79 Namibia 9 148,390.96 0.00 148,390.96 Niger 3 25,609.60 0.00 25,609.60 Nigeria 116 9,863,582.14 456,155.04 10,319,737.17 Rwanda 22 222,153.03 10,000.00 232,153.03 Sao Tome and Principe 2 2,050.98 0.00 2,050.98 Senegal 39 458,674.73 79,330.49 538,005.22 Seychelles 7 39,443.21 2,500.00 41,943.21 Sierra Leone 10 99,601.63 25,000.00 124,601.63 Somalia 2 974.61 0.00 974.61 South Africa 92 2,594,331.30 15,000.00 2,609,331.30 South Sudan 1 5,000.00 0.00 5,000.00 Sudan 6 27,267.78 6,488.79 33,756.57 Swaziland 9 47,779.49 0.00 47,779.49 Tanzania 63 497,431.02 15,540.51 512,971.53 Togo 13 253,212.28 0.00 253,212.28 Uganda 53 495,608.49 13,088.37 508,696.86 Zambia 40 279,271.34 20,285.82 299,557.16 Zimbabwe 51 284,261.86 99,000.00 383,261.86 Regional Investments: Sub -Saharan Africa 110 3,124,942.47 70,898.47 3,195,840.94 112 IFC FINANCIALS 2016 NUMBER OF LOAN & GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL EAST ASIA AND THE PACIFIC Cambodia 14 480,798.23 355,000.00 835,798.23 China 282 9,019,404.34 2,111,109.29 11,130,513.63 Fiji 11 57,493.22 2,500.00 59,993.22 Indonesia 130 4,207,221.56 2,647,055.37 6,854,276.92 Kiribati 1 1,798.00 0.00 1,798.00 Korea, Republic of 51 868,449.18 195,700.00 1,064,149.18 Lao People's Democratic Republic 13 75,019.82 0.00 75,019.82 Malaysia 12 154,868.40 5,389.13 160,257.52 Mongolia 20 808,001.34 882,125.00 1,690,126.34 Myanmar 10 348,089.09 0.00 348,089.09 Papua New Guinea 12 374,518.93 25,000.00 399,518.93 Philippines 106 3,003,198.25 695,879.60 3,699,077.85 Samoa 7 20,096.57 0.00 20,096.57 Solomon Islands 2 45,000.00 0.00 45,000.00 Thailand 86 2,195,564.90 1,748,419.34 3,943,984.24 Timor-Leste 2 1,500.00 0.00 1,500.00 Tonga 1 6,787.00 0.00 6,787.00 Vanuatu 4 18,104.05 0.00 18,104.05 Vietnam 56 5,655,115.96 253,135.00 5,908,250.96 Regional Investments: East Asia and the Pacific 48 1,636,139.03 0.00 1,636,139.03 SOUTH ASIA Bangladesh 50 3,333,636.26 92,745.40 3,426,381.66 Bhutan 5 54,530.01 0.00 54,530.01 India 433 12,586,686.57 1,743,639.77 14,330,326.34 Maldives 7 168,250.00 8,500.00 176,750.00 Nepal 27 222,444.23 39,000.00 261,444.23 Sri Lanka 45 748,734.00 128,615.60 877,349.60 Regional Investments: South Asia 12 250,988.18 0.00 250,988.18 EUROPE AND CENTRAL ASIA Albania 21 487,756.81 65,691.91 553,448.72 Armenia 17 435,514.47 0.00 435,514.47 Azerbaijan 27 586,543.25 197,930.00 784,473.25 Belarus 20 644,201.12 6,000.00 650,201.12 Bosnia and Herzegovina 33 358,576.43 10,577.55 369,153.98 Bulgaria 28 938,756.63 183,646.71 1,122,403.34 Croatia 22 774,637.47 228,199.03 1,002,836.50 Czech Republic 19 482,772.92 245,587.93 728,360.84 Estonia 11 137,806.09 11,854.97 149,661.07 Georgia 25 947,548.81 49,825.25 997,374.06 Greece 11 212,810.34 40,131.25 252,941.59 Hungary 34 437,985.38 70,334.83 508,320.21 Kazakhstan 35 1,388,007.40 282,916.67 1,670,924.07 Kosovo 5 37,448.88 0.00 37,448.88 Kyrgyz Republic 15 123,526.17 0.00 123,526.17 Latvia 7 80,966.79 35,000.00 115,966.79 Lithuania 11 95,040.95 9,309.00 104,349.95 Macedonia, Former Yugoslav Republic of 16 237,798.16 25,000.00 262,798.16 Moldova 18 263,322.94 45,000.00 308,322.94 IFC FINANCIALS 2016 113 NUMBER OF LOAN & GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL EUROPE AND CENTRAL ASIA Montenegro 6 86,754.20 0.00 86,754.20 Poland 47 529,925.93 115,316.83 645,242.77 Romania 51 2,498,321.73 478,163.46 2,976,485.19 Russian Federation 194 8,797,860.99 2,523,371.96 11,321,232.95 Serbia 39 1,512,414.11 135,630.26 1,648,044.37 Slovak Republic 7 115,543.69 0.00 115,543.69 Slovenia 12 241,309.47 47,382.71 288,692.18 Tajikistan 20 146,115.69 0.00 146,115.69 Turkey 200 10,894,731.40 3,791,862.15 14,686,593.55 Turkmenistan 1 