The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project (P151789) REPORT NO.: RES39202 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF KAREP: KYRGYZ AUDIT AND FINANCIAL REPORTING ENHANCEMENT PROJECT APPROVED ON DECEMBER 5, 2016 TO THE KYRGYZ REPUBLIC GOVERNANCE EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Lilia Burunciuc Global Director: Edward Olowo-Okere Practice Manager/Manager: Adenike Sherifat Oyeyiola Task Team Leader(s): Natalia Manuilova The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project (P151789) ABBREVIATIONS AND ACRONYMS DFiD Department for International Development (United Kingdom) IASB International Accounting Standards Board ICAEW Institute of Chartered Accountants of England and Wales IFAC International Federation of Accountants IFRS International Financial Reporting Standards IP Implementation Progress ISA International Standards on Auditing PDO Project’s Development Objective SECO State Secretariat for Economic Affairs (Switzerland) SME Small and Medium Enterprises SOE State Owned Enterprise SPMF State Property Management Fund SSRSFM State Service for Financial Markets Regulation and Supervision The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project (P151789) BASIC DATA Product Information Project ID Financing Instrument P151789 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 02-Aug-2016 30-Mar-2020 Organizations Borrower Responsible Agency State Service for Regulation and Supervision of Financial Kyrgyz Republic Markets,Ministry of Finance Project Implementation Unit Financing (in USD Million) FIN_SUMM_PUB_TBL SUMMARY Total Project Cost 0 Total Financing 0 Financing Gap 0 DETAILS -NewFin3 Project Development Objective (PDO) Original PDO KAREP Development Objective is to equip the Kyrgyz Republic with a sound institutional framework for corporate financial reporting by: (i) improving the statutory framework, bringing it closer to good international practices; (ii) enhancing institutional capacityof the regulators, including the financial markets regulator (SSRSFM) and the state property fund, (iii) assisting selected key State Owned Enterprises (SOEs) in improving their financial reporting systems The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project (P151789) and processes, thus, contributing to better corporate governance and management accountability, and (iv) modernizing accounting education and literacy. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net TF Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A3153 05-Dec-2016 05-Dec-2016 19-Jun-2017 30-Mar-2020 1.24 .67 .57 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project () A. Project Status and Context 1. The Project’s Development Objective (PDO) is partially achieved and remains relevant: Kyrgyz Republic is yet to adopt and implement the legislation for improved accounting and audit frameworks that would improve private and state-owned companies’ transparency and public availability of reliable financial data in the Kyrgyz Republic. 2. The Project implementation delay is due to: (i) one year long ratification process by the Kyrgyz Parliament; and (ii) slow start of the implementation and frequent changes in the main counterparts’ SSRSFM leadership, both impacting the Project progress. 3. The ratings of the Progress towards achievement of PDO and Overall Implementation Progress were downgraded to Moderately Unsatisfactory in July 2019 due to insufficient progress in the legislation update. The extension of the closing date is necessary to achieve the PDO. Both, PDO and IP ratings will be revisited once the Project extension is processed, a new action plan is agreed with the SSRSFM and is put back on implementation track. 4. No additional financing is being sought as remaining available funds are sufficient to achieve the PDO. There are no outstanding financial management issues or overdue audits. The first audit of the Project is planned to cover the period of FY2017-2019 and the respective audit report is due by June 30, 2020. 5. Donor (SECO) supported the request for a no-cost extension of the Closing Date. The respective amendment to the Administration Agreement was signed on March 19, 2020. B. Progress Achieved and Rationale for Restructuring 6. Certain progress has been achieved by the Project’s main counterpart – SSRSFM: (i) new accounting and audit legislation was drafted, yet to be finalized and adopted; (ii) financial reporting framework in process of being improved for SOEs; (iii) accounting education benchmarking finalized with next steps agreed between SSRSFM and the Ministry of Education on improving university level accounting education; (iv) training on the IFRS and IFRS for SMEs is ongoing for the preparers of financial statements (public interest entities and SMEs) and academia; (v) capacity building activities are ongoing for the main counterparts of the Project: SSRSFM, SPMF, National Bank. Intermediate indicators are on track but may be delayed due to ongoing COVID-19 emergency (for training for professors and examiners). 7. PDO level objectives progress is summarized in the table: PDO Level Indicator Status Legal framework on financial reporting and audit » Audit legislation gap analysis compiled modernized, inconsistencies with other » Legislation drafted for both: accounting and audit laws legislation assessed and amended » Stakeholders consultations ongoing Translation of international standards available, » Agreements with standard setters (IASB, IFAC) signed and regularly updated and incorporated into the formalized the use of international standards in the Kyrgyz legislation Republic » IFRS for SME translated; full IFRS and ISA are still to be translated Institutional responsibilities of regulators » Pending changes in the legislation clarified, sustainable funding mechanisms » Capacity building ongoing designed capacity improved Number of teachers’/ lecturers’ are trained in » Ongoing. As of December 2019, 116 professors and lecturers knowledge of international standards trained in IFRS and IFRS for SMEs Universities curricula/ manuals are updated with » Pending completion of the Accounting Education international standards Benchmarking study and respective recommendations implementation 8. Despite the progress achieved, the delays with legislation updates hamper further Project progress. The SSRSFM has drafted the new legislation in accounting and audit, however, adoption and implementation has not yet materialized. The new management of the SSRSFM appointed in November 2019 has confirmed their intention to follow through and committed to legislation update. I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project () II. DESCRIPTION OF PROPOSED CHANGES C. Budget Status and Available Funds 9. Due to the Project late launch and delay of activities implementation, the Project’s budget is 54% utilized. 10. Moreover, parallel technical assistance implemented by the ICAEW (Institute of Chartered Accountants of England and Wales) with funding provided by IFAC and DFID, is devoting their resources for development of the professional accountancy organizations, thus allowing for re-prioritization of Project’s activities and resources. 11. This is the first extension of the closing date. No-cost extension of the closing date is proposed to extend the closing date of the Recipient Executed Trust Fund (P151789) for twenty three months - from March 30, 2020 to February 28, 2022. This extension has been requested by the client and agreed with the Donor. The respective amendment to the Administration Agreement was signed by SECO on March 19,2020. 12. The extension is requested to: (i) complete implementation of activities which were delayed due to the delayed start of the Project implementation and to achieve PDO; and (ii) allow implementation support for the new legislation in accounting and audit III. SUMMARY OF CHANGES Changed Not Changed Loan Closing Date(s) ✔ Implementation Schedule ✔ Implementing Agency ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Cancellations Proposed ✔ Additional Financing Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Change in Overall Risk Rating ✔ The World Bank KAREP: Kyrgyz Audit and Financial Reporting Enhancement Project () Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline TF Status Closing Closing(s) Closing for Withdrawal Applications TF-A3153 Effective 30-Mar-2020 28-Feb-2022 28-Jun-2022 Note to Task Teams: End of system generated content, document is editable from here.