Redefining Development Finance Financials 2018 Table of Contents 47 CONSOLIDATED FINANCIAL 2 STATEMENTS AND INTERNAL CONTROL REPORTS 48 Management’s Report Regarding MANAGEMENT’S DISCUSSION AND ANALYSIS Effectiveness of Internal Control over External Financial Reporting 3 Executive Summary 50 Independent Auditors’ Report on 7 Client Services Management’s Responsibility for Internal 17 Liquid Assets Control over Financial Reporting 18 Funding Resources 52 Consolidated Balance Sheets 21 Risk Management 53 Consolidated Statements of Operations 29 Critical Accounting Policies 54 Consolidated Statements of Comprehensive Income (Loss) 31 Results of Operations 55 Consolidated Statements of 43 Governance and Control Changes in Capital 57 Consolidated Statements of Cash Flows 59 Consolidated Statement of Capital Stock and Voting Power 60 Notes to Consolidated Financial Statements 116 Independent Auditors’ Report on Consolidated Financial Statements 118 INVESTMENT PORTFOLIO Cumulative Gross Commitments by Region IFC FINANCIALS 2018 | 1 MANAGEMENT’S DISCUSSION AND ANALYSIS IFC FINANCIALS 2018 | 2 Executive Each WBG entity has outlined common as well as ­ specific directions, and a proposed work pro- institution-­ Summary gram and budget trajectory to achieve those directions. The key joint WBG priority over the coming years will be to mainstream the Cascade/MFD into operational work, including expanding its scope beyond infrastructure This executive overview of the Management’s Discussion to the Small and Medium Enterprise (SME), Finance, and Analysis (MD&A) highlights selected information Human Development and other sectors. In addition, and may not contain all of the information that is the WBG is committed to enhancing synergies that important to readers of this document. For a complete strengthen its global leadership and impact in a range description of the financial year’s performance, as well of areas, notably in climate change, gender, jobs, knowl- as the risks and critical accounting estimates affect- edge, and pandemics. In implementing its individual ing the International Finance Corporation (IFC or the strategy, each WBG institution is also committed to Corporation), this MD&A should be read in its entirety. promoting greater cost-­ effectiveness and efficiency. As part of its mission to serve all clients, IFC will exe- cute its strategy by, inter alia, addressing constraints OVERVIEW to private sector investment in fragile and low-­ income countries and directing more financing to these geog- IFC is the largest global development institution focused raphies. New tools are being deployed under IFC’s on the private sector in developing countries. Established strategy (IFC 3.0) to allow IFC to support upstream mar- in 1956, IFC is owned by 184 member countries, a group ket creation in FCS, IDA countries and small states. IFC that collectively determines its policies. IFC is a member will also maintain a robust presence in ­ Middle-­Income of the World Bank Group (WBG)1 but is a legal entity Countries (MICs) — ​ by helping to address challenges separate and distinct from IBRD, IDA, MIGA, and ICSID, such as infrastructure needs, urbanization, and climate with its own Articles of Agreement, share capital, finan- change, and by supporting innovative, replicable busi- cial structure, management, and staff. Membership in ness models. IFC is open only to member countries of IBRD. Following the Spring Meetings in April 2018, a financing The mission of the WBG is defined by two goals (the package, comprising: (i) a three-step capital raising pro- Twin Goals): to end extreme poverty by reducing the cess: Conversion of a portion of retained earnings into percentage of people living on less than $1.90 per day paid-in capital, a Selective Capital Increase (SCI) and to no more than 3% globally by 2030; and to promote a General Capital Increase (GCI) that would provide up shared prosperity in a sustainable manner by fostering to $5.5 billion in additional paid-in capital; (ii) a planned income growth for the bottom 40% of the population suspension of grants to IDA after the conclusion of the of every developing country. IDA 182 replenishment cycle; and (iii) internal measures for increased efficiency was endorsed by the Board of Governors. STRATEGY AND BUSINESS OUTLOOK BUSINESS The Forward Look: A Vision for the World Bank Group in 2030 (the Forward Look), endorsed by shareholders MODEL in 2016, crystallized a shared vision for how the WBG IFC helps developing countries achieve sustainable can help its clients achieve the Twin Goals and the 2030 growth by financing private sector investment, mobi- Development Agenda. It describes how the WBG will lizing capital in international financial markets, and deliver sustainable and inclusive growth, invest in human providing advisory services to businesses and govern- capital, and strengthen resilience through four pillars: ments. IFC’s principal investment products are loans providing services to all clients; scaling up mobilization, and equity investments, with smaller debt security and while expanding the use of private sector solutions; tak- guarantee portfolios. IFC also plays an active and direct ing stronger leadership on global issues; and building a role in mobilizing additional funding from other investors more efficient and effective business model. and lenders through a variety of means. Such means The WBG has achieved significant progress in the imple- principally comprise: loan participations, parallel loans, mentation of the Forward Look. This includes the IDA sales of loans, the non-IFC portion of structured finance scale up and strengthened engagement in small states transactions which meet core mobilization criteria, the and countries affected by fragility, conflict, and violence non-IFC portion of commitments in IFC’s initiatives, (FCV); the launch of the Cascade/Maximizing Finance and the non-IFC investment portion of commitments in for Development approach, which is fostering greater funds managed by IFC’s wholly owned subsidiary, IFC partnership across IFC and IBRD; expanded efforts Asset Management Company LLC (AMC), (collectively across the WBG on the climate and gender agendas Core Mobilization). Unlike most other development reforms to make each institution of the WBG more agile institutions, IFC does not accept host government and cost-­effective. guarantees of its exposures. IFC raises virtually all of the funds for its lending activities through the issuance 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 2. A replenishment occurs every three years and involves donors Investment Guaranty Agency (MIGA), and the International and borrower representatives determining IDA’s strategic Centre for Settlement of Investment Disputes (ICSID). directions, financing, and allocation rules. IFC FINANCIALS 2018 | 3 of debt obligations in the international capital mar- FINANCIAL PERFORMANCE SUMMARY kets, while maintaining a small borrowing window with IBRD. Equity investments are funded from capital (or From year to year, IFC’s net income is affected by a net worth). number of factors that can result in volatile financial performance. IFC’s capital base and its assets and liabilities, other than its equity investments, are primarily denominated Global equity markets in emerging economies have in US dollars ($ or US$) or swapped into US dollars but been volatile in recent years but there was an over- it has a growing portion of debt issuances denominated all improved operating environment in FY18, despite in currencies other than USD and which are invested in a decline in the fourth quarter of FY18 (FY18 Q4). IFC’s such currencies. Overall, IFC seeks to minimize foreign major investment currencies remained relatively stable exchange and interest rate risks arising from its loans against IFC’s reporting currency, the US$, through much and liquid assets by closely matching the currency and of FY18 until significant depreciation in a number of such rate bases of its assets in various currencies with lia- currencies during FY18 Q4. Overall commodity prices bilities having the same characteristics. IFC generally rose during FY18, although there were mixed results manages non-­ equity investment related and certain across the various sectors. lending related residual currency and interest rate risks The market volatility, together with ­ specific p roject-­ by utilizing currency and interest rate swaps and other developments, impacts the valuations of IFC’s invest- derivative instruments. ments and overall financial results. IFC recorded higher The Management’s Discussion and Analysis contains income from equity investments and associated deriva- forward looking statements which may be identified tives in FY18, compared to FY17, driven largely by lower by such terms as “anticipates,” “believes,” “expects,” impairments. IFC also recorded higher income from “intends,” “plans” or words of similar meaning. Such loans and guarantees due to the increase in interest statements involve a number of assumptions and esti- rates and an increase in income from debt securities mates that are based on current expectations, which are driven by higher average balances. FY17 income from subject to risks and uncertainties beyond IFC’s control. loans was positively impacted by a onetime recognition Consequently, actual future results could differ materi- of interest income as a result of a full prepayment of ally from those currently anticipated. a loan. However, IFC also recorded higher borrowing charges, consistent with the increase in interest rates, and lower income from liquid asset trading activities. Specific provisions for losses on loans declined substan- BASIS OF PREPARATION project-­ tially in FY18, led by ­ specific developments, but OF IFC’S CONSOLIDATED was offset by an increase in general provisions on loans as FY17 included a one-time release of $156 million from FINANCIAL STATEMENTS the implementation of a new risk rating system. The accounting and reporting policies of IFC conform IFC has reported income before net unrealized gains and to accounting principles generally accepted in the losses on non-­ trading financial instruments accounted United States (GAAP). IFC’s accounting policies are dis- for at fair value, grants to IDA and net gains and losses cussed in more detail in Section VI, Critical Accounting attributable to non-­ controlling interests of $1,272 million Policies, and in Note A to IFC’s Consolidated Financial in FY18, $143 million higher than FY17 ($1,129 million) Statements as of and for the year ended June 30, 2018 and $772 million higher than FY16 ($500 million). IFC’s (FY18 or FY18 Consolidated Financial Statements). financial performance is detailed more fully in Section ​ esults of Operations. VII — R Management uses income available for designations (Allocable Income) (a non-GAAP measure) as a basis Income Available for Designations (a non-GAAP mea- for designations of retained earnings. Allocable Income sure)3 was $1,318 million, compared with $1,233 million generally comprises net income excluding net unreal- in FY17 and $770 million in FY16. ized gains and losses on equity investments and net unrealized gains and losses on non-­ trading financial instruments accounted for at fair value, income from consolidated entities other than AMC, and expenses reported in net income related to prior year designations. 3. Income available for designations generally comprises net income excluding unrealized gains and losses on investments and unrealized gains and losses on other non-trading financial instruments, income from consolidated VIEs, and expenses reported in net income related to prior year designations. IFC FINANCIALS 2018 | 4 Table 1: Reconciliation of Reported Net Income to Income Available for Designations (US$ millions) FY18 FY17 FY16 Net income (loss) attributable to IFC $1,280 $1,418 $      (33) controlling interests Add: Net gains (losses) attributable to non-­ – 4 (1) Net income (loss) $1,280 $1,422 $      (34) Adjustments to reconcile Net Income to Income Available for Designations Unrealized losses and (gains) on borrowings 93 (74) (62) Grants to IDA 80 101 330 Advisory Services Expenses from prior year designations 60 64 57 Unrealized (gains) and losses on investments (198) (287) 470 Other 3 7 9 Income Available for Designations $1,318 $1,233 $770 Table 2: Selected Financial Data as of and for the Last Five Fiscal Years (US$ millions) AS OF AND FOR THE YEARS ENDED JUNE 30 2018 2017 2016 2015 2014 Consolidated income highlights: Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,377 $ 1,298 $ 1,126 $ 1,123 $ 1,065 Provision for losses on loans, guarantees, accrued interest and other receivables (90) (86) (359) (171) (88) Income from equity investments and associated derivatives 853 707 518 427 1,289 Income from debt securities, including realized gains and losses on debt securities and associated derivatives 363 282 129 132 89 Income from liquid asset trading activities 771 917 504 467 599 Charges on borrowings (1,041) (712) (409) (258) (196) Other income 578 528 501 505 461 Other expenses (1,662) (1,617) (1,464) (1,423) (1,418) Foreign currency transaction gains and losses on non-­ trading activities 123 (188) (46) 53 (19) Income before net unrealized gains and losses on non-­ trading financial instruments accounted for at fair value and grants to IDA 1,272 1,129 500 855 1,782 trading financial Net unrealized gains and losses on non-­ instruments accounted for at fair value 88 394 (204) (106) (43) Income before grants to IDA 1,360 1,523 296 749 1,739 Grants to IDA (80) (101) (330) (340) (251) Net income (loss) 1,280 1,422 (34) 409 1,488 controlling Less: Net (gains) losses attributable to non-­ interests – (4) 1 36 (5) Net income (loss) attributable to IFC $ 1,280 $ 1,418 $ (33) $ 445 $ 1,483 AS OF AND FOR THE YEARS ENDED JUNE 30 2018 2017 2016 2015 2014 Consolidated balance sheet highlights: Total assets $ 94,272 $ 92,254 $ 90,434 $ 87,548 $ 84,130 Liquid assets4 38,936 39,192 41,373 39,475 33,738 Investments 42,264 40,519 37,356 37,578 38,176 Borrowings outstanding, including fair value adjustments 53,095 54,103 55,142 51,265 49,481 Total capital $ 26,136 $ 25,053 $ 22,766 $ 24,426 $ 23,990 of which Undesignated retained earnings $ 23,116 $ 21,901 $ 20,475 $ 20,457 $ 20,002 Designated retained earnings 190 125 133 184 194 Capital stock 2,566 2,566 2,566 2,566 2,502 Accumulated other comprehensive income (loss) (AOCI) 264 458 (431) 1,197 1,239 Non-­controlling interests – 3 23 22 53 4. Net of securities sold under repurchase agreements, payable for cash collateral received and associated derivatives. IFC FINANCIALS 2018 | 5 Table 3: Key Financial Ratios 2018 2017 2016 2015 2014 Financial ratios : a Return on average assets (GAAP basis) b 1.4% 1.6% 0.0% 0.5% 1.8% Return on average assets (non-GAAP basis) c 1.4% 1.3% 0.5% 1.3% 1.8% Return on average capital (GAAP basis) d 5.0% 5.9% (0.1)% 1.8% 6.4% Return on average capital (non-GAAP basis) e 5.1% 4.9% 1.8% 4.6% 6.5% Overall liquidity ratio f 100% 82% 85% 81% 78% External funding liquidity level g N/A N/A 504% 494% 359% Debt to equity ratio h 2.5:1 2.7:1 2.8:1 2.6:1 2.7:1 Total reserves against losses on loans to total disbursed portfolio i 5.1% 6.1% 7.4% 7.5% 6.9% Capital measures: Total Resources Required ($ billions) j 20.1 19.4 19.2 19.2 18.0 Total Resources Available ($ billions) k 24.7 23.6 22.5 22.6 21.6 Strategic Capital l 4.6 4.2 3.3 3.4 3.6 Deployable Strategic Capital m 2.2 1.8 1.0 1.1 1.4 Deployable Strategic Capital as a percentage of Total Resources Available 9% 8% 4% 5% 7% a. Certain financial ratios, as described below, are calculated excluding the effects of unrealized gains and losses on investments, other non-trading financial 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% of the next three years’ estimated net cash requirements. g. This ratio was discontinued at the end of FY17 since it was no longer considered a key ratio for IFC. h. Leverage (Debt/equity) ratio is defined as the number of times outstanding borrowings plus committed guarantees cover paid-in capital and accumulated earnings (net of retained earnings designations and certain unrealized gains/losses). i. 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. j. Total resources required (TRR) is the minimum capital required to cover the expected and unexpected loss on IFC’s portfolio, calibrated triple-A rating. TRR is the sum of the economic capital requirements for IFC’s different assets, and it is determined by to maintain IFC’s ­ 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. k. 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. l. Total resources available less total resources required. m. 90% of total resources available less total resources required. IFC FINANCIALS 2018 | 6 Client INVESTMENT PRODUCTS Services Loans — I​FC finances projects and companies through loans, typically for seven to twelve years. IFC also makes loans to intermediary banks, leasing companies, and other financial institutions for on-­lending. IFC provides BUSINESS long-term local-­ currency solutions and helps compa- OVERVIEW nies access local capital markets through loans from IFC denominated in local currency, derivatives which IFC fosters sustainable economic growth in develop- allow clients to hedge existing or new foreign currency ing countries by financing private sector investment, denominated liabilities back in to the client’s local cur- mobilizing capital in the international financial mar- rency, and structured finance which enable clients to kets, and providing advisory services to businesses and borrow in local currency from other sources. While IFC’s governments. loans have traditionally been denominated in the cur- rencies of major industrial nations, IFC has made it For all new investments, IFC articulates the expected a priority to structure local-­ currency products based impact on sustainable development, and, as the projects on client demand and on IFC’s ability to economically mature, IFC assesses the quality of the development hedge loans in these currencies through the use of cross benefits realized. currency swaps or forward contracts. IFC’s strategic focus areas are aligned to advance the Loans generally have the following characteristics: World Bank Group’s global priorities. ••Term — ​typically amortizing with final maturities gen- erally for seven to twelve years, although some loans have been made for tenors as long as 20 years. INVESTMENT ••Currency — ​primarily in major convertible currencies, SERVICES principally US dollar, and to a lesser extent, Euro, but with a growing local-­ currency loan portfolio. IFC’s investments are normally made in its developing ••Interest rate — t ​ ypically variable (or fixed and swapped into variable). member countries. The Articles of Agreement mandate that IFC shall invest in productive private enterprises. ••Pricing — ​reflects such factors as market conditions and country and project risks. The requirement for private ownership does not dis- qualify enterprises that are partly owned by the public Equity — I​FC’s equity investments provide developmen- sector if such enterprises are organized under local tal support and long-term growth capital that private commercial and corporate law, operate free of host enterprises need. IFC invests directly in companies’ government control in a market context and according equity, and through ­ equity funds. IFC gener- private-­ to profitability criteria, and/or are in the process of being ally invests between 5 and 20 percent of a company’s totally or partially privatized. equity. IFC’s equity investments are typically in the form of common or preferred stock which is not mandatorily IFC provides a range of financial products and ser- redeemable by the issuer or puttable to the issuer by vices to its clients to promote sustainable enterprises, IFC. Equity investments are usually denominated in the encourage entrepreneurship, and mobilize resources currency of the country in which the investment is made. that wouldn’t otherwise be available. IFC’s financing IFC also uses put and call options, profit participation products are tailored to meet the needs of each proj- features, conversion features, warrants and other types ect. Investment services product lines include: loans, of instruments in managing its equity investments. equity investments, trade finance, loan participations, structured finance, client risk management services, and Debt Securities — ​Investments typically in the form of blended finance. bonds and notes issued in bearer or registered form, backed securities securitized debt obligations (e.g. asset-­ IFC’s investment project cycle can be divided into the ­ ortgage-­ (ABS), m backed securities (MBS), and other col- following stages: lateralized debt obligations) and preferred shares that ••Business Development are mandatorily redeemable by the issuer or puttable ••Concept Review to the issuer by IFC. ••Appraisal (Due Diligence) Guarantees and Partial Credit Guarantees — I ​ FC offers ••Investment Review partial credit guarantees to clients covering, on a risk-­ ••Negotiations sharing basis, client obligations on bonds and/or loans. ••Public Disclosure IFC’s guarantee is available for debt instruments and ••Board of Directors Review and Approval trade obligations of clients and covers commercial as ••Commitment well as noncommercial risks. IFC will provide local cur- ••Disbursement of funds rency guarantees, but when a guarantee is called, the ••Project Supervision and Development client will generally be obligated to reimburse IFC in US Outcome Tracking dollar terms. ••Evaluation ••Closing IFC supervises its projects to monitor project perfor- mance and compliance with contractual obligations and with IFC’s internal policies and procedures. IFC FINANCIALS 2018 | 7 Client Risk Management Services — ​ I FC extends Trade and Supply Chain Finance — I ​FC’s Global Trade long-­maturity risk management products to clients in Finance Program (GTFP) guarantees trade-­ related developing countries. IFC provides derivative products payment obligations of approved financial institutions. to its clients to allow them to hedge their interest rate, Separately, the Global Trade Liquidity Program (GTLP) currency, or ­ commodity-price exposures. IFC interme- and Critical Commodities Finance Program (CCFP) pro- diates between clients in developing countries and vides liquidity for trade in developing countries. IFC has derivatives market makers to provide such clients with also commenced a number of other Trade and Supply access to risk-management products to bridge the Chain F­ inance-­related programs, including Global Trade credit gap between its clients and the market. Supplier Finance (GTSF), Global Warehouse Finance Program, Working Capital and Systemic Solutions and Loan Mobilization — ​ I FC promotes development by Global Trade Structured Trade. mobilizing financing for the private sector in its develop- ing member countries. IFC mobilizes funds through loan Structured Finance — I ​FC uses structured and securi- participation programs, parallel loans and a Managed tized products to provide forms of financing that may Co-­Lending Portfolio Program (MCPP). not otherwise be available to clients to help clients diversify funding, extend maturities, and obtain financ- Loan Participations: Through its “B Loan Program”, IFC ing in particular currencies. Products include partial offers commercial banks and other financial institutions credit guarantees, structured liquidity facilities, portfolio the opportunity to lend to IFC-­ financed projects. These risk transfer, securitizations, and Islamic finance. loans are a key part of IFC’s efforts to mobilize addi- tional private sector financing in developing countries, Blended Finance — I ​FC combines concessional funds, thereby broadening the Corporation’s developmental typically from donor partners, with IFC’s resources to impact. Through the B Loan Program, financial institu- finance certain projects. tions share fully in the commercial credit risk of projects, while IFC remains the lender of record. When IFC par- ticipates a B Loan, it always maintains an A Loan for its own account. An A Loan Participation (ALP) is an INVESTMENT exposure management tool which IFC uses to reduce PROGRAM its risk exposures to a client, country or sector. An ALP is created through the partial sale of an IFC A Loan to commercial banks or other financial institutions and COMMITMENTS is governed in much the same way as a B Loan. IFC In FY18, the Long-Term Finance program was remains the lender of record and an ALP participant $11,630 million, as compared to $11,854 million in FY17 shares all project risks with IFC. and Core Mobilization was $11,671 million, as compared Parallel Loans: IFC acts as an arranger (and can also to $7,462 million for FY17, a total increase of 21%. act as an administrative agent) by using its existing In addition, the average outstanding balance for Short- mobilization platform, deal-structuring expertise and Term Finance was $3,435 million at June 30, 2018, as global presence to identify investments, perform due compared to $3,185 million at June 30, 2017. diligence, and negotiate loan documents in cooperation with parallel lenders. CORE MOBILIZATION Managed Co-­ lending Portfolio Program: MCPP allows institutional investors the opportunity to passively par- Core Mobilization is financing from entities other than ticipate in IFC’s future loan portfolio. Investors provide IFC that becomes available to clients due to IFC’s direct capital on a portfolio basis, which can be deployed involvement in raising resources. IFC finances only a by IFC in individual investments in accordance with portion, usually not more than 25%, of the cost of any IFC’s strategy and processes. Through MCPP, IFC can project. All IFC-­f inanced projects, therefore, require expand its base of co-­ lending partners to include inves- other financial partners. IFC mobilizes such private tors that do not have the capacity to invest on a “deal sector finance from other entities through a number of by deal” basis. means, as outlined in the Table below. IFC FINANCIALS 2018 | 8 Table 4: FY18 vs FY17 INVESTMENT DISBURSEMENTS Long-Term Finance IFC disbursed $11,150 million for its own account in FY18 ($10,354 million in FY17): $7,919 million of loans and Core Mobilization ($6,486 million in FY17), $1,270 million of equity invest- (US$ millions) ments ($1,872 million in FY17), and $1,961 million of debt securities ($1,996 million in FY17). FY18 FY17 DISBURSED INVESTMENT PORTFOLIO Total Long-Term Finance and Core Mobilization5 $23,301 $19,316 IFC’s total disbursed investment portfolio (a non-GAAP Long-Term Finance performance measure) was $41,738 million at June 30, 2018 ($40,015 million at June 30, 2017), comprising the Loans $ 9,804 $ 9,643 disbursed loan portfolio of $25,172 million ($24,210 mil- Equity investments 1,300 1,601 lion at June 30, 2017), the disbursed equity portfolio of Guarantees 443 540 $10,975 million ($11,385 million at June 30, 2017), and Client risk management 83 70 the disbursed debt security portfolio of $5,591 million ($4,420 million at June 30, 2017). Total Long-Term Finance $11,630 $11,854 IFC’s disbursed investment portfolio is diversified by Core Mobilization industry sector and geographic region. Loan participations, parallel The distribution of the disbursed investment portfolio by loans, and other mobilization geographical region and industry sector as of June 30, Parallel loans $ 5,389 $ 1,509 2018 and June 30, 2017 is shown below: Loan participations6 1,785 1,610 Managed Co-­ lending Portfolio Figure 1: Disbursed Program 571 356 Other Mobilization 1,238 988 Investment Portfolio Total loan participations, Distribution by Region parallel loans and other mobilization $ 8,983 $ 4,463 (US$ millions) AMC (see definitions in Table 7) Asia GEM Funds $    151 $      79 12,950 Catalyst Funds 62 39 11,096 Global Infrastructure Fund 19 157 Latin America and the Caribbean MENA Fund 16 10 8,972 8,679 Asia Fund 15 46 Europe and Central Asia China-­Mexico Fund – 180 7,821 ALAC Fund – 20 7,510 Total AMC $    263 $   531 Sub-Saharan Africa Other initiatives 5,341 Public Private Partnership $ 1,044 $ 1,248 5,225 Middle East and North Africa Global Trade Liquidity Program, Critical 3,244 Commodities Finance 4,275 Program and Global Other Warehouse Finance Program 960 1,220 r 3,410 Debt and Asset Recovery 3,230 Program 421 –    FY18    FY17 Total other initiatives $ 2,425 $2,468 Total Core Mobilization $11,671 $7,462 5. Debt security commitments are included in loans and equity investments based on their predominant characteristics. 6. In FY17, $30 million was mobilized through loan participations by the Women Entrepreneurs Debt Fund, LP (WED Fund) that is managed by AMC. IFC FINANCIALS 2018 | 9 Table 5: Disbursed Investment Portfolio Distribution by Industry Sector (US$ millions) DISBURSED INVESTMENTS AS A % OF TOTAL FY18 FY17 FY18 FY17 Finance & Insurance $ 16,186 $ 14,521 39% 36% Electric Power 5,276 4,976 13% 12% Collective Investment Vehicles 4,018 3,741 10% 9% Transportation and Warehousing 2,368 2,589 6% 7% Chemicals 2,301 2,090 5% 5% Agriculture and Forestry 1,719 1,862 4% 5% Oil, Gas and Mining 1,353 1,923 3% 5% Food & Beverages 1,180 1,016 3% 3% Health Care 916 944 2% 2% Wholesale and Retail Trade 884 582 2% 2% Others 5,537 5,771 13% 14% Total $41,738 $40,015 100% 100% The carrying value of IFC’s investment portfolio com- US dollar, appreciated significantly against emerging prises: (i) the disbursed investment portfolio; (ii) reserves market investment currencies in FY18 such as the Turkish against losses on loans; (iii) unamortized deferred loan lira, Brazilian real and Indian rupee. The remainder of origination fees, net and other; (iv) disbursed amount the change is primarily due to loan sales and capital allocated to a related financial instrument reported charges. The carrying amount of IFC’s loan portfolio separately in other assets or derivative assets; (v) unre- on IFC’s consolidated balance sheet (comprising the alized gains and losses on equity investments held by disbursed loan portfolio together with adjustments as consolidated variable interest entities; (vi) unrealized detailed in Note D to IFC’s FY18 Consolidated Financial gains and losses on investments accounted for at fair Statements) grew 4.8% to $23,609 million at June 30, value as ­ available-for-sale; and (vii) unrealized gains and 2018 ($22,520 million at June 30, 2017). losses on investments. Loans traditionally have been denominated in the The carrying value of IFC’s investment portfolio was currencies of major industrial nations, but IFC has an $42,264 million at June 30, 2018 ($40,519 million at extensive portfolio of local currency products. IFC typ- June 30, 2017), comprising the loan portfolio of ically offers local currency products in other currencies $23,609 million ($22,520 million at June 30, 2017), where it can economically hedge the local currency the equity portfolio of $13,032 million ($13,488 million loan cash flows back into US dollars using swap mar- at June 30, 2017), and the debt security portfolio of kets or where it can fund itself in local bond markets. $5,623 million ($4,511 million at June 30, 2017). IFC’s disbursed loan portfolio at June 30, 2018 includes $3,748 million of currency products denominated in LOANS Chinese renminbi, Brazilian real, South African rand, Indian rupee, Colombian peso, Indonesian rupiah, Loans comprise 60% of the disbursed investment port- Philippine peso, Mexican peso, New Romanian lei, folio as of June 30, 2018 (61% at June 30, 2017) and 56% Kazakhstan tenge, Peruvian soles nuevos, Russian ruble, of the carrying amount of the investment portfolio as of Hong Kong dollar and Turkish lira ($3,225 million at June 30, 2018 (56% at June 30, 2017). June 30, 2017). The $523 million increase in FY18 in local currency loans outstanding measured in US dollars was IFC’s disbursed loan portfolio totaled $25,172 million mainly due to disbursements of loans denominated in at June 30, 2018 ($24,210 million at June 30, 2017), an Brazilian real, Chinese renminbi and Colombian peso. increase of 4.0%. The increase in the loan portfolio IFC has also made loans in a number of frontier market is due to new disbursements exceeding repayments currencies such as Tunisian dinar, Paraguayan gua- ($1,561 million in FY18), partially offset by reduction in rani, Rwandan franc, and Zambian kwacha. At June 30, loans outstanding due to write-offs net of recoveries 2018, 73% of IFC’s disbursed loan portfolio was US ($294 million in FY18) and currency exchange rate fluctu- ­ dollar-­denominated (75% at June 30, 2017). ations ($199 million in FY18). IFC’s reporting currency, the IFC FINANCIALS 2018 | 10 The currency position of the disbursed loan portfolio at June 30, 2018 and June 30, 2017 is shown below: Table 6: Currency Position of the Disbursed Loan Portfolio (US$ millions) DISBURSED LOANS AS A % OF TOTAL FY18 FY17 FY18 FY17 US dollar $ 18,332 $ 18,065 73% 75% Euro 2,754 2,729 11% 11% Chinese renminbi 789 665 3% 3% Brazilian real 722 427 3% 2% South African rand 388 373 1% 1% Indian rupee 370 455 1% 2% Colombian peso 303 181 1% 1% Indonesian rupiah 219 335 1% 1% Philippine peso 216 156 1% 1% Mexican peso 184 152 1% 1% Others 895 672 4% 2% Total $25,172 $24,210 100% 100% EQUITY INVESTMENTS The carrying amount of IFC’s debt securities portfo- lio (comprising the disbursed debt securities portfolio, IFC’s disbursed equity portfolio totaled $10,975 million together with adjustments as detailed in Note D to IFC’s at June 30, 2018 ($11,385 million at June 30, 2017), a FY18 Consolidated Financial Statements), increased decrease of 3.6%. The decrease was primarily due to 25% to $5,623 million at June 30, 2018 ($4,511 million write downs of $446 million in FY18, as new investments at June 30, 2017). made were more than offset by the cost of investments Additional information on IFC’s investment portfolio as sold during the year. of and for the years ended June 30, 2018, and June 30, Equity investments accounted for 26% of IFC’s dis- 2017, can be found in Notes B, D, E, F, G, H, P and R to bursed investment portfolio at June 30, 2018, compared IFC’s FY18 Consolidated Financial Statements. with 28% at June 30, 2017 and 31% of the carrying amount of the investment portfolio at June 30, 2018 GUARANTEES AND PARTIAL (33% at June 30, 2017). CREDIT GUARANTEES The carrying amount of IFC’s equity investment portfo- IFC offers partial credit guarantees to clients cover- lio (comprising the disbursed equity portfolio, together ing, on a risk-­sharing basis, client obligations on bonds with adjustments as detailed in Note D to IFC’s FY18 and/or loans. IFC’s guarantee is available for debt Consolidated Financial Statements), declined 3.4% instruments and trade obligations of clients and covers to $13,032 million at June 30, 2018 ($13,488 million at commercial as well as noncommercial risks. IFC will pro- June 30, 2017). vide local currency guarantees, but when a guarantee is The fair value of IFC’s equity portfolio7 was $15,283 mil- called, the client will generally be obligated to reimburse lion at June 30, 2018 ($15,353 million at June 30, 2017). IFC in US dollar terms. Guarantee fees are consistent with IFC’s loan pricing policies. DEBT SECURITIES Guarantees of $4,096 million were outstanding (i.e., not called) at June 30, 2018 ($3,528 million at June 30, 2017). IFC’s disbursed debt securities portfolio totaled $5,591 million at June 30, 2018 ($4,420 million at June 30, INVESTMENT PORTFOLIO MANAGEMENT 2017), an increase of 26%. The increase in the debt securities portfolio is due to new disbursements exceed- At the core of IFC’s approach to portfolio management ing repayments ($1,447 million in FY18), partially offset is the aim to build and proactively manage a portfolio by reduction in balances outstanding due to currency that produces strong financial results and development exchange rate fluctuations ($193 million in FY18) and impact. IFC achieves this through a combination of other-than-­ temporary impairments ($39 million in FY18). strong presence on the ground and deep sector exper- Debt securities accounted for 14% of IFC’s disbursed tise, that enables IFC to stay close to its clients and investment portfolio at June 30, 2018 (11% at June 30, markets, monitor trends and anticipate impacts on its 2017) and 13% of the carrying amount of the investment portfolio of clients. portfolio at June 30, 2018 (11% at June 30, 2017). 