101053 International Development Association Management’s Discussion & Analysis and Condensed Quarterly Financial Statements December 31, 2012 (Unaudited) INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) CONTENTS December 31, 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS I INTRODUCTION 3 II SOURCES AND APPLICATIONS OF FUNDS 3 III BASIS OF REPORTING 3 IV STATEMENT OF ACTIVITIES ANALYSIS 4 V BALANCE SHEET ANALYSIS 6 VI FUNDING AND LIQUIDITY POSITION 7 VII COMMERCIAL CREDIT RISK 8 VIII IDA16 COMMITMENT AUTHORITY 8 IX SENIOR MANAGEMENT CHANGES 9 LIST OF BOXES, TABLES, AND CHARTS Box 1 Selected Financial Data 2 Tables 1 Statement of Activities for the three months ended December 31, 2012 and 2011 4 2 Condensed Balance Sheet 6 3 Changes in the net asset value of the investment portfolio 7 4 Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating 8 Chart 1 IDA16 Commitment Authority Status 8 CONDENSED QUARTERLY FINANCIAL STATEMENTS CONDENSED BALANCE SHEET 10 CONDENSED STATEMENT OF INCOME 11 CONDENSED STATEMENT OF COMPREHENSIVE INCOME 12 CONDENSED STATEMENT OF CHANGES IN ACCUMULATED DEFICIT 12 CONDENSED STATEMENT OF CASH FLOWS 13 NOTES TO CONDENSED QUARTERLY FINANCIAL STATEMENTS 14 Box 1: Selected Financial Data In millions of US dollars, except ratios and return data in percentages and months As of and for the six months ended Full Year December December June 30, 31, 2012 31, 2011 2012 Development Operations (Section IV) Commitments of development credits, grants and guarantees $ 6,826 $ 4,946 $ 14,753 Gross disbursements of development credits and grants 4,581 5,680 11,061 a a Net disbursements of development credits and grants 3,000 3,194 7,037 Balance Sheet (Section V) Total assets $160,344 $154,409 $160,028 Net investment portfolio 26,019 23,037 26,333 of which core liquidity 8,807 8,270 9,698 Development credits outstanding 124,588 122,230 123,576 Payable for development grants 5,981 6,210 6,161 Subscriptions and contributions paid-in 178,903 169,968 175,587 Income Statement (Section IV) Income from development credits and guarantees $ 460 $ 461 $ 914 Investment income, net 381 566 1,006 Transfers and grants from affiliated organizations and trust funds 612 857 858 Development grants (643) (908) (2,062) Net (loss) income (93) 780 (210) Funding Position (Section VI) Investment portfolio and unrestricted demand notes as a percentage of undisbursed commitments of credits and development grants payable 80% 80% 81% Liquidity Position (Section VI) Months of average monthly gross disbursements covered by core liquidity 11 9 11 a. Net disbursements for the six months ended December 31, 2011 and for the year ended June 30, 2012 include $940 million of prepayments. The associated funds were received in June 2011 but were effective in July, 2011. 2 IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 I. Introduction This document should be read in conjunction with the International Development Association’s (IDA) financial statements and management’s discussion and analysis issued for the fiscal year ended June 30, 2012. IDA undertakes no obligation to update any forward looking statements. Box1 provides IDA’s selected financial data as of and for the six months ended December 31, 2012 and December 31, 2011 as well as the full year June 30, 2012. II. Sources and Applications of Funds IDA’s lending, grant financing and guarantee activities are funded by donor and internal resources, and transfers and grants from affiliated organizations. These key activities are presented and discussed below. Sources of Funds Donor Resources (Subscriptions and Contributions): IDA finances its new commitments for development credits and development grants primarily through contributions from donors. The donor resources are in the form of subscriptions and contributions with assigned voting rights. Internal Resources: These comprise contractual principal repayments (including any accelerated repayments and voluntary prepayments), income from the investment portfolio, and interest income from Blend and Hard- term credits. Transfers and Grants from affiliated organizations and trust funds: These are transfers from the International Bank for Reconstruction and Development’s (IBRD) net income and grants from the International Finance Corporation’s (IFC) retained earnings. Applications of Funds Disbursement of development credits and grants: Through its development operations, IDA’s development credits, development grants and guarantees benefit the poorest members with the lowest credit ratings. III. Basis of Reporting IDA prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), referred to in this document as the “reported basis”. Under the reported basis, IDA’s Statement of Income does not reflect the true economic results of IDA due to a number of asymmetries. These include the following: • The recording of development grants as charges to net income, while the associated funding resources are recorded as equity through members’ subscriptions and contributions. • The reporting of the translation adjustments on the non-special drawing rights currencies (non functional currencies) associated with IDA’s currency forward contracts in the Statement of Income; for which the economic offset, represented by the translation adjustment on the future donor inflows being hedged, is not reported in the financial statements. • The reporting in the Statement of Income of the unrealized mark-to-market gains/losses on the donor asset and liability tranche of the investment portfolio, for which the economic offset, represented by the change in the present value of the associated future net cash outflows reflected in the immunization strategy, is not reported in IDA’s financial statements. The immunization strategy aims to align the duration of this tranche with the duration of the contractual future net cash outflows. • Donor compensation received for forgone charges due to debt relief and grant financing, which funds part of the net administrative expenses, is recorded as equity through members’ contributions. IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 3 IV. Statement of Activities Analysis Given the asymmetries embedded in IDA’s reported results, Management believes that a Statement of Activities (Table 1), better reflects the operating results of IDA. The Statement of Activities categorizes activities under two broad headings, namely: operating activities and risk management activities. It is designed to show the financial impact of IDA’s operating and risk management activities. Table 1 : Statement of Activities Expressed in millions of U.S. dollars For the six months ended December 31 2012 2011 Variance Operating Activities Contributions and other support Members’ subscriptions and contributions $ 1,601 $ 1,828 $ (227) Transfers and grants from affiliated organizations and trust funds 612 857 (245) 2,213 2,685 (472) Development operations Development credit disbursements (3,666) (4,411) 745 Principal repayments 1,581 1,504 77 Discount on prepaid development credits - (113) 113 Write-off on buy-down of development credits, net of proceeds - (3) 3 Development grant disbursements (900) (1,257) 357 Provision for debt relief and for losses on development credits and other exposures, net (12) 20 (32) (2,997) (4,260) 1,263 Investments Investment income, net 381 566 (185) Administrative and other activities Service and interest Charges 460 461 (1) Administrative expenses, net (636) (549) (87) Project Preparation Advances (PPA) grants/other - (2) 2 (176) (90) (86) Results from Operating Activities (579) (1,099) 520 Risk Management Activities Non-functional currency translation adjustment (losses)/gains, net (201) 425 (626) Translation adjustment on non-functional currency donor inflows gains/(losses), net 202 (442) 644 Fair value adjustment on non-trading portfolios, net (54) 68 (122) Results from Risk Management Activities (53) 51 (104) Results from Operating and Risk Management Activities $ (632) $ (1,048) $ 416 Reconciliation to Reported Basis Net Income Expressed in millions of U.S. dollars For the six months ended December 31 2012 2011 Results from operating and risk management activities $ (632) $ (1,048) Members’ subscriptions and contributions (1,601) (1,828) Development credit disbursements 3,666 4,411 Principal repayments (1,581) (1,504) Proceeds from buydown of development credits - (42) Development grant disbursements 900 1,257 Development grant commitments (643) (908) Translation adjustment on non-functional donor inflows (losses)/gains, net (202) 442 Reported Basis Net (Loss)/Income $ (93) $ 780 4 IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 Overall Results from Operating and Risk Management Activities The overall result from IDA’s operating and risk management activities was negative $632 million for the six months ended December 31, 2012 (FY 2013 YTD). This primarily reflects the $2,997 million of net cash outflows for development operations, partially offset by $1,601 million of cash receipts relating to donor contributions, $612 million of transfers and grants from affiliated organizations and trust funds, and $381 million investment income, net. Despite the negative results from operating and risk management activities, IDA’s liquidity position as of December 31, 2012 was sufficient to cover approximately 11 months of average monthly gross disbursements, and remains within the historical range of 9 to 14 months. IDA maintained a stable