35,000.00 0.00 35,000.00 Ukraine 52 2,415,405.74 811,700.00 3,227,105.74 Uzbekistan 19 160,513.67 12,900.00 173,413.67 Regional Investments: Europe and Central Asia 67 3,199,737.81 200,880.02 3,400,617.83 LATIN AMERICA AND THE CARIBBEAN Antigua and Barbuda 1 30,000.00 0.00 30,000.00 Argentina 199 6,113,525.74 4,549,263.01 10,662,788.75 Barbados 6 128,625.08 0.00 128,625.08 Belize 4 33,066.33 11,000.00 44,066.33 Bolivia 32 550,809.86 140,500.00 691,309.86 Brazil 272 15,492,225.08 7,062,477.70 22,554,702.78 Chile 68 2,507,283.82 1,317,104.66 3,824,388.48 Colombia 137 3,387,409.11 1,292,631.03 4,680,040.13 Costa Rica 33 889,359.32 99,708.82 989,068.14 Dominica 1 700.00 0.00 700.00 Dominican Republic 36 717,430.50 241,850.00 959,280.50 Ecuador 28 726,436.48 82,240.06 808,676.54 El Salvador 19 579,721.59 113,500.00 693,221.59 Grenada 2 8,000.00 0.00 8,000.00 Guatemala 28 1,513,288.25 210,000.00 1,723,288.25 Guyana 8 76,416.96 0.00 76,416.96 Haiti 12 127,803.80 25,250.00 153,053.80 Honduras 26 1,468,018.74 142,900.75 1,610,919.49 Jamaica 24 517,495.60 194,244.48 711,740.09 Mexico 210 7,186,033.39 2,884,633.53 10,070,666.92 Nicaragua 24 631,803.87 12,428.57 644,232.45 Panama 33 2,045,042.15 153,300.00 2,198,342.15 Paraguay 18 1,260,054.41 10,000.00 1,270,054.41 Peru 79 2,310,576.53 963,099.31 3,273,675.85 St. Lucia 3 45,421.91 0.00 45,421.91 Suriname 1 4,065.88 0.00 4,065.88 Trinidad and Tobago 18 358,653.74 235,000.00 593,653.74 Uruguay 19 347,857.83 120,000.00 467,857.83 Venezuela, Republica Bolivariana de 39 897,229.54 703,791.42 1,601,020.96 Regional Investments: 80 1,978,744.75 350,000.00 2,328,744.75 Latin America and the Caribbean 114 IFC FINANCIALS 2016 NUMBER OF LOAN & GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL MIDDLE EAST AND NORTH AFRICA Afghanistan 8 225,346.86 0.00 225,346.86 Algeria 14 253,557.27 5,556.90 259,114.17 Bahrain 2 340,271.16 0.00 340,271.16 Egypt, Arab Republic of 102 3,229,037.98 814,871.26 4,043,909.23 Iran, Islamic Republic of 11 63,342.91 8,199.46 71,542.37 Iraq 13 738,951.18 150,000.00 888,951.18 Jordan 56 1,441,377.29 625,088.31 2,066,465.61 Lebanon 39 3,609,847.60 230,430.00 3,840,277.60 Morocco 45 965,950.97 515,014.09 1,480,965.06 Oman 7 319,853.40 57,000.00 376,853.40 Pakistan 138 6,203,021.36 665,807.01 6,868,828.37 Saudi Arabia 11 466,276.71 0.00 466,276.71 Syrian Arab Republic 4 24,731.60 0.00 24,731.60 Tunisia 31 482,686.92 427,227.80 909,914.72 United Arab Emirates 4 69,000.00 0.00 69,000.00 Yemen, Republic of 14 206,004.20 56,104.66 262,108.86 Regional Investments: Middle East and North Africa 45 1,557,581.28 33,000.00 1,590,581.28 WORLDWIDE Australia 2 975.00 0.00 975.00 Cyprus 7 32,181.47 645.25 32,826.72 Finland 4 1,233.13 1,914.51 3,147.64 Israel 1 10,500.00 0.00 10,500.00 Italy 1 960.00 0.00 960.00 Portugal 7 51,811.13 11,000.00 62,811.13 Spain 5 19,042.51 1,685.00 20,727.51 Regional Investments: Worldwide 150 9,216,280.15 183,000.00 9,399,280.15 Other2 25 393,181 11,400 404,581 5,988 197,094,870 47,992,205 245,087,074 1. Commitments are composed of funds to be provided by IFC for its own account and funds to be provided by participants through the purchase of an interest in IFC’s investment. 2. Of this amount, $9.8 million ($8.4m for IFC and $1.4m for participant’s account) represents investments made at a time when the authorities on Taiwan represented China in the International Finance Corporation. The balance represents investments in West Bank and Gaza, Taiwan, China and Hong Kong SAR, China. IFC FINANCIALS 2016 115 116 IFC FINANCIALS 2016 Creating Opportunity Where It’s Needed Most 2121 PENNSYLVANIA AVENUE, NW WASHINGTON, DC 20433 USA 202 473 3800 ifc.org