7. Including “equity-like” securities classified as debt securities in IFC’s consolidated balance sheet and equity-related options. IFC FINANCIALS 2018 | 11 In order to provide continued corporate oversight to For projects in financial distress, IFC’s Special IFC’s portfolio, the Corporate Portfolio Committee peri- Operations Department determines the appropriate odically reviews the investment portfolio, looking both remedial actions. It seeks to keep the project opera- at broad trends as well as select individual assets, which tional to achieve the development impact intended at are further complemented by monthly focused in-depth its onset. It also negotiates agreements with creditors discussions of IFC’s key sector and country exposures. and shareholders to share the burden of restructuring. Quarterly reviews of IFC’s portfolio results are presented Investors and other partners participating in IFC’s to the Board, along with an in-depth analysis at the end operations are kept regularly informed on project of the Fiscal Year. Our investment and portfolio teams, developments. IFC consults or seeks their consent as largely based in field offices, complement global reviews appropriate. with asset-by-asset quarterly assessments, for both debt and equity investments. At the core of active portfolio management is the need to have timely and accurate information to At the corporate level, IFC combines the analysis of its drive business decisions. IFC continues to invest in portfolio performance with sector expertise and coun- information-­ ­ technology systems to better support the try/region market intelligence, and projections of global management of its portfolio, and is in the process of macroeconomic and market trends to inform decisions strengthening its portfolio support structure through about future investments. IFC also regularly conducts the creation of the Operations Support Unit at the cor- stress tests to assess the performance of the portfolio porate level, to be further extended to its sector and against possible macroeconomic developments, and to regional teams. identify and address risks. At the asset level, IFC’s multidisciplinary teams, includ- ing investment and sector specialists with deep industry expertise, closely monitor investment performance and ASSET compliance with investment agreements. IFC does this, MANAGEMENT among other things, through site visits to evaluate proj- ect implementation, and through active engagement COMPANY with sponsors and government officials, where relevant, to identify potential problems early on and formulate IFC Asset Management Company, LLC (AMC), a wholly appropriate solutions. IFC also systematically and owned subsidiary of IFC, invests third-party capital and timely tracks environmental and social performance, IFC capital, enabling outside investors to benefit from and measure financial and development results. IFC’s expertise in achieving strong equity returns, as well as positive development impact in the countries in which Following strong historical growth of its equity portfolio, it invests in developing and frontier markets. Investors in IFC’s equity portfolio declined in FY18 as a result of a funds managed by AMC include sovereign wealth funds, more moderate pace of new equity commitments com- national pension funds, multilateral and bilateral devel- bined with continued strong divestments. Additionally, opment institutions, national development agencies IFC constantly assesses its equity portfolio proactively and international financial institutions (IFIs). AMC helps to identify assets ready for divestments, where IFC’s IFC mobilize additional capital resources for investment development role has been completed. This rebalancing in productive private enterprise in developing countries. of the equity portfolio is the result of an analysis that takes into account market conditions, opportunities, Cumulatively through June 30, 2018, AMC raised total expected returns, and risks, and is adjusted periodically funds of $10.1 billion ($9.8 billion at June 30, 2017). as required. To strengthen this process, IFC has recently appointed Equity Heads of Industry, who provide central oversight particularly of IFC’s larger and more complex equity positions. IFC FINANCIALS 2018 | 12 The Funds Managed by AMC and their activities as of and for the years ended June 30, 2018 and 2017 can be summarized as follows: Table 7: Funds Managed by AMC and Their Activities FY18 vs FY17 (US$ millions unless otherwise indicated) THROUGH JUNE 30, 2018 TOTAL FUNDS RAISED FOR THE YEAR ENDED SINCE INCEPTION JUNE 30, 2018 FROM CUMULATIVE INVESTMENT INVESTMENT OTHER INVESTMENT COMMITMENTS DISBURSEMENTS TOTAL FROM IFC INVESTORS COMMITMENTS1 MADE BY FUND2 MADE BY FUND Investment Period IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, Catalyst Funds) $  418 $  75 $ 343 $ 379 $ 73 $ 70 IFC Global Infrastructure Fund, LP (Global Infrastructure Fund)3 1,430 200 1,230 891 23 44 Mexico Fund, LP (China-­ China-­ Mexico Fund) 1,200 – 1,200 320 – 75 IFC Financial Institutions Growth Fund, LP (FIG Fund) 505 150 355 133 – – IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds (Japan Parallel), LP (collectively, GEM Funds) 800 150 650 397 189 120 IFC Middle East and North Africa Fund, LP (MENA Fund) 162 60 102 52 25 2 Women Entrepreneurs Debt Fund, LP (WED Fund) 115 30 85 87 19 32 IFC Emerging Asia Fund, LP (Asia Fund) 693 150 543 90 20 11 Post Investment Period IFC Capitalization (Equity) Fund, L.P. (Equity Capitalization Fund) 1,275 775 500 1,226 – – IFC Capitalization (Subordinated Debt) Fund, L.P. (Sub-Debt Capitalization Fund) 1,725 225 1,500 1,614 – – IFC African, Latin American and Caribbean Fund, LP (ALAC Fund) 1,000 200 800 876 – 25 Africa Capitalization Fund, Ltd. (Africa Capitalization Fund) 182 – 182 130 – – IFC Russian Bank Capitalization Fund, LP (Russian Bank Cap Fund)4 550 250 300 82 – – Total $10,055 $2,265 $7,790 $6,277 $349 $379 1. Net of commitment cancellations. 2. Excludes commitment cancellations from prior periods. investment fund managed by AMC on behalf of Fund LPs. 3. Includes co-­ 4. The Russian Bank Cap Fund has completed the exit from all its investments and was liquidated during FY18. IFC FINANCIALS 2018 | 13 THROUGH JUNE 30, 2017 TOTAL FUNDS RAISED FOR THE YEAR ENDED SINCE INCEPTION JUNE 30, 2017 FROM CUMULATIVE INVESTMENT INVESTMENT OTHER INVESTMENT COMMITMENTS DISBURSEMENTS TOTAL FROM IFC INVESTORS COMMITMENTS1 MADE BY FUND2 MADE BY FUND IFC Capitalization (Equity) Fund, L.P. (Equity Capitalization Fund) $ 1,275 $ 775 $ 500 $ 1,226 $      - $      - IFC Capitalization (Subordinated Debt) Fund, L.P. (Sub-Debt Capitalization Fund) 1,725 225 1,500 1,619 – – IFC African, Latin American and Caribbean Fund, LP (ALAC Fund) 1,000 200 800 901 36 14 Africa Capitalization Fund, Ltd. (Africa Capitalization Fund) 182 – 182 130 – – IFC Russian Bank Capitalization Fund, LP (Russian Bank Cap Fund)3 550 250 300 82 – – IFC Catalyst Fund, LP, IFC Catalyst Fund (UK), LP and IFC Catalyst Fund (Japan), LP (collectively, Catalyst Funds) 418 75 343 306 49 48 IFC Global Infrastructure Fund, LP (Global Infrastructure Fund)4 1,430 200 1,230 868 189 151 Mexico Fund, LP (China-­ China-­ Mexico Fund) 1,200 – 1,200 320 180 43 IFC Financial Institutions Growth Fund, LP (FIG Fund) 505 150 355 133 – 37 IFC Global Emerging Markets Fund of Funds, LP and IFC Global Emerging Markets Fund of Funds (Japan Parallel), LP (collectively, GEM Funds) 800 150 650 207 99 44 IFC Middle East and North Africa Fund, LP (MENA Fund) 162 60 102 27 15 15 Women Entrepreneurs Debt Fund, LP (WED Fund) 110 30 80 70 40 45 IFC Emerging Asia Fund, LP (Asia Fund) 440 150 290 69 67 70 Total $9,797 $2,265 $7,532 $5,958 $675 $467 1. Reported net of commitment cancellations in FY18. FY17 amounts have been updated for consistency with the FY18 methodology. 2. Excludes commitment cancellations from prior periods. 3. The Russian Bank Cap Fund has completed the exit from all its investments and was liquidated during FY18. investment fund managed by AMC on behalf of Fund LPs. 4. Includes co-­ IFC FINANCIALS 2018 | 14 ADVISORY ­Public-­Private Partnerships: IFC helps governments design and implement p private partnerships in ­ ublic-­ SERVICES infrastructure and basic public services. IFC’s advice helps solve infrastructure bottlenecks, increase public It takes more than finance to achieve sustainable devel- access to electricity, water, health, and education and opment. IFC’s experience shows the powerful role advice helps governments achieve national development goals. can play in unlocking private sector investment and Agribusiness: IFC helps clients improve productivity helping businesses expand and create jobs — t ​hereby and standards in agribusiness. IFC’s efforts are focused strengthening the World Bank Group’s efforts to end on designing efficient value chains and boosting food poverty and boost shared prosperity. thereby providing valuable social, economic, security — ​ To help address increasingly complex development and environmental benefits for all stakeholders. challenges, IFC initiated a holistic approach to create Energy & Resource Efficiency: IFC helps clients develop markets and mobilize private investment. Advisory is quality energy clean, affordable, competitive, and high-­ critical for IFC’s delivery on the new strategy by bringing solutions across the value chain. IFC accelerates the together the diverse World Bank Group actions needed development of commercial markets to increase renew- to create markets and by focusing on building a pipeline able energy production and improve people’s access to of bankable projects, especially in IDA and FCS. modern energy services. Advisory will also continue to deliver proven solutions IFC also provides advisory solutions that can be that support clients to raise their standards, expand deployed across several industries. This includes helping their market access, enable sector reform and develop businesses improve corporate governance and building level playing field. the capacity of smaller businesses operating within the During FY18, IFC provided advice in a number of areas supply chains of larger companies, thereby increasing critical to development: local opportunities while helping clients make better use of local suppliers and resources. Central to IFC’s Financial Sector: IFC helps increase the availability advisory work is helping clients build robust and inclu- and affordability of financial services for individuals sive business performance by making them aware of, and for micro, small, and medium enterprises. IFC works and invest in, the value women can bring either as a with financial institutions to strengthen their risk man- defined consumer segment that can be better served, agement and diversify their product offering in areas as employees, as business leaders or as entrepreneurs such as small and medium enterprises (SMEs), housing and suppliers. finance, and sustainable energy. IFC also supports the development of financial markets — b ​ y promoting uni- The IFC Advisory Services Portfolio8 as of June 30, 2018 versal access to finance, strengthening capital markets, totaled $1.5 billion ($1.5 billion at June 30, 2017). FY18 and establishing credit bureaus and collateral registries program expenditures with clients was $273 million that open up new avenues for companies to create jobs ($246 million in FY17) with a strong focus in strategic and grow sustainably. priority areas of IDA (57%), FCS (19%) and Climate Change (27%) (63%, 20% and 26% respectively in FY17). Investment Climate: IFC helps national and local gov- This emphasis is expected to continue in the coming ernments implement reforms that improve the business years, in particular as a result of the implementation environment and attract and retain investment — ​ fos- of the Creating Market Advisory Window to focus on tering growth, competitive markets, and job creation. market creation in IDA-­ eligible and fragile countries. 8. IFC Advisory Services Portfolio is the total of funds managed by IFC for active advisory projects. Program Expenditures Table 8: IFC Advisory Services — ​ with Clients by Region for FY18 vs FY17 FY18 FY17 IFC ADVISORY SERVICES EXPENSES BY REGION US$ MILLIONS % US$ MILLIONS % Sub Saharan Africa 86 32 82 33 East Asia and the Pacific 46 17 41 17 South Asia 42 15 27 11 Europe and Central Asia 37 14 35 14 Latin America and the Caribbean 30 11 25 10 World region 17 6 14 6 Middle East and North Africa 15 5 22 9 Total expenditures 273 100 246 100 IFC FINANCIALS 2018 | 15 Program Expenditures with Table 9: IFC Advisory Services — ​ Clients by Area for FY18* vs FY17 FY18 FY17 IFC ADVISORY SERVICES EXPENSES BY AREA US$ MILLIONS % US$ MILLIONS % Financial Sector 79 29 70 28 Investment Climate 60 22 63 26 Cross-­Industry Areas 55 20 44 18 ­Public-­Private Partnerships 35 13 34 14 Energy & Resource Efficiency 25 9 20 8 Agribusiness 19 7 15 6 Total expenditures 273 100 246 100 *The date reflects the organizational structure IFC had in place for both FY17 and FY18. PRIVATE SECTOR WINDOW INVESTMENT PORTFOLIO In line with the Forward Look, a $2.5 billion IFC-MIGA Private Sector Window (PSW) was created in the 18th INITIATIVES replenishment of IDA (the IDA18 Replenishment). Its goal is to mobilize private sector investment in IDA-only and MANAGED CO-­ LENDING PORTFOLIO PROGRAM IDA-­ conflict-­ eligible fragile and ­ affected countries, with particular emphasis on fragile and ­ affected conflict-­ The MCPP is an investment platform that uses a countries. The PSW is deployed through four facilities. portfolio approach to mobilize third-party investors These facilities have been designed to target critical alongside IFC for the benefit of our emerging markets challenges faced by the private sector in these diffi- clients. The MCPP offers an innovative new approach cult markets and will leverage IFC and MIGA’s business to Syndications and represents one of the few active platforms and instruments. The facilities are as follows: delivery mechanisms for leveraging new pools of ­ private-­sector capital for development objectives. ••Risk Mitigation Facility: Involves both MIGA and IFC, this facility is designed to provide p ­ roject-based MCPP creates loan portfolios for investors that mimic guarantees to encourage/mobilize private sector segments of IFC’s own future portfolio — ​ similar to an investment in infrastructure projects and p private ­ ublic-­ index fund. Each MCPP facility is crafted to meet the partnerships. individual needs of investors and to address the business ••Local Currency Facility: Administered by IFC, this challenges and regulatory hurdles they face in taking facility is designed to provide local currency denomi- emerging markets exposures. nated loans, investments or hedges to private sector clients who operate in markets where there are lim- As of FY18-end, eight global investors have commit- ited currency hedging capabilities. In the absence of ted over $7 billion to MCPP; four investors participate currency hedging instruments and creditworthy coun- exclusively in infrastructure projects, two exclusively in terparties, IDA would enter into swaps or indemnity sectoral. financial institutions, and two others are cross-­ agreement with IFC. Investors have also approved funding for 120 projects totaling $3.9 billion across 40 countries as of FY18-end. ••Blended Finance Facility: Administered by IFC, this facility blends PSW financing support with IFC IFC will continue to deploy the remaining funds raised investments to support small and medium enterprises as IFC originate new projects that meet investors’ eli- (SMEs), agribusiness and other pioneering investments. gibility criteria. ••MIGA Guarantee Facility: Administered by MIGA, this facility is designed to expand the coverage of MIGA Political Risk Insurance (PRI) products through shared first-loss or risk participation similar to reinsurance. As of June 30, 2018, $185 million of instruments under the PSW had been approved. IFC entered into a cur- rency swap of $9 million with IDA under the Local Currency Facility. IFC FINANCIALS 2018 | 16 LIQUID FUNDED LIQUIDITY ASSETS The primary funding source for liquid assets for IFC is borrowings from market sources. Proceeds of borrow- All liquid assets are managed according to an invest- ings from market sources not immediately disbursed for ment authority approved by the Board of Directors and loans and loan-like debt securities (Funded Liquidity) are liquid asset investment guidelines approved by IFC’s managed internally against money market benchmarks. Corporate Risk Committee, a subcommittee of IFC’s A small portion of Funded Liquidity is managed by third Management Team. parties with the same benchmark as that managed IFC funds its liquid assets from two sources, borrow- internally. ings from the market (funded liquidity) and capital (net worth). Liquid assets are managed in a number of port- folios related to these sources. MANAGED IFC generally invests its liquid assets in highly rated fixed and floating rate instruments issued by, or uncon- NET WORTH ditionally guaranteed by, governments, government The second funding source of liquid assets is that portion agencies and instrumentalities, multilateral organiza- of IFC’s net worth not invested in equity and ­equity-like tions, and high quality corporate issuers; these include investments (Managed Net Worth) which is managed asset-­backed securities (ABS) and ­ mortgage-­ backed against a U.S. Treasury benchmark. A portion of these securities (MBS), time deposits, and other uncondi- assets are managed by third parties with the same tional obligations of banks and financial institutions. benchmark as that part managed internally. Diversification across multiple dimensions ensures a favorable risk return profile. IFC manages the individual Income from liquid assets trading activities9 was liquid assets portfolios on an aggregate portfolio basis $771 million in FY18, $728 million from Funded Liquidity against each portfolios benchmark within specified and $43 million from Managed Net Worth. risk parameters. In implementing these portfolio man- agement strategies, IFC utilizes derivative instruments, principally currency and interest rate swaps and futures and options, and it takes 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 $38.9 billion at June 30, 2018 ($39.2 billion at June 30, 2017). The decrease in FY18 reflects net redemption of borrowings and net disbursements for operating activities. 9. Reported gross of borrowing costs and excluding foreign exchange gains and losses on local currency Funded Liquidity which are reported separately from income from liquid assets trading activities in foreign currency gains and losses on non- trading activities and the effects of internal trades related to foregone swapping of market borrowings and Funded Liquidity in certain currencies. IFC FINANCIALS 2018 | 17 FUNDING IFC diversifies its borrowings by currency, country, source, and maturity to provide flexibility and cost-­ RESOURCES effectiveness. In FY18 IFC borrowed in 29 currencies and in final maturities ranging from 3 months to 30 years. Borrowings outstanding have a weighted average remaining contractual maturity of 7.4 years at June 30, IFC’s funding resources (comprising borrowings, capital 2018 (6.4 years at June 30, 2017). Actual maturities may and retained earnings) as of June 30, 2018 and June 30, differ from contractual maturities due to the existence 2017 are as follows: of call features in certain of IFC’s borrowings. Market borrowings are generally swapped into Figure 2: IFC’s Funding ­ f loating-rate obligations denominated in US dollars. Resources (US$ millions) As of June 30, 2018, IFC had gross payables from b orrowing-­ ­ related currency swaps of $21.2 billion Borrowings from market sources ­ orrowing-­related ($19.0 billion at June 30, 2017) and from b interest rate swaps in the notional principal payable 51,396 amount of $31.2 billion ($34.5 billion at June 30, 2017). 50,541 After the effect of these derivative instruments is taken Retained earnings into consideration, 95% of IFC’s market borrowings at 23,306 June 30, 2018 were variable rate US ­ denominated dollar-­ 22,026 (95% — ​ June 30, 2017). The weighted average cost of Paid-in capital market borrowings after currency and interest rate 2,566 swap transactions was 2.5% at June 30, 2018 (1.4% at 2,566 June 30, 2017). This increase was mainly due to devel- Discount Note Program and other opments in USD funding, where compared to the prior short-term borrowings year, US$ six-month LIBOR rates were 1.0% higher and 2,262 IFC’s credit spread widened by 0.1%. 2,706 IFC also uses its borrowings as a tool to promote capital Borrowings from IDA markets development in emerging and frontier mar- 843 kets and this can result in raising local currency funds. 969 Proceeds of these issuances not disbursed into loans Borrowings from IBRD have primarily been invested in securities of the related – sovereign and sovereign instrumentalities in the cur- rency of the issuances. Borrowings from market sources 196 at June 30, 2018 with no associated interest rate or    FY18    FY17 currency swap amounted to 5% of the total borrowings from market sources (5% at June 30, 2017). BORROWINGS As of June 30, 2018, $2.7 billion ($2.1 billion as of June 30, 2017) of such non-US$ denominated market borrow- The major source of IFC’s borrowings is the international ings were outstanding, denominated in Botswana capital markets. Under the Articles of Agreement, IFC pula, Chinese renminbi, Dominican peso, Georgian may borrow in the public markets of a member coun- lari, Indian rupee, Kazakhstan tenge, Namibia dollar, try only with approvals from that member, together New Romanian lei, New Serbian dinar, New Turkish lira, with the member in whose currency the borrowing is Philippine peso, Rwanda franc and Ukraine hrivnya. denominated. Proceeds of such borrowings were invested in such local currencies, on-lent to clients and/or partially swapped IFC operates under a General Funding Authorization into US dollars. that authorizes IFC to borrow within the limits of its risk policies without requiring annual authorizations from IFC has short term discount note programs in US$, the Board of the Corporation as to the size of its bor- Chinese renminbi and Turkish Lira to provide an addi- rowing program for the subsequent financial year. tional funding and liquidity management tool for IFC in support of certain of IFC’s trade finance and supply IFC’s new medium and long-term borrowings (after chain initiatives and to expand the availability of short the effect of ­ related derivatives) totaled b orrowing-­ term local currency finance. The discount note pro- $16.0 billion during FY18 ($15.4 billion in FY17 and grams provide for issuances with maturities ranging $14.3 billion in FY16). In addition, the Board of Directors from overnight to one year. The weighted average cost has authorized the repurchase and/or redemption of of discount note borrowing was 1.54% at June 30, 2018. debt obligations issued by IFC, which enhances the During FY18, IFC issued $12.7 billion of discount notes liquidity of IFC’s borrowings. During FY18, IFC repur- and $2.3 billion were outstanding as of June 30, 2018 chased and retired $0.8 billion of outstanding debt under the short-term discount note programs. ($2.1 billion in FY17 and $0.5 billion in FY16), generating gains on buybacks of $2 million in FY18 ($2 million in FY17 and $6 million in FY16). IFC FINANCIALS 2018 | 18 CAPITAL AND RETAINED EARNINGS Table 10: IFC’s Capital (US$ millions) JUNE 30, 2018 JUNE 30, 2017 Capital Capital stock, authorized $  2,580 $  2,580 Capital stock, subscribed and paid-in $2,566 $2,566 Accumulated other comprehensive income 264 458 Retained earnings 23,306 22,026 Total IFC capital $26,136 $25,050 Non-­controlling interests – 3 Total capital $26,136 $25,053 At June 30, 2018 and June 30, 2017, retained earnings comprised the following: Table 11: IFC’s Retained Earnings (US$ millions) JUNE 30, 2018 JUNE 30, 2017 Undesignated retained earnings $23,116 $21,901 Designated retained earnings: Creating Markets Advisory Window (CMAW) 122 – Advisory services 46 99 IFC SME Ventures for IDA countries and Global Infrastructure Project Development Fund 17 18 ­Performance-based grants 5 8 Total designated retained earnings $  190 $  125 Total retained earnings $23,306 $22,026 IFC FINANCIALS 2018 | 19 DESIGNATIONS OF RETAINED EARNINGS FY17 Designations On August 3, 2017, the Board of Directors approved a Amounts available to be designated are determined designation of $85 million of IFC’s retained earnings based on a Board of ­ approved ­ Directors-­ income-based for IFC’s CMAW, $40 million of IFC’s retained earn- formula and, beginning in FY08, on a ­ principles-based ings for advisory services, a reallocation of $49 million Board of ­ approved financial distribution pol- Directors-­ of the unutilized balances of prior year designations icy, and are approved by the Board of Directors. related to Advisory Services to CMAW, and, subject to IFC’s Board of Directors approved a change to the the conditions detailed above, a designation of up to sliding-scale formula and the methodology used for ­ $80 million of IFC’s retained earnings for grants to IDA. calculating the incremental rate of designation, begin- These designations were noted with approval by the ning with the designation in respect of FY17. The revised Board of Governors on October 13, 2017. On June 20, approach establishes a threshold that no designations 2018 IFC recognized expenditures against designations of any kind can take place if IFC’s Deployable Strategic of retained earnings for grants to IDA of $80 million Capital (DSC) ratio is below 2%, and establishes a pursuant to signing of a grant agreement between IDA framework for prioritizing future designations to advi- and IFC. sory services and for transfers to IDA based on IFC’s DSC ratio and a cushion for advisory services. IFC has FY18 Designations also created a new mechanism that was funded for Income available for designations in FY18 (a non- the first time in FY18, the Creating Markets Advisory GAAP measure) totaled $1,318 million. Based on the Window (CMAW), to focus on market creation in eligible new Board-­ approved distribution policy outlined above, IDA countries and fragile and conflict situations. the maximum amount available for designation was The revised approach also establishes a maximum $230 million. On August 9, 2018, the Board of Directors cumulative amount that can be contributed to IDA, approved a designation of $70 million of IFC’s retained during the IDA 18 Replenishment, of $300 million, with earnings for IFC’s CMAW, $45 million of IFC’s retained no more than $100 million in any given year (plus any earnings for advisory services, and, subject to the condi- shortfall from earlier years). tions detailed above, a designation of up to $115 million of IFC’s retained earnings for grants to IDA. These des- The approach also caps transfers to IDA during a fiscal ignations are expected to be noted with approval by the year at IFC’s Net Income, if any, for the nine months Board of Governors, and, subject to the above condi- ended March 31 of that fiscal year with actual transfer tions, concluded, in FY19. to occur in June of that fiscal year. Any amounts desig- nated the prior year and not transferred pursuant to this DEPLOYABLE STRATEGIC CAPITAL requirement would be deferred to the next fiscal year. Transfers to IDA will also be deferred to the next fiscal IFC’s DSC ratio was 8.7% at June 30, 2018, compared year if capital as reported on IFC’s consolidated balance with 7.8% at June 30, 2017. Total Resources Available sheet has declined between June 30 of the prior fiscal (TRA) increased to $24.7 billion at the end of FY18 from year and March 31 of that fiscal year. $23.6 billion at the end of FY17. DSC increased in FY18 IFC recognizes designations of retained earnings for due to an increase in TRA that outweighed the increase Advisory Services and CMAW when the Board of in Total Resources Required (TRR). The increase in TRA Directors approves it and recognizes designation of was driven by strong income and the increase in TRR retained earnings for grants to IDA when it is noted was largely driven by higher capital required for the with approval by the Board of Governors. Expenditures Treasury portfolio due in part to the change in capital for the various approved designations are recorded calculation methodology. as expenses in IFC’s consolidated income statement in the period in which they occur, and have the effect of reducing retained earnings designated for this spe- cific purpose. IFC FINANCIALS 2018 | 20 RISK The ERM Framework is depicted as follows: MANAGEMENT Figure 3: IFC’s Enterprise Risk Management Framework ENTERPRISE What else can go wrong and how are What are all the risks to IFC’s business strategy RISK MANAGEMENT the risks that IFC faces interconnected? Stress and operations? Coverage Testing IFC provides long-term investments and advisory ser- What is IFC How much doing about risk is IFC vices to the private sector in emerging markets and is the risks? Response Risk willing to take? Appetite therefore exposed to a range of potential financial and Risk Culture non-­f inancial impacts. Active monitoring and sound management of evolving risks remain critical pillars in How well does Control Governance How good is IFC Environment & Policies terms of fulfilling IFC’s mission. IFC manage its risks? at overseeing its risk taking? Measurement Risk Data & ENTERPRISE RISK MANAGEMENT FRAMEWORK & Evaluation Infrastructure How does IFC How does IFC ensure it IFC’s enterprise risk management framework (ERM) is determine the size and scope of the risks? has the right information to manage its risk pro le? designed to enable the prudent management of finan- cial and reputational impacts that originate from the Risk Culture — ​Starting with IFC’s senior management, 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 integral to the success of ERM. help align the Corporation’s performance with its stra- tegic direction. The ERM framework that IFC adopted Risk Coverage — ​ IFC’s risk profile is assessed across in FY14 remains aligned with industry standards and is five classes of risk, namely credit, market, operational, designed to underpin IFC’s response to risk by defining: liquidity and business risks. Each of these is addressed in this section. ••IFC’s core risk management principles; ••A common risk taxonomy for use across the organiza- Risk Appetite — ​A comprehensive set of explicit risk tion, to help ensure that risk management efforts are appetite statements, with associated metrics, provides coordinated and aligned across the distinct parts of a consistent and integrated basis for making decisions the organization that share responsibility for manag- that impact IFC’s risk profile, while monitoring IFC’s ing different aspects of risk; risk exposures, and taking remedial action when risk ••A standard classification of roles and responsibilities tolerances are threatened or exceeded. for risk management, to differentiate and thereby clar- Risk Governance and Policies — ​ IFC’s risk governance ify how different parts of the Corporation contribute ­ndustry-­ structure is based on the i standard principle of towards the overall management of risk; “three lines of defense”. ••How emerging and evolving risks are identified, defined, monitored and managed; and ••IFC’s first line of defense is line management, con- ••The structures, processes and methods that are nec- sisting of frontline decision makers on individual essary to put active risk management into practice. projects and transactions. The second line of defense is, collectively, the Management Team, its committees KEY RISK MANAGEMENT PRINCIPLES and IFC’s independent risk management functions. Independent oversight bodies, together with the Board The key principles that continue to inform IFC’s ERM of Directors, serve as the third line of defense. These Framework are: independent oversight bodies are: ••The Independent Evaluation Group, which assesses ••Maximizing development impact while maintaining the alignment between projected and realized out- financial sustainability within specified tolerances; comes of IFC’s investment and advisory projects ••Ensuring that business decisions are based on a thor- undertaken with its clients; ough understanding of risks and that risks and rewards are balanced appropriately; ••The Compliance Advisor/Ombudsman, which is the independent recourse mechanism for IFC’s stakehold- ••Being disciplined and selective in undertaking activi- ers, responding to complaints from ­ affected project-­ ties that could cause significant adverse reputational communities with the goal of enhancing social and impact; and environmental outcomes on the ground; ••Sharing responsibility for risk management across the ••The World Bank Group’s Internal Audit Vice Corporation. Presidency, which evaluates the effectiveness of the The ERM Framework comprises several components, organization’s governance, risk management, and each addressing a specific issue within the Framework. control processes; and These components are dynamic in nature and reflect ••The Integrity Vice-­Presidency, which investigates the fact that IFC’s risk management evolution is a con- and pursues sanctions related to allegations of tinual, iterative and interconnected effort. fraud and corruption in World Bank Group-­ financed activities. ••IFC’s risk management policies define the types and amounts of risk that IFC’s Management Team is willing to assume, via delegated authority from the Board. IFC FINANCIALS 2018 | 21 ​ ource data is collected, Risk Data and Infrastructure — S IFC conforms to key financial policies approved by its integrated and analyzed to support d ­ ecision-­ making Board of Directors, as detailed below: across the Corporation. Capital Adequacy Policy — ​ IFC is required to maintain Measurement and Evaluation — I ​FC uses a combination a minimum level of total resources (including paid-in of quantitative and qualitative metrics to manage its capital, total loss reserves and retained earnings, net risk profile. Key metrics for each category of risk are of designations) equal to total potential losses for all discussed later in this section. 