funding position of 80% at December 31, 2012 as compared to 81% at June 30, 2012. The funding gap will be primarily covered by future receipts of cash and demand notes already committed by donors. At all times, IDA enters into new commitments based on the commitment authority available. See Section VIII for further details on IDA’s Commitment Authority. Results from Operating Activities The key drivers of IDA’s results from operating activities are: (i) Contributions and Other Support, (ii) Development Operations, (iii) Investment Income, and (iv) Administrative Expenses. The impact of these activities on IDA’s Results from Operating Activities for FY 2013 YTD, as compared with the six months ended December 31, 2011(FY 2012 YTD) are discussed below. Contributions and Other Support Transfers and Grants from Affiliated Organizations and Trust Funds The decline of $245 million is due to the timing of the transfer of the IFC grant under IDA 16. In FY 2012, the transfer of the first installment, $330 million, occurred in December 2011. In contrast, the second installment of the grant from IFC of $340 million was received in January 2013. Development Operations Development Credit Disbursements Gross disbursements of development credits during FY 2013 YTD were $3,666 million, which is a decrease of $745 million from FY 2012 YTD. In terms of regional focus, disbursements to South Asia and Africa accounted for $634 million of the decrease. Africa and the South Asian Region together accounted for 72% of the total gross disbursements during FY 2013 YTD. Gross Disbursements Of the $3,666 million in development credit USD Mns disbursements, 23% related to commitments made FY 13 4,566 under IDA16, 43% under IDA15, 30% under IDA14 and the remaining 4% related to commitments made under earlier replenishments. FY 12 5,668 Development Grant Disbursements 0 1,000 2,000 3,000 4,000 5,000 6,000 The majority of the $357 million decrease in development grants disbursed between FY 2013 YTD Development Credits and Grants (Includes adjustments for certain PPA activity) and FY 2012 YTD is attributable to the Africa region. Discount on Prepaid Development Credits During FY 2012 YTD, the total amount prepaid by two IDA graduate members of $940 million, reflected the present value of the development credits as of the date of the prepayment, resulting in an aggregate discount of $113 million. Investments Investment Income IDA’s investment portfolio had a duration of approximately four years as of December 31, 2012. It has two components: the core liquidity and the donor asset and liability management components. The decrease of $185 million in investment income, of which $103 million relates to the donor asset and liability management component, was primarily driven by the lower unrealized mark-to-market gains experienced as a result of the more moderate decline in the yield curves for all major currencies during FY 2013 YTD as compared to FY 2012 YTD. IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 5 Administrative and Other Activities Administrative Expenses, net The increase of $87 million was primarily due to higher pension expenses during FY 2013 YTD compared to FY 2012 YTD. Risk Management Activities The key drivers of IDA’s results from risk management activities are the unrealized mark to market adjustments on the currency forward contracts entered into to hedge the foreign currency exposure from future donor contributions. IDA uses currency forward contracts to hedge those donor contributions that are denominated in non- functional currencies, into special drawing rights (SDR) basket currencies. There are certain non-functional currencies that are not being hedged with such contracts, due to the relatively small size of the contribution or the unpredictability of the expected payment date. The liability positions of the currency forward contracts economically hedging donor pledges are composed of non-functional currencies. Appreciation (depreciation) of these currencies against the U.S. dollar results in translation adjustment losses (gains). The translation adjustment losses on non-functional currencies of $201 million in FY 2013 YTD were primarily due to the significant appreciation of the majority of the non- functional currencies against the U.S. dollar. In contrast, the significant depreciation of the non-functional currencies against the U.S. dollar during the same period in FY 2012 resulted in $425 million of translation adjustment gains. The translation adjustment on the economic offset to the currency forward contracts; the future inflows from donors, was a gain of $202 million during FY 2013 YTD and a loss of $442 million during FY 2012 YTD. The differences between the reported translation adjustments and the related economic offsets are marginal, and primarily represent the donor contributions in certain nonfunctional currencies that are not being hedged due to the reasons outlined above. V. Balance Sheet Analysis The principal components of IDA’s balance sheet are development credits outstanding, investment assets net of liabilities, and subscriptions and contributions paid-in. Movements in these principal components between December 31, 2012 and June 30, 2012 are discussed further below. Table 2: Condensed Balance Sheet In millions of U.S. dollars December June 30, As of 31, 2012 2012 Variance Assets Investment assets, including related derivative assets $ 31,282 $ 34,079 $(2,797) Derivatives relating to asset-liability management 6,914 7,327 (413) Receivables and other assets, including non-investment cash 1,786 1,769 17 Development credits outstanding 124,588 123,576 1,012 Accumulated provision for debt relief and losses on development credits (4,226) (6,723) 2,497 Total assets $160,344 $160,028 $316 Liabilities and equity Liabilities and derivatives relating to investments $ 5,263 $ 7,746 (2,483) Derivatives relating to asset-liability management 7,265 7,714 (449) Payables and other liabilities, including maintenance of value 6,651 6,788 (137 ) Subscriptions and contributions paid-in 178,903 175,587 3,316 Demand obligations (10,393) (8,678) (1,715) Accumulated deficit (39,399) (39,306) (93) Accumulated other comprehensive income 12,054 10,177 1,877 Total liabilities and equity $160,344 $160,028 $316 Development Credits Outstanding and Accumulated Provision for Debt Relief and Losses on Development Credits Development credits outstanding increased by $1,012 million during FY 2013 YTD. This was primarily due to net positive disbursements of $2,085 million and positive translation adjustments of $1,483 million resulting 6 IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 from the 1.28% appreciation of the SDR against the US dollar. This was partially offset by the $2,554 million write off of development credits relating to Côte d’Ivoire and Guinea under the Multilateral Debt Relief Initiative (MDRI). The $2,497 million decrease in the accumulated provision for debt relief and losses on development credits, was also primarily due to the write off of development credits relating to Côte d’Ivoire and Guinea under the Multilateral Debt Relief Initiative (MDRI). Investment Assets, net of related Liabilities The net investment portfolio decreased slightly from $26,333 million as of June 30, 2012 to $26,019 million as of December 31, 2012, reflecting the net results of IDA’s cash related activities as follows: Table 3: Changes in the net asset value of the investment portfolio In millions of U.S. dollars December 31, June 30, 2012 2012 Beginning of fiscal year $26,333 $24,872 Net cash used in development activities (2,085) (5,567) Net cash from contributions and other support 1,601 8,958 Net cash used in operating activities (98) (796) Effects of exchange rates 264 (1,128) Others 4 (6) End of period/fiscal year $26,019 $26,333 Subscriptions and Contributions The $3,316 million increase in subscriptions and contributions paid-in, is primarily attributable to the receipt from members of $2,838 million of demand notes and $364 million of cash contributions. VI. Funding and Liquidity Positions Management monitors IDA’s funding and liquidity positions to assess IDA’s ability to conduct its operations. Since IDA does not borrow from the capital markets, even though it is allowed to do so under its Articles of Agreement, it is important that it has sufficient funding resources and liquidity to meet its contractual obligations to disburse approved development credits and grants in a timely manner. Funding Position Liquidity Position USD bIllions Months 60 30 40 25 20 20 Undisbursed commitments of credits and grants 15 Investment portfolio & unrestricted demand notes 0 10 100% 5 75% 0 50% Funding position percentage Jun 09 Jun 10 Jun 11 Jun 12 Dec 12 25% 0% Months of gross disbursements covered by Core Liquidity Jun 09 Jun 10 Jun 11 Jun 12 Dec 12 As of December 31, 2012, the investment portfolio As of December 31, 2012, core liquidity accounted and unrestricted demand notes covered 80% of all for $8,807 million, comprising short-term and undisbursed commitments of development credits medium-term investments, and was sufficient to and grants, compared with 81% as at June 30, 2012. cover nearly 11 months of average monthly gross IDA’s funding position has been relatively stable for disbursements. the last 4 years, ranging from 74% to 81%. IDA’s liquidity position has been relatively stable for the last 4 years, ranging from 9 to 14 months of average monthly