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 Committee of Sponsoring Leverage Policy — ​ IFC’s outstanding debt plus guar- Organizations of the Treadway Commission (COSO) antees held must not exceed four times its net worth. Framework, to reduce the level of financial reporting Overall Liquidity Policy — ​M inimum liquidity (liquid risk to an acceptable level. assets plus undrawn borrowing commitments from Risk Response — ​ Risks are analyzed and monitored IBRD) must be sufficient at all times to cover at least by IFC’s risk oversight units and the Corporate Risk 45% of IFC’s estimated net cash requirements for the Committee, a subcommittee of IFC’s Management next three years. Team, which meets frequently to discuss and decide Matched Funding Policy — L ​ oans are funded with liabil- ­ nterprise-level risk issues. upon e ities that have similar characteristics in terms of interest Stress Testing —  ​ I FC-wide stress testing provides rate basis, currency, and duration, except for new prod- Management with an additional tool to inform capital ucts, approved by the Board of Directors, involving management and decision making. The testing involves asset-­liability mismatches. multi-year projections of IFC’s financial performance In order to safeguard its reputation, IFC pays close and capital adequacy under base case and stressed attention to potential adverse reputational impacts macroeconomic scenarios. which may exceed its risk tolerance, as negative percep- tions of IFC held by stakeholders or the general public ENTERPRISE LEVEL RISK APPETITE may ultimately impact IFCs ability to carry out busi- ness effectively. In determining which engagements and IFC has developed risk appetite statements which activities to pursue, IFC assesses whether any identified set the direction for the Corporation’s willingness to potential adverse impact to its reputation is balanced take risks in fulfilment of its development goals. These by the project’s or program’s potential development statements reflect the Corporation’s core values of max- impact and financial returns. imizing development impact, preserving its financial sustainability and safeguarding its reputation. One of the key f ­orward-­looking tools used by IFC for promoting its brand and managing reputational impact At the strategic level, IFC has adopted the following risk is effective communication. Communication activities are appetite statements: coordinated by the IFC’s Partnerships, Communications Developmental Impact: IFC will maximize develop- & Outreach Vice Presidency. This unit provides advice mental impact by focusing on the World Bank Group’s on strategic and crisis communications for managing twin goals of addressing extreme poverty and boosting potential and actual reputational impacts at both the shared prosperity, while maintaining financial sus- corporate and project levels, throughout the project life tainability and safeguarding its brand. IFC applies a cycle. It is also responsible for external and internal com- rigorous ex-ante and ex-post impact assessment frame- munications, campaigns, civil society engagement, brand work (AIMM) under which projects are scored, incentives marketing, and web, social, and other media. It collab- are set and trade-offs managed on a portfolio basis. orates across IFC and works in conjunction with other WBG entities to develop and implement effective com- Financial Sustainability: IFC will generate and maintain munications strategies that strengthen the IFC brand. sufficient financial resources, conduct its business and manage risks consistent with standards implied by a ­triple-A rating. Safeguarding Reputation: In determining what TREASURY RISK engagement and activities to pursue, IFC will assess MANAGEMENT whether any potential adverse impact to its reputation is balanced by the potential development impact. Treasury risks are managed through a two-tier risk framework: (1) a comprehensive policy framework and From a financial sustainability perspective, the capital (2) an economic capital limit for treasury activities. The required to maintain a t ­ riple-A rating is assessed using an policy framework is based on four principles: economic capital framework, which is the foundation of financial risk management at IFC. Economic capital acts ••Investment in high quality assets; as a “common currency of risk” across the organization, ••Diversification via position size/concentration limits; providing IFC with an objective, quantifiable measure of ••Limits on market risks (credit spread, interest rate and risk that can be applied consistently across business lines, foreign exchange risk); and products, regions and sectors. IFC holds economic cap- ••Proactive portfolio surveillance. ital for credit, market and operational risks. The primary In line with regulatory changes in global financial measure of capital adequacy is DSC, which is the capital markets, IFC enhanced its Treasury risk management available to support future commitments over and above framework in FY18, including changes to economic cap- the current portfolio plus an additional capital buffer. ital methodology. IFC FINANCIALS 2018 | 22 CREDIT RISK IFC’s investment projects are actively supervised after commitment. CRs are reviewed regularly for each proj- MANAGEMENT ect, and revised if required. In addition, an independent corporate portfolio team in the Risk and Financial Sustainability Vice Presidency monitors and assesses DEFINITION AND SCOPE OF CREDIT RISK IFC’s portfolio, including stress testing of exposure to emerging risks. When projects show sign of financial IFC defines credit risk as the risk of loss of principal or distress, immediate attention is key for improving poten- loss of an expected financial return due to credit events tial outcomes. Seasoned “workout” professionals from such as a default or downgrade in credit ratings or IFC’s Department of Special Operations in the Risk any other failure to meet a contractual obligation that and Financial Sustainability Vice Presidency focus on results in financial loss. IFC is exposed to credit risk in projects, to implement the restructuring, or possible its loan portfolio and in the form of counterparty credit recovery, of IFC’s exposure. risk in its Treasury portfolios. The credit risk of loans is quantified in terms of the INVESTMENT OPERATIONS probability of default, loss given default and exposure at risk. These risk parameters are used to determine risk- Credit risk in investment projects is actively managed based economic capital for capital adequacy, capital throughout the project life cycle. Investment teams are allocation and internal risk management purposes, as responsible for gathering the necessary information well as for setting the general reserve against losses on from the client to verify the financial viability of the loans and exposure limits. project, and for assigning a credit rating (CR) at defined stages in the project approval process. The CR, the TREASURY OPERATIONS investment size and the product type determine the authority level required for transaction approval. All IFC manages its exposures to counterparties in its projects are subject to independent credit assessment Treasury operations to mitigate potential losses from by a credit officer within the independent Risk and the failure by a counterparty to fulfill its contractual Financial Sustainability Vice Presidency and who par- obligations. Conservative counterparty eligibility criteria ticipates in the project approval process. Projects are are set by Authorizations from the Board of Directors approved with reference to a number of operational and by Directives approved by IFC’s Corporate Risk and prudential limits approved by the Corporate Risk Committee. Eligible counterparties are predominantly Committee, including limits related to single project or banks and financial institutions with high quality credit client exposure, single country exposure, and sector ratings issued by leading international credit rating concentration; these are detailed below: agencies. Details of applicable financial policies and guidelines are given below: ••IFC’s total exposure to a country, for the purpose of setting exposure limits, is measured as the amount of ••Counterparties are selected based on standard eli- economic capital required to support its investment gibility criteria, with a tenor limit for deposits and portfolio in that country. Exposure limits are set for repurchase agreements. each country based on the size of its economy and its ••Counterparties for derivative instruments are generally limits apply for certain sector expo- risk rating. Sub-­ restricted to banks and financial institutions with high sures within a country. quality credit ratings from leading international credit ••IFC’s total exposure to a single client or client group rating agencies; for the sole purpose of funding local may not exceed stipulated economic capital and nom- currency loans, eligibility is extended to central banks inal limits based on the CR for the client. and select local banks. ••Individual Investment Limits are applied at the indi- ••Exposures to individual counterparties are subject to vidual project or client level to prevent excessive exposure limits. For derivatives, exposure is measured concentrations. in terms of total potential future exposure based on ••Preferential debt exposure to a country is limited by replacement cost. reference to that country’s total medium and long- ••IFC signs collateral agreements with counterparties term external debt. that require the posting of collateral when net mark- ••IFC’s total equity and quasi-­ equity exposure (out- to-­market exposures exceed certain predetermined standing exposure net of impairments) shall not thresholds. exceed IFC’s net worth. ••For e­ xchange-­ traded instruments, credit risk is lim- ited by restricting transactions to a list of authorized exchanges, contracts and dealers, and by placing limits on IFC’s position in each contract. IFC FINANCIALS 2018 | 23 FY18 CREDIT RISK COMMENTARY INVESTMENT OPERATIONS performing Selected indicators of credit risk exposure in IFC’s loan portfolio, together with the five-year trend of non-­ loans (NPLs), are given below: Table 12: IFC Loan Portfolio Credit Risk Indicators INDICATOR JUNE 30, 2018 JUNE 30, 2017 CHANGE NPLs as % of the loan portfolio 4.6% 5.4% Down 0.8% Principal amount outstanding on NPLs $1,400 million $1,522 million Down $122 million Total reserves against losses on loans $1,293 million $1,483 million Down $190 million Total reserves against losses on loans as % of disbursed loan portfolio 5.1% 6.1% Down 1.0% Total reserves against losses on guarantees $15 million $12 million Up $3 million Figure 4: NPLs as Percentage of Disbursed Loan Portfolio $ millions 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 FY14 FY15 FY16 FY17 FY18 Percentage 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0    $ millions   Percentage of disbursed loans ​ esults of Additional details are provided in Section VII — R Operations (Provision for Losses on Loans, Guarantees, Accrued Interest and Other Receivables). TREASURY OPERATIONS Treasury operations counterparties remain well diver- sified by sector and geography. In accordance with its agreements with counterparties, at June 30, 2018, IFC held $236 million in cash and $231 million in securities market exposures as collateral for changes in mark-to-­ on open trades ($334 million in cash and $197 million in June 30, 2017). securities — ​ IFC FINANCIALS 2018 | 24 MARKET FY18 MARKET RISK RISK MANAGEMENT COMMENTARY DEFINITION AND SCOPE OF MARKET RISK LIQUID ASSET PORTFOLIOS Market risk is the risk of losses in positions arising from IFC’s liquid asset portfolios have minimal interest rate movements in market prices. IFC’s exposure to market risk due to short-tenor benchmarks and because devia- risk is mitigated by its matched funding policy, whereby tions from those benchmarks are small. The overall level it uses derivative instruments to convert loans funded of risk in IFC’s Treasury operations reduced modestly in from market borrowings, and the market borrowings FY18 due to lower credit spread exposure. In addition, themselves, into floating rate US dollar assets and liabil- the liquid asset portfolios reduced risk exposure to more ities with similar duration. Similarly, market risk resulting ­ capital-­ intensive sectors such as securitized products from derivative transactions with clients, to facilitate cli- and increased risk exposure to less ­ intensive capital-­ ents’ risk management, is typically mitigated by entering sectors. Interest rate, foreign exchange, and spread risks into offsetting positions with highly rated market coun- are all controlled on a daily basis using a system of limits terparties. IFC’s residual exposure to market risk arises that remained in compliance during FY18. primarily from its listed and unlisted equity investments in emerging markets, from its Treasury liquid asset port- EQUITY INVESTMENTS folios, and also from its aggregate asset and liability management positions. Emerging market equities rallied during the first part of the fiscal year (up 28% from the end of June 2017 to all- EQUITY INVESTMENTS time highs in January 2018), then gave up some of those gains in the second half, to end up 9% for the fiscal year. The risk of loss in value of IFC’s emerging markets equity The early market gains came during a global rally, where investments is mitigated primarily by applying the same emerging markets outperformed due to a perceived rel- limits framework, decision making process and portfo- ative undervaluation, while the later retreat was driven lio management methods as described above for its by concerns of the impact of a strengthening dollar lending operations. IFC has a multi-year horizon for and potential trade wars. Oil (WTI) jumped from $46/ its equity investments and accepts short term price barrel at the beginning of the fiscal year to $74/barrel volatility of these investments, which can be significant. at the end of the period, helping producers but hurting importers. The U.S. dollar strengthened significantly LIQUID ASSET PORTFOLIOS during the later months of FY18, with the JP Morgan Emerging Markets Currency Index declining 6% versus Market risk in IFC’s liquid assets portfolios is managed the U.S. dollar over the fiscal year, as the expectations of to the chosen risk profile of the respective portfo- further Fed hikes increased. Some currencies saw signifi- lio benchmarks, using derivative and other financial cant devaluations, driven by political events, including in instruments such as over-the-­ counter foreign exchange Turkey, Brazil and Argentina. IFC continues to focus on forward agreements, interest rate and currency swaps, selectivity, active management of its portfolio through and ­exchange-­ traded interest rate futures and options. close monitoring, portfolio reviews and oversight. Active Overall market risk exposure is also subject to daily mon- management enabled the Corporation to continue its itoring, based on Directives approved by the Corporate judicious divestitures in FY18 and take advantage of Risk Committee, which limit interest rate, credit spread, market opportunities to generate significant realized and foreign exchange risk. gains from its mature exposures. ASSET-­LIABILITY MANAGEMENT While IFC’s m­ atched-­funding policy helps mitigate cur- LIQUIDITY RISK rency and interest rate risk, IFC is still exposed to residual MANAGEMENT market risks in the market b ­ orrowings-­ funded portion of the balance sheet. Residual currency risk arises from IFC defines liquidity risk as the risk of a financial loss factors such as changes in the level of reserves for losses arising from the inability to liquidate financial assets on non-US dollar loans. The aggregate position in each or to raise additional funds in the expected time frame lending currency is monitored and the risk is managed to meet contractual obligations. IFC faces liquidity risk within a range of +/- $5 million equivalent in each cur- in its core development finance activities because its rency. Residual interest rate risk may arise from differing investments are predominantly illiquid in nature, due to interest rate reset dates on assets and liabilities, or from the lack of capital flows, the infrequency of transactions, assets that are fully match-­ funded at inception, but and the lack of price transparency in many emerging become mismatched over time due to write-downs, markets. To offset this risk, IFC maintains appropriate prepayments, or rescheduling. The residual interest rate liquid asset portfolios funded by market borrowings. risk is managed by measuring the sensitivity of the present value of assets and liabilities in each currency LIQUID ASSET PORTFOLIOS to a one basis point change in interest rates and man- aging exposures to within a potential change in value Liquidity risk in the liquid asset portfolios is addressed of +/- $50,000. by strict eligibility criteria defined in Directives approved by the Corporate Risk Committee. Examples include IFC FINANCIALS 2018 | 25 minimum sizes for bond issuances, and limits on single the Corporation. IFC’s ORM approach is designed to bond issue concentration and on the percentage of ensure that operational risks are identified, assessed, total bond issuance held by IFC. Consequently, a sig- and managed to enable senior management to deter- nificant portion of the liquid asset portfolio is invested mine which risks IFC will accept, mitigate or transfer. IFC quality sovereign, in highly liquid securities such as high-­ seeks to manage key risks by maintaining a compre- ­ sovereign-­ guaranteed, and supranational fixed income hensive set of business processes and internal controls. instruments. IFC expects to continue to be able to realize IFC utilizes risk transfer mechanisms, including insur- these assets as needed to meet its cash requirements, ance, at both the project and the institutional levels for even in a liquidity crisis. mitigation of low probability/frequency and high impact operational risks. IFC identifies and evaluates opera- FUNDING tional risks from a standard ­likelihood-­potential impact approach, determines available contractual transfer IFC’s funding operations ensure that IFC has the funds and insurance options to bring residual risk within it needs for its lending operations, and that it has suffi- tolerance, implements the recommended/approved cient liquidity to safeguard its ­ triple-A rating and fulfill structuring of that risk, and tracks its effectiveness over ­ ounter-­ IFC’s c cyclical role. IFC is able to access a variety time. IFC insures its corporate assets and operations of funding markets, including the US dollar market, the against catastrophic losses where commercially viable. Australian dollar market as well as private placement and retail markets. IFC’s discount note program com- plements IFC’s traditional funding sources by providing swift access to funded liquidity. IFC’s ­ triple-A rating is FY18 OPERATIONAL critical to the Corporation’s ability to maintain its low cost of funds. Regular issuance in a variety of markets RISK COMMENTARY serves to sustain investor confidence and maintain a IFC continues to develop and implement enhanced diversified investor base. IFC continues to enjoy one of methodologies to identify, measure, monitor and man- the lowest funding costs of any multilateral develop- age material operational risks in its key activities. IFC ment bank. has an ­enterprise-level approach to assess risk and con- tinues to develop this methodology for operational risk. FY18 LIQUIDITY RISK IFC therefore periodically assesses operational risks in the processes that support IFC’s key business pillars, COMMENTARY namely, equity, debt, loans and treasury products, as well as advisory services and provides an ORM report On June 30, 2018, IFC’s liquid asset portfolios totaled to CRC on a quarterly basis. IFC also continues to focus $38.9 billion (June 30, 2017  —   ​ $ 39.2 billion). The on its preparedness to react to significant events that Corporation’s overall liquidity coverage ratio as a per- could disrupt its normal operations through the Business centage of next three years’ estimated net cash needs Continuity Management program, which covers critical stood at 100%, above the minimum requirement of business processes across all IFC offices. 45%. During FY18, IFC raised $16.0 billion in market In common with both ­ private-­sector financial institutions borrowings, net of derivatives (FY17 — $ ​ 15.4 billion). The and its IFI peers, IFC continues to face an increasingly outstanding balance under the Discount Note Program challenging cyber risk environment, including a higher at June 30, 2018 was $2.3 billion (June 30, 2017 — $ ​ 2.7 bil- active threat context and increasingly demanding com- lion). In FY18, IFC’s funding costs vs US dollar 6 month pliance expectations. Accordingly, IFC is continually Libor increased slightly when compared with FY17 due assessing its cybersecurity stance in line with financial to the increase in the weighted average maturity of the services industry expectations and practices, including FY18 funding program. risk governance processes and enhanced data incident response practices. IFC has also adopted a privacy policy reflecting global practices, including appropriate OPERATIONAL RISK procedural and technical standards, which is expected to be implemented over the next few years. MANAGEMENT Among the key risk management concerns implicated Consistent with the Basel Framework, IFC defines oper- are (a) increased reliance on third party vendors; ational risk as the risk of loss resulting from inadequate (b) heightened privacy and confidential information or failed internal processes, people and systems, or from requirements; and (c) heightened cyber risk governance external events and holds economic capital against expectations overall, including effective information such risks. Given IFC’s business model, both financial governance, and integration of cyber risk management and non-­ financial potential impacts are considered in ­ nterprise-level ORM. into e assessment of risks. None of the issues described above is unique to IFC IFC’s Operational Risk Management (ORM) program specifically, or even IFIs generally, but represent key conforms to a Directive approved by the Corporate Risk emerging sources of potential financial and reputational Committee, which defines the management of, and roles impacts for the Corporation in the medium term. and responsibilities for, operational risk management in IFC FINANCIALS 2018 | 26 BUSINESS RISK every new investment project, covering the following five areas: MANAGEMENT ••Effectiveness of the Board of Directors; ••Sufficiency of internal controls, audit, risk manage- DEFINITION AND SCOPE OF BUSINESS RISK ment and compliance; ••Adequacy of financial and non-­financial disclosures; Business risk is risk that is specific to IFC given its mis- ••Adequacy of shareholders’ rights; and sion and strategy and that is not covered by other risk ••Demonstration of the client’s commitment to imple- dimensions. It has the following components, which are ment high quality corporate governance policies and described in the paragraphs below together with the practices. specific risk mitigation measures that are adopted: envi- The findings from these assessments are considered in ronment and social; corporate governance; integrity; the decision on whether to proceed with the project. anti-money laundering and combating the financing of terrorism (AML/CFT); use of offshore financial centers INTEGRITY RISK, AML/CFT RISKS (OFCs); data access, security and privacy; operational AND USE OF OFCs conflict of interest; management of policies & proce- dures framework; and risks associated with external Integrity risk is the risk of engaging with external insti- financing. tutions or persons whose background or activities may have adverse reputational and/or financial impact on ENVIRONMENT AND SOCIAL RISK IFC. IFC works with a wide range of partners in both Investment Operations and Advisory Services, from Environment and social (E&S) risk is the risk that IFC multi­national to small companies, and from government does not effectively engage and influence clients to institutions to non-­ governmental organizations. Thus, fulfill the requirements of the Performance Standards each transaction or service opportunity presents unique on Environmental and Social Sustainability, poten- integrity risks, affected by different factors, including tially causing harm to people or the environment. The the type of engagement, financial instrument, struc- Performance Standards form part of IFC’s Sustainability ture, and duration of the engagement. IFC has defined Framework, articulating the Corporation’s strategic procedures for conducting Integrity Due Diligence and commitment to sustainable development: these are used to: ••The Performance Standards guide clients on sus- tainable business practices, including continually ••Uncover integrity risk issues related to a prospective project or engagement and the institutions and per- identifying and managing risks through: analytical sons involved; work such as environmental and social assessments; stakeholder engagement; and client disclosure obliga- ••Evaluate and assess integrity risks, including deciding on how to mitigate and whether to accept the risks, project-level activities. tions in relation to ­ and determining next steps, which may include esca- ••The Policy on Environmental and Social Sustainability lation to IFC senior management and Board approval; describes IFC’s commitments, roles and responsibilities in relation to environmental and social sustainability. ••Appropriately classify integrity risks; and ••IFC’s Access to Information Policy reflects the ••Monitor integrity risks throughout the life of the project or engagement. Corporation’s commitment to transparency and good governance and outlines institutional disclosure IFC conducts AML/CFT due diligence on financial obligations. institution clients to determine whether the client has arrangements to ensure that: IFC uses the Sustainability Framework along with other strategies, policies and initiatives to focus business ••Client AML/CFT procedures and controls are in com- activities on achieving the Corporation’s develop- pliance with relevant national AML/CFT laws and ment objectives. All project teams are required to regulations; record expectations of development outcomes with ••AML/CFT procedures and controls are appropriate for time-bound targets using standard indicators. These the client’s business and operating environments; and indicators are tracked and performance is rated on an ••Implementation of the client’s AML/CFT controls is annual basis for the duration of every project. effective. Figure 5 on page 28 shows the historic Environmental IFC also has defined procedures for analyzing the use and Social Risk Rating (ESRR) distribution by fiscal year. of offshore financial centers (OFCs) by clients and spon- This distribution depicts a broad E&S risk profile of our sors and related tax issues by: portfolio. There was a measurable improvement in the last three fiscal years. ••Determining whether an OFC is eligible to serve as an intermediary jurisdiction for a project by referencing the Global Forum’s published peer reviews (which pro- CLIENT CORPORATE GOVERNANCE RISK vides a broad international perspective); and Corporate governance risk is the risk that IFC’s clients ••Requiring the client to provide information to support have inefficient or ineffective corporate governance the determination that the project’s corporate struc- practices, leading to adverse reputational or financial ture is legitimate and has not been designed for tax impact on IFC. IFC manages corporate governance evasion/abuse or other illegitimate purposes. risk primarily by conducting a structured evaluation of IFC FINANCIALS 2018 | 27 OPERATIONAL CONFLICT OF INTEREST RISK Figure 5: Environment and Operational conflicts of interest can arise when IFC acts Social Risk Rating Distribution in the interests of more than one party, where the inter- ests of those parties might be, or might be perceived to FY12 be, inconsistent. Given the nature and scope of products 9% and services that IFC provides to its clients in further- 66% 4 ance of its development mandate, and the different 22% roles played by other World Bank Group entities, actual 3% or perceived operational conflicts of interest can arise FY13 in the normal course of its activities. IFC recognizes that adverse legal, reputational, client relationship and other 10% implications may arise if such conflicts are not man- 67% 3 aged. IFC has implemented policies and procedures to 20% manage these risks. 3% FY14 EXTERNAL FINANCING RISK 8% 68% 2 As well as using its own resources to invest in and pro- 21% vide advice to clients, IFC raises additional funds from 3% public and private sector institutional investors, lend- FY15 ers and donors through several different mechanisms. 7% External financing risk is the risk that when entrusted with oversight of such funds, IFC does not meet its con- 71% 1 tractual obligations to the third parties involved. 20% 2% To mitigate this risk, IFC works within agreed frameworks FY16 which establish IFC’s responsibilities and obligations 7% with respect to the third parties. For example, where 74% financing to clients is mobilized through B Loans or the MCPP, the specialized Syndications Department follows 17% defined processes to identify co-­ financiers, advise on 2% structuring, and monitor compliance with investment FY17 agreements. In some cases, financing from third parties, 6% including donors, is administered through trust funds. A 76% separate unit within IFC follows predefined procedures 16% for clearing all IFC trust fund proposals and agreements 2% and overseeing IFC’s trust fund portfolio. Finally, AMC, FY18 a wholly-owned subsidiary, provides for an independent 6% governance process making decisions for the benefit of 78% investors in AMC-­ managed funds and AMC compliance 15% matters are subject to IFC oversight. 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% FY18 BUSINESS RISK 1 2 3 4 COMMENTARY ESRR distribution scale: 1) Excellent, 2) Satisfactory, 3) Partly Unsatisfactory, 4) Unsatisfactory. The score is calculated at appraisal as a baseline, and is then updated after each Focused supervision efforts in the last three fiscal years supervision activity. have improved the E&S risk profile of IFC’s investment During FY18, IFC’s centralized Business Risk and portfolio by reducing the number of poor performing Compliance Department (CBR) enhanced and expanded projects, defined as a historical environmental and IFC’s approach to addressing non-­ financial risks relating social risk rating (ESRR) of 3 and 4. The ESRR evaluates to IFC’s operational, advisory and corporate functions, a client’s management of E&S risks and avoidance and in particular, integrity, AML/CFT, economic sanctions, control of adverse outcomes. World Bank Group sanctions and debarment; use of OFCs by clients and sponsors and related tax behaviors and practices; market conduct and mobilization of third party capital; handling of material non-­ public infor- mation (MNPI); operational conflicts of interest; data access, security and privacy; and nominee director- ship compliance matters. CBR sets business standards related to and assists business and project teams in the management of such risks and has implemented policies and procedures to manage these risks. IFC FINANCIALS 2018 | 28 CRITICAL The assessment of the adequacy of reserves against losses for loans is highly dependent on management’s ACCOUNTING judgment about factors such as its assessment of the financial capacity of borrowers, geographical con- POLICIES centration, industry, regional and macroeconomic conditions, and historical trends. Due to the inherent limitation of any particular estimation technique, man- agement utilizes a capital pricing and risk framework to Note A to IFC’s FY18 Consolidated Financial Statements estimate the probable losses on loans inherent in the contain a summary of IFC’s significant accounting portfolio but not specifically identifiable. This Board of policies, including a discussion of recently adopted Directors-­ ­ approved framework uses actual loan loss accounting standards and accounting and financial history and aligns the loan loss provisioning framework reporting developments. Certain of these policies are with IFC’s capital adequacy framework. considered to be “critical” to the portrayal of IFC’s financial condition and results of operations, since they The reserve against losses on loans is separately require management to make difficult, complex or sub- reported in the consolidated balance sheet as a reduc- jective judgments, some of which may relate to matters tion of IFC’s total loans. Increases or decreases in the that are inherently uncertain. reserve level are reported in the income statement as provision for losses or release of provision for losses on These policies include: loans, and guarantees. The reserve against losses on ••Determining the level of reserves against losses in the loans relates only to the Investment services segment loan portfolio; of IFC (see Note S to the FY18 Consolidated Financial ••Determining the level and nature of impairment for Statements for further discussion of IFC’s business equity investments and debt securities carried at fair segments). value with changes in fair value being reported in other comprehensive income (OCI) and for equity invest- ments accounted for at cost less impairment (where impairment is determined with reference to fair value); OTHER-THAN-­TEMPORARY ••Determining the fair value of certain equity invest- IMPAIRMENTS ON EQUITY ments, debt securities, loans, liquid assets, borrowings and derivatives, which have no quoted market prices INVESTMENTS AND and are accounted for at fair value; and DEBT SECURITIES ••Determining the future pension and postretirement benefit costs and obligations using actuarial assump- IFC assesses all equity investments accounted for at fair tions based on financial market interest rates, past value through OCI and all equity investments accounted experience, and management’s best estimate of future for at cost less impairment for impairment each quarter. benefit cost changes and economic conditions. When impairment is identified and is deemed to be Many of IFC’s financial instruments are classified in other-than-­ temporary, the equity investment is writ- accordance with the fair value hierarchy established ten down to its impaired value, which becomes the by accounting standards for fair value measurements new cost basis in the equity investment. IFC generally and disclosures where the fair value and/or impair- presumes that all equity impairments are deemed to ment is estimated based on internally developed models be other-than-­ temporary. Impairment losses on equity or methodologies utilizing significant inputs that are investments accounted for at cost less impairment are non-­observable. not reversed for subsequent recoveries in value of the equity investment until it is sold. Recoveries in value on equity investments accounted for at fair value through OCI that have been the subject of an other-than-­ RESERVE AGAINST temporary impairments are reported in OCI until sold. LOSSES ON LOANS IFC assesses all debt security investments accounted for at fair value through OCI for impairment each quarter. IFC considers a loan as impaired when, based on cur- When impairment is identified, the entire impairment rent information and events, it is probable that IFC will is recognized in net income if certain conditions are be unable to collect all amounts due according to the met (as detailed in Note A to IFC’s FY18 Consolidated loan’s contractual terms. The reserve against losses for Financial Statements). However, if IFC does not intend impaired loans reflects management’s judgment of the to sell the debt security and it is not more likely than present value of expected future cash flows discounted not that IFC will be required to sell the security, but the at the loan’s effective interest rate. The reserve against security has suffered a credit loss, the c related ­ redit-­ losses for loans also includes an estimate of probable impairment loss is recognized in net income and the losses on loans inherent in the portfolio but not specif- non-credit related loss is recognized in OCI. ically identifiable. The reserve is established through periodic charges to income in the form of a provision for losses on loans. Loans written off, as well as any sub- sequent recoveries, are recorded through the reserve. IFC FINANCIALS 2018 | 29 VALUATION OF FINANCIAL PENSION AND OTHER INSTRUMENTS WITH NO POSTRETIREMENT QUOTED MARKET PRICES BENEFITS IFC reports at fair value all of its derivative instru- IFC participates, along with IBRD and MIGA, in pension ments, all of its liquid asset trading securities and and postretirement benefit plans that cover substan- certain borrowings, loans, equity investments and debt tially all of their staff members. All costs, assets and securities. In addition, various investment agreements liabilities associated with the plans are allocated contain embedded or stand-alone derivatives that, between IBRD, IFC and MIGA based upon their employ- for accounting purposes, are separately accounted as ees’ respective participation in the plans. The underlying either derivative assets or liabilities, including puts, caps, actuarial assumptions used to determine the projected floors, and forwards. IFC classifies all financial instru- benefit obligations, the fair value of plan assets and the ments accounted for at fair value based on the fair value funded status associated with these plans are based hierarchy established by accounting standards for fair on financial market interest rates, past experience, value measurements and disclosures as described in and management’s best estimate of future benefit more detail in Notes A and R to IFC’s FY18 Consolidated cost changes and economic conditions. For further Financial Statements. details, please refer to Note V to the FY18 Consolidated Financial Statements. Many of IFC’s financial instruments accounted for at fair value are valued based on unadjusted quoted market prices or using models where the significant assumptions and inputs are ­ market-­observable. The fair values of financial instruments valued using mod- els where the significant assumptions and inputs are not m observable are generally estimated using ­ arket-­ complex pricing models of the net present value of esti- mated future cash flows. Management makes numerous assumptions in developing pricing models, including an assessment about the counterparty’s financial position and prospects, the appropriate discount rates, interest rates, and related volatility and expected movement in foreign currency exchange rates. Changes in assump- tions could have a significant impact on the amounts reported as assets and liabilities and the related unreal- ized gains and losses reported in the income statement and statement of OCI. The fair value computations affect both the Investment services and Treasury seg- ments of IFC (see Note S to the FY18 Consolidated Financial Statements for further discussion of IFC’s busi- ness segments). IFC FINANCIALS 2018 | 30 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 (loss) 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 investment Global climate for emerging markets equities, fluctuations in currency portfolio and commodity markets and c ­ ompany-­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 guarantees default. 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-­ Principally, differences between changes in fair values of borrowings, trading financial instruments including IFC’s credit spread, and associated derivative instruments and accounted for at fair value unrealized gains or losses associated 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 ­ overnors-­ Level of the Board of G approved grants to IDA. Other comprehensive income (loss): Unrealized gains and losses on Global climate for emerging markets equities, fluctuations in currency listed equity investments and and commodity markets and ­ company-­ specific performance. Such equity debt securities accounted for as investments are valued using unadjusted quoted market prices and debt ­available-for-sale securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-­ observable. Unrecognized net actuarial gains Returns on pension plan assets and the key assumptions that underlay and losses and unrecognized prior projected benefit obligations, including financial market interest rates, staff service costs on benefit plans expenses, past experience, and management’s best estimate of future benefit cost changes and economic conditions. IFC’s net income (loss) for each of the past five fiscal years ended June 30, 2018 is presented below (US$ Figure 6: IFC’s Net Income millions): (Loss), Fiscal Years 2014–2018 Fiscal year ended June 30, FY14 FY15 FY16 FY17 FY18 US$ 0 200 400 600 800 1,000 1,200 1,400 1,600 millions IFC FINANCIALS 2018 | 31 The following paragraphs detail significant variances FY18 FY17 between FY18 vs FY17 and FY17 vs FY16, covering the Income before net unrealized periods included in IFC’s FY18 Consolidated Financial gains and losses on non-­ trading Statements. financial instruments accounted for at fair value, grants to IDA and net gains and losses attributable FY18 VERSUS FY17 to non-­controlling interests $1,272 $1,129 Net unrealized gains and losses on non-­trading financial instruments NET INCOME accounted for at fair value 88 394 Income before grants to IDA 1,360 1,523 IFC has reported income before net unrealized gains and losses on non-­ trading financial instruments accounted Grants to IDA (80) (101) for at fair value, grants to IDA and net gains and losses Net Income 1,280 1,422 attributable to non-­ controlling interest of $1,272 mil- Net (gains) losses attributable to lion in FY18, as compared to $1,129 million in FY17. The non-­controlling interests – (4) $143 million increase in FY18 when compared to FY17 Net Income (Loss) attributable was principally a result of the following: to IFC $1,280 $1,418 Table 14: Change in A more detailed analysis of the components of IFC’s net income follows. Net Income FY18 vs FY17 Income from Loans and Guarantees, Including (US$ millions) Realized Gains and Losses on Loans and Associated Derivatives INCREASE (DECREASE) IFC’s primary interest earning asset is its loan portfolio. FY18 VS FY17 Income from loans and guarantees, including realized Higher foreign currency transaction gains gains and losses on loans and associated derivatives for on non-­trading activities $     311 FY18 totaled $1,377 million, compared with $1,298 million in FY17, an increase of $79 million. Lower other-than-­temporary impairments on equity investments and debt securities 150 The disbursed loan portfolio increased by $962 million Higher income from loans and guarantees, from $24,210 million at June 30, 2017 to $25,172 million realized gains and losses on loans and at June 30, 2018. The increase in the loan portfolio associated derivatives 79 is due to new disbursements exceeding repayments Higher debt securities income 66 ($1,561 million in FY18), partially offset by reduction in loans outstanding due to write-offs net of recover- Higher unrealized gains on equity investments ies ($294 million in FY18) and currency exchange rate and associated derivatives, net 50 fluctuations ($199 million in FY18). IFC’s reporting cur- Higher other income 50 rency, the US dollar, appreciated significantly against Lower pension expenses 49 emerging market investment currencies in FY18 such Higher administrative expenses (67) as the Turkish lira, Brazilian real and Indian rupee. The remainder of the change is primarily due to loan sales Lower realized gains on equity investments and capital charges. and associated derivatives, net (81) Lower income from liquid asset trading activities (146) Higher charges on borrowings (329) Other, net 11 Change in income before net unrealized trading financial gains and losses on non-­ instruments accounted for at fair value, grants to IDA and net gains and losses controlling interests attributable to non-­ $     143 IFC FINANCIALS 2018 | 32 Table 15: FY18 Change in investments that generated individual capital gains in excess of $20 million for a total of $674 million, or 63%, Income from Loans and of the FY17 realized gains. Guarantees, Including Realized Dividend income in FY18 totaled $282 million, as com- pared with $244 million in FY17. Dividend income in FY18 Gains and Losses on Loans included returns from two unincorporated joint venture and Associated Derivatives (UJVs) in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $13 mil- (US$ millions) lion, as compared with $11 million from three such UJVs in FY17. One investee generated dividends of $51 million Income from loans and guarantees, in FY18 ($58 million in FY17). including realized gains and losses on loans and associated derivatives in FY17 $1,298 Other-than-­ temporary impairments on equity invest- ments totaled $446 million in FY18 ($264 million on Increase due to increase in interest rates 77 equity investments accounted for at cost less impair- Increase due to increase in loan portfolio 32 ment; and $182 million on equity investments accounted Increase due to lower amount of interest ­ vailable-for-sale), as compared with $581 million for as a reversed on non-­accruing loans, net 26 in FY17 ($365 million on equity investments accounted Increase due to lower realized losses on loans 14 for at cost less impairment; and $216 million on equity investments accounted for as a ­ vailable-for-sale), a Increase due to higher income from swaps 11 decrease of $135 million. The largest amount of impair- Decrease due to lower income from ments in FY18 were from the South Asia, Europe and participation notes, fees and other income (10) Central Asia regions, primarily in the Manufacturing, Decrease due to lower recognition of deferred Agribusiness and Services and Financial Markets sec- interest (71) tors. In FY18, five investments generated individual Change in Income from loans and other-than-­ temporary impairments in excess of $20 mil- guarantees, including realized gains lion for a total of $155 million. In FY17, seven investments and losses on loans and associated generated an individual other-than-­ temporary impair- derivatives $  79 ment in excess of $20 million for a total of $267 million. Income from loans and guarantees, Net unrealized gains on equity investments and associ- including realized gains and losses on ated derivatives totaled $17 million (Net unrealized losses loans and associated derivatives in FY18 $1,377 of $33 million in FY17) reflecting an overall improvement in the macro environment for emerging market equities. The increase in interest rates during FY18, including the US$ six-month LIBOR which increased from 1.45% at June 30, 2017 to 2.50% at June 30, 2018, was a key driver Income from Debt Securities and Realized Gains and of the higher loan income in FY18 compared to FY17. The Losses on Debt Securities and Associated Derivatives weighted average contractual interest rate on loans at Income from debt securities and realized gains and June 30, 2018 was 6.0%, up from 5.4% June 30, 2017. losses on debt securities and associated derivatives increased to $363 million in FY18 from $282 million in The decrease in the recognition of deferred interest is FY17. The increase was primarily due an increase in inter- primarily due to $67 million of previously capitalized and est income of $128 million in FY18 when compared with deferred interest that was recognized in FY17 as a result FY17 due to higher average balances, partially offset by of a $127 million prepayment. a $60 million decrease in realized gains ($93 million in FY18) when compared to FY17 ($153 million). Income from Equity Investments and Associated Derivatives Provision for Losses on Loans, Guarantees, Accrued Income from the equity investment portfolio, including Interest and Other Receivables associated derivatives, increased by $146 million from The quality of the loan portfolio, as measured by the $707 million in FY17 to $853 million in FY18. weighted average country risk ratings and the weighted IFC sells equity investments where IFC’s developmental average credit ratings, experienced some marginal role is complete, where pre-­ determined sales trigger improvement in FY18. Non-­ p erforming loans (NPLs) levels have been met, and where applicable, lock ups decreased by $122 million, from $1,522 million of the have expired. Gains on equity investments and associ- disbursed loan portfolio at June 30, 2017 to $1,400 mil- ated derivatives comprise realized and unrealized gains. lion10 at June 30, 2018. The decrease of $122 million was comprised of $376 million of loans and loan-like IFC recognized realized gains on equity investments debt securities being placed in NPL status, $319 mil- and associated derivatives in the form of cash and lion being removed from NPL status due to write-offs, non-­monetary considerations for FY18 of $992 million, $146 million being removed from NPL status due to pos- as compared with $1,073 million for FY17, a decrease itive developments such as repayments, prepayments of $81 million. Realized gains on equity investments and improvements and other changes of $33 million. In and associated derivatives are concentrated in a small FY18, ten loans greater than $10 million, and totaling number of investments. In FY18, there were nineteen $300 million, were placed in NPL status. investments that generated individual capital gains in excess of $20 million for a total of $684 million, or 68% of the FY18 realized gains, compared to sixteen 10. Includes $23 million reported as debt securities on the Balance ​ une 30, 2017). Sheet as of June 30, 2018 ($101 million — J IFC FINANCIALS 2018 | 33 IFC recorded a net provision for losses on loans, guar- Interest income in FY18 totaled $664 million, compared antees, accrued interest and other receivables of to $582 million in FY17. Holdings in products other $90 million in FY18 ($82 million of specific provisions on than ABS and MBS, including US Treasuries, global loans, $2 million of portfolio provisions on loans, $1 mil- government bonds, high quality corporate bonds and lion net release of provision on guarantees and other derivatives generated $134 million of gains in FY18. receivables and $7 million provision on accrued inter- The portfolio of ABS and MBS experienced fair value est) as compared to a provision of $86 million in FY17 losses totaling $27 million in FY18, for a total net gain ($268 million of specific provisions on loans partially off- of $107 million (realized and unrealized). This compares set by $171 million release of portfolio provisions on loans to a total gain (realized and unrealized) of $335 million and an $11 million release of provision on guarantees). in FY17. Project-­ ­ specific developments on ten loans comprised Performance over the course of FY18 was supported by 68% of the specific provision for losses on loans in FY18 narrowing spreads for high-­ quality ABS, contributions (excluding release of provisions). from cross-­currency basis spreads, and deviations from At June 30, 2018, IFC’s total reserves against losses interest-rate parity in f ­ exchange forward rates. In ­ oreign-­ on loans were $1,293 million or 5.1% of the disbursed FY18 Q4, performance benefited primarily from narrow- loan portfolio ($1,483 million; 6.1% at June 30, 2017), ing cross-­currency basis swap spreads and movements a decrease of $190 million from June 30, 2017. The in forward foreign exchange rates towards i ­nterest-rate decrease in reserves against losses on loans due to parity. The Corporation reduced its exposure to credit write-offs, net of recoveries of $285 million, and for- spreads during FY18 and increased its exposure to eign exchange gains related to reserves held against deposits and other money-­ market instruments. Liquid non-U.S. ­ dollar-­ denominated loans ($5 million), was asset holdings remain well diversified geographically partially offset by provisions of $84 million and other and are concentrated in money-­ market instruments. adjustments ($16 million). Improving economic growth in the U.S. accompanied by Specific reserves against losses on loans at June 30, rising inflation allowed the U.S. Federal Reserve to con- 2018 of $651 million ($841 million at June 30, 2017) are tinue its tightening of monetary policy. The Fed raised its held against impaired loans of $1,258 million ($1,675 mil- benchmark policy rate 3 times in 25 bps increments over lion at June 30, 2017), a coverage ratio of 52% (50% at the course of the fiscal year, and the U.S. Treasury mar- June 30, 2017). ket reacted by flattening the spread between long-term and short-term yields. The 2-year Note yield rose 115 bps, In FY17 Q3, IFC completed the implementation of the while the 10-year Note yield rose 59 bps. The increase in Investment Risk Platform (IRP), which replaced IFC’s the front-end of the yield curve was considerably faster previous credit risk rating system and economic cap- than the pace embedded in the yield curve such that ital engine. The new rating system better aligns IFC’s the benchmark for the Treasury Managed Portion of the practice to internationally recognized standards, where Corporation’s net worth, the 1 to 3-year U.S. Treasury appropriate, given IFC’s portfolio and IRP allows for index, had a total return of close to zero. The perfor- easier comparison between external ratings and IFC’s mance of non-USD liquid assets in developed markets internal ratings. More granular ratings are expected benefited from a reduction in USD funding pressures, to lead to better differentiation and a better under- which resulted in less-­ negative cross-­currency bases standing of client credit standing which will allow for and adjustments in ­ currency forward rates that foreign-­ more focus on those credits that most warrant scru- contributed to returns. tiny. The improved predictive power for probability of default and loss given default is also anticipated to lead During FY18 Q4, short-term US Treasury yields rose more to more informed investment decisions. As a result of than long-term yields with the 2-year Note yield rising implementing IRP, IFC reviewed its methodology for 26 bps, and the 10-year Note yield up 12 bps. The U.S. estimating the portfolio reserve against losses, in par- Federal Reserve tightened monetary policy in June, in ticular the estimation of the probability of default and line with expectations, but they increased the projected loss given default. The implementation of IRP resulted number of interest rate hikes for 2018 from 3 to 4. The in a $156 million release of portfolio provision related to S&P 500 equity index was up modestly over the quarter, this change in estimate that was reported in FY17 Q3. 2.9%, and credit spreads widened slightly. The IFC trea- sury managed portion of net worth gained $23 million Income from Liquid Asset Trading Activities during FY18 Q4 despite the increase in short-term inter- est rates. While the increase in yields resulted in a return The liquid assets portfolio, net of derivatives and secu- for the benchmark that was considerably lower than the rities lending activities, decreased by $0.3 billion from yield of the benchmark at the outset of the quarter, the $39.2 billion at June 30, 2017, to $38.9 billion at June 30, portfolio benefited from an increase in its size, and this 2018. Gross income from liquid asset trading activities income was enhanced by the use of securities lending totaled $771 million in FY18 compared to $917 million in to make additional investments. FY17, a decrease of $146 million. The decrease in gross income was primarily attributable to a decrease in the In FY18 and FY17, all internally managed liquid asset performance of liquid assets net of benchmarks. The portfolios outperformed their respective benchmarks. performance in FY17 was exceptionally strong, espe- At June 30, 2018, trading securities with a fair value of cially in FY17 Q1, due to a rebound from the post-­ BREXIT $18 million are classified as Level 3 securities, which is mark-to-­ market losses suffered in FY16 Q4. 0.1% of total trading securities at fair value ($19 mil- ​ une 30, 2017). lion — J IFC FINANCIALS 2018 | 34 Charges on Borrowings and losses on the derivatives economically hedging such debt securities are reported in Net Income. Additionally, IFC’s charges on borrowings increased by $329 million, these foreign currency gains and losses reported in from $712 million in FY17 (net of $2 million gain on extin- Other Comprehensive Income are reclassified to Net guishment of borrowings) to $1,041 million in FY18 (net of Income upon sale or repayment. In FY18, this resulted $2 million gain on extinguishment of borrowings), largely F Y17), of which in a loss of $73 million ($12 million — ​ attributable to rising LIBOR rates and increased term $62 million resulted from a single repayment of an of new borrowings. ­ available-for-sale debt security. The weighted average cost of IFC’s borrowings out- Largely due to a small population of unhedged non- standing from market sources, after the effects of dollar-­ U.S. ­ denominated loans and debt securities and borrowing-­ ­ related derivatives, and excluding short-term the U.S. dollar strengthening against such currencies, borrowings from market and other sources, was 2.5% IFC has recorded overall foreign exchange related at June 30, 2018, an increase from 1.4% at June 30, losses in a combination of Net Income and Other 2017. The size of the borrowings portfolio (excluding Comprehensive Income of $70 million in FY18 (losses of short-term borrowings), net of b related deriv- ­ orrowing-­ $124  million — ​F Y17). atives and before unamortized discounts, net, and fair value adjustments, increased by $1.4 billion during FY18 Net Unrealized Gains and Losses on Non-­Trading from $52.0 billion at June 30, 2017, to $53.4 billion at Financial Instruments June 30, 2018. As discussed in more detail in Note A to IFC’s FY18 Other Income Consolidated Financial Statements, IFC accounts for certain financial instruments at fair value with unre- Other income of $578 million for FY18 was $50 million alized gains and losses on such financial instruments higher than in FY17 ($528 million) due to a $20 million being reported in net income, namely: (i) all market increase in service fees from FY17 to FY18, primarily in borrowings that are economically hedged with financial mobilization fees, which reflected Core Mobilization of instruments that are accounted for at fair value with $11,671 million in FY18 which was $4,209 million higher changes therein reported in net income; (ii) unrealized than in FY17 and higher income from Advisory Services, gains and losses on certain loans, debt securities and predominantly contributions from donors, of $305 mil- associated derivatives; and (iii) borrowings from IDA. lion ($277 million in FY17). In FY18, income from advisory services comprised $252 million of donor funds utilized ($229 million — ​F Y17) and $53 million of fees from clients Table 16: Net Unrealized and administrative fees from donors ($48 million — F ​ Y17). Gains and Losses on Other Expenses Non-­Trading Financial Administrative expenses (the principal component of other expenses) increased $67 million from $962 million Instruments FY18 vs FY17 in FY17 to $1,029 million in FY18. The increase in FY18 is (US$ millions) principally due to higher staff costs which increased by $66 million in FY18. FY18 FY17 Advisory services expenses totaled $354 million in FY18 Unrealized gains and losses on loans, ($327 million in FY17); the increase from FY17 is consis- debt securities and associated derivatives $181 $320 tent with the increase in advisory services income. Unrealized gains and losses on IFC recorded expenses from pension and other postre- borrowings from market, IDA and tirement benefit plans in FY18 of $244 million, compared associated derivatives, net (93) 74 with $293 million in FY17. This decrease, based on the Net unrealized gains and losses on beginning of the year actuarial assumptions and cal- non-­trading financial instruments culations reflecting the funding status of the plans at accounted for at fair value $ 88 $394 FY17-end, was primarily driven by lower amortization of unrecognized net actuarial losses resulting largely from IFC reported net unrealized gains on loans, debt secu- an increase in the discount rates used to determine the rities and associated derivatives of $181 million in FY18 projected benefit obligation between FY16-end and ($320 million in FY17). In FY18 this comprised unrealized FY17-end. The discount rate used to determine the pro- losses of $33 million on the loan and debt securities port- jected benefit obligation for the Staff Retirement Plan, folio carried at fair value, unrealized gains of $177 million was 3.70% at FY17-end versus 3.40% at FY16-end. on ­ related swaps, unrealized gains of $28 mil- lending-­ lion on client risk management swaps and unrealized Foreign Currency Transaction Gains and Losses on gains of $9 million on other derivatives, mainly con- Non-­Trading Activities version features, warrants in investment contracts and Foreign currency transaction gains reported in net interest rate and currency swaps economically hedging income in FY18 totaled $123 million (losses of $188 mil- client obligations. The unrealized gains of $177 million F Y17). Foreign currency transaction losses on lion — ​ on l related swaps is driven by upward move- ­ending-­ debt securities accounted for as ­available-for-sale of ment in interest rates during the fiscal year in EUR, INR, $193 million in FY18 (gains of $64 million — ​F Y17) are and USD, the main currencies of ­ related swap lending-­ reported in Other Comprehensive Income, while gains issuance. IFC FINANCIALS 2018 | 35 Changes in the fair value of IFC’s borrowings from mar- ket, IDA and associated derivatives, net, includes the Table 17: Other Comprehensive impact of changes in IFC’s own credit spread when Income (Loss) — ​Unrealized measured against US$ LIBOR. As credit spreads widen, unrealized gains are recorded and when credit spreads Gains and Losses on Equity narrow, unrealized losses are recorded (notwithstanding Investments and Debt the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The mag- Securities FY18 vs FY17 nitude and direction (gain or loss) can be volatile from period to period but does not alter the cash flows. IFC’s (US$ millions) policy is to generally match currency, amount and timing FY18 FY17 of cash flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. Net unrealized gains and losses on equity investments arising during At June 30, 2018, the yield on the benchmark 5-year U.S. the year: Treasury bond stood at 2.7 percent, up from 1.9 percent Unrealized gains $     859 $     814 at the beginning of the fiscal year. Due to the increase Unrealized losses (414) (269) in market interest