gross disbursements since FY 2009. IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 7 VII. Commercial Counterparty Credit Risk The effective management of commercial counterparty credit risk is vital to the success of IDA’s investment and asset-liability management activities. The monitoring and managing of this risk is a continuous process due to changing market conditions. IDA's commercial counterparty credit risk is concentrated in investments in debt instruments issued by sovereign governments, agencies, corporate entities and banks, as shown in Table 4. Table 4: Commercial Credit Exposure, Net of Collateral Held, by Counterparty Rating In millions of U.S. dollars As of December 31, 2012 June 30, 2012 Agencies, Asset Agencies, Asset Backed Backed Securities, Securities, Swaps, Swaps, Counterparty Corporates, % of Corporates, Time % of Rating Sovereigns Time Deposits Total Total Sovereigns Deposits Total Total AAA $15,107 $3,188 $18,295 63% $18,233 $3,259 $21,492 70% AA 6,050 2,853 8,903 31 3,507 3,379 6,886 22 A 17 1,397 1,414 5 – 2,173 2,173 7 BBB or lower 172 84 256 1 – 81 81 * Total $21,346 $7,522 $28,868 100 $21,740 $8,892 $30,632 100 * Denotes less than 0.5%. IDA’s total commercial credit exposure net of collateral was $28,868 million as of December 31, 2012. Of this amount, $11,559 million (40 %) related to countries in the eurozone; of which $10,970 million (95%) was rated AA or above, and none were rated below A. VIII. IDA16 Commitment Authority December 31, 2012 is the mid-point of the IDA16 USD Mns Commitments replenishment period. Cumulative commitments made under IDA16 as of December 31, 2012 FY 13 6,826 amounted to approximately 40% of the total IDA16 lending envelope of SDR 33.9 billion (U.S. dollar equivalent 52.1 billion). FY 12 4,946 Chart 1 provides a breakdown of the principal 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 sources making up the total lending envelope under the revised IDA16 Commitment Authority Development Credits and Grants Framework and the extent to which these sources have been used for commitments of development credits, grants and guarantees through December 31, 2012. Chart 1 : IDA16 Commitment Authority Status a In billions of U.S. dollars equivalent a. Commitment Authority is measured and monitored in SDR. The chart represents the U.S. dollar equivalent amounts based on USD/SDR exchange rate at December 31, 2012 for presentational purposes only. Actual commitments are recorded based on historical USD rates. b. Amounts may not add due to rounding. c. Includes U.S.dollar equivalent 5.4 billion of donor commitments for compensation of debt relief provided under MDRI. d. IDA 16 replenishment guarantee commitments to date totaled $448 million, of which only 25% ($112 million) is used for the purposes of the Commitment Authority. 8 IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 IX. Senior Management Changes Effective July 1, 2012, Jim Yong Kim became the President of IDA. Effective March 1, 2013, Bertrand Badre will become IDA’s Managing Director, Finance and Chief Financial Officer (CFO). Charles McDonough, who has been the acting CFO from March 28, 2012, will continue to act as CFO through February 28, 2013. Effective January 1, 2013, Mahmoud Mohieldin commenced the new role of President’s Special Envoy on Millennium Development Goals and Financial Development. Effective January 1, 2013, Pamela Cox assumed the position of Senior Vice President, Change Management. IDA MANAGEMENT’S DISCUSSION AND ANALYSIS: DECEMBER 31, 2012 9 CONDENSED BALANCE SHEET Expressed in millions of U.S. dollars December 31, June 30, 2012 2012 (Unaudited) (Unaudited) Assets Due from banks—Note C Unrestricted currencies $ 130 $ 78 Currencies subject to restrictions 30 28 160 106 Investments—Trading (including securities transferred under repurchase or securities lending agreements of $2,700 million—December 31, 2012; $2,691 million—June 30, 2012)—Note C 28,520 30,424 Securities purchased under resale agreements—Note C 266 441 Derivative assets—Notes C, D and F Investments 2,313 1,905 Asset-liability management 6,914 7,327 9,227 9,232 Receivable from affiliated organization—Note F 953 1,006 Development credits outstanding—Note E Total development credits 164,199 160,720 Less: Undisbursed balance 39,611 37,144 Development credits outstanding 124,588 123,576 Less: Accumulated provision for debt relief and for losses on development credits 4,226 6,723 Plus: Deferred development credits origination costs 28 27 Net development credits outstanding 120,390 116,880 Other assets—Note C 828 1,939 Total assets $160,344 $160,028 Liabilities Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received—Note C $ 2,779 $ 3,824 Derivative liabilities—Notes C, D and F Investments 2,344 1,898 Asset-liability management 7,265 7,714 9,609 9,612 Payable for development grants—Note G 5,981 6,161 Payable to affiliated organization—Note F 337 375 Other liabilities—Notes C and E 706 2,510 Total liabilities 19,412 22,482 Equity Members’ subscriptions and contributions—Note B Subscriptions and contributions committed 225,379 224,732 Less: Subscriptions and contributions receivable 43,814 46,571 Cumulative discounts on subscriptions and contributions 2,662 2,574 Subscriptions and contributions paid-in 178,903 175,587 Nonnegotiable, noninterest-bearing demand obligations on account of members’ subscriptions and contributions (10,393) (8,678) Deferred amounts to maintain value of currency holdings (233) (234) Accumulated deficit (see Condensed Statement of Changes in Accumulated Deficit) (39,399) (39,306) Accumulated other comprehensive income—Note I 12,054 10,177 Total equity 140,932 137,546 Total liabilities and equity $160,344 $160,028 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. 10 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 CONDENSED STATEMENT OF INCOME Expressed in millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, (Unaudited) (Unaudited) 2012 2011 2012 2011 Income Development credits and guarantees—Note E $ 232 $ 229 $ 460 $ 461 Investments—Trading, net—Notes C and D 102 148 385 571 Transfers and grants from affiliated organizations and trust funds—Note F 610 334 612 857 Other income—Note F 118 134 206 231 Total income 1,062 845 1,663 2,120 Expenses Administrative expenses—Notes F and H 446 419 842 780 Development grants—Note G 277 489 643 908 Interest expense on securities sold under repurchase agreements 2 1 4 5 Provision for debt relief and for losses on development credits and other exposures, net—(release) charge—Note E (16) (22) 12 (20) Discount on prepaid development credits—Note E — — — 113 Write-off on buydown of development credits—Note E — — — 45 Non-functional currency translation adjustment losses (gains), net 11 63 201 (425) Fair value adjustment on non-trading portfolios, net—Note D 20 (57) 54 (68) Project Preparation Advances (PPA) grants/Other (3) (3) — 2 Total expenses 737 890 1,756 1,340 Net Income (Loss) $ 325 $ (45) $ (93) $ 780 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 11 CONDENSED STATEMENT OF COMPREHENSIVE INCOME Expressed in millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, (Unaudited) (Unaudited) 2012 2011 2012 2011 Net income (loss) $ 325 $ (45) $ (93) $ 780 Other comprehensive (loss) income —Note I Currency translation adjustments on functional currencies (285) (2,402) 1,877 (6,047) Comprehensive income (loss) $ 40 $(2,447) $1,784 $(5,267) CONDENSED STATEMENT OF CHANGES IN ACCUMULATED DEFICIT Expressed in millions of U.S. dollars Six Months Ended December 31, (Unaudited) 2012 2011 Accumulated deficit at beginning of the fiscal year $(39,306) $(39,096) Net (loss) income for the period (93) 780 Accumulated deficit at end of the period $(39,399) $(38,316) The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. 12 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 CONDENSED STATEMENT OF CASH FLOWS Expressed in millions of U.S. dollars Six Months Ended December 31, (Unaudited) 2012 2011 Cash flows from investing activities Development credits Disbursements $(3,666) $(4,411) Principal repayments 1,581 1,504 Proceeds from buydown of development credits — 42 Net cash used in investing activities (2,085) (2,865) Cash flows from financing activities Members’ subscriptions and contributions 1,601 1,828 Cash flows from operating activities Net (loss) income (93) 780 Adjustments to reconcile net (loss) income to net cash provided by operating activities Provision for debt relief and for losses on development credits and other exposures, net—charge (release) 12 (20) Non-functional currency translation adjustment losses (gains), net 201 (425) Discount on prepaid development credits — 113 Write-off on buydown of development credits — 45 Fair value adjustment on non-trading portfolios, net 54 (68) PPA grants/Other — 2 Changes in: Investments—Trading, net 628 928 Other assets and liabilities (271) (314) Net cash provided by operating activities 531 1,041 Effect of exchange rate changes on unrestricted cash 5 (3) Net increase in unrestricted cash 52 1 Unrestricted cash at beginning of the fiscal year 78 20 Unrestricted cash at end of the period $ 130 $ 21 Supplemental disclosure Increase (decrease) in ending balances resulting from exchange rate fluctuations Development credits outstanding $ 1,483 $(4,822) Investment portfolio 264 (910) Principal repayments written off under Heavily Indebted Poor Countries (HIPC) Debt Initiative (3) (2) Development credits written off under Multilateral Debt Relief Initiative (MDRI) (2,554) – Amounts received in prior year relating to current year’s development credit prepayments — 940 Buydown of Development credits — nominal value — 87 The Notes to Condensed Quarterly Financial Statements are an integral part of these Statements. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 13 NOTES TO CONDENSED QUARTERLY FINANCIAL STATEMENTS NOTE A—SUMMARY OF SIGNIFICANT In April 2011, the Financial Accounting Standards ACCOUNTING AND RELATED POLICIES Board (FASB) issued Accounting Standard Update (ASU) No. 2011-02, Receivables: A Creditor’s Basis of Preparation Determination of Whether a Restructuring Is a These unaudited condensed quarterly financial Troubled Debt Restructuring. The ASU clarifies statements should be read in conjunction with the criteria to be considered in evaluating whether a June 30, 2012 audited financial statements and notes restructuring of a receivable constitutes a troubled included therein. The condensed comparative debt restructuring and was effective for IDA from the information that has been derived from the June 30, quarter ended September 30, 2012. As it is IDA’s 2012 audited financial statements has not been practice not to restructure its development credits, audited. In the opinion of management, the this ASU did not have an impact on its financial condensed quarterly financial statements reflect all statements. adjustments necessary for a fair presentation of In June 2011, the FASB issued ASU 2011-05, IDA’s financial position and results of operations in Comprehensive Income (Topic 220): Presentation of accordance with accounting principles generally Comprehensive Income. The ASU requires accepted in the United States of America (U.S. comprehensive income to be reported in either a GAAP). single statement or in two consecutive statements. Management makes estimates and assumptions that The ASU does not change which items are reported affect the reported amounts of assets and liabilities in other comprehensive income or existing and disclosure of contingent assets and liabilities at requirements to reclassify items out of accumulated the date of the condensed quarterly financial other comprehensive income to net income. statements and the reported amounts of income and Subsequently, in December 2011, the FASB issued expenses during the reporting period. Due to the ASU 2011-12, Deferral of the Effective Date for inherent uncertainty involved in making those Amendments to the Presentation of Reclassifications estimates, actual results could differ from those of Items Out of Accumulated Other Comprehensive estimates. Areas in which significant estimates have Income in Accounting Standards Update No. been made include, but are not limited to, the 2011-05, which deferred certain reclassification provision for debt relief and losses on development provisions in ASU 2011-05. For IDA, the ASUs are credits and other exposures, and valuation of certain effective for fiscal year ending after December 15, financial instruments carried at fair value. The results 2012, and interim and annual periods thereafter. The of operations for the first six months of the current ASUs will not have an effect on IDA’s financial fiscal year are not necessarily indicative of the results statement as these are already in compliance with one that may be expected for the full year. of the options allowed under ASU 2011-05. Certain reclassifications of the prior year’s In August 2012, the FASB issued a proposed ASU, information have been made to conform with the Comprehensive Income (Topic 220): Presentation of current year’s presentation. Items Reclassified Out of Accumulated Other Comprehensive Income, which would require entities These financial statements were approved for issue to present separately in the notes, tabular information on February [ ], 2013, which was also the date about items that are reclassified out of each through which IDA’s management evaluated component of accumulated other comprehensive subsequent events. income. IDA is currently evaluating the impact of Accounting and Reporting Developments this proposed ASU on its financial statements. 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 IDA has been determined as of December 31, 2012. IDA continues to evaluate the potential future implications of the Act. 14 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) NOTE B—MEMBERS’ SUBSCRIPTIONS AND During the six months ended December 31, 2012, CONTRIBUTIONS, AND MEMBERSHIP IDA encashed demand obligations totaling $1,237 million. Subscriptions and Contributions: The movement in Subscriptions and Contributions Paid-in for the six months ended December 31, 2012, and for the fiscal NOTE C—INVESTMENTS year ended June 30, 2012, is summarized below: The investment securities held by IDA are designated In millions of U.S. dollars as trading and are carried and reported at fair value, December June 30, or at face value which approximates fair value. 31, 2012 2012 As of December 31, 2012, the majority of the Beginning of the fiscal year $175,587 $167,610 Cash contributions received 364 1,655 Investments—Trading is comprised of government Demand obligations received 2,838 6,848 and agency obligations (82%), with almost all the Translation adjustment 114 (526) instruments being classified as either Level 1 or End of the period/fiscal year $178,903 $175,587 Level 2 within the fair value hierarchy. A summary of IDA’s Investments—Trading at December 31, 2012 and June 30, 2012, is as follows: In millions of U.S. dollars December 31, 2012 June 30, 2012 Investments—Trading Government and agency obligations $23,457 $23,140 Time deposits 4,083 6,104 Asset-backed securities (ABS) 980 1,180 Total $28,520 $30,424 IDA manages its investments on a net portfolio basis. The following tables summarize IDA’s net portfolio position as of December 31, 2012 and June 30, 2012: In millions of U.S. dollars December 31, 2012 June 30, 2012 Investments—Trading $28,520 $30,424 Securities purchased under resale agreements 266 441 Securities sold under repurchase agreements, securities lent under securities lending agreements, and payable for cash collateral received (2,779) (3,824) Derivatives Assets Currency forward contracts 1,020 743 Currency swaps 1,291 1,159 Interest rate swaps 2 2 a Other * 1 Total 2,313 1,905 Derivatives Liabilities Currency forward contracts (1,029) (747) Currency swaps (1,313) (1,149) Interest rate swaps (2) (2) a Other (*) (*) Total (2,344) (1,898) b Cash held in investment portfolio 110 54 c Receivable from investment securities traded 73 1,255 d Payable for investment securities purchased (140) (2,024) Net Investment Portfolio $26,019 $26,333 a. These relate to Mortgage Backed Securities To-Be-Announced (TBA securities). b. This amount is included in Unrestricted currencies under Due from Banks on the Condensed Balance Sheet. c. This amount is included in Other assets on the Condensed Balance Sheet. d. This amount is included in Other liabilities on the Condensed Balance Sheet. * Indicates amount less than $0.5 million. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 15 IDA uses derivative instruments to manage currency and interest rate risk in the investment portfolio. For details regarding these instruments, see Note D—Derivative Instruments. As of December 31, 2012, there were short sales totaling $30 million ($32 million—June 30, 2012) included in Other liabilities on the Condensed Balance Sheet. For the three and six months ended December 31, 2012, IDA’s income included $80 million of unrealized losses and $36 million of net unrealized gains in income (three and six months ended December 31, 2011—$54 million of unrealized losses and $179 million of unrealized gains, respectively). Fair Value Disclosures The following tables present IDA’s fair value hierarchy for investment assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and June 30, 2012: In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of December 31, 2012 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $6,665 $16,792 $— $23,457 Time deposits 151 3,932 — 4,083 ABS — 975 5 980 Total Investments—Trading 6,816 21,699 5 28,520 Securities purchased under resale agreements — 266 — 266 Derivative assets—Investments Currency forward contracts — 1,020 — 1,020 Currency swaps — 1,291 — 1,291 Interest rate swaps — 2 — 2 a Other — * — * — 2,313 — 2,313 Total $6,816 $24,278 $5 $31,099 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements $— $2,779 $— $2,779 Derivative liabilities—Investments Currency forward contracts — 1,029 — 1,029 Currency swaps — 1,313 — 1,313 Interest rate swaps — 2 — 2 a Other — * — * — 2,344 — 2,344 Total $— $5,123 $— $5,123 a. These relate to TBA securities * Indicates amount less than $0.5 million. 16 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2012 Level 1 Level 2 Level 3 Total Assets: Investments—Trading Government and agency obligations $7,131 $16,009 $— $23,140 Time deposits 997 5,107 — 6,104 ABS — 1,176 4 1,180 Total Investments—Trading 8,128 22,292 4 30,424 Securities purchased under resale agreements 335 106 — 441 Derivative assets—Investments Currency forward contracts — 743 — 743 Currency swaps — 1,159 — 1,159 Interest rate swaps — 2 — 2 a Other — 1 — 1 — 1,905 — 1,905 Total $8,463 $24,303 $4 $32,770 Liabilities: Securities sold under repurchase agreements and securities lent under security lending agreements $ 97 $ 3,727 $— $ 3,824 Derivative liabilities—Investments Currency forward contracts — 747 — 747 Currency swaps — 1,149 — 1,149 Interest rate swaps — 2 — 2 a Other — * — * — 1,898 — 1,898 Total $ 97 $ 5,625 $— $ 5,722 a. These relate to TBA securities. * Indicates amount less than $0.5 million. Level 3 Financial Instruments The following table provides a summary of changes in the fair value of IDA’s Level 3 financial instruments relating to Investments—Trading during the three and six months ended December 31, 2012 and December 31, 2011: In millions of U.S. dollars Level 3 Financial Instruments Investments – Trading (ABS) Three Months Ended December 31, Six Months Ended December 31, 2012 2011 2012 2011 Beginning of the period/fiscal year $5 $8 $4 $ 18 Total realized/unrealized gains ( losses) in: Net income 1 2 1 1 Sales/Settlements * (1) * (2) Transfers (out) in, net (1) (7) * (15) End of the period $5 $2 $5 $ 2 * Indicates amount less than $0.5 million. The following table provides information on the unrealized gains or losses included in income for the three and six months ended December 31, 2012 and December 31, 2011, relating to IDA’s Level 3 financial instruments still held as of those dates, as well as where those amounts are included in the Condensed Statement of Income. In millions of U.S. dollars Level 3 Financial Instruments Still Held as of the reporting date Unrealized Gains (Losses) Investments – Trading (ABS) Condensed Statement of Income Location Three Months Ended December 31, Six Months Ended December 31, 2012 2011 2012 2011 Investments—Trading, net $ $* $1 $* * Indicates amount less than $0.5 million. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 17 The fair value of Level 3 instruments in the losses (both interest and principal) as a percentage of investment portfolio is estimated using valuation the principal balance. models that incorporate observable market inputs and Significant increases (decreases) in the assumptions unobservable inputs. The significant unobservable used for these inputs in isolation, would result in a inputs include constant prepayment rates, probability significantly lower (higher) fair value measurement. of default, and loss severity rate. The constant Generally, a change in the assumption used for the prepayment rate is an annualized expected rate of probability of default is accompanied by a principal prepayment for a pool of ABS. The directionally similar change in the assumption used probability of default is an estimate of the expected for the loss severity and a directionally opposite likelihood of not collecting contractual amounts change in the assumption used for constant owed. Loss severity is the present value of lifetime prepayment rates. The following table provides a summary of the valuation technique applied in determining fair values of these Level 3 instruments as of December 31, 2012 and June 30, 2012 and quantitative information regarding the significant unobservable inputs used: In millions of U.S. dollars Fair value at Range (weighted average) December June 30, Valuation Portfolio 31, 2012 2012 Technique Unobservable input December 31, 2012 June 30, 2012 Constant prepayment rate 0.0% to 15.0% (6.9%) 0.5% to 5.0% (4.5%) Investments Discounted $5 $4 Probability of default 0.0% to 11.0% (2.1%) 0.0% to 8.0% (1.1%) (ABS) Cash Flow Loss severity 0.0% to 100% (79.2 %) 0.0% to 100% (45.9%) Inter-level transfers The transfers from Level 2 to Level 3 reflect the unavailability of quoted prices for similar instruments resulting from a decreased volume of trading for these instruments. Conversely, transfers from Level 3 to Level 2 reflect the availability of quoted prices for similar instruments resulting from increased volume of trading for these instruments. The table below provides the details of all gross inter-level transfers during the three and six months ended December 31, 2012 and December 31, 2011: In millions of U.S. dollars Three Months Ended December 31, 2012 Six Months Ended December 31, 2012 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Investments-Trading ABS Transfers (out of) into $— $(1) $1 $— $(3) $3 Transfers into (out of) — 2 (2) — 3 (3) $— $1 $(1) $— $( *) $* * Indicates amount less than $0.5 million. In millions of U.S. dollars Three Months Ended December 31, 2011 Six Months Ended December 31, 2011 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Investments-Trading ABS Transfers into (out of) $— $7 $(7) $— $17 $(17) Transfers (out of) into — — — — (2) 2 $— $7 $(7) $— $15 $(15) Valuation Methods and Assumptions Investment securities Summarized below are the techniques applied in Where available, quoted market prices are used to determining the fair values of investments. determine the fair value of trading securities. Examples include futures contracts and most 18 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) government and agency securities. authorized dealers and counterparties. In addition, credit limits have been established for counterparties For instruments for which market quotations are not by type of instrument and maturity category. available, fair values are determined based on model-based valuation techniques, whether Swap Agreements: Credit risk is mitigated through a internally-generated or vendor-supplied, that include credit approval process, volume limits, monitoring the standard discounted cash flow method using procedures and the use of mark-to-market collateral market observable inputs such as yield curves, credit arrangements. IDA may require collateral in the form spreads, and prepayment spreads. Where applicable, of cash or other approved liquid securities from unobservable inputs such as constant prepayment individual counterparties to mitigate its credit rates, probability of default, and loss severity are exposure. used. IDA has entered into master derivatives agreements Unless quoted prices are available, given their short which contain legally enforceable close-out netting term nature, time deposits are reported at face value provisions. These agreements may further reduce the which approximates fair value. gross credit risk exposure related to the swaps. The reduction in exposure as a result of these netting Securities purchased under resale agreements, provisions can vary as additional transactions are securities sold under repurchase agreements, and entered into under these agreements. The extent of securities lent under securities lending agreements the reduction in exposure may therefore change These securities are of a short term nature and substantially within a short period of time following reported at face value, which approximates fair value. the balance sheet date. Commercial Credit Risk Securities Lending: IDA may engage in securities lending and repurchases, against adequate collateral, For the purpose of risk management, IDA is party to as well as securities borrowing and reverse a variety of financial transactions, certain of which repurchases (resales) of government and agency involve elements of credit risk. Credit risk exposure obligations and ABS. Transfers of securities by represents the maximum potential loss due to IDA to counterparties are not accounted for as sales possible nonperformance by obligors and as the accounting criteria for the treatment as a sale counterparties under the terms of the contracts. For have not been met. Counterparties are permitted to all securities, IDA limits trading to a list of repledge these securities until the repurchase date. The following is a summary of the carrying amount of the securities transferred under repurchase or securities lending agreements, and the related liabilities, as of December 31, 2012 and June 30, 2012: In millions of U.S. dollars December 31, 2012 June 30, 2012 Financial Statement Presentation Securities transferred under Included under Investments—Trading on the repurchase or securities lending $2,700 $2,691 Condensed Balance Sheet agreements Included under Securities sold under repurchase Liabilities relating to securities agreements, securities lent under securities transferred under repurchase or $2,728 $3,772 lending agreements, and payable for cash securities lending agreements collateral received on the Condensed Balance Sheet. As of December 31, 2012, the liabilities relating to legally considered to be true purchases and sales, the securities transferred under repurchase or securities securities received are not recorded on the Balance Sheet lending agreements included $ Nil ($1,046 as the accounting criteria for treatment as a sale have not million—June 30, 2012) of repurchase agreement been met. As of December 31, 2012, IDA had received trades that had not settled at that date. securities with a fair value of $266 million ($442 million—June 30, 2012) in connection with resale IDA receives collateral in connection with resale agreements. Of this amount, securities totaling $51 agreements. This collateral serves to mitigate IDA's million ($52 million—June 30, 2012) had been exposure to credit risk. The collateral received is in the transferred under repurchase or securities lending form of liquid securities and IDA is permitted to agreements. repledge these securities. While these transactions are IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 19 NOTE D—DERIVATIVE INSTRUMENTS IDA uses derivative instruments in its investment portfolio and for asset-liability management purposes. All derivative instruments are classified as Level 2 for the purposes of fair value hierarchy classification. The following table summarizes IDA’s use of authorized derivatives in its various financial portfolios. Portfolio Derivative instruments used Purpose/Risk being managed Risk management purposes: Interest rate swaps, currency forward contracts, currency swaps, options, Manage currency and interest rate risk in the Investments—Trading swaptions and futures contracts portfolio Manage foreign exchange risks of future cash Currency forward contracts and currency Other assets/liabilities flows in non-Special Drawing Rights (SDR) swaps component currencies Other purposes: Client operations Structured swaps Assist clients in managing commodity output risks Under its derivative agreement with IBRD, IDA is not required to post collateral as long as it maintains liquidity holdings at pre-determined levels that are a proxy for an AAA credit rating. As of December 31, 2012, having met the liquidity holdings requirement, IDA had not posted any collateral with IBRD. The following tables provide information on the fair value amounts and the location of the derivative instruments on the Condensed Balance Sheet, as well as the notional amounts and credit risk exposures of those derivative instruments, as of December 31, 2012 and June 30, 2012: Fair value amounts of the derivative instruments on the Condensed Balance Sheet: In millions of U.S. dollars Derivative assets Derivative liabilities Condensed Condensed Balance Sheet December June 30, Balance Sheet December June 30, Location 31, 2012 2012 Location 31, 2012 2012 Derivatives not designated as hedging instruments Options, swaptions and Futures-Investments Other assets $ — $ * Other liabilities $ 6 $ 1 Derivative Derivative Interest rate swaps assets 2 2 liabilities 2 2 Derivative Derivative Currency forward contracts assets 7,934 8,070 liabilities 8,294 8,461 Derivative Derivative Currency swaps assets 1,291 1,159 liabilities 1,313 1,149 Derivative Derivative a Other assets * 1 liabilities * * Total Derivatives $9,227 $9,232 $9,615 $9,613 a. These relate to TBA securities. * Indicates amount less than $0.5 million. 20 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) Notional amounts and credit risk exposure of the derivative instruments: In millions of U.S. dollars Type of contract December 31, 2012 June 30, 2012 Investments—Trading Interest rate swaps Notional principal $ 68 $ 60 Credit exposure 2 2 Currency swaps (including currency forward contracts) Credit exposure 17 28 a Swaptions, exchange traded Options and Futures contracts Notional long position 633 1,251 Notional short position 4,200 4,778 Credit exposure — 2 b Other Notional long position 280 203 Notional short position 31 26 Credit exposure * 1 Derivatives—Asset/liability management Currency forward contracts Credit exposure 64 57 a. Exchange traded instruments are generally subject to daily margin requirements and are deemed to have no material credit risk. All options and futures contracts are interest rate contracts. b. These relate to TBA securities. * Indicates amount less than $0.5 million Amounts of gains and losses on the non-trading derivative instruments and their location in the Condensed Statement of Income during the three and six months ended December 31, 2012 and December 31, 2011 are as follows: a Derivatives not designated as hedging instruments and not held in a trading portfolio In millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, Condensed Statement of Gains (Losses) Gains (Losses) Type of Instrument Income Location 2012 2011 2012 2011 Currency forward contracts and Fair value adjustment on structured swaps non-trading portfolios, net $(20) $57 $(54) $68 a. For alternative disclosures about trading derivatives, see the following table. All instruments in IDA’s investment portfolio are portfolio is primarily held to ensure the availability of held for trading purposes. Within the investment funds to meet future cash flow requirements and for portfolio, IDA holds highly rated fixed income liquidity management purposes. instruments as well as derivatives. The investment The following table provides information on the amount of gains and losses on the net investment portfolio (derivative and non-derivative instruments), and their location on the Condensed Statement of Income during the three and six months ended December 31, 2012 and December 31, 2011: In millions of U.S. dollars Gains (Losses) Three Months Ended Six Months Ended Condensed Statement of Income December 31, December 31, Type of instrument Location 2012 2011 2012 2011 Fixed income Investments—Trading, net $(25) $22 $125 $320 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 21 Fair Value Disclosures IDA’s fair value hierarchy for derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and June 30, 2012 is as follows: In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of December 31, 2012 Level 1 Level 2 Level 3 Total Derivative assets: Investments Currency forward contracts $— $1,020 $— $1,020 Currency swaps — 1,291 — 1,291 Interest rate swaps — 2 — 2 a Other — * — * — 2,313 — 2,313 Asset-liability management Currency forward contracts — 6,914 — 6,914 Total derivative assets $— $9,227 $— $9,227 Derivative liabilities: Investments Currency forward contracts $— $1,029 $— $1,029 Currency swaps — 1,313 — 1,313 Interest rate swaps — 2 — 2 a Other — * — * — $2,344 — $2,344 Asset-liability management Currency forward contracts — 7,265 — 7,265 Total derivative liabilities $— $9,609 $— $9,609 a.These relate to TBA securities. * Indicates amount less than $0.5 million In millions of U.S. dollars Fair Value Measurements on a Recurring Basis As of June 30, 2012 Level 1 Level 2 Level 3 Total Derivative assets: Investments Currency forward contracts $— $ 743 $— $ 743 Currency swaps — 1,159 — 1,159 Interest rate swaps — 2 — 2 a Other — 1 — 1 — 1,905 — 1,905 Asset-liability management Currency forward contracts — 7,327 — 7,327 Total derivative assets $— $9,232 $— $9,232 Derivative liabilities: Investments Currency forward contracts $— $ 747 $— $ 747 Currency swaps — 1,149 — 1,149 Interest rate swaps — 2 — 2 a Other — * — * — 1,898 — 1,898 Asset-liability management — — Currency forward contracts — 7,714 — 7,714 Total derivative liabilities $— $9,612 $— $9,612 a.These relate to TBA securities. * Indicates amount less than $0.5 million. and are valued using the standard discounted cash During the three and six months ended December 31, flow methods using market observable inputs such as 2012 and December 31, 2011, there were no yield curves, foreign exchange rates and basis inter-level transfers in the derivatives portfolio. spreads. Valuation Methods and Assumptions Derivative contracts include currency forward contracts, plain vanilla swaps and structured swaps, 22 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) NOTE E—DEVELOPMENT CREDITS AND Development credits constitute the majority of OTHER EXPOSURES sovereign exposures. Development credits and other exposures (exposures) IDA’s country risk ratings are an assessment of its are generally made directly to member countries of borrowers’ ability and willingness to repay IDA on IDA. Other exposures include irrevocable time and in full. These ratings are internal credit commitments, guarantees and repaying project quality indicators. Individual country risk ratings are preparation facilities. derived on the basis of both quantitative and qualitative factors. For the purpose of analyzing the Development credits are carried and reported at risk characteristics of IDA’s exposures, exposures are amortized cost. Of the total development credits grouped into three classes in accordance with outstanding as of December 31, 2012, 89% were to assigned borrower risk ratings which relate to the the South Asia, Africa, and East Asia and Pacific likelihood of loss: Low, Medium and High risk regions combined. classes, as well as exposures in nonaccrual status. Based on IDA’s internal credit quality indicators, the IDA considers all exposures in nonaccrual status to majority of the development credits outstanding are be impaired. in the Medium risk and High risk classes. IDA’s borrowers’ country risk ratings are key As of December 31, 2012, six borrowers with determinants in the provisions for development credit development credits outstanding totaling $3,520 losses. million representing 2.83% of the total were in IDA considers a development credit to be past due nonaccrual status. when a borrower fails to make payment on any Credit Quality of Sovereign Development Credits principal, service, interest or other charges due to IDA, on the dates provided in the contractual Based on an evaluation of IDA’s development development credit agreements. credits, management has determined that IDA has one portfolio segment — Sovereign Exposures. The following tables provide an aging analysis of development credits outstanding as of December 31, 2012 and June 30, 2012: In millions of U.S. dollars December 31, 2012 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $— $— $— $— $ — $ — $ 6,801 $ 6,801 Medium — — — — — — 29,423 29,423 High 2 — — — — 2 84,842 84,844 Credits in accrual status 2 — — — — 2 121,066 121,068 Credits in nonaccrual status 12 2 6 32 1,133 1,185 2,335 3,520 Total $14 $2 $6 $32 $1,133 $1,187 $123,401 $124,588 In millions of U.S. dollars June 30, 2012 Days past due Up to 45 46-60 61-90 91-180 Over 180 Total Past Due Current Total Risk Class Low $— $— $— $— $ — $ — $ 7,074 $ 7,074 Medium — — — — — — 33,611 33,611 High * — — — — * 79,405 79,405 Credits in accrual status * — — — — * 120,090 120,090 Credits in nonaccrual status 12 2 6 28 1,072 1,120 2,366 3,486 Total $12 $2 $6 $28 $1,072 $1,120 $122,456 $123,576 * Indicates amount less than $0.5 million. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 23 Accumulated Provision for Losses on Provision for Debt Relief Development Credits, Debt Relief (HIPC Debt HIPC Debt Initiative and MDRI provisions are based Initiative and MDRI) and Other Exposures on quantitative and qualitative analyses of various Provision for Losses on Development Credits and factors, including estimates of Decision Point and Other Exposures Completion Point dates. These factors are reviewed Management determines the appropriate level of periodically as part of the reassessment of the accumulated provision for losses, which reflects the adequacy of the accumulated provision for debt probable losses inherent in IDA’s exposures. relief. Provisions are released as qualifying debt Probable losses comprise estimates of losses arising service becomes due, and is forgiven under the from default and nonpayment of principal amounts HIPC Debt Initiative and are reduced by the amount due, as well as present value losses. Management of the eligible development credits written off when reassesses the adequacy of the accumulated provision the country reaches Completion Point, and becomes on a periodic basis and adjustments are recorded as a eligible for MDRI debt relief. charge against or addition to income. Changes to the accumulated provision for losses on development credits and other exposures, as well as the debt relief under HIPC Debt Initiative and MDRI for the six months ended December 31, 2012 and the fiscal year ended June 30, 2012 are summarized below: In millions of U.S. dollars December 31, 2012 June 30, 2012 Develop- Debt relief Develop- Debt relief ment under ment under credits Other HIPC/MDRI Total credits Other HIPC/MDRI Total Accumulated provision, beginning of the fiscal year $ 1,339 $13 $5,384 $6,736 $ 1,333 $15 $5,614 $6,962 Increase (decrease) in provision, net 10 2 (*) 12 70 (1) (3) 66 Development credits written off under HIPC — — (3) (3) — — (5) (5) Development credits written off under MDRI — — (2,554) (2,554) — — — — Translation adjustment 16 — 34 50 (64) (1) (222) (287) Accumulated provision, end of the period/ fiscal year $ 1,365 $15 $2,861 $4,241 $ 1,339 $13 $5,384 $6,736 Composed of accumulated provision for losses on: Development credits in accrual status $ 1,153 $ 1,131 Development credits in nonaccrual status 212 208 Total $ 1,365 $ 1,339 Development credits: Development credits in accrual status $121,068 $120,090 Development credits in nonaccrual status 3,520 3,486 Total $124,588 $123,576 * Indicates amount less than $0.5 million. Reported as Follows Condensed Balance Sheet Condensed Statement of Income Accumulated Provision for Losses on: Accumulated provision for debt relief and Provision for debt relief and for losses on Development Credits losses on development credits development credits and other exposures Accumulated provision for debt relief and Provision for debt relief and for losses on Debt Relief under HIPC/MDRI losses on development credits development credits and other exposures Provision for debt relief and for losses on Other Exposures Other liabilities development credits and other exposures On July 1, 2012, development credits totaling $1,559 On December 20, 2012, Comoros reached the million were written off under the MDRI as a result Completion Point under the HIPC Debt Initiative, of Côte d’Ivoire reaching the Completion Point under allowing for the cancellation of eligible development the HIPC Debt Initiative on June 26, 2012. credits under MDRI totaling $93 million on January 1, 2013. The accumulated provision for debt relief On October 1, 2012, development credits totaling under the HIPC/MDRI of $2,861 million as of $995 million were written off under the MDRI as a December 31, 2012, includes a provision for this result of Guinea reaching the Completion Point under amount. the HIPC Debt Initiative on September 26, 2012. 24 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) Overdue Amounts other charges accrued on development credits outstanding to the member are deducted from the It is the policy of IDA to place in nonaccrual status income from development credits in the current all development credits and other exposures made to, period. Charge income on nonaccrual exposures is or guaranteed by, a member of IDA if principal, included in income only to the extent that payments service charges, or other charges with respect to any have actually been received by IDA. If collectability such exposures are overdue by more than six months, risk is considered to be particularly high at the time unless IDA’s management determines that the of arrears clearance, a borrowing member’s overdue amount will be collected in the immediate exposures may not automatically emerge from future. IDA considers the exposures in nonaccrual nonaccrual status. In such instances, a decision on the status to be impaired. In addition, if exposures restoration of accrual status is made on a made by IBRD to a member government are placed case-by-case basis, and in certain cases that decision in nonaccrual status, all development credits and may be deferred until a suitable period of payment or other exposures made to, or guaranteed by, that policy performance has passed. member government will also be placed in nonaccrual status by IDA. On the date a member’s As of December 31, 2012, there were no principal or development credits and other exposures are placed charges under development credits in accrual status into nonaccrual status, unpaid service charges and which were overdue by more than three months. The following tables provide a summary of selected financial information related to development credits in nonaccrual status as of December 31, 2012 and June 30, 2012 and for the three and six months ended December 31, 2012 and December 31, 2011: In millions of U.S. dollars Average Overdue amounts Nonaccrual Recorded recorded Principal Provision for Provision for a b c Borrower Since investment investment Outstanding debt relief credit losses Principal Charges Eritrea March 2012 $ 480 $ 478 $ 480 $ 355 $ 25 $ 11 $ 5 Myanmar September 1998 783 781 783 — 157 321 88 Somalia July 1991 442 440 442 425 4 185 73 Sudan January 1994 1,289 1,284 1,289 1,211 16 533 177 Syrian Arab Republic June 2012 14 14 14 — * 2 * Zimbabwe October 2000 512 509 512 — 10 133 49 Total — December 31, 2012 $3,520 $3,506 $3,520 $1,991 $212 $1,185 $392 Total — June 30, 2012 $3,486 $3,206 $3,486 $1,980 $208 $1,120 $376 a. A credit loss provision has been recorded against each of the credits in nonaccrual status. b. For December 31, 2012, represents the average for the six months ended that date (June 30, 2012—represents the average for the fiscal year then ended). c. Credit loss provisions are determined after taking into account accumulated provision for debt relief. * Indicates amount less than $0.5 million. In millions of U.S. dollars Three Months Ended Six Months Ended December 31, December 31, 2012 2011 2012 2011 Service charge income not recognized as a result of development credits being in nonaccrual status $6 $6 $13 $12 During the six months ended December 31, 2012 Subsequent Event: and December 31, 2011, no development credits On January 25, 2013, Myanmar cleared all of its were placed into nonaccrual status or restored to overdue principal and charges due to IDA and the accrual status. credits to, or guaranteed by, Myanmar were restored During the three and six months ended December to accrual status on that date. 31, 2012 and December 31, 2011, no service charge income was recognized on development credits in nonaccrual status. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 25 Guarantees 2012). Guarantees of $373 million were outstanding at During the six months ended December 31, 2012 December 31, 2012 ($299 million—June 30, 2012). and December 31, 2011, no guarantees provided by This amount represents the maximum potential IDA were called. undiscounted future payments that IDA could be Segment Reporting required to make under these guarantees, and is not included on the Condensed Balance Sheet. The Based on an evaluation of its operations, guarantees issued by IDA have original maturities management has determined that IDA has only one ranging between 10 and 23 years, and expire in reportable segment. decreasing amounts through 2035. Charge income comprises service charges and As of December 31, 2012, liabilities related to interest charges on outstanding development credit IDA’s obligations under guarantees of $32 million balances and guarantee fee income. For the six ($26 million—June 30, 2012), have been included in months ended December 31, 2012, Credits to two Other liabilities on the Condensed Balance Sheet. countries generate in excess of ten percent of total These include the accumulated provision for charge income; this amounted to $100 million and guarantee losses of $9 million ($7 million—June 30, $47 million, respectively. The following table presents IDA’s development credits outstanding and associated charge income as of and for the six months ended December 31, 2012 and December 31, 2011, by geographic region: In millions of U.S. dollars December 31, 2012 December 31, 2011 Development Development Credits Charge Credits Charge Region Outstanding Income Outstanding Income Africa $ 35,959 $122 $ 35,136 $125 East Asia and Pacific 20,949 78 20,597 78 Europe and Central Asia 8,362 32 8,066 31 Latin America and the Caribbean 1,975 8 1,824 7 Middle East and North Africa 3,754 14 3,786 14 South Asia 53,589 206 52,821 206 Total $124,588 $460 $122,230 $461 Buydown of Development Credits Discount on Development Credits prepaid During the six months ended December 31, 2012, During the six months ended December 31, 2012, there were no development credits purchased under there were no development credits prepaid. the buydown mechanism. During the six months ended December 31, 2011, During the six months ended December 31, 2011, two IDA graduate countries prepaid development two development credits with outstanding nominal credits with outstanding nominal values totaling values of $87 million were purchased for a present $1,053 million as part of IDA16. The total amount value equivalent of $42 million under the buydown prepaid of $940 million reflected the present value mechanism by the Global Program to Eradicate of the development credits as of the date of the Poliomyelitis Trust Funds, resulting in a $45 million prepayment, resulting in an aggregate discount of write-off. $113 million. Fair Value Disclosures The table below presents the fair value of IDA’s development credits along with their respective carrying amounts as of December 31, 2012 and June 30, 2012: In millions of U.S. dollars December 31, 2012 June 30, 2012 Carrying Carrying Value Fair Value Value Fair Value Net Development Credits Outstanding $120,390 $85,240 $116,880 $79,917 26 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) Valuation Methods and Assumptions The fair values of development credits are calculated using market-based methodologies which incorporate the respective borrowers’ Credit Default Swap (CDS) spreads and, where applicable, proxy CDS spreads. Basis adjustments are applied to market recovery levels to reflect IDA’s recovery experience. NOTE F—AFFILIATED ORGANIZATIONS IDA transacts with affiliated organizations as a recipient of transfers and grants, administrative and derivative intermediation services as well as through cost sharing of IBRD’s sponsored pension and other postretirement plans. Transfers and Grants Cumulative transfers and grants made to IDA as of December 31, 2012 were $15,130 million ($14,518 million—June 30, 2012). Details by transferor are as follows: In millions of U.S. dollars Beginning of Transfers during the Transfers from the fiscal year period End of period Total $14,518 $612 $15,130 Of which from: IBRD 12,115 608 12,723 IFC 2,230 — 2,230 Subsequent Event: On January 23, 2013, IDA received a grant of $340 million from the IFC. This is the second installment of IFC’s contribution toward the Sixteenth replenishment of IDA’s resources. Receivables and Payables As of December 31, 2012, and June 30, 2012, the total amounts receivable from or (payable to) affiliated organizations comprised: In millions of U.S. dollars December 31, 2012 Pension and Other Administrative Postretirement Derivative Services Benefits transactions Total Receivable from: IBRD $ — $ 953 $ 6,914 $7,867 Payable to: IBRD $(337) $ — $(7,265) $7,602 In millions of U.S. dollars June 30, 2012 Pension and Other Administrative Postretirement Derivative Services Benefits transactions Total Receivable from: IBRD $ — $1,006 $ 7,327 $ 8,333 Payable to: IBRD $(375) $ — $(7,714) $(8,089) Administrative Services: The payable to IBRD Other income: Includes IDA’s share of other income represents IDA’s share of joint administrative jointly earned with IBRD during the three and six expenses, net of other income jointly earned. The months ended December 31, 2012 totaling $62 allocation of expenses is based upon an agreed cost million and $97 million, respectively (three and six sharing formula, and amounts are settled quarterly. months ended December 31, 2011—$52 million and $89 million, respectively). Other income is allocated For the three and six months ended December 31, on the basis consistent with that applied to joint 2012, IDA’s share of joint administrative expenses administrative expenses. totaled $390 million and $733 million, respectively (three and six months ended December 31, For the three and six months ended December 31, 2011—$338 million and $639 million, respectively). 2012 and December 31, 2011, the amount of fee IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 27 revenue associated with services provided to other prepaid costs for pension and other postretirement affiliated organizations is included in Other income benefit plans and Post-Employment Benefits Plan on the Condensed Statement of Income, as follows: (PEBP) assets. These will be realized over the life of the plan participants. In millions of U.S. dollars Derivative transactions: These relate to currency Three Months Ended Six Months Ended December 31, December 31, forward contracts entered into by IDA with IBRD 2012 2011 2012 2011 acting as the intermediary with the market, and Fees charged to primarily convert donors’ expected contributions in IFC $13 $11 $20 $19 national currencies under the Sixteenth and prior Fees charged to replenishments of IDA’s resources into the four MIGA 2 2 3 3 currencies of the SDR basket. Pension and Other Postretirement Benefits: The receivable from IBRD represents IDA’s net share of NOTE G—DEVELOPMENT GRANTS A summary of changes to the amounts payable for development grants for the six months ended December 31, 2012, and for the fiscal year ended June 30, 2012, is presented below: In millions of U.S. dollars December 31, 2012 June 30, 2012 Balance, beginning of the fiscal year $6,161 $ 6,830 Commitments 643 2,062 Disbursements (900) (2,398) Translation adjustment 77 (333) Balance, end of the period/fiscal year $5,981 $ 6,161 For the fiscal years ending June 30, 2013 and June 30, 2012, the commitment charge rate on the undisbursed balances of IDA grants was set at nil percent. NOTE H—PENSION AND OTHER NOTE I—COMPREHENSIVE INCOME POSTRETIREMENT BENEFITS Comprehensive income consists of net income and IBRD, along with IFC and the Multilateral other gains and losses affecting equity that, under Investment Guarantee Agency sponsor a defined U.S. GAAP, are excluded from net income. For IDA, benefit Staff Retirement Plan, a Retired Staff comprehensive income is comprised of net income Benefits Plan and a PEBP that cover substantially all (loss) and currency translation adjustments on of their staff members. functional currencies. These items are presented in the Statement of Comprehensive Income. While IDA is not a participating entity to these benefit plans, IDA shares the benefit costs and The following table presents the changes in reimburses IBRD for its proportionate share of any Accumulated other comprehensive income balances contributions made to these plans by IBRD, as part of for the six months ended December 31, 2012 and IBRD’s allocation of staff and associated December 31, 2011. administrative expenses to IDA based on an agreed In millions of U.S. dollars cost sharing ratio. Six Months Ended During the three and six months ended December 31, December 31, 2012 2011 2012, IDA’s share of IBRD’s benefit costs relating to Balance, beginning of the all the three plans totaled $84 million and $162 fiscal year $10,177 $17,794 million, respectively (three and six months ended Currency translation December 31, 2011—$46 million and $90 million, adjustments on functional currencies 1,877 (6,047) respectively). Balance, end of the period $12,054 $11,747 The cost of any potential future liability arising from these plans would be shared by IBRD and IDA using the applicable share ratio. 28 IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) NOTE J—OTHER FAIR VALUE DISCLOSURES The table below presents IDA’s estimates of fair value of its financial assets and liabilities along with their respective carrying amounts as of December 31, 2012 and June 30, 2012. In millions of U.S. dollars December 31, 2012 June 30, 2012 Carrying Value Fair Value Carrying Value Fair Value Due from Banks $ 160 $ 160 $ 106 $ 106 Investments (including Securities Purchased Under Resale Agreements) 28,786 28,786 30,865 30,865 Net Development Credits Outstanding 120,390 85,240 116,880 79,917 Derivative Assets Investments 2,313 2,313 1,905 1,905 Other Asset/Liability Management 6,914 6,914 7,327 7,327 Securities sold/lent under repurchase agreements/ securities lending agreements and payable for cash collateral received 2,779 2,779 3,824 3,824 Derivative Liabilities Investments 2,344 2,344 1,898 1,898 Other Asset/Liability Management 7,265 7,265 7,714 7,714 As of December 31, 2012, IDA’s development credits are classified as level 3 within the fair value hierarchy. Valuation Methods and Assumptions As of December 31, 2012 and June 30, 2012, IDA had no assets or financial liabilities measured at fair value on a non-recurring basis. For valuation methods and assumptions of the following items refer to the respective notes as follows: Investments: See Note C Derivative assets and liabilities: See Note D Development Credits Outstanding: See Note E Due from Banks: The carrying amount of unrestricted and restricted currencies is considered a reasonable estimate of the fair value of these positions. IDA CONDENSED QUARTERLY FINANCIAL STATEMENTS: DECEMBER 31, 2012 (UNAUDITED) 29