rates, IFC recorded unrealized gains of $1,096 million on medium and long-term borrowings Reclassification adjustment for carried at fair value in FY18, offset by unrealized losses realized gains and other-than-­ of $1,189 million on related derivatives. Overall, IFC has temporary impairments included in net income (511) (332) reported $93 million of net unrealized losses on borrow- ings and associated derivatives in FY18 (net unrealized Net unrealized losses and gains on gains $74 million in FY17). At the end of FY18, after swap equity investments $ (66) $    213 credit spreads for IFC borrowing issuances in US dollars Net unrealized gains and losses on were generally narrower across the term structure than debt securities arising during the at the end of FY17. Additionally, compared to the end year: of FY17, the cost of economically hedging borrowings in Unrealized gains $    391 $    337 Australian and New Zealand dollars was little changed, Unrealized losses (627) (88) while the cost of borrowing in Japanese yen was higher at most maturities at the end of FY18. Reclassification adjustment for credit related realized gains, non-­ portion of impairments which were Grants to IDA recognized in net income and other- During FY18, IFC recorded a grant to IDA of $80 million, than-­temporary included in net as compared with $101 million in FY17. income (10) (116) Net unrealized losses and gains on OTHER COMPREHENSIVE INCOME (OCI) debt securities $(246) $    133 Total unrealized losses and gains Unrealized Gains and Losses on Equity Investments on equity investments and debt securities $(312) $    346 and Debt Securities IFC’s investments in debt securities and equity Net unrealized losses on equity investments and debt investments that are listed in markets that provide securities was $312 million in FY18 (net unrealized gains readily determinable fair values are classified as of $346 million in FY17). The unrealized loss in FY18 was available-for-sale, with unrealized gains and losses on ­ primarily driven by foreign currency transaction losses these investments being reported in OCI until realized. on debt securities accounted for as ­ available-for-sale When realized, the gain or loss is transferred to net and the reclassification of realized gains on listed equity income. Changes in unrealized gains and losses on investments, partially offset by the reclassification of equity investments and debt securities reported in OCI impairments on listed equity investments and higher are significantly impacted by (i) the global environment equity valuations, due to the improved emerging mar- for emerging markets; and (ii) the realization of gains on kets environment. sales of such equity investments and debt securities. Unrecognized Net Actuarial Gains and Losses and Unrecognized Prior Service Costs on Benefit Plans Unrecognized pension adjustments largely represent the unrecognized net actuarial gains and losses on benefit plans. Actuarial gains and losses occur when actual results differ from expected results in determining the funded status of the pension plans. Since the pension plans are long term, changes in asset returns and dis- count rates cause volatility in comprehensive income. The change in the funded status reflects the rise in inter- est rates used to measure the liability, and, to a greater extent, the higher actual asset returns compared with the long-term projection. Given its long-term planning IFC FINANCIALS 2018 | 36 horizon for pension plans, Management is focused FY17 FY16 mainly on ensuring that contributions to pension plans Income before net unrealized appropriately reflect long term assumptions about asset gains and losses on non-­ trading returns and discount rates. financial instruments accounted During FY18, IFC experienced a gain of $118 million — ​ for at fair value, grants to $111 million of unrecognized net actuarial gains and IDA and net gains and losses attributable to non-­ controlling a $7 million reduction of prior service cost. The gain interests $1,129 $     500 resulted largely from the increase in the discount rates used to determine the projected benefit obligations Net unrealized gains and losses at FY18-end when compared with FY17-end. The dis- on non-­ trading financial instruments accounted for at count rate assumptions used to determine the projected fair value 394 (204) benefit obligation for the Staff Retirement Plan and Post-­Employment Benefits Plan increased from 3.7% at Income before grants to IDA 1,523 296 June 30, 2017 to 4.1% at June 30, 2018 and from 3.8% Grants to IDA (101) (330) at June 30, 2017 to 4.1% at June 30, 2018, respectively. Net Income (loss) 1,422 (34) Net (gains) losses attributable to non-­controlling interests (4) 1 FY17 VERSUS FY16 Net Income (Loss) attributable to IFC $1,418 $   (33) NET INCOME A more detailed analysis of the components of IFC’s net income follows. IFC has reported 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 Income from Loans and Guarantees, Including attributable to non-­ controlling interest of $1,129 million Realized Gains and Losses on Loans and Associated in FY17, as compared to $500 million in FY16. Derivatives IFC’s primary interest earning asset is its loan portfolio. Income from loans and guarantees, including realized Table 18: Change in gains and losses on loans and associated derivatives for Net Income FY17 vs FY16 FY17 totaled $1,298 million, compared with $1,126 million in FY16, an increase of $172 million. (US$ millions) The disbursed loan portfolio increased by $300 million INCREASE from $23,910 million at June 30, 2016 to $24,210 million (DECREASE) at June 30, 2017. The increase in the loan portfolio is gen- FY17 VS FY16 erally due to new disbursements exceeding repayments Higher income from liquid asset trading ($779 million in FY17) partially offset by the reduction activities $       413 in loans outstanding due to write-offs ($417 million in FY17). The remainder of the change is primarily due to Lower provisions for losses on loans, conversions from loans to equity investments. guarantees and other receivables 273 Higher income from loans and guarantees, realized gains and losses on loans and associated derivatives 172 Lower unrealized losses on equity investments and associated derivatives, net 171 Higher debt securities income (excluding impairments) 162 temporary impairments on Lower other-than-­ equity investments and debt securities 154 Higher expenses from pension and other postretirement benefit plans (108) Higher foreign currency transaction losses on non-­trading activities (142) Lower realized gains on equity investments and associated derivatives, net (144) Higher charges on borrowings (303) Other, net (19) Change in income before net unrealized trading financial gains and losses on non-­ instruments accounted for at fair value, grants to IDA and net gains and losses controlling interests attributable to non-­ $      629 IFC FINANCIALS 2018 | 37 Table 19: FY17 Change in IFC recognized realized gains on equity investments and associated derivatives in the form of cash and Income from Loans and non-­monetary considerations for FY17 of $1,073 million, as compared with $1,217 million for FY16, a decrease Guarantees, Including Realized of $144 million. Realized gains on equity investments Gains and Losses on Loans and associated derivatives are concentrated in a small number of investments. In FY17, there were sixteen and Associated Derivatives investments that generated individual capital gains in excess of $20 million for a total of $674 million, or 63%, (US$ millions) of the FY17 realized gains, compared to thirteen invest- ments that generated individual capital gains in excess Income from loans and guarantees, including realized gains and losses on of $20 million for a total of $856 million, or 70%, of the loans and associated FY16 realized gains. derivatives in FY16 $1,126 Dividend income in FY17 totaled $244 million, as com- Increase due to increase in loan portfolio pared with $241 million in FY16. Dividend income in FY17 and interest rate environment 72 included returns from three unincorporated joint venture Increase due to higher recognition of (UJVs) in the oil, gas and mining sectors accounted for deferred interest 55 under the cost recovery method, which totaled $11 mil- Increase due to lower amount of interest lion, as compared with $11 million from two such UJVs in reversed on non-­accruing loans, net 43 FY16. One investee generated dividends of $58 million in FY17. Increase due to higher income from participation notes and other income 48 Other-than-­ temporary impairments on equity invest- Decrease due to higher realized losses ments totaled $581 million in FY17 ($216 million on equity on loans (35) investments accounted for as ­ available-for-sale; and Decrease due to lower commitment and $365 million on equity investments accounted for at financial fees (11) cost less impairment), as compared with $744 million in FY16 ($360 million on equity investments accounted Change in Income from loans and for as a­ vailable-for-sale; and $384 million on equity guarantees, including realized gains investments accounted for at cost less impairment), and losses on loans and associated derivatives $       172 a decrease of $163 million. Other-than-­ temporary impairments on equity investments in FY17 reflected Income from loans and guarantees, the economic downturn in certain countries in South including realized gains and losses on Asia, East Asia and the Pacific, Middle East and North loans and associated derivatives in FY17 $1,298 Africa, and Latin America and the Caribbean regions. The increase in interest rates during FY17, including the In FY17, seven investments generated individual other- US$ six-month LIBOR which increased from 0.92% at than-­temporary impairments in excess of $20 million for June 30, 2016 to 1.45% at June 30, 2017, was a key driver a total of $267 million. In FY16, six investments gener- of the higher loan income in FY17 compared to FY16. The ated an individual other-than-­ temporary impairment in weighted average contractual interest rate on loans at excess of $20 million for a total of $173 million. June 30, 2017 was 5.4%, up from 5.1% June 30, 2016. Net unrealized losses on equity investments and asso- The increase in the recognition of deferred interest is ciated derivatives totaled $33 million (Net unrealized primarily due to $67 million of previously capitalized losses of $204 million in FY16) reflecting the realization and deferred interest that was recognized in FY17 Q1 of gains and overall improvement in the macro environ- as a result of a full prepayment of a $127 million loan. ment for emerging market equities. The increase in realized losses is primarily due to a Income from Debt Securities and Realized Gains and $30 million write-off of a loan accounted for under the Losses on Debt Securities and Associated Derivatives fair value option reported in FY17 Q2. Income from debt securities and realized gains and Income from Equity Investments and losses on debt securities and associated derivatives Associated Derivatives increased to $282 million in FY17 from $129 million in FY16. The largest changes were higher realized gains on Income from the equity investment portfolio, including debt securities and associated derivatives of $114 mil- associated derivatives, increased by $189 million from lion, higher interest income of $53 million, partially offset $518 million in FY16 to $707 million in FY17. by higher other-than-­ temporary impairments of $9 mil- IFC sells equity investments where IFC’s developmental lion in FY17 when compared with FY16. One investment role is complete, where pre-­ determined sales trigger generated a $102 million realized gain from a debt secu- levels have been met, and where applicable, lock ups rity to equity conversion in FY17 Q4 and overall higher have expired. Gains on equity investments and associ- average balances was the other main cause for the ated derivatives comprise realized and unrealized gains. increase. IFC FINANCIALS 2018 | 38 Provision for Losses on Loans, Guarantees and non-U.S. ­ denominated loans of $6 million and dollar-­ Other Receivables other adjustments of $20 million. In FY17, IFC actively exited a number of loans through settlement or sale or The quality of the loan portfolio, as measured by the upon a recognition that the possibility of recovery was weighted average country risk ratings and the weighted remote resulting in a significant amount of exits — 2​3 average credit ratings, experienced some marginal loans exited NPL status in FY17 upon write-off. improvement in FY17. NPLs decreased by $190 million, from $1,712 million of the disbursed loan portfolio at Specific reserves against losses on loans at June 30, June 30, 2016 to $1,522 million11 at June 30, 2017. The 2017 of $841 million ($965 million at June 30, 2016) are decrease of $190 million was comprised of $508 million held against impaired loans of $1,675 million ($1,752 mil- of loans and loan-like debt securities being placed in lion at June 30, 2016), a coverage ratio of 50% (55% at NPL status, $239 million being removed from NPL sta- June 30, 2016). tus due to positive developments such as repayments, prepayments and improvements resulting in moving to Income from Liquid Asset Trading Activities performing status, $468 million being removed from The liquid assets portfolio, net of derivatives and secu- NPL status due to write-offs and other changes of rities lending activities, decreased by $2.2 billion from $9 million. In FY17, fifteen loans greater than $10 million, $41.4 billion at June 30, 2016, to $39.2 billion at June 30, and totaling $451 million, were placed in NPL status. 2017. Gross income from liquid asset trading activities IFC recorded a net provision for losses on loans, guar- totaled $917 million in FY17 compared to $504 million in antees and other receivables of $86 million in FY17 FY16, an increase of $413 million. The increase in gross ($268 million of specific provisions on loans partially income was primarily attributable to an increase in the offset by $171 million release of portfolio provisions on performance of liquid assets net of benchmarks and, to loans and an $11 million release of provision on guaran- a lesser extent, the increase in money-­ market rates and tees) as compared to a provision of $359 million in FY16 short-term U.S. Treasury yields. The related increase in ($319 million of specific provisions for losses on loans; LIBOR resets will also be reflected in an increased fund- $36 million of portfolio provisions for losses on loans; ing cost (charges on borrowings) of the Corporation. and a net $4 million of provision for losses on guarantees Interest income in FY17 totaled $582 million, compared and other receivables). Adverse ­ project-­specific devel- to $561 million in FY16. Holdings in products other opments on ten loans comprised 81% of the specific than ABS and MBS, including US Treasuries, global provision for losses on loans in FY17 (excluding release government bonds, high quality corporate bonds and of provisions and recoveries). derivatives generated $285 million of gains in FY17. The In FY17, IFC completed the implementation of IRP, which portfolio of ABS and MBS experienced fair value gains replaced IFC’s previous credit risk rating system and totaling $50 million in FY17, for a total gain of $335 mil- economic capital engine. The new rating system better lion (realized and unrealized). This compares to a total aligns IFC’s practice to internationally recognized stan- loss (realized and unrealized) of $57 million in FY16. dards, where appropriate, given IFC’s portfolio and IRP In FY17, the liquid assets portfolios outperformed their allows for easier comparison between external ratings benchmarks by $408 million. FY17 began in the wake of and IFC’s internal ratings. More granular ratings are the “BREXIT” vote, which had raised risk premia across expected to lead to better differentiation and a bet- the developed markets and dampened returns at the ter understanding of client credit standing which will very end of FY16. The rebound in asset prices as the allow for more focus on those credits that most warrant market adapted to the news of the result was tremen- scrutiny. The improved predictive power for probability dous. In fact, certain U.K. securities not only recaptured of default and loss given default is also anticipated to their FY16 mark-to-­ market losses but generated gains lead to more informed investment decisions. As a result in excess of those losses. Increasing clarity around the of implementing IRP, IFC reviewed its methodology for rating actions impacting U.S. student loan securities estimating the portfolio reserve against losses, in par- also contributed to a recovery in assets that were ticular the estimation of the probability of default and negatively impacted in FY16. In addition, improving loss given default. The $171 million release of portfolio economic growth across much of the world, especially provisions in FY17 includes a $156 million release of during the first half of FY17 contributed to tighter credit provision related to this change in estimate that was spreads. Tighter credit spreads contributed to a strong reported in FY17 Q3. The additional release of portfolio performance for the Funded Liquidity portfolios. The provisions of $15 million was largely due to the impact of Corporation reduced its exposure to credit spreads unimpaired loans becoming impaired during FY17, which over the course of FY17 and increased its exposure to had a resulting negative impact on specific provisions. deposits and money-­ market instruments. Liquid asset At June 30, 2017, IFC’s total reserves against losses holdings remain well diversified both geographically and on loans were $1,483 million or 6.1% of the disbursed ­nterest-­ across the eligible sectors of the eligible i bearing loan portfolio ($1,775 million; 7.4% at June 30, 2016), investment universe. a decrease of $292 million from June 30, 2016. The Stable U.S. economic growth, an improving labor mar- decrease in reserves against losses on loans due to ket, and an increase in the pace of inflation, at least in write-offs, net of recoveries of $415 million has been the first half of FY17, allowed the U.S. Federal Reserve partially offset by provisions of $97 million, foreign to raise the range for its benchmark overnight rate for exchange losses related to reserves held against 11. Includes $101 million reported as debt securities on the Balance ​ une 30, 2016). Sheet as of June 30, 2017 ($66 million — J IFC FINANCIALS 2018 | 39 a second time in December and two more times in the The weighted average cost of IFC’s borrowings out- second half of FY17. This resulted in negative returns for standing from market sources, after the effects of the Treasury Managed Portion of the Corporation’s net borrowing-­ ­ related derivatives, and excluding short-term worth, which is invested in U.S. Treasuries. Interest rates borrowings from market and other sources, was 1.4% at rose significantly across the yield curve led by the “belly”. June 30, 2017, an increase from 1.1% at June 30, 2016. The yield for the on-the-run 2-year U.S. Treasury rose The size of the borrowings portfolio (excluding the short- 80 bps, the 5-year yield rose 89 bps, the 10-year yield term borrowings), net of b­ orrowing-­ related derivatives rose 83 bps, and the 30-year yield rose 55 bps over the and before fair value adjustments, decreased by $1.9 bil- fiscal year. The Treasury Managed Portion of IFC’s net lion during FY17 from $53.9 billion at June 30, 2016, to worth is benchmarked to the 1 to 3-year U.S. Treasury $52.0 billion at June 30, 2017. index. As a result, the portfolio suffered a small loss as the income was not sufficient to offset the capital losses Other Income as yields rose. USD LIBOR-Swap yields rose more than Other income of $528 million for FY17 was $27 million U.S. Treasury yields, reversing some of the movement higher than in FY16 ($501 million). There were higher in FY16. With the yield spreads for the Corporation’s returns on the Post Employment Benefit Plan (PEBP) high-­quality USD assets remaining stable relative to assets which are partly invested in global equities and U.S. Treasuries, the spreads relative to the LIBOR-based reflected the improved market for equity investments benchmark narrowed, contributing to the performance in FY17 as compared to the same period in FY16. The of USD-­ denominated assets. The performance of non- decline in service fees from FY16 to FY17 was primarily USD liquid assets benefited from a reduction in USD due to a decrease in mobilization fees. funding pressures, which resulted in less-­ negative cross-­ currency bases and adjustments in ­ foreign-­currency Other income also includes management and other forward rates that contributed to returns. fees from IFC’s consolidated subsidiary, AMC, of $79 million ($66 million in FY16) with the increase com- During FY17 Q4, short-term US Treasury yields rose, ing from increased number of funds and assets under while long-term yields declined. The US Federal management and income from Advisory Services, pre- Reserve tightened monetary policy in June despite dominantly contributions from donors, of $277 million ­ weaker-than-­ expected inflation readings during the ($266 million in FY16). In FY17, income from advisory quarter. The S&P 500 equity index was up modestly services comprised $229 million of donor funds utilized over the quarter, and credit spreads narrowed, but at ​ Y16) and $48 million of fees from clients ($217 million — F a slower pace. ­ Option-­implied volatilities remained at and administrative fees from donors ($49 million — F ​ Y16). historically low levels. This resulted in positive excess returns for the high-­ quality securities in IFC’s Liquid Other Expenses Asset Portfolios. The IFC treasury managed portion of net worth gained $17 million during the quarter despite Administrative expenses (the principal component of the increase in short-term interest rates. An increase in other expenses) increased by $29 million from $933 mil- the size of the portfolio and the slow pace of increase lion in FY16 to $962 million in FY17. The increase in FY17 is in yields on 1 to 3-year Treasuries supported interest due to higher salary costs and higher variable expenses, income, and this income was enhanced by the use of primarily consultants and travel. securities lending to make additional investments. Advisory services expenses totaled $327 million in FY17 In FY17 and FY16, all internally managed liquid asset ($308 million in FY16) with the increase from FY16 con- portfolios outperformed their respective benchmarks. sistent with the increase in advisory services income. At June 30, 2017, trading securities with a fair value of IFC recorded expenses from pension and other postre- $19 million are classified as Level 3 securities, which is tirement benefit plans in FY17 of $293 million, compared 0.1% of total trading securities at fair value ($68 mil- with $185 million in FY16. This increase, based on the ​ une 30, 2016). lion — J beginning of the year actuarial assumptions and cal- culations based on the funding status of the plans at Charges on Borrowings FY16-end, was driven by higher service cost and lower interest costs, partially offset by higher expected returns IFC’s charges on borrowings increased by $303 million, on plan assets and higher amortization of unrecognized from $409 million in FY16 (net of $6 million gain on extin- net actuarial losses resulting largely from the decrease guishment of borrowings) to $712 million in FY17 (net of in the discount rates used to determine the projected $2 million gain on extinguishment of borrowings), largely benefit obligation. attributable to rising LIBOR rates and increased interest charges on the back of pricing in the SSA (Sovereigns, Supranational and Agency) market becoming more expensive due to USD swap curve tightening and wid- ening borrowing spreads vs. LIBOR. IFC FINANCIALS 2018 | 40 Foreign Currency Transaction Gains and Losses on management swaps and unrealized gains of $9 mil- Non-­Trading Activities lion on other derivatives, mainly conversion features, warrants in investment contracts and interest rate and Foreign currency transaction losses reported in net currency swaps economically hedging client obligations. income in FY17 totaled $188 million (losses of $46 mil- The unrealized gains of $128 million on ­lending-­ related ​ Y16). Foreign currency transaction gains on debt lion — F swaps is driven by the increase in value of the pay securities accounted for as ­ available-for-sale in the fixed and receive floating swaps as LIBOR rates have amount of $64 million in FY17 (losses of $49 million — ​ increased. FY16) are reported in Other Comprehensive Income, while gains and losses on the derivatives economically Changes in the fair value of IFC’s borrowings from mar- hedging such debt securities are reported in net income. ket, IDA and associated derivatives, net, includes the impact of changes in IFC’s own credit spread when Largely due to IFC having a small population of measured against US$ LIBOR. As credit spreads widen, unhedged non-U.S. d denominated loans and debt ­ ollar-­ unrealized gains are recorded and when credit spreads securities and the U.S. dollar strengthening against such narrow, unrealized losses are recorded (notwithstanding currencies, IFC has recorded overall foreign exchange the impact of other factors, such as changes in risk-free related losses in a combination of Net Income and Other interest and foreign currency exchange rates). The mag- Comprehensive Income of $124 million in FY17 (losses of nitude and direction (gain or loss) can be volatile from $95  million — ​F Y16). period to period but do not alter the cash flows. IFC’s policy is to generally match currency, amount and timing Net Unrealized Gains and Losses on Non-­Trading of cash flows on market borrowings with cash flows on Financial Instruments associated derivatives entered into contemporaneously. As discussed in more detail in Note A to IFC’s FY17 Due to the increase in market interest rates, IFC Consolidated Financial Statements, IFC accounts for recorded unrealized gains of $991 million on market certain financial instruments at fair value with unre- borrowings in FY17, more than offsetting $949 million alized gains and losses on such financial instruments of unrealized losses recorded on derivatives associ- being reported in net income, namely: (i) all market ated with market borrowings. At the end of FY17, the borrowings that are economically hedged with financial cost of economically hedging borrowings in U.S. dol- instruments that are accounted for at fair value with lars, Australian dollars, and New Zealand dollars was changes therein reported in net income; (ii) unrealized marginally more favorable to IFC as compared to the gains and losses on certain loans, debt securities and end of FY16. Additionally, credit spreads for IFC borrow- associated derivatives; and (iii) borrowings from IDA. ing issuances were generally narrower across the term structure than at the end of FY16. Table 20: Net Unrealized Gains Overall, IFC has reported $74 million of net unrealized and Losses on Non-­Trading gains on borrowings and associated derivatives in FY17 ($62 million in FY16). Financial Instruments Grants to IDA FY17 vs FY16 (US$ millions) During FY17, IFC recorded a grant to IDA of $101 million, FY17 FY16 as compared with $330 million in FY16. Unrealized gains and losses on loans, debt securities and associated OTHER COMPREHENSIVE INCOME (OCI) derivatives $320 $ (266) Unrealized gains and losses on Unrealized Gains and Losses on Equity Investments borrowings from market, IDA and and Debt Securities associated derivatives, net 74 62 IFC’s investments in debt securities and equity Net unrealized gains and losses on non-­trading financial instruments investments that are listed in markets that provide accounted for at fair value $394 $(204) readily determinable fair values are classified as ­ available-for-sale, with unrealized gains and losses on IFC reported net unrealized gains on loans, debt secu- these investments being reported in OCI until realized. rities and associated derivatives of $320 million in FY17 When realized, the gain or loss is transferred to net (net unrealized losses of $266 million in FY16). In FY17 income. Changes in unrealized gains and losses on this comprised unrealized gains of $102 million on the equity investments and debt securities reported in OCI loan and debt securities portfolio carried at fair value, are significantly impacted by (i) the global environment unrealized gains of $128 million on l ­ending-­related for emerging markets; and (ii) the realization of gains on swaps, unrealized gains of $81 million on client risk sales of such equity investments and debt securities. IFC FINANCIALS 2018 | 41 Table 21: Other Comprehensive Unrecognized Net Actuarial Gains and Losses and Unrecognized Prior Service Costs on Benefit Plans Income (Loss) — ​Unrealized Unrecognized pension adjustments largely represent the Gains and Losses on Equity unrecognized net actuarial gains and losses on benefit plans. Actuarial gains and losses occur when actual Investments and Debt results differ from expected results in determining the Securities FY17 vs FY16 funded status of the pension plans. Since the pension plans are long term, changes in asset returns and dis- (US$ millions) count rates cause volatility in comprehensive income. The improvement in the funded status reflects the rise FY17 FY16 in interest rates used to measure the liability, and to a Net unrealized gains and losses on greater extent the higher actual asset returns compared equity investments arising during with the long-term projection. Given its long-term plan- the year: ning horizon for pension plans, Management is focused Unrealized gains $     814 $     355 mainly on ensuring that contributions to pension plans appropriately reflect long term assumptions about asset Unrealized losses (269) (871) returns and discount rates. Reclassification adjustment for realized gains and other-than-­ During FY17, IFC experienced a gain of $543 million temporary impairments included primarily due to $537 million of unrecognized net actu- in net income (332) (281) arial gains and a $6 million reduction of prior service Net unrealized gains and losses on cost. The gain resulted largely from the increase in the equity investments $     213 $(797) discount rates used to determine the projected benefit obligations at FY17-end when compared with FY16-end. Net unrealized gains and losses on The discount rate assumptions used to determine the debt securities arising during the year: projected benefit obligation for the Staff Retirement Plan and Post-­ Employment Benefits Plan increased Unrealized gains $337 $    103 from 3.4% at June 30, 2016 to 3.7% at June 30, 2017 Unrealized losses (88) (180) and from 3.5% at June 30, 2016 to 3.8% at June 30, Reclassification adjustment for 2017, respectively. credit related realized gains, non-­ portion of impairments which were recognized in net income and other-than-­temporary included in net income (116) 10 Net unrealized gains and losses on debt securities $     133 $ (67) Total unrealized gains and losses on equity investments and debt securities $     346 $(864) Net unrealized gains on equity investments and debt securities was $346 million in FY17. This was primar- ily driven by higher equity valuations, as a result of the improved emerging markets environment, and the reclassification of write-downs of listed equity invest- ments, partially offset by the reclassification of realized gains on listed equities. IFC FINANCIALS 2018 | 42 GOVERNANCE AND CONTROL SENIOR MANAGEMENT AND SENIOR MANAGEMENT CHANGES The following is a list of the principal officers of IFC as of June 30, 2017: President Dr. Jim Yong Kim Chief Executive Officer Philippe Le Houérou Vice President, New Business Dimitris Tsitsiragos1 Vice President, Blended Finance and Partnerships Nena Stoiljkovic Vice President, General Counsel and Vice President, Legal, Compliance Risk, Ethiopis Tafara and ESG Sustainability Vice President, Portfolio Management Saran Kebet-­Koulibaly2 Vice President, Risk and Financial Sustainability Mohamed Gouled Vice President, Corporate Strategy and Resources Stephanie von Friedeburg3 Vice President, Treasury and Syndications Jingdong Hua Vice President, WBG Controller Bernard Lauwers Vice President, Economics and Private Sector Development Hans Peter Lankes wholly-owned Vice President, CEO, IFC Asset Management Company LLC (a ­ Gavin E.R. Wilson4 subsidiary of IFC) Vice President, Communications and Outreach Karin Finkelston 1. Dimitris Tsitsiragos left IFC in November 2017. Koulibaly left IFC in November 2017. 2. Saran Kebet-­ Stephanie von Friedeburg was appointed to the new position of IFC’s Chief Operating Officer, effective January 1, 2018. Stephanie 3.  temporarily assumed the position of Vice President, New Business on November 1, 2017. G avin E.R. Wilson left IFC and AMC in October 2017 and Marcos Brujis became AMC Chief Executive Officer and Vice President, IFC 4.  AMC Services effective November 1, 2017. IFC has realigned the organization to include a greater IFC has also appointed Monish Mahurkar as Vice focus at the regional and country level in order to imple- President, Corporate Strategy and Resources, includ- ment the IFC 3.0 strategy. The changes include the ing Human Resources and Information Technology, and creation of the above mentioned new position of Chief Mohamed Gouled assumed the IFC Controllers func- Operating Officer, to oversee all IFC operations and tion within the Risk and Financial Sustainability Vice drive the implementation of the IFC strategy, and the Presidency, both effective January 1, 2018. creation of three Regional Vice President positions who will report to the Chief Operating Officer. Accordingly, IFC announced the following appointments effective January 1, 2018: ••The appointment of Georgina Baker, Regional Vice President, Latin America & Caribbean and Europe & Central Asia. ••The appointment of Sérgio Pimenta, Regional Vice ­ iddle-East and Africa. President, M ••The reassignment of Nena Stoiljkovic, to the position of Regional Vice President, South Asia and East Asia & Pacific. IFC FINANCIALS 2018 | 43 Accordingly, the following is a list of the principal officers of IFC as of June 30, 2018: President Dr. Jim Yong Kim Chief Executive Officer Philippe Le Houérou Chief Operating Officer Stephanie von Friedeburg Regional Vice President, Latin America & the Caribbean and Europe & Central Asia Georgina Baker ­ iddle East and Africa Regional Vice President, M Sérgio Pimenta Regional Vice President, South Asia and East Asia & the Pacific Nena Stoiljkovic Vice President and General Counsel, Legal, Compliance Risk, and ESG Sustainability Ethiopis Tafara Vice President, Risk and Financial Sustainability1 Mohamed Gouled Vice President, Corporate Strategy and Resources Monish Mahurkar Vice President, Treasury and Syndications Jingdong Hua Vice President, Economics and Private Sector Development Hans Peter Lankes wholly-owned Vice President, CEO, IFC Asset Management Company LLC (a ­ Marcos Brujis subsidiary of IFC) Vice President, Partnerships, Communications and Outreach Karin Finkelston 1. Renamed Risk and Finance effective July 1, 2018. The committees are made up of eight members and GENERAL function under their respective stipulated terms of ref- GOVERNANCE erence. These committees are as follows: decision-­ IFC’s ­ making structure consists of the Board ••Audit Committee — ​ assists the Board in overseeing IFC’s finances, accounting, risk management and of Governors, the Board of Directors, the President, internal controls (see further explanation below). the Executive Vice President and CEO, management and staff. The Board of Governors is the highest ••Budget Committee — ​ assists the Board in approving IFC’s budget and in overseeing the preparation and decision-­ ­ making authority. Governors are appointed execution of IFC’s strategy and business plans. The by their member governments for a five-year term, committee provides guidance to management on which is renewable. The Board of Governors may del- strategic directions. egate authority to the Board of Directors to exercise any of its powers, except those reserved to the Board ••Committee on Development Effectiveness — s ​ upports the Board in assessing IFC’s development effective- of Governors under the Articles of Agreement. ness, providing guidance on strategic directions, and monitoring the quality and results of operations. ••Committee on Governance and Directors’ BOARD Administrative Matters — ​ assists the Board on issues related to governance, the Board’s own effective- MEMBERSHIP ness, and the administrative policy applicable to Directors’ offices. In accordance with its Articles of Agreement, Directors ••Human Resources Committee — ​ strengthens the effi- are appointed or elected every two years by their mem- ciency and effectiveness of the Board in discharging ber governments. The Board currently has 25 Directors its oversight responsibility on IFC’s human resources who represent all member countries. Directors are nei- strategy, policies and practices, and their alignment ther officers nor staff of IFC. The President is the only with the business needs of the organization. member of the Board from management, and he serves as a non-­voting member and as Chairman of the Board. The Board is required to consider proposals made by the President on the use of IFC’s net income: retained The Board and its committees are in continuous ses- earnings and designation of retained earnings and on sion at the main IBRD offices in Washington DC, as other policies that affect its general operations. The business requires. Each committee’s terms of reference Board is also responsible for presenting to the Board of establishes its respective roles and responsibilities. As Governors, at the Annual meetings, audited accounts, committees do not vote on issues, their role is primarily an administrative budget, and an annual report on to serve the Board in discharging its responsibilities. operations and policies and on other matters. IFC FINANCIALS 2018 | 44 AUDIT BUSINESS COMMITTEE CONDUCT The WBG promotes a positive work environment in MEMBERSHIP which staff members understand their ethical obliga- tions to the institutions. In support of this commitment, The Audit Committee consists of eight Directors. the institutions have a Code of Conduct in place. The Membership in the Committee is determined by the WBG has both an Ethics HelpLine and a Fraud and Board, based on nominations by the Chairman of the Corruption hotline. A third-party service offers many Board, following informal consultation with Directors. methods of worldwide communication. Reporting channels include telephone, mail, email, or confidential KEY RESPONSIBILITIES submission through a website. The Audit Committee is appointed by the Board for the IFC has in place procedures for receiving, retaining, primary purpose of assisting the Board in overseeing and handling recommendations and concerns relating IFC’s finances, accounting, risk management, internal to business conduct identified during the accounting, controls and institutional integrity, specific responsibil- internal control and auditing processes. ities include: WBG staff rules clarify and codify the staff’s obliga- ••Oversight of the integrity of IFC’s financial statements. tions in reporting suspected fraud, corruption, or other ••Appointment, qualifications, independence and per- misconduct that may threaten the operations or gov- formance of the External Auditor. ernance of the WBG. These rules also offer protection ••Performance of the Internal Audit Department. from retaliation. ••Adequacy and effectiveness of financial and account- ing policies and internal controls and the mechanisms to deter, prevent and penalize fraud and corruption in IFC operations and corporate procurement. AUDITOR ••Effective management of financial, fiduciary, compli- INDEPENDENCE ance in IFC. ••Oversight of the institutional arrangements and pro- The appointment of the external auditor for IFC is cesses for risk management across IFC. governed by a set of Board-­ ­ approved principles. These include: In carrying out its role, the Audit Committee discusses financial issues and policies that affect IFC’s finan- ••Until the completion of the FY18 audit and audit-­ cial position and capital adequacy with Management, related work, prohibiting the external auditor from external auditors, and internal auditors. It recommends providing any non-audit-­ related services; the annual audited financial statements for approval to ••Requiring all audit-­related services to be pre-­approved the Board. The Audit Committee monitors and reviews on a case-by-case basis by the Board, upon recom- developments in corporate governance and its own role mendation of the Audit Committee; and on an ongoing basis. ••Mandatory rebidding of the external audit contract every five years, with a limit of two consecutive terms EXECUTIVE SESSIONS and mandatory rotation thereafter, provided however, that the Audit Committee may exceptionally recom- Under the Audit Committee’s terms of reference, it mend that the incumbent audit firm should be allowed may convene in executive session at any time, without to participate in the re-­ bidding. Management’s presence. The Audit Committee meets The external auditor is appointed to a five-year term, separately in executive session with the external and with a limit of two consecutive terms, and is subject to internal auditors. annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by ACCESS TO RESOURCES AND TO MANAGEMENT the Board. FY18 is the final year of KPMG LLP’s second term as IFC’s external auditor. Throughout the year, the Audit Committee receives a large volume of information to enable it to carry out its On November 28, 2017, following a mandatory rebidding duties, and meets both formally and informally through- of the external audit contract, IFC’s Directors approved out the year to discuss relevant matters. It has complete the appointment of Deloitte as IFC’s external auditor for access to Management and reviews and discusses with a five-year term commencing FY19. Management topics considered in its terms of reference. Communication between the external auditor and The Audit Committee has the authority to seek advice the Audit Committee is ongoing and carried out as and assistance from outside legal, accounting, or other often as deemed necessary by either party. The Audit advisors as it deems necessary. Committee meets periodically with the external auditor and individual committee members have independent access to the external auditor. IFC’s external auditors also follow the communication requirements with the Audit Committees set out under generally accepted auditing standards in the United States. IFC FINANCIALS 2018 | 45 During FY17, the Board approved amendments to the Concurrently, IFC’s external auditor provides a report policy on the appointment of an external auditor which stating IFC maintained, in all material respects, effective will come into effect for the FY19 audit period. The internal control over external financial reporting. See primary amendments now permit the external auditor Independent Auditors’ Report on effectiveness of inter- to provide non-­ prohibited non-audit related services nal control over financial reporting on Page 47. subject to monetary limits. Broadly, the list of prohib- ited non-audit services include those that would put DISCLOSURE CONTROLS AND PROCEDURES the external auditor in the roles typically performed by management or in a position of auditing their own work, Disclosure controls and procedures are designed to such as accounting services, internal audit services, and ensure that information required to be disclosed is provision of investment advice. The total non-audit ser- gathered and communicated to Management as vices fees over the term of the relevant external audit appropriate, to allow timely decisions regarding contract shall not exceed 70 percent of the audit fees required disclosure by IFC. Management conducted an over the same period. evaluation of the effectiveness of such controls and pro- cedures and the President, the Chief Executive Officer, the Vice President, Risk and Financial Sustainability and Controller have concluded that these controls and INTERNAL procedures were effective as of June 30, 2018. 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 COSO, “Internal Control — ​ Integrated Framework (2013)” provides guidance for designing, implementing and conducting internal control and assessing its effectiveness. Since FY16, IFC has been using the 2013 COSO framework to assess the effec- tiveness of the internal control over external financial reporting. As of June 30, 2018, these controls were determined to be effective. See “Management’s report regarding effectiveness of Internal Control over External Financial Reporting” on Page 45. IFC FINANCIALS 2018 | 46 CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS IFC FINANCIALS 2018 | 47 IFC FINANCIALS 2018 | 48 IFC FINANCIALS 2018 | 49 KPMG LLP Suite 12000 1801 K Street, NW Washington, DC 20006 Independent Auditors’ Report President and Board of Directors International Finance Corporation: We have audited the International Finance Corporation and subsidiaries’ (IFC) internal control over financial reporting as of June 30, 2018, based on criteria established in the Internal Control –Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s Responsibility for Internal Control Over Financial Reporting Management is responsible for designing, implementing, and maintaining effective internal control over financial reporting, and for its assessment about the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Effectiveness of Internal Control Over External Financial Reporting. Auditors’ Responsibility Our responsibility is to express an opinion on the entity's internal control over financial reporting based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting involves performing procedures to obtain audit evidence about whether a material weakness exists. The procedures selected depend on the auditors’ judgment, including the assessment of the risks that a material weakness exists. An audit includes obtaining an understanding of internal control over financial reporting and testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Definition and Inherent Limitations of Internal Control Over Financial Reporting An entity’s internal control over financial reporting is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with U.S. generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely detection and correction, of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent, or detect and correct, misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. IFC FINANCIALS 2018 | 50 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Opinion In our opinion, IFC maintained, in all material respects, effective internal control over financial reporting as of June 30, 2018, based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Report on Consolidated Financial Statements We also have audited, in accordance with auditing standards generally accepted in the United States of America, the accompanying consolidated financial statements of IFC, which comprise the consolidated balance sheets as of June 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in capital and cash flows for each of the years in the three-year period ended June 30, 2018, and our report dated August 9, 2018 expressed an unmodified opinion on those consolidated financial statements. Washington, D.C. August 9, 2018 IFC FINANCIALS 2018 | 51 Page 49 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED BALANCE SHEETS as of June 30, 2018 and June 30, 2017 (US$ millions) 2018 2017 Assets Cash and due from banks............................................................................................................................. $ 1,249 $ 1,107 Time deposits – Note C ................................................................................................................................ 13,156 13,576 Trading securities - Notes C and R .............................................................................................. 28,909 30,188 Securities purchased under resale agreements and receivable for cash collateral pledged - Notes C and W .......................................................................... 1,989 932 Investments - Notes B, D, E, F, G, R and T Loans ($927 at June 30, 2018, $970 at June 30, 2017 at fair value; net of reserve against losses of $1,293 at June 30, 2018, $1,483 at June 30, 2017) - Notes D, E and R .................................................................................................................. 23,609 22,520 Equity investments ($10,322 at June 30, 2018, $10,279 at June 30, 2017 at fair value) - Notes B, D, G and R 13,032 13,488 Debt securities - Notes D, F and R ............................................................................................ 5,623 4,511 Total investments ................................................................................................................. 42,264 40,519 Derivative assets - Notes Q, R and W .......................................................................................... 2,809 2,647 Receivables and other assets – Note J ........................................................................................ 3,896 3,285 Total assets ............................................................................................................................. $ 94,272 $ 92,254 Liabilities and capital Liabilities Securities sold under repurchase agreements and payable for cash collateral received - Notes C and W ........................................................................... $ 6,364 $ 5,401 Borrowings outstanding - Notes K and R From market and other sources at amortized cost ................................................................... 2,874 3,025 From market sources at fair value............................................................................................ 49,414 49,927 From International Development Association at fair value ........................................................ 807 955 From International Bank for Reconstruction and Development at amortized cost ..................... - 196 Total borrowings ................................................................................................................... 53,095 54,103 Derivative liabilities - Notes Q, R and W....................................................................................... 4,289 3,381 Payables and other liabilities – Notes L and V ............................................................................. 4,388 4,316 Total liabilities ....................................................................................................................... 68,136 67,201 Capital Capital stock, authorized (2,580,000 at June 30, 2018 and June 30, 2017) shares of $1,000 par value each - Note M Subscribed and paid-in ............................................................................................................ 2,566 2,566 Accumulated other comprehensive income - Note O ................................................................... 264 458 Retained earnings - Note O ......................................................................................................... 23,306 22,026 Total IFC capital ................................................................................................................... 26,136 25,050 Non-controlling interests .............................................................................................................. - 3 Total capital .......................................................................................................................... 26,136 25,053 Total liabilities and capital ...................................................................................................... $ 94,272 $ 92,254  The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2018 | 52 Page 50 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS for each of the three years ended June 30, 2018 (US$ millions) 2018 2017 2016 Income from investments Income from loans and guarantees, including realized gains and losses on loans and associated derivatives - Note E ................................................................ $ 1,377 $ 1,298 $ 1,126 Provision for losses on loans, guarantees, accrued interest and other receivables - Note E (90) (86) (359) Income from equity investments and associated derivatives - Note G ............................... 853 707 518 Income from debt securities, including realized gains and losses on debt securities and associated derivatives - Note F ..................................................................................... 363 282 129 Total income from investments ................................................................................. 2,503 2,201 1,414 Income from liquid asset trading activities - Note C ........................................................... 771 917 504 Charges on borrowings – Note K ...................................................................................... (1,041) (712) (409) Income from investments and liquid asset trading activities, after charges on borrowings ........................................................................................ 2,233 2,406 1,509 Other income Advisory services income .................................................................................................. 305 277 266 Service fees ...................................................................................................................... 102 82 117 Other - Notes B and N....................................................................................................... 171 169 118 Total other income ...................................................................................................... 578 528 501 Other expenses Administrative expenses – Note X ..................................................................................... (1,029) (962) (933) Advisory services expenses .............................................................................................. (354) (327) (308) Expense from pension and other postretirement benefit plans - Note V............................. (244) (293) (185) Other - Note B ................................................................................................................... (35) (35) (38) Total other expenses .................................................................................................. (1,662) (1,617) (1,464) Foreign currency transaction gains (losses) on non-trading activities ................................ 123 (188) (46) 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................................... 1,272 1,129 500 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value - Note P ............................................................................................................... 88 394 (204) Income before grants to IDA .............................................................................................. 1,360 1,523 296 Grants to IDA - Note O ...................................................................................................... (80) (101) (330) Net income (loss) ................................................................................................................ 1,280 1,422 (34) Net (gains) losses attributable to non-controlling interests ................................................. - (4) 1 Net income (loss) attributable to IFC ................................................................................. $ 1,280 $ 1,418 $ (33) The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2018 | 53 Page 51 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) for each of the three years ended June 30, 2018 (US$ millions) 2018 2017 2016 Net income (loss) attributable to IFC ........................................................................... $ 1,280 $ 1,418 $ (33) Other comprehensive income (loss) Unrealized gains and losses on debt securities Net unrealized gains (losses) on available-for-sale debt securities arising during the period .................................................................................................................... (236) 249 (77) Reclassification adjustment for realized gains included in net income (income from debt securities and realized gains and losses on debt securities and associated derivatives) ............................................................................................................ (49) (170) (35) 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) ................................................................... 39 54 45 Net unrealized (losses) gains on debt securities .............................................. (246) 133 (67) Unrealized gains and losses on equity investments Net unrealized gains (losses) on equity investments arising during the period .......... 445 545 (516) Reclassification adjustment for realized gains included in net income (income from equity investments and associated derivatives) ..................................................... (693) (548) (641) Reclassification adjustment for other-than-temporary impairments included in net income (income from equity investments and associated derivatives) ................... 182 216 360 Net unrealized (losses) gains on equity investments ....................................... (66) 213 (797) Net unrecognized net actuarial gains (losses) and unrecognized prior service credits (cost) on benefit plans - Note V ................................................................. 118 543 (764) Total other comprehensive (loss) income .................................................................. (194) 889 (1,628) Total comprehensive income (loss) attributable to IFC.............................................. $ 1,086 $ 2,307 $ (1,661)  The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2018 | 54 Page 52 Page 52 INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION CONSOLIDATED CONSOLIDATED STATEMENTS STATEMENTS OF CHANGES OF CHANGES IN CAPITAL IN CAPITAL of the for eachfor each of the three years three ended years ended June June 30, 30, 2018 2018 (US$ millions) (US$ millions) Attributable Attributable to IFC to IFC Accumulated Accumulated other other Undesignated Designated Undesignated Total Designated Total comprehensive comprehensive Non- Non- retained retained retained retained retained retained income (loss) income - (loss) - Capital Total IFC Total Capital IFC controlling Total controlling Total earnings earnings earnings earnings Earnings Earnings Note O Note O stock capital capital stock capital interests interests capital At 2015 At June 30, $ June 30, 2015 $ 20,457 20,457 $ $ 184 184 $ 20,641 $ 20,641 $ 1,197 $ 2,566 $1,197 $ 24,404 $2,566 $ 24,404 $ $ 22 $ 22 $ 24,426 24,426 Year endedYearJune 30, June 30, ended 2016 2016 Net Loss attributable Net Loss attributable to to IFC IFC (33) (33) (33) (33) (33) (33) (33) (33) Other comprehensive Other comprehensive loss loss (1,628) (1,628) (1,628) (1,628) (1,628) (1,628) received for Payments Payments received for IFC capital stock IFC capital stock subscribed subscribed - - - - - - Designation Designation of retained of retained Note O - Note O earnings - earnings (344) (344) 344 344 - - - - - - Expenditures Expenditures against against designated retained retained designated Note O - Note O earnings - earnings 395 395(395) (395) - - - - - - Non-controlling Non-controlling interests interests issued issued 2 2 2 2 attributable Net lossesNet losses attributable to non-controlling to non-controlling interests interests (1) (1) (1) (1) At 2016 At June 30, $ June 30, 2016 $ 20,475 20,475 $ $ 133 133 $ 20,608 $ 20,608 $ (431) $ 2,566 $ (431) $ 22,743 $2,566 $ 22,743 $ $ 23 $ 23 $ 22,766 22,766 Year endedYearJune 30, June 30, ended 2017 2017 Net IncomeNet Income attributable attributable to IFC to IFC 1,418 1,418 1,418 1,418 1,418 1,418 1,418 1,418 Other comprehensive Other comprehensive income income 889 889 889 889 889 889 received for Payments Payments received for IFC capital stock IFC capital stock Subscribed Subscribed - - - - - - Designations Designations of retained of retained Note O - Note O earnings - earnings (161) (161) 161 161 - - - - - - Expenditures Expenditures against against designated retained retained designated Note O - Note O earnings - earnings 169 169(169) (169) - - - - - - Non-controlling Non-controlling interests interests redeemedredeemed (24) (24)(24) (24) attributable Net gains Net to gains attributable to non-controlling non-controlling interests interests 4 4 4 4 At 2017 At June 30, $ June 30, 2017 $ 21,901 21,901 $ $ 125 125 $ 22,026 $ 22,026 $ $ 458 2,566 $ 458 $ 25,050 $2,566 $ 25,050 $ $ 3 $ 3 $ 25,053 25,053   The The notes to the notes to the Consolidated Consolidated Financial Financial Statements are Statements an integral part are integral anof part of these statements. these statements. IFC FINANCIALS 2018 | 55 Page Page 53 53 INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION CONSOLIDATEDSTATEMENTS CONSOLIDATED OFCHANGES STATEMENTSOF INCAPITAL CHANGESIN CAPITAL for for each each ofof the three the threeyears years ended ended June June 30, 30, 2018 2018 (US$ (US$millions) millions) Attributable Attributable IFC toto IFC Accumulated Accumulated other other Undesignated Designated Undesignated Designated Total Total comprehensive comprehensive Non- Non- retained retained retained retained retained retained income income (loss) (loss) - - Capital Capital Total IFC Total IFC controlling controlling Total Total earnings earnings Earnings Earnings earnings earnings Note Note OO stock stock capital capital interests interests capital capital June AtAt 30, June 30, 2017 2017 $$ 21,901 $ $ 21,901 125 125 $ $ 22,026 22,026 $ $ 458 $ $ 458 2,566 $ $ 25,050 2,566 25,050 $ $ 25,053 3 3 $ $ 25,053 Year Year ended ended June June 30, 30, 2018 2018 Net Net Income Income attributable attributable IFC to to IFC 1,280 1,280 1,280 1,280 1,280 1,280 1,280 1,280 Other Other comprehensive comprehensive loss loss (194) (194) (194) (194) (194) (194) Payments Payments received received for for IFCIFC capital capital stock stock Subscribed Subscribed - - - - - - Designations Designations retained of of retained earnings earnings - Note - Note OO (205) (205) 205 205 - - - - - - Expenditures Expenditures against against designated designated retained retained earnings earnings - Note - Note OO 140 140 (140) (140) - - - - - - Non-controlling Non-controlling interests interests redeemed redeemed (3) (3) (3) (3) Net Net gains gains attributable attributable to to non-controlling non-controlling interests interests - - - - June AtAt 30, June 30, 2018 2018 $$ 23,116 $ $ 23,116 190 190 $ $ 23,306 23,306 $ $ 264 $ $ 264 2,566 $ $ 26,136 2,566 26,136 $ $ 26,136 - - $ $ 26,136 The The notes notes to the to the Consolidated Financial Consolidated Financial Statements Statements are an an are integral integral part part of these statements. of these statements. IFC FINANCIALS 2018 | 56 Page 54 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the three years ended June 30, 2018 (US$ millions) 2018 2017 2016 Cash flows from investing activities Loan disbursements ......................................................................................................... $ (7,919) $ (6,486) $ (7,248) Investments in equity securities ........................................................................................ (1,270) (1,872) (1,929) Investments in debt securities ........................................................................................... (1,961) (1,996) (775) Loan repayments .............................................................................................................. 6,358 5,707 5,988 Equity redemptions............................................................................................................. - 78 - Debt securities repayments .............................................................................................. 514 256 292 Proceeds from sales of loan investments .......................................................................... 43 17 - Proceeds from sales of equity investments ....................................................................... 2,369 2,101 2,297 Proceeds from sales of debt securities ............................................................................. 20 146 141 Investment in land and building for headquarters .............................................................. (29) (56) - Net cash used in investing activities ........................................................................ (1,875) (2,105) (1,234) Cash flows from financing activities Medium and long-term borrowings Issuance ......................................................................................................................... 16,524 16,296 15,462 Retirement ...................................................................................................................... (16,755) (17,868) (10,981) Medium and long-term borrowings related derivatives, net .............................................. (551) (901) (1,189) Short-term borrowings, net ............................................................................................... 1,577 1,329 (434) Non-controlling interests (redeemed) issued ..................................................................... (3) (24) 2 Net cash provided by (used in) financing activities................................................. 792 (1,168) 2,860 Cash flows from operating activities Net income (loss) attributable to IFC ................................................................................. 1,280 1,418 (33) Add: Net gains (losses) attributable to non-controlling interests ........................................ - 4 (1) Net income (loss).............................................................................................................. 1,280 1,422 (34) Adjustments to reconcile net income or loss to net cash used in operating activities: Realized losses (gains) on loans and associated derivatives, net .................................... 19 33 (2) Realized gains on debt securities and associated derivatives, net ................................... (93) (153) (39) Gains on equity investments and related derivatives, net ................................................ (1,009) (1,040) (1,013) Provision for losses on loans, guarantees, accrued interest and other receivables .......... 90 86 359 Other-than-temporary impairments on debt securities ..................................................... 39 54 45 Other-than-temporary impairments on equity investments............................................... 446 581 744 Net premiums received at issuance of borrowings .......................................................... 2 7 4 Net discounts paid on retirement of borrowings ............................................................... (33) (13) (83) Net realized gains on extinguishment of borrowings ........................................................ (2) (2) (6) Foreign currency transaction losses (gains) on non-trading activities .............................. (123) 188 46 Net unrealized (gains) losses on non-trading financial instruments accounted for at fair value .......................................................................................................................... (88) (394) 204 Change in accrued income on loans, time deposits and securities .................................. (35) (70) (61) Change in payables and other liabilities .......................................................................... (450) 20 743 Change in receivables and other assets .......................................................................... (720) (148) (279) Change in trading securities and securities purchased and sold under resale and repurchase agreements.............................................................................................. 1,905 2,592 2,504 Net cash provided by operating activities ................................................................ 1,228 3,163 3,132 Change in cash and cash equivalents ................................................................................ 145 (110) 4,758 Effect of exchange rate changes on cash and cash equivalents ......................................... (423) 288 729 Net change in cash and cash equivalents........................................................................... (278) 178 5,487 Beginning cash and cash equivalents................................................................................. 14,683 14,505 9,018 Ending cash and cash equivalents ................................................................................. $ 14,405 $ 14,683 $ 14,505 Composition of cash and cash equivalents Cash and due from banks ................................................................................................. $ 1,249 $ 1,107 $ 1,391 Time deposits ................................................................................................................... 13,156 13,576 13,114 Total cash and cash equivalents ..................................................................................... $ 14,405 $ 14,683 $ 14,505 The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2018 | 57 Page 55 INTERNATIONAL FINANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS for each of the three years ended June 30, 2018 (US$ millions) 2018 2017 2016 Supplemental disclosure Change in ending balances resulting from currency exchange rate fluctuations: Loans outstanding ................................................................................................. $ (199) $ 98 $ (271) Debt securities ....................................................................................................... (193) 64 (49) Loan and debt security-related currency swaps ..................................................... 340 (93) 335 Borrowings............................................................................................................. 1,473 (81) 368 Borrowing-related currency swaps ......................................................................... (1,318) 23 (190) Charges on borrowings paid, net ............................................................................. $ 896 $ 733 $ 413 Non-cash items: Loan and debt security conversion to equity, net..................................................... $ 59 $ 197 $ 52 The notes to the Consolidated Financial Statements are an integral part of these statements. IFC FINANCIALS 2018 | 58 Page Page 56 56 INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION CONSOLIDATED CONSOLIDATED STATEMENT STATEMENT OFOF CAPITAL STOCK CAPITAL STOCK AND VOTING AND POWER VOTING POWER as as of of June June 30, 2018 30, 2018 (US$ thousands) (US$ thousands) Capital Capital Stock Stock Power Power VotingVoting Capital Stock Stock Capital Power Power VotingVoting Amount Amount PercentNumber Percent NumberPercent Percent AmountAmount Percent PercentNumber of Number Percent of Percent Members Members paid paid of totalof total of votes of votes of total of total Members Members paid paid of total of total votes votes of total of total Afghanistan............................. Afghanistan............................. 111 111 * * 931 931 0.03 0.03 Lebanon……………………….. Lebanon……………………….. 135 135 0.01 0.01 955 955 0.04 0.04 Albania.................................... 1,302 1,302 Albania.................................... 0.05 0.05 2,122 2,122 0.08 0.08 Lesotho Lesotho ………………………... ………………………... 71 71 * * 891 891 0.03 0.03 Algeria..................................... 5,784 5,784 Algeria..................................... 0.23 0.23 6,604 6,604 0.24 0.24 Liberia Liberia …………………………. …………………………. 83 83 * * 903 903 0.03 0.03 Angola..................................... 1,481 1,481 Angola..................................... 0.06 0.06 2,301 2,301 0.08 0.08 Libya …………………………… Libya …………………………… 55 55 * * 875 875 0.03 0.03 Antigua and Barbuda............... Antigua and Barbuda............... 13 13 * * 833 833 0.03 0.03 Lithuania Lithuania ………………………. ………………………. 2,341 2,341 0.09 0.09 3,161 3,161 0.12 0.12 Argentina................................. 42,40542,405 Argentina................................. 1.65 1.65 43,22543,225 1.59 1.59 Luxembourg…………………… Luxembourg…………………… 2,139 2,139 0.08 0.08 2,959 2,959 0.11 0.11 Armenia................................... Armenia................................... 992 992 0.04 0.04 1,812 1,812 0.07 0.07 Macedonia, Macedonia, FYR ofFYR of …………... …………... 536 536 0.02 0.02 1,356 1,356 0.05 0.05 Australia.................................. 47,32947,329 Australia.................................. 1.84 1.84 48,14948,149 1.77 1.77 Madagascar Madagascar …………………... …………………... 432 432 0.02 0.02 1,252 1,252 0.05 0.05 Austria..................................... 19,74119,741 Austria..................................... 0.77 0.77 20,56120,561 0.76 0.76 MalawiMalawi …………………………. …………………………. 1,822 1,822 0.07 0.07 2,642 2,642 0.10 0.10 Azerbaijan............................... 2,367 2,367 Azerbaijan............................... 0.09 0.09 3,187 3,187 0.12 0.12 Malaysia ………………………. Malaysia ………………………. 16,60616,606 0.65 0.65 17,42617,426 0.64 0.64 Bahamas, The………………... Bahamas, The………………... 335 335 0.01 0.01 1,155 1,155 0.04 0.04 MaldivesMaldives ………………………. ………………………. 16 16 * * 836 836 0.03 0.03 Bahrain………………………… 1,746 1,746 Bahrain………………………… 0.07 0.07 2,566 2,566 0.09 0.09 Mali …………………………….. Mali …………………………….. 451 451 0.02 0.02 1,271 1,271 0.05 0.05 Bangladesh…………………… 9,632 9,632 Bangladesh…………………… 0.38 0.38 10,45210,452 0.38 0.38 Malta …………………………… Malta …………………………… 1,615 1,615 0.06 0.06 2,435 2,435 0.09 0.09 Barbados……………………… Barbados……………………… 361 361 0.01 0.01 1,181 1,181 0.04 0.04 MarshallMarshall IslandsIslands ……………… ……………… 663 663 0.03 0.03 1,483 1,483 0.05 0.05 Belarus.................................... 5,267 5,267 Belarus.................................... 0.21 0.21 6,087 6,087 0.22 0.22 Mauritania Mauritania …………………….. …………………….. 214 214 0.01 0.01 1,034 1,034 0.04 0.04 Belgium................................... 50,61050,610 Belgium................................... 1.97 1.97 51,43051,430 1.89 1.89 Mauritius Mauritius ………………………. ………………………. 1,665 1,665 0.06 0.06 2,485 2,485 0.09 0.09 Belize...................................... Belize...................................... 101 101 * * 921 921 0.03 0.03 …………………………. MexicoMexico …………………………. 30,53230,532 1.19 1.19 31,35231,352 1.15 1.15 Benin…………………………... Benin…………………………... 119 119 * * 939 939 0.03 0.03 Micronesia, Micronesia, Fed. States Fed. States of…… of…… 744 744 0.03 0.03 1,564 1,564 0.06 0.06 Bhutan…………………………. Bhutan…………………………. 720 720 0.03 0.03 1,540 1,540 0.06 0.06 Moldova Moldova ……………………….. ……………………….. 1,192 1,192 0.05 0.05 2,012 2,012 0.07 0.07 Bolivia…………………………. 1,902 1,902 Bolivia…………………………. 0.07 0.07 2,722 2,722 0.10 0.10 MongoliaMongolia ………………………. ………………………. 144 144 0.01 0.01 964 964 0.04 0.04 and Herzegovina……. BosniaBosnia and Herzegovina……. 620 620 0.02 0.02 1,440 1,440 0.05 0.05 Montenegro Montenegro ………………………………………… 1,035 1,035 0.04 0.04 1,855 1,855 0.07 0.07 Botswana……………………… Botswana……………………… 113 113 * * 933 933 0.03 0.03 Morocco ……………………….. Morocco ……………………….. 9,635 9,635 0.38 0.38 10,45510,455 0.38 0.38 Brazil…………………………... 55,58555,585 Brazil…………………………... 2.17 2.17 56,40556,405 2.08 2.08 Mozambique Mozambique ………………….. ………………….. 322 322 0.01 0.01 1,142 1,142 0.04 0.04 Bulgaria ……………………….. Bulgaria ……………………….. 4,934 4,934 0.19 0.19 5,754 5,754 0.21 0.21 Myanmar ………………………. Myanmar ………………………. 666 666 0.03 0.03 1,486 1,486 0.05 0.05 Burkina Faso........................... Burkina Faso........................... 836 836 0.03 0.03 1,656 1,656 0.06 0.06 Namibia ……………………….. Namibia ……………………….. 404 404 0.02 0.02 1,224 1,224 0.05 0.05 Burundi.................................... Burundi.................................... 100 100 * * 920 920 0.03 0.03 Nepal …………………………... Nepal …………………………... 822 822 0.03 0.03 1,642 1,642 0.06 0.06 Cabo Verde…………………… Cabo Verde…………………… 15 15 * * 835 835 0.03 0.03 Netherlands Netherlands ………………………………………… 56,13156,131 2.19 2.19 56,95156,951 2.10 2.10 Cambodia................................ Cambodia................................ 339 339 0.01 0.01 1,159 1,159 0.04 0.04 New Zealand New Zealand ………………….. ………………….. 3,583 3,583 0.14 0.14 4,403 4,403 0.16 0.16 Cameroon............................... Cameroon............................... 885 885 0.03 0.03 1,705 1,705 0.06 0.06 Nicaragua Nicaragua ……………………... ……………………... 715 715 0.03 0.03 1,535 1,535 0.06 0.06 Canada………………………... 81,34281,342 Canada………………………... 3.17 3.17 82,16282,162 3.02 3.02 Niger …………………………… Niger …………………………… 147 147 0.01 0.01 967 967 0.04 0.04 AfricanAfrican CentralCentral Republic…….Republic……. 119 119 * * 939 939 0.03 0.03 …………………………. NigeriaNigeria …………………………. 27,67227,672 1.08 1.08 28,49228,492 1.05 1.05 Chad…………………………… 1,364 1,364 Chad…………………………… 0.05 0.05 2,184 2,184 0.08 0.08 Norway ………………………… Norway ………………………… 17,59917,599 0.69 0.69 18,41918,419 0.68 0.68 Chile…………………………… 12,64712,647 Chile…………………………… 0.49 0.49 13,46713,467 0.50 0.50 Oman ………………………….. Oman ………………………….. 1,187 1,187 0.05 0.05 2,007 2,007 0.07 0.07 China………………………….. 61,75661,756 China………………………….. 2.41 2.41 62,57662,576 2.30 2.30 Pakistan ……………………….. Pakistan ……………………….. 21,29221,292 0.83 0.83 22,11222,112 0.81 0.81 Colombia……………………… 13,65813,658 Colombia……………………… 0.53 0.53 14,47814,478 0.53 0.53 Palau …………………………... Palau …………………………... 25 25 * * 845 845 0.03 0.03 Comoros………………………. Comoros………………………. 14 14 * * 834 834 0.03 0.03 Panama ……………………….. Panama ……………………….. 1,007 1,007 0.04 0.04 1,827 1,827 0.07 0.07 Dem. Rep. Congo,Congo, Dem. Rep. of……….. 2,159 2,159 of……….. 0.08 0.08 2,979 2,979 0.11 0.11 Papua Papua New Guinea ………….. New Guinea ………….. 1,147 1,147 0.04 0.04 1,967 1,967 0.07 0.07 Republic Congo,Congo, of…………... Republic of…………... 131 131 0.01 0.01 951 951 0.04 0.04 Paraguay ……………………… Paraguay ……………………… 436 436 0.02 0.02 1,256 1,256 0.05 0.05 Costa Rica.............................. Costa Rica.............................. 952 952 0.04 0.04 1,772 1,772 0.07 0.07 Peru ……………………………. Peru ……………………………. 8,373 8,373 0.33 0.33 9,193 9,193 0.34 0.34 Côte d'Ivoire............................ 3,544 3,544 Côte d'Ivoire............................ 0.14 0.14 4,364 4,364 0.16 0.16 Philippines Philippines …………………….. 13,65813,658 0.53 0.53 14,47814,478 …………………….. 0.53 0.53 Croatia.................................... 2,882 2,882 Croatia.................................... 0.11 0.11 3,702 3,702 0.14 0.14 PolandPoland …………………………. …………………………. 7,605 7,605 0.30 0.30 8,425 8,425 0.31 0.31 Cyprus…………………………. 2,139 2,139 Cyprus…………………………. 0.08 0.08 2,959 2,959 0.11 0.11 PortugalPortugal ……………………….. ……………………….. 8,324 8,324 0.32 0.32 9,144 9,144 0.34 0.34 Republic………………. Czech Czech Republic………………. 8,913 8,913 0.35 0.35 9,733 9,733 0.36 0.36 Qatar …………………………... Qatar …………………………... 1,650 1,650 0.06 0.06 2,470 2,470 0.09 0.09 Denmark………………………. 18,55418,554 Denmark………………………. 0.72 0.72 19,37419,374 0.71 0.71 Romania Romania ………………………. ………………………. 4,278 4,278 0.17 0.17 5,098 5,098 0.19 0.19 Djibouti………………………… Djibouti………………………… 21 21 * * 841 841 0.03 0.03 Russian Federation Russian ………….. Federation ………….. 102,853 102,853 4.01 4.01 103,673 103,673 3.82 3.82 Dominica................................. Dominica................................. 42 42 * * 862 862 0.03 0.03 Rwanda ……………………….. Rwanda ……………………….. 306 306 0.01 0.01 1,126 1,126 0.04 0.04 Dominican Dominican Republic................ 1,187 1,187 Republic................ 0.05 0.05 2,007 2,007 0.07 0.07 SamoaSamoa …………………………. …………………………. 35 35 * * 855 855 0.03 0.03 Ecuador................................... 2,161 2,161 Ecuador................................... 0.08 0.08 2,981 2,981 0.11 0.11 Sao TomeSaoand Tome and Principe Principe ……… ……… 439 439 0.02 0.02 1,259 1,259 0.05 0.05 Arab Republic Egypt, Egypt, of.......... Arab Republic of.......... 13,38013,380 0.52 0.52 14,20014,200 0.52 0.52 Saudi Arabia Saudi Arabia ………………….. 51,03851,038 1.99 1.99 51,85851,858 ………………….. 1.91 1.91 El Salvador.............................. El Salvador.............................. 29 29 * * 849 849 0.03 0.03 Senegal ……………………….. Senegal ……………………….. 2,299 2,299 0.09 0.09 3,119 3,119 0.11 0.11 Equatorial Equatorial Guinea................... Guinea................... 43 43 * * 863 863 0.03 0.03 ………………………….. Serbia Serbia ………………………….. 1,803 1,803 0.07 0.07 2,623 2,623 0.10 0.10 Eritrea..................................... Eritrea..................................... 935 935 0.04 0.04 1,755 1,755 0.06 0.06 Seychelles Seychelles …………………….. …………………….. 27 27 * * 847 847 0.03 0.03 Estonia.................................... 1,434 1,434 Estonia.................................... 0.06 0.06 2,254 2,254 0.08 0.08 Sierra Leone Sierra ………………….. Leone ………………….. 223 223 0.01 0.01 1,043 1,043 0.04 0.04 Eswatini……………………...... Eswatini……………………...... 684 684 0.03 0.03 1,504 1,504 0.06 0.06 Singapore Singapore ……………………... ……………………... 177 177 0.01 0.01 997 997 0.04 0.04 Ethiopia………………………... Ethiopia………………………... 127 127 * * 947 947 0.03 0.03 Slovak Slovak Republic ………………. Republic ………………. 4,457 4,457 0.17 0.17 5,277 5,277 0.19 0.19 Fiji……………………………… Fiji……………………………… 287 287 0.01 0.01 1,107 1,107 0.04 0.04 SloveniaSlovenia ……………………….. ……………………….. 1,585 1,585 0.06 0.06 2,405 2,405 0.09 0.09 Finland………………………… 15,69715,697 Finland………………………… 0.61 0.61 16,51716,517 0.61 0.61 Solomon Solomon IslandsIslands ……………… ……………… 37 37 * * 857 857 0.03 0.03 France…………………………. France…………………………. 121,015121,015 4.72 4.72 121,835 121,835 4.48 4.48 Somalia Somalia ………………………... ………………………... 83 83 * * 903 903 0.03 0.03 Gabon…………………………. 1,268 1,268 Gabon…………………………. 0.05 0.05 2,088 2,088 0.08 0.08 South…………………… South Africa Africa …………………… 17,41817,418 0.68 0.68 18,23818,238 0.67 0.67 Gambia, The………………….. Gambia, The………………….. 94 94 * * 914 914 0.03 0.03 South Sudan South Sudan ………………….. ………………….. 1,880 1,880 0.07 0.07 2,700 2,700 0.10 0.10 Georgia………………………... 1,380 1,380 Georgia………………………... 0.05 0.05 2,200 2,200 0.08 0.08 Spain …………………………... 37,02637,026 1.44 1.44 37,84637,846 Spain …………………………... 1.39 1.39 Germany………………………. Germany………………………. 128,908128,908 5.02 5.02 129,728 129,728 4.77 4.77 Sri ……………………… Sri Lanka Lanka ……………………… 7,491 7,491 0.29 0.29 8,311 8,311 0.31 0.31 Ghana…………………………. 5,546 5,546 Ghana…………………………. 0.22 0.22 6,366 6,366 0.23 0.23 St. St. Kitts andKitts Nevis Nevis …………… and…………… 638 638 0.02 0.02 1,458 1,458 0.05 0.05 Greece.................................... 6,898 6,898 Greece.................................... 0.27 0.27 7,718 7,718 0.28 0.28 St. Lucia St.……………………….. Lucia ……………………….. 74 74 * * 894 894 0.03 0.03 Grenada.................................. Grenada.................................. 74 74 * * 894 894 0.03 0.03 Sudan Sudan ………………………….. ………………………….. 111 111 * * 931 931 0.03 0.03 Guatemala.............................. 1,084 1,084 Guatemala.............................. 0.04 0.04 1,904 1,904 0.07 0.07 SurinameSuriname ……………………… ……………………… 620 620 0.02 0.02 1,440 1,440 0.05 0.05 Guinea.................................... Guinea.................................... 339 339 0.01 0.01 1,159 1,159 0.04 0.04 Sweden ………………………... Sweden ………………………... 26,87626,876 1.05 1.05 27,69627,696 1.02 1.02 Guinea-Bissau........................ Guinea-Bissau........................ 18 18 * * 838 838 0.03 0.03 Switzerland Switzerland ……………………. 44,06344,063 1.72 1.72 44,88344,883 ……………………. 1.65 1.65 Guyana………………………... 1,392 1,392 Guyana………………………... 0.05 0.05 2,212 2,212 0.08 0.08 Syrian Syrian Arab Republic Arab Republic ………… ………… 194 194 0.01 0.01 1,014 1,014 0.04 0.04 Haiti……………………………. Haiti……………………………. 822 822 0.03 0.03 1,642 1,642 0.06 0.06 Tajikistan Tajikistan ……………………… ……………………… 1,212 1,212 0.05 0.05 2,032 2,032 0.07 0.07 Honduras……………………… Honduras……………………… 495 495 0.02 0.02 1,315 1,315 0.05 0.05 TanzaniaTanzania ………………………. ………………………. 1,003 1,003 0.04 0.04 1,823 1,823 0.07 0.07 Hungary………………………. 11,77111,771 Hungary………………………. 0.46 0.46 12,59112,591 0.46 0.46 Thailand ……………………….. Thailand ……………………….. 11,78111,781 0.46 0.46 12,60112,601 0.46 0.46 Iceland………………………… Iceland………………………… 42 42 * * 862 862 0.03 0.03 Timor- Timor-Leste Leste …………………… …………………… 777 777 0.03 0.03 1,597 1,597 0.06 0.06 India……………………………. India……………………………. 102,947102,947 4.01 4.01 103,767 103,767 3.82 3.82 Togo …………………………… Togo …………………………… 808 808 0.03 0.03 1,628 1,628 0.06 0.06 Indonesia……………………… 31,60231,602 Indonesia……………………… 1.23 1.23 32,42232,422 1.19 1.19 Tonga Tonga ………………………….. ………………………….. 34 34 * * 854 854 0.03 0.03 Iran, Islamic Iran, Islamic Republic of…….. Republic of…….. 1,444 1,444 0.06 0.06 2,264 2,264 0.08 0.08 Trinidad and Tobago Trinidad ………… and Tobago ………… 4,112 4,112 0.16 0.16 4,932 4,932 0.18 0.18 Iraq…………………………….. Iraq…………………………….. 147 147 0.01 0.01 967 967 0.04 0.04 TunisiaTunisia ………………………… ………………………… 3,566 3,566 0.14 0.14 4,386 4,386 0.16 0.16 Ireland…………………………. 1,290 1,290 Ireland…………………………. 0.05 0.05 2,110 2,110 0.08 0.08 …………………………. TurkeyTurkey …………………………. 15,83715,837 0.62 0.62 16,65716,657 0.61 0.61 Israel…………………………… 2,135 2,135 Israel…………………………… 0.08 0.08 2,955 2,955 0.11 0.11 Turkmenistan Turkmenistan ………………….…………………. 810 810 0.03 0.03 1,630 1,630 0.06 0.06 Italy……………………………. 81,34281,342 Italy……………………………. 3.17 3.17 82,16282,162 3.02 3.02 Uganda Uganda ………………………... ………………………... 735 735 0.03 0.03 1,555 1,555 0.06 0.06 Jamaica……………………….. 4,282 4,282 Jamaica……………………….. 0.17 0.17 5,102 5,102 0.19 0.19 Ukraine ………………………… Ukraine ………………………… 10,15910,159 0.40 0.40 10,97910,979 0.40 0.40 Japan…………………………..162,534 Japan………………………….. 162,534 6.33 6.33 163,354 163,354 6.01 6.01 United United Arab Emirates Arab Emirates ………... ………... 4,033 4,033 0.16 0.16 4,853 4,853 0.18 0.18 Jordan…………………………. Jordan…………………………. 941 941 0.04 0.04 1,761 1,761 0.06 0.06 United United Kingdom ………………. Kingdom ………………. 121,015 121,015 4.72 4.72 121,835 121,835 4.48 4.48 Kazakhstan…………………… 4,637 4,637 Kazakhstan…………………… 0.18 0.18 5,457 5,457 0.20 0.20 United United States States ………………….…………………. 569,379 569,379 22.19 22.19 570,199 570,199 20.99 20.99 Kenya…………………………. 4,041 4,041 Kenya…………………………. 0.16 0.16 4,861 4,861 0.18 0.18 Uruguay Uruguay ……………………….. ……………………….. 3,569 3,569 0.14 0.14 4,389 4,389 0.16 0.16 Kiribati………………………… Kiribati………………………… 12 12 * * 832 832 0.03 0.03 Uzbekistan Uzbekistan ……………………. ……………………. 3,873 3,873 0.15 0.15 4,693 4,693 0.17 0.17 Republic Korea, Korea, of…………… Republic of…………… 28,14828,148 1.10 1.10 28,96828,968 1.07 1.07 Vanuatu Vanuatu ……………………….. ……………………….. 55 55 * * 875 875 0.03 0.03 Kosovo………………………… 1,454 1,454 Kosovo………………………… 0.06 0.06 2,274 2,274 0.08 0.08 Venezuela, Venezuela, Rep. Boliv. Rep.de ….. de ….. Boliv. 27,58827,588 1.08 1.08 28,40828,408 1.05 1.05 Kuwait…………………………. 15,07315,073 Kuwait…………………………. 0.59 0.59 15,89315,893 0.58 0.58 Vietnam Vietnam ……………………….. ……………………….. 446 446 0.02 0.02 1,266 1,266 0.05 0.05 Republic……………… KyrgyzKyrgyz Republic……………… 1,720 1,720 0.07 0.07 2,540 2,540 0.09 0.09 Yemen, Yemen, Republic of ………….. Republic of ………….. 715 715 0.03 0.03 1,535 1,535 0.06 0.06 Lao People's Lao People's Dem. Rep.…….. Dem. Rep.…….. 278 278 0.01 0.01 1,098 1,098 0.04 0.04 Zambia ………………………… Zambia ………………………… 1,286 1,286 0.05 0.05 2,106 2,106 0.08 0.08 Latvia………………………….. 2,150 2,150 Latvia………………………….. 0.08 0.08 2,970 2,970 0.11 0.11 ZimbabweZimbabwe …………………….. …………………….. 3,215 3,215 0.13 0.13 4,035 4,035 0.15 0.15 Less * Less *than than .005 .005 percent percent Total Total June 30, June 2018 30, 2018 2,566,199 2,566,199 100.00+ 100.00+ 2,717,079 100.00+ 2,717,079 100.00+ + May + Mayfrom differ differ from the sum the ofsum of the individual the individual percentages percentages shownshown because because of rounding. of rounding. Total Total June June 30, 30, 2017 2017 2,566,199 2,566,199 100.00+ 100.00+ 2,717,079 100.00+ 2,717,079 100.00+ The to The notes the Consolidated notes Financial to the Consolidated Financial Statements Statements are anare an integral integral these part ofpart these statements. of statements. IFC FINANCIALS 2018 | 59 Page 57 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 S and U. 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 changi ng 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. 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 IFC FINANCIALS 2018 | 60 Page 58 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (FVO) 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 and investments in certain debt securities 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 and investments in debt securities 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 and investments for which the Fair Value Option has been elected mitigates the earnings volatility that would otherwise occur, due to measuring the borrowings and investments 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 principa l (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. 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. 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. IFC FINANCIALS 2018 | 61 Page 59 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2018 and June 30, 2017. 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 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. For purposes of providing certain disclosures about IFC’s entire reserve against losses on loans, IFC considers its entire lo an 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. IFC FINANCIALS 2018 | 62 Page 60 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 th e 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. 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. 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. IFC FINANCIALS 2018 | 63 Page 61 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 conside red 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 assoc iated 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 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. IFC FINANCIALS 2018 | 64 Page 62 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 inst ruments 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 borr owings 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. 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. IFC FINANCIALS 2018 | 65 Page 63 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 was 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. 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 was the year ending June 30, 2017 for IFC) and for interim periods thereafter. IFC adopted ASU 2014-15, effective June 30, 2017, with no material impact on IFC’s financial position, results of operations or cash flows. 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. IFC adopted ASU 2016-06 on July 1, 2017 with 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 equit y method accounting, IFC adopted ASU 2016-07 effective July 1, 2017 with no material impact on IFC’s financial position, results of operations or cash flows. In October, 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That are under Common Control (ASC 2016-17). ASC 2016-17 amends Topic 810 so that a single decision maker with respect to a VIE is not required to consider interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, the entity is required to include those interests on a proportional basis consistent with interests held through other related parties. ASC 2016-17 is effective for fiscal years, and interim periods within those annual periods, beginning after December 5, 2016 (which is the year ended June 30, 2018 for IFC). IFC adopted ASU 2016-17 effective July 1, 2017 with no material impact on IFC’s financial position, results of operations or cash flows. Accounting standards under evaluation – 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, 2018. 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 does not expect ASU 2014-09 to have a material impact on IFC’s financial position, results of operations or cash flows. IFC FINANCIALS 2018 | 66 Page 64 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (except investments accounted for under the equity method and those that result in consolidation of the investee), and 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 a liability at fair value under the FVO. Given the magnitude of its investments in equity securities and the inherent volatility of prices for equity securities, the adoption of ASU 2016-01 will have a significant impact on IFC’s future reported net earnings. IFC adopted ASU 2016-01 on July 1, 2018. As of that date, IFC reclassified accumulated net unrealized gains related to available-for-sale equity investments of approximately $1.4 billion from accumulated other comprehensive income to retained earnings, and recognized in retained earnings accumulated net unrealized gains of approximately $1.5 billion related to equity investments at cost less impairment. In addition, the portion of the total cumulative change in the fair value of liabilities for which the FVO is applied that results from a change in the instrument-specific credit risk of $43 million was reclassified from retained earnings to accumulated other comprehensive income. 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 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that 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 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 March, 2017, The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from other components of net periodic benefit cost and present it with other current period compensation costs for related employees in the income statement, and (2) present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. In addition, ASU 2017-07 requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described lines. For IFC, this ASU will be effective from the quarter ending September 30, 2018 . Implementation will result in a modification in the presentation of IFC’s Statement of Income, with no impact on net income, as well as additional disclosures in the notes to the financial statements. In March, 2017, The FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). ASU 2017-08 shortens the amortization period for certain investments in callable debt securities purchased at a premium by requiring the premium to be amortized to the earliest call date. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 (which is the year ended June 30, 2020 for IFC). ASU 2017-08 is not expected to have a material impact on IFC’s financial position, results of operations or cash flows. In June 2018, the FASB issued ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions made and Contributions Received (ASU 2018-08). ASU 2018-08 provides guidance to assist entities in evaluating whether transactions are contributions and whether a contribution is conditional. ASU 2019-08 is effective for annual periods beginning after June 30, 2018, including interim periods within those annual periods (which is the year ended June 30, 2019 for IFC). IFC is currently evaluating the impact of ASU 2018-08. In addition, during the year ended June 30, 2018, 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. IFC FINANCIALS 2018 | 67 Page 65 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 thi rd-party capital. AMC is consolidated into IFC’s financial statements. At June 30, 2018, IFC has provided $2 million of capital to AMC ($2 million - June 30, 2017). As a result of the consolidation of AMC, amounts included in IFC’s consolidated balance sheet at June 30, 2018 and June 30, 2017 comprise (US$ millions): June 30, 2018 June 30, 2017 Cash, receivables and other assets $ 55 $ 58 Equity investments * * Payables and other liabilities 2 2 * Less than $0.5 million. As a result of the consolidation of AMC, amounts included in IFC’s consolidated statement of operations for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 comprise (US$ millions): 2018 2017 2016 Other income $ 80 $ 79 $ 66 Other expenses 24 23 24 At June 30, 2018, 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 Catalyst Funds 18%*** IFC Global Infrastructure Fund, LP 17% China-Mexico Fund, LP - IFC Financial Institutions Growth Fund, LP 30% IFC Global Emerging Markets Fund of Funds 19%**** IFC Middle East and North Africa Fund, LP 37% Women Entrepreneurs Debt Fund, LP 26% IFC Emerging Asia Fund, LP 22% ** 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 19% 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 does not have an ownership interest in the IFC Global Emerging Markets Fund of Funds, (Japan Parallel) LP. IFC’s investments in AMC Funds are accounted for at fair value under the Fair Value Option. Other Consolidated entities In August 2015, IFC created a special purpose vehicle, IFC Sukuk Company, to facilitate a $100 million Sukuk under IFC’s borr owings program. The Sukuk is scheduled to mature in September 2020. IFC Sukuk Company is a VIE and has been consolidated into these Consolidated Financial Statements because IFC is the VIE’s primary beneficiary. The collective impact of this and other entities consolidated into these Consolidated Financial Statements under the VIE or voting interest model is insignificant. IFC FINANCIALS 2018 | 68 Page 66 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C – LIQUID ASSET PORTFOLIO Income from liquid asset trading activities Income from liquid asset trading activities for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 comprises (US$ millions): 2018 2017 2016 Interest income, net $ 664 $ 582 $ 561 Net gains and losses on trading activities (realized and unrealized) 107 335 (57) Total income from liquid asset trading activities $ 771 $ 917 $ 504 Net gains and losses on trading activities comprise net losses on asset-backed and mortgage-backed securities of $27 million for the year ended June 30, 2018 ($50 million net gains - year ended June 30, 2017; $70 million net losses – year ended June 30, 2016) and net gains on other trading securities of $134 million for the year ended June 30, 2018 ($285 million net gains - year ended June 30, 2017; $13 million net gains - year ended June 30, 2016). The annualized rate of return on the liquid asset trading portfolio, calculated as total income from the liquid asset trading activities divided by fair value average daily balance of total trading securities, during the year ended June 30, 2018, was 2.6% (3.0% - year ended June 30, 2017; 1.4% - year ended June 30, 2016). After the effect of associated derivative instruments, the liquid asset portfolio generally reprices within one year. Composition of liquid asset portfolio The composition of IFC’s liquid asset portfolio included in the consolidated balance sheet captions is as follows (US$ millions): June 30, 2018 June 30, 2017 Assets Cash and due from banks $ 837 $ 643 Time deposits 13,156 13,576 Trading securities 28,909 30,188 Securities purchased under resale agreements and receivable for cash collateral pledged 1,989 932 Derivative assets 689 241 Receivables and other assets: Receivables from unsettled security trades 868 586 Accrued interest income on time deposits and securities 154 187 Accrued income on derivative instruments 29 31 Total assets 46,631 46,384 Liabilities Securities sold under repurchase agreements and payable for cash collateral received 6,364 5,401 Derivative liabilities 233 611 Payables and other liabilities: Payables for unsettled security trades 1,055 1,084 Short-Term Borrowings - 36 Liability for short sold securities 1 - Accrued charges on derivative instruments 42 60 Total liabilities 7,695 7,192 Total net liquid asset portfolio $ 38,936 $ 39,192 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 3.7% of the portfolio at June 30, 2018 (6.3% - June 30, 2017). IFC FINANCIALS 2018 | 69 Page 67 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C – LIQUID ASSET PORTFOLIO (continued) Trading securities comprises: Year ended June 30, 2018 At June 30, 2018 Fair value average Weighted average daily balance Fair value contractual (US$ million) (US$ millions) maturity (years) Government, agency and government-sponsored agency obligations $ 12,958 $ 13,401 2.5 Asset-backed securities 7,972 7,192 19.0 Corporate securities 8,753 8,238 0.8 Money market funds 125 78 n/a Total trading securities $ 29,808 $ 28,909 Year ended June 30, 2017 At June 30, 2017 Fair value average Weighted average daily balance Fair value contractual (US$ million) (US$ millions) maturity (years) Government, agency and government-sponsored agency obligations $ 12,137 $ 13,120 2.0 Asset-backed securities 9,814 8,407 18.1 Corporate securities 8,316 8,534 1.2 Money market funds 113 127 n/a Total trading securities $ 30,380 $ 30,188 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, 2018 and June 30, 2017 comprises (US$ millions): June 30, 2018 June 30, 2017 Loans Loans at amortized cost $ 23,975 $ 23,033 Less: Reserve against losses on loans (1,293) (1,483) Loans at amortized cost less reserve against losses 22,682 21,550 Loans accounted for at fair value under the Fair Value Option (outstanding principal balance $1,037 at June 30, 2018, $1,026 – June 30, 2017) 927 970 Total loans 23,609 22,520 Equity investments Equity investments at cost less impairment 2,710 3,209 Equity investments accounted for at fair value as available-for-sale (cost $2,126 at June 30, 2018, $2,122 – June 30, 2017) 3,528 3,590 Equity investments accounted for at fair value (cost $6,096 at June 30, 2018, $5,973 – June 30, 2017) 6,794 6,689 Total equity investments 13,032 13,488 Debt securities Debt securities accounted for at fair value as available-for-sale (amortized cost $5,092 at June 30, 2018, $3,930 - June 30, 2017) 4,900 3,984 Debt securities accounted for at fair value under the Fair Value Option (amortized cost $692 at June 30, 2018, $517 – June 30, 2017) 723 527 Total debt securities 5,623 4,511 Total carrying amount of investments $ 42,264 $ 40,519 IFC FINANCIALS 2018 | 70 Page Page 68 68 INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION NOTES NOTES TO TO CONSOLIDATED CONSOLIDATED FINANCIAL FINANCIAL STATEMENTS STATEMENTS NOTE NOTE D – INVESTMENTS D – INVESTMENTS (continued) (continued) distribution The The of the distribution of investment the investment portfolio portfolio by industry by industry sector sector and and by geographical by geographical region and and region a reconciliation a reconciliation of total of total disbursed disbursed portfolio portfolio to carrying to carrying amount amount of investments of investments is asis follows as follows (US$ millions): (US$ millions): June 30, 2018 June 30, 2018 June 30, 2017 June 30, 2017 Equity Debt Equity Debt Equity Debt Equity Debt Sector Sector Loans investments Loans investmentssecurities securities Total Total Loansinvestments Loans securities investments Total securities Total Manufacturing, Manufacturing, agribusiness agribusiness services and and services AsiaAsia 1,870 $ $1,870 $ $ $ 228 228 $ 978 978 3,076 $ $ $3,076 $ 1,645 $ 1,645 $ $ 293 293 $ 928 928 2,866 $ $2,866 Europe, Europe, Middle Middle EastEast and and North Africa North Africa 2,293 2,293 775 775 3,351 283 283 3,351 2,426 2,426 965 965 122 122 3,513 3,513 Sub-Saharan Sub-Saharan Africa, Africa, Latin America Latin America Caribbean and and Caribbean 3,018 3,018 687 687 74 74 3,779 3,779 2,811 2,811 693 693 103 103 3,607 3,607 Other Other 667 667 129 129 - - 796 796 587 587 128 128 - - 715 715 Total Total manufacturing, manufacturing, agribusiness agribusiness services and and services 7,848 7,848 2,569 2,569 585 585 11,002 11,002 7,469 7,469 2,714 2,714 10,701 518 518 10,701 Financial Financial markets markets AsiaAsia 2,461 2,461 1,238 1,238 1,732 1,732 5,431 5,431 1,919 1,919 1,206 1,312 1,206 1,312 4,437 4,437 Europe, Europe, Middle Middle EastEast and and North Africa North Africa 1,819 1,819 832 832 1,722 1,722 4,373 4,373 1,981 1,981 1,203 1,262 1,203 1,262 4,446 4,446 Sub-Saharan Sub-Saharan Africa, Africa, Latin America Latin America Caribbean and and Caribbean 3,708 3,708 754 754 598 598 5,060 5,060 3,183 3,183 821 821 482 482 4,486 4,486 Other Other 896 896 370 370 400 400 1,666 1,666 894 894 265 265 225 225 1,384 1,384 Total Total financial financial markets markets 8,884 8,884 3,194 3,194 4,452 16,530 4,452 16,530 7,977 7,977 3,495 3,281 3,495 14,753 3,281 14,753 Infrastructure Infrastructure natural and and resources natural resources AsiaAsia 2,338 2,338 702 702 29 29 3,069 3,069 1,882 1,882 603 603 40 40 2,525 2,525 Europe, Europe, Middle Middle EastEast and and North Africa North Africa 1,823 1,823 769 769 236 236 2,828 2,828 2,079 2,079 817 817 264 264 3,160 3,160 Sub-Saharan Sub-Saharan Africa, Africa, Latin America Latin America Caribbean and and Caribbean 3,335 3,335 630 630 53 53 4,018 4,018 3,686 3,686 646 646 77 77 4,409 4,409 OtherOther 203 203 21 21 - - 224 224 211 211 5 5 - - 216 216 Total Total infrastructure infrastructure natural and and natural resources resources 7,699 7,699 2,122 2,122 318 318 10,139 10,139 7,858 7,858 2,071 2,071 10,310 381 381 10,310 Telecom, Telecom, media media & technology, & technology, and and venture venture investing investing AsiaAsia 277 277 994 994 104 104 1,375 1,375 307 307 852 852 109 109 1,268 1,268 Europe, Europe, Middle Middle and and EastEast NorthNorth Africa Africa 52 52 435 435 26 26 513 513 111 111 524 524 32 32 667 667 Sub-Saharan Sub-Saharan Africa, Africa, Latin America Latin America Caribbean and and Caribbean 292 292 1,094 1,094 69 69 1,455 1,455 346 346 996 996 59 59 1,401 1,401 Other Other 120 120 567 567 37 37 724 724 142 142 733 733 40 40 915 915 Total Total Telecom, Telecom, media media & technology, & technology, and and venture venture investing investing 741 741 3,090 3,090 236 236 4,067 4,067 906 906 3,105 3,105 240 240 4,251 4,251 Total Total disbursed disbursed investment investment portfolio portfolio$ 25,172 $ $ 25,172 10,975 $ 10,975 $ $ 5,591 5,591 $ 41,738 $ $ 41,738 $ 24,210 24,210 $ 11,385 $ 11,385 4,420 $ $ $ $ 4,420 40,015 40,015 Reserve Reserve against against losseslosses on loans on loans (1,293) (1,293) - - - (1,293) - (1,293) (1,483) (1,483) - - - (1,483) - (1,483) Unamortized Unamortized deferred deferred loanloan origination origination fees, net and fees, other net and other (156) (156) - - - - (156) (156) (144) (144) - - - - (144) (144) Disbursed Disbursed amountamountallocated allocated related to a to a related financial financial instrument instrument reported reported separately separately in other in other assetsassetsor or derivative derivative assetsassets (4) (4) (37) (37) - - (41) (41) (7) (7) (39) (39) - - (46) (46) Adjustments Adjustments to disbursed to disbursed investment investment portfolio portfolio - - (2) (2) (16) (16) (18) (18) - - (35) (35) (62) (62) (97) (97) Unrealized Unrealized losses on equity losses investments on equity investments by consolidated heldheld by consolidated VIEs VIEs - - (4) (4) - - (4) (4) - - (7) (7) - - (7) (7) Unrealized Unrealized gains on investments gains on investments accounted accounted for at fair for fair value at value as as available-for-sale available-for-sale - - 1,402 1,402 17 17 1,419 1,419 - - 1,468 1,468 143 143 1,611 1,611 Unrealized Unrealized gains (losses) gains on on (losses) investments investments accounted accounted for under for under the the fair value fair value optionoption (110) (110) 698 698 31 31 619 619 (56) (56) 716 716 10 10 670 670 Carrying Carrying amount amount of investments of investments $ $ 23,609 $ 23,609 13,032 $ $ $ 13,032 5,623 5,623 $ 42,264 $ $ 42,264 $ 22,520 22,520 $ 13,488 $ 13,488 $ $ 4,511 4,511 $ $ 40,519 40,519 IFC FINANCIALS 2018 | 71 Page 69 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, 2018, June 30, 2017 and June 30, 2016 comprise the following (US$ millions): 2018 2017 2016 Interest income $ 1,274 $ 1,244 $ 1,026 Commitment fees 41 34 34 Other financial fees 81 53 64 Realized (losses) gains on loans, guarantees and associated derivatives (19) (33) 2 Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,377 $ 1,298 $ 1,126 The currency composition and average contractual rate of the disbursed loan portfolio are summarized below: June 30, 2018 June 30, 2017 Average Average Amount contractual Amount contractual (US$ millions) rate (%) (US$ millions) rate (%) US dollar $ 18,332 5.9 $ 18,065 5.0 Euro 2,754 3.1 2,729 3.3 Chinese renminbi 789 5.8 665 5.6 Brazilian real 722 8.3 427 12.8 South African rand 388 10.2 373 10.5 Indian rupee 370 10.2 455 10.2 Colombian peso 303 7.9 181 9.7 Indonesian rupiah 219 7.9 335 7.6 Philippine peso 216 5.6 156 6.9 Mexican peso 184 10.3 152 10.3 New Romanian lei 156 3.6 125 3.7 Kazakhstan tenge 97 17.7 63 17.0 Peruvian Soles nuevos 84 8.7 88 8.7 Russian ruble 79 12.0 105 11.9 Hong Kong dollar 74 2.2 19 1.9 Turkish lira 67 16.8 81 14.4 Other currencies OECD currencies 1 1.8 7 2.4 Non-OECD currencies 337 12.5 184 11.3 Total disbursed loan portfolio $ 25,172 6.0 $ 24,210 5.4 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, 2019 through June 30, 2023 and thereafter, as follows (US$ millions): 2019 2020 2021 2022 2023 Thereafter Total Fixed rate loans $ 1,169 $ 1,229 $ 675 $ 464 $ 308 $ 1,464 $ 5,309 Variable rate loans 3,576 3,554 2,837 2,186 2,035 5,675 19,863 Total disbursed loan portfolio $ 4,745 $ 4,783 $ 3,512 $ 2,650 $ 2,343 $ 7,139 $ 25,172 At June 30, 2018, 21% of the disbursed loan portfolio consisted of fixed rate loans (20% - June 30, 2017), while the remainder was at variable rates. At June 30, 2018, the disbursed loan portfolio included $185 million of loans serving as collateral under secured borrowing arrangements ($216 million - June 30, 2017). IFC’s disbursed variable rate loans generally reprice within one year. IFC FINANCIALS 2018 | 72 Page 70 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Reserve against losses on loans and provision for losses on loans Changes in the reserve against losses on loans for the years ended June 30, 2018, June 30, 2017 and June 30, 2016, as well as the related recorded investment in loans evaluated for impairment individually (specific reserves) and on a pool basis (portfolio reserves) respectively, are summarized below (US$ millions): Year ended June 30, 2018 Specific Portfolio Total reserves reserves reserves Beginning balance $ 841 $ 642 $ 1,483 Provision (release of provision) for losses on loans, net 82 2 84 Write-offs (304) - (304) Recoveries of previously written-off loans 19 - 19 Foreign currency transaction adjustments (2) (3) (5) Other adjustments* 15 1 16 Ending balance $ 651 $ 642 $ 1,293 Related recorded investment in loans at June 30, 2018 evaluated for impairment** $ 23,975 $ 22,717 $ 23,975 Recorded investment in loans with specific reserves $ 1,258 Year ended June 30, 2017 Specific Portfolio Total reserves reserves reserves Beginning balance $ 965 $ 810 $ 1,775 Provision (release of provision) for losses on loans, net 268 (171)*** 97 Write-offs (417) - (417) Recoveries of previously written-off loans 2 - 2 Foreign currency transaction adjustments 3 3 6 Other adjustments* 20 - 20 Ending balance $ 841 $ 642 $ 1,483 Related recorded investment in loans at June 30, 2017 evaluated for impairment** $ 23,033 $ 21,358 $ 23,033 Recorded investment in loans with specific reserves $ 1,675 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 * 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. *** Includes $156 million release of provision in FY17 Q3 due to a change in estimate as a result of reviewing IFC’s methodology for estimating the portfolio reserves against losses, in particular the probability of default and loss given default, pursuant to the implementation of a new Investment Risk Platform (IRP), which replaced IFC’s previous credit risk rating system. IFC FINANCIALS 2018 | 73 Page 71 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) Reserve for losses on guarantees and other receivables and provision for losses on guarantees and other receivables Changes in the reserve against losses on guarantees for the years ended June 30, 2018, June 30, 2017 and June 30, 2016, are summarized below (US$ millions): 2018 2017 2016 Beginning balance $ 12 $ 23 $ 20 Provision (release of provision) for losses on guarantees 3 (11) 3 Ending balance $ 15 $ 12 $ 23 Changes in the reserve against losses on other receivables for the years ended June 30, 2018, June 30, 2017 and June 30, 2016, are summarized below (US$ millions): 2018 2017 2016 Beginning balance $ 8 $ 8 $ 7 Provision (release of provision) for losses on other receivables (4) * 1 Write-offs (2) - - Foreign currency transaction adjustments (1) - - Ending balance $ 1 $ 8 $ 8 * Less than $0.5 million. Provision (release of provision) for losses on loans, guarantees, accrued interest and other receivables includes $7 million of provision for accrued interest in the year ended 30 June, 2018 ($0 for the years ended 30 June, 2017 and 2016). Impaired loans The average recorded investment and the recorded investment in loans at amortized cost that are impaired at June 30, 2018 and June 30, 2017 are as follows (US$ millions): June 30, 2018 June 30, 2017 Average recorded investment in loans at amortized cost that are impaired $ 1,357 $ 1,792 Recorded investment in loans at amortized cost that are impaired 1,258 1,675 Loans at amortized cost that are impaired with specific reserves are summarized by industry sector and geographic region as follows (US$ millions): June 30, 2018 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Manufacturing, agribusiness and services Asia $ 74 $ 177 $ 40 $ 86 $ 2 Europe, Middle East and North Africa 278 354 118 315 4 Sub-Saharan Africa, Latin America and Caribbean 158 177 64 163 7 Other - 15 - - - Total manufacturing, agribusiness and services 510 723 222 564 13 Financial markets Asia - 2 - - - Europe, Middle East and North Africa 17 26 17 27 2 Sub-Saharan Africa, Latin America and Caribbean 41 69 37 46 1 Total financial markets 58 97 54 73 3 Infrastructure and natural resources Asia 109 131 77 95 - Europe, Middle East and North Africa 186 211 127 188 2 Sub-Saharan Africa, Latin America and Caribbean 317 364 146 353 6 Total infrastructure and natural resources 612 706 350 636 8 Telecom, media & technology, and venture investing Asia 46 46 10 46 - Europe, Middle East and North Africa 12 12 1 17 1 Sub-Saharan Africa, Latin America and Caribbean 20 20 14 21 - Total Telecom, media & technology, and venture investing 78 78 25 84 1 Total $ 1,258 $ 1,604 $ 651 $ 1,357 $ 25 All impaired loans at June 30, 2018 had specific reserves. IFC FINANCIALS 2018 | 74 Page 72 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2017 Unpaid Related Average Interest Recorded principal specific recorded income investment balance reserve investment recognized Manufacturing, agribusiness and services Asia $ 101 $ 153 $ 84 $ 102 $ 1 Europe, Middle East and North Africa 447 682 226 600 12 Sub-Saharan Africa, Latin America and Caribbean 167 189 58 167 9 Other - 15 - 10 - Total manufacturing, agribusiness and services 715 1,039 368 879 22 Financial markets Asia - 2 - - - Europe, Middle East and North Africa 33 38 18 35 3 Sub-Saharan Africa, Latin America and Caribbean 45 70 15 43 1 Total financial markets 78 110 33 78 4 Infrastructure and natural resources Asia 105 119 67 112 - Europe, Middle East and North Africa 167 176 108 155 4 Sub-Saharan Africa, Latin America and Caribbean 524 535 241 478 20 Total infrastructure and natural resources 796 830 416 745 24 Telecom, media & technology, and venture investing Europe, Middle East and North Africa 65 65 13 68 3 Sub-Saharan Africa, Latin America and Caribbean 21 21 11 22 1 Total Telecom, media & technology, and venture investing 86 86 24 90 4 Total $ 1,675 $ 2,065 $ 841 $ 1,792 $ 54 All impaired loans at June 30, 2017 had specific reserves. Nonaccruing loans Loans on which the accrual of interest has been discontinued amounted to $1,377 million at June 30, 2018 ($1,421 million – June 30, 2017). The interest income on such loans for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 is summarized as follows (US$ millions): 2018 2017 2016 Interest income not recognized on nonaccruing loans 201 121 157 Interest income recognized on loans in nonaccrual status related to current and prior years, on a cash basis 48 41 34 The recorded investment in nonaccruing loans at amortized cost at June 30, 2018 and June 30, 2017 is summarized by industry sector and geographic region as follow (US$ millions): June 30, 2018 Telecom, media & Total recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture nonaccruing and services markets resources investing loans Asia $ 71 $ - $ 123 $ 46 $ 240 Europe, Middle East and North Africa 257 35 236 20 548 Sub-Saharan Africa, Latin America and Caribbean 242 53 295 20 610 Other - - - 2 2 Total disbursed loans at amortized cost $ 570 $ 88 $ 654 $ 88 $ 1,400 IFC FINANCIALS 2018 | 75 Page 73 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2017 Telecom, media & Total recorded Manufacturing, Infrastructure technology, investment in agribusiness Financial and natural and venture nonaccruing and services markets resources investing loans Asia $ 106 $ - $ 105 $ - $ 211 Europe, Middle East and North Africa 392 33 129 64 618 Sub-Saharan Africa, Latin America and Caribbean 165 45 271 22 503 Total disbursed loans at amortized cost $ 663 $ 78 $ 505 $ 86 $ 1,332 Past due loans An age analysis, based on contractual terms, of IFC’s loans at amortized cost by industry sector and geographic region follow s (US$ millions): June 30, 2018 30-59 60-89 90 days days days past or greater Total past Total past due due past due due Current loans Manufacturing, agribusiness and services Asia $ - $ - $ 54 $ 54 $ 1,790 $ 1,844 Europe, Middle East and North Africa - 14 184 198 2,049 2,247 Sub-Saharan Africa, Latin America and Caribbean 14 5 150 169 2,734 2,903 Other - - - - 667 667 Total manufacturing, agribusiness and services 14 19 388 421 7,240 7,661 Financial markets Asia - - - - 2,371 2,371 Europe, Middle East and North Africa - - 2 2 1,797 1,799 Sub-Saharan Africa, Latin America and Caribbean - 2 26 28 3,602 3,630 Other - - - - 897 897 Total financial markets - 2 28 30 8,667 8,697 Infrastructure and natural resources Asia - - 62 62 2,128 2,190 Europe, Middle East and North Africa 34 - 146 180 1,339 1,519 Sub-Saharan Africa, Latin America and Caribbean - - 88 88 3,185 3,273 Other - - - - 202 202 Total infrastructure and natural resources 34 - 296 330 6,854 7,184 Telecom, media & technology, and venture investing Asia - - 46 46 226 272 Europe, Middle East and North Africa - - - - 45 45 Sub-Saharan Africa, Latin America and Caribbean - - 16 16 260 276 Total Telecom, media & technology, and venture investing - - 62 62 531 593 Total disbursed loans at amortized cost $ 48 $ 21 $ 774 $ 843 $ 23,292 $ 24,135 Unamortized deferred loan origination fees, net and other (156) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (4) Recorded investment in loans at amortized cost $ 23,975 At June 30, 2018, loans 90 days or greater past due still accruing were insignificant. IFC FINANCIALS 2018 | 76 Page 74 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2017 30-59 60-89 90 days days days past or greater Total past Total past due due past due due Current loans Manufacturing, agribusiness and services Asia $ - $ - $ 102 $ 102 $ 1,514 $ 1,616 Europe, Middle East and North Africa 33 3 377 413 1,963 2,376 Sub-Saharan Africa, Latin America and Caribbean 4 20 134 158 2,571 2,729 Other - - - - 587 587 Total manufacturing, agribusiness and services 37 23 613 673 6,635 7,308 Financial markets Asia - - - - 1,859 1,859 Europe, Middle East and North Africa 5 - 3 8 1,945 1,953 Sub-Saharan Africa, Latin America and Caribbean 20 - 26 46 3,059 3,105 Other - - - - 894 894 Total financial markets 25 - 29 54 7,757 7,811 Infrastructure and natural resources Asia - - 105 105 1,737 1,842 Europe, Middle East and North Africa 11 - 143 154 1,503 1,657 Sub-Saharan Africa, Latin America and Caribbean 64 13 36 113 3,509 3,622 Other - - - - 211 211 Total infrastructure and natural resources 75 13 284 372 6,960 7,332 Telecom, media & technology, and venture investing Asia - - - - 305 305 Europe, Middle East and North Africa - - 46 46 57 103 Sub-Saharan Africa, Latin America and Caribbean - - 16 16 309 325 Total Telecom, media & technology, and venture investing - - 62 62 671 733 Total disbursed loans at amortized cost $ 137 $ 36 $ 988 $ 1,161 $ 22,023 $ 23,184 Unamortized deferred loan origination fees, net and other (144) Disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets (7) Recorded investment in loans at amortized cost $ 23,033 At June 30, 2017, loans 90 days or greater past due still accruing were insignificant. IFC FINANCIALS 2018 | 77 Page 75 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. In FY17 Q3, IFC implemented a new rating system, replacing its previous rating system. A description of each credit rating and categorization in terms of the attributes of the borrower, the business environment in which the borrower operates or the loan itself under the new rating system follows: Credit Indicative Risk External Rating Rating Category Description AAA, AA+, An obligor rated CR-1 is the highest rating assigned by IFC. The obligor's ability to meet its financial CR-1 Very Strong obligations is very strong. AA, AA- An obligor rated CR-2 is slightly more susceptible to the negative effects of changes in CR-2 A+, A, A- Strong circumstances and economic conditions than obligors rated CR-1. The obligor's ability to meet its financial obligations remains strong. An obligor rated CR-3 exhibits an adequate financial profile, even though at a weaker level than CR-3 BBB+ ‘CR-1’ and ‘CR-2’. An obligor rated CR-4 exhibits an adequate financial profile. However, adverse economic CR-4 BBB conditions or changing circumstances are more likely to lead to a deterioration of the obligor’s Adequate ability to meet its financial obligations. An obligor rated CR-5, as the lowest of the investment grade ratings, exhibits an adequate financial profile. However, adverse economic conditions and/or changing circumstances are more likely to CR-5 BBB- lead to a weaker financial profile and a deterioration of the obligor’s ability to meet its financial obligations. An obligor rated CR-6, as the first non-investment grade rating, is less vulnerable to default than CR-6 BB+ other non-investment obligors. An obligor rated CR-7 can face major uncertainties. Exposure to negative business, financial, or CR-7 BB economic conditions could lead to the obligor's insufficient financial profile and a deterioration of Moderate the obligor’s ability to meet its financial obligations. An obligor rated CR-8 faces major ongoing uncertainties. Exposure to negative business, financial, CR-8 BB- or economic conditions could lead to the obligor's insufficient financial profile and a deterioration of the obligor’s ability to meet its financial obligations. An obligor rated CR-9 is less vulnerable to default than obligors rated 'CR-10’ or ‘CR-11'. CR-9 B+ Significantly negative business, financial, or economic conditions will likely weaken the obligor's financial profile and ability to meet its financial obligations. An obligor rated CR-10 is more vulnerable to default than obligors rated 'CR-9’ but the obligor still has the capacity to meet its financial obligations. Negative business, financial, or economic CR-10 B conditions will likely weaken the obligor's financial profile and ability to meet its financial Weak obligations. An obligor rated CR-11 is more vulnerable to default than obligors rated 'CR-9’ or ‘CR-10’. The obligor still has the capacity to meet its obligations but slightly negative business, financial, or CR-11 B- economic conditions are more likely to weaken the obligor's financial profile and ability to meet its financial obligations than a company rated CR-10. An obligor rated CR-12 faces significant challenges. While such obligors will likely have some Very Weak/ positive characteristics, these may be outweighed by large uncertainties or major exposures to CR-12 CCC+ Special adverse conditions. The obligor is dependent upon favorable business, financial, and economic Attention conditions to meet its financial obligations An obligor rated CR-13 is currently vulnerable to default, and is dependent upon significantly Very Weak favorable business, financial, and economic conditions to meet its financial obligations. In the CR-13 CCC event of negative business, financial, or economic conditions, the obligor is not likely to meet its /Substandard financial obligations and rescheduling and/or restructuring is likely to be required. An obligor rated CR-14 is highly vulnerable to default. It is highly likely that a rescheduling and/or Extremely restructuring are required without which a default under IFC’s accounting definition would ensue. CR-14 CCC- Weak In some cases, even though default has not occurred yet, cash flow may be insufficient to service /Doubtful debt in full. Imminent An obligor rated CR-15 is currently extremely vulnerable to nonpayment and there are indications CR-15 Worse than that the next payment will not be made before meeting IFC’s accounting definition of default. Default CCC- and D D /Default An obligor rated D is in payment default according to IFC’s accounting definition of default. IFC FINANCIALS 2018 | 78 Page Page 76 76 INTERNATIONAL INTERNATIONAL FINANCE FINANCE CORPORATION CORPORATION NOTES NOTES TO TO CONSOLIDATED CONSOLIDATED FINANCIAL FINANCIAL STATEMENTS STATEMENTS NOTE NOTE LOANS E –E – LOANS AND GUARANTEES AND GUARANTEES (continued) (continued) A summary A summary of IFC’s of IFC’s disbursed disbursed loans loans at amortized at amortized by credit costcost quality by credit quality indicator indicator effective June effective 30, 2018 June and and 30, 2018 JuneJune 30, 2017 respectively, 30, 2017 as well respectively, as as as well by industry by industry sector sector geographic and and geographic region region follows follows (US$ millions): (US$ millions): Weak/ VeryVery Weak/ Extremely Imminent Extremely Imminent Special Special Weak/ VeryVery Weak/ Weak/ Weak/ Default/ Default/ Strong VeryVery Strong Adequate Strong Strong Adequate Moderate Weak Moderate Weak Attention Attention Substandard Doubtful Substandard Default Doubtful Default Total Total Total Total disbursed disbursed loans at at loans amortized amortized at June costcost at June 30, 2018 30, 2018 $ $ 35 35 $ $1,207 1,207 $ $ 3,457 3,457 $ $8,814 8,814 $ $ 8,299 8,299 $ $ 402 402 $ $ 291 291 $ $ 561 561 $ $ 1,069 1,069 $ 24,135 $ 24,135 Total Total disbursed disbursed loans at at loans amortized amortized at June costcost at June 30, 2017 30, 2017 $ $ 56 56 $ $1,029 1,029 $ $ 3,308 3,308 $ $9,196 9,196 $ $ 6,151 6,151 $ $ 1,114 1,114 $ $ 466 466 $ $ $ $ 456 456 1,408 1,408 $ 23,184 $ 23,184 June June 30, 2018 30, 2018 Weak/ VeryVery Weak/ Extremely Imminent Extremely Imminent Special Special Weak/ VeryVery Weak/ Weak/ Weak/ Default/ Default/ Strong VeryVery Strong Adequate Strong Strong Moderate Adequate Moderate Weak Weak Attention Attention Substandard Doubtful Substandard Default Doubtful Default Total Total Geographic Geographic Region Region AsiaAsia $ $ - $ - $ 292 292 $ $ 1,248 1,248 $ $2,520 2,520 $ 2,320 $ 2,320 $ $ 19 19 $ $ 37 37 $ $ 19 19 $ $ 222 222 $ $ 6,677 6,677 Europe, Europe, Middle Middle East and and East North Africa North Africa - - 405 405 707 707 1,663 1,663 2,055 2,055 34 34 17 17 285 285 444 444 5,610 5,610 Sub-Saharan Sub-Saharan Africa, Africa, Latin Latin America America Caribbean and and Caribbean - - 510 510 725 725 3,969 3,969 3,632 3,632 220 220 366 366 257 257 10,082 403 403 10,082 Other Other 35 35 - - 777 777 662 662 292 292 - - - - - - - - 1,766 1,766 Total Total geographic geographic region$ region $ 35 35 $ $1,207 $ $ 1,207 3,457 3,457 $ $ 8,814 8,814 $ 8,299 $ 8,299 $ $ 402 402 $ $ 291 291 $ $ $ $ 561 561 1,069 1,069 $ 24,135 $ 24,135 June June 30, 2018 30, 2018 Weak/ VeryVery Weak/ Extremely Imminent Extremely Imminent Special Special Weak/ VeryVery Weak/ Weak/ Weak/ Default/ Default/ Strong VeryVery Strong Adequate Strong Strong Moderate Adequate Moderate Weak Weak Attention Attention Substandard Doubtful Substandard Default Doubtful Default Total Total Industry Industry Sector Sector Manufacturing, Manufacturing, agribusiness agribusiness services and and services $ $ 35 35 $ $ 772 772 $ $ 1,238 1,238 $ $2,660 2,660 $ 2,037 $ $ 134 134 $ 2,037 $ $ $ 88 88 $ 216 216 $ $ 481 481 $ $ 7,661 7,661 Financial Financial markets markets - - 29 29 1,8791,879 4,632 4,632 2,048 2,048 23 23 28 28 16 16 42 42 8,697 8,697 Infrastructure Infrastructure natural and and natural resources resources - - 300 300 281 281 1,286 1,286 4,113 4,113 133 133 282 282 317 317 472 472 7,184 7,184 Telecom, Telecom, media & & media technology, technology, venture and and venture investing investing - - 106 106 59 59 236 236 101 101 1 1 4 4 12 12 74 74 593 593 Total Total industry industry sector sector $ $ $ $1,207 35 35 $ $ 1,207 3,457 3,457 $ $ 8,814 8,814 $ 8,299 $ 8,299 $ $ 291 291 $ $ 402 402 $ $ $ $ 561 561 1,069 1,069 $ 24,135 $ 24,135 IFC FINANCIALS 2018 | 79 Page 77 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E – LOANS AND GUARANTEES (continued) June 30, 2017 Very Weak/ Extremely Imminent Special Very Weak/ Weak/ Default/ Very Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Geographic Region Asia $ 40 $ 257 $ 1,054 $ 2,355 $ 1,557 $ 118 $ 22 $ 19 $ 200 $ 5,622 Europe, Middle East and North Africa - 253 610 2,367 1,574 390 63 217 615 6,089 Sub-Saharan Africa, Latin America and Caribbean - 518 1,116 3,610 2,737 606 381 220 593 9,781 Other 16 1 528 864 283 - - - - 1,692 Total geographic region $ 56 $ 1,029 $ 3,308 $ 9,196 $ 6,151 $ 1,114 $ 466 $ 456 $ 1,408 $ 23,184 June 30, 2017 Very Weak/ Extremely Imminent Special Very Weak/ Weak/ Default/ Very Strong Strong Adequate Moderate Weak Attention Substandard Doubtful Default Total Industry Sector Manufacturing, agribusiness and services $ 56 $ 551 $ 1,191 $ 2,783 $ 1,447 $ 388 $ 150 $ 75 $ 667 $ 7,308 Financial markets - 29 1,763 4,369 1,412 122 36 45 35 7,811 Infrastructure and natural resources - 300 262 1,769 3,226 538 273 324 640 7,332 Telecom, media & technology, and venture investing - 149 92 275 66 66 7 12 66 733 Total industry sector $ 56 $ 1,029 $ 3,308 $ 9,196 $ 6,151 $ 1,114 $ 466 $ 456 $ 1,408 $ 23,184 Loan modifications, including past due amounts capitalized and written off, during the year ended June 30, 2018 considered troubled debt restructurings totaled $208 million ($351 million – year ended June 30, 2017). There were two loans that defaulted during the year ended June 30, 2018 that had been modified in a troubled debt restructuring within 12 months prior to the date of default with an outstanding balance of $13 million. 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 ob ligations 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, 2018 totaled $4,809 million ($4,599 million – June 30, 2017). Guarantees of $4,096 million that were outstanding (i.e., not called) at June 30, 2018 ($3,528 million – June 30, 2017), were not included in loans on IFC’s consolidated balance sheet. The outstanding amount represents the maximum amount of undiscounted future payments that IFC could be required to make under these guarantees. NOTE F – DEBT SECURITIES Income from debt securities, including realized gains and losses on debt securities and associated derivatives for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 comprise the following (US$ millions): 2018 2017 2016 Interest income $ 306 $ 178 $ 125 Dividends 3 5 10 Realized gains on debt securities and associated derivatives 93 153 39 Other-than-temporary impairments (39) (54) (45) Total income from debt securities, including realized gains and losses on debt securities and associated derivatives $ 363 $ 282 $ 129 IFC FINANCIALS 2018 | 80 Page 78 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F – DEBT SECURITIES (continued) Debt securities accounted for as available-for-sale at June 30, 2018 and June 30, 2017 comprise (US$ millions): June 30, 2018 Unrealized Unrealized Foreign currency Amortized cost gains losses transaction losses Fair value Corporate debt securities $ 4,115 $ 81 $ (97) $ (138) $ 3,961 Preferred shares 144 66 (2) - 208 Asset-backed securities 833 - (31) (71) 731 Total $ 5,092 $ 147 $ (130) $ (209) $ 4,900 June 30, 2017 Unrealized Unrealized Foreign currency Amortized cost gains losses transaction losses Fair value Corporate debt securities $ 3,169 $ 107 $ (11) $ (72) $ 3,193 Preferred shares 220 48 (1) - 267 Asset-backed securities 541 - - (17) 524 Total $ 3,930 $ 155 $ (12) $ (89) $ 3,984 The following table shows the unrealized losses and fair value of debt securities at June 30, 2018 and June 30, 2017 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, 2018 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 1,116 $ (78) $ 308 $ (19) $ 1,424 $ (97) Preferred shares 18 (1) 1 (1) 19 (2) Asset-backed securities 125 (31) - - 125 (31) Total $ 1,259 $ (110) $ 309 $ (20) $ 1,568 $ (130) June 30, 2017 Less than 12 months 12 months or greater Total Fair Unrealized Fair Unrealized Fair Unrealized value losses value losses value losses Corporate debt securities $ 599 $ (11) $ 2 $ * $ 601 $ (11) Preferred shares 16 (1) - - 16 (1) Total $ 615 $ (12) $ 2 $ * $ 617 $ (12) * Less than $0.5 million. Corporate debt securities comprise investments in bonds and notes. Unrealized losses associated with corporate debt securities are primarily attributable to movements in the credit default swap spread curve applicable to the issuer. Based upon IFC’s assessment of expected credit losses, IFC has determined that the issuer is expected to make all contractual principal and interest payments. Accordingly, IFC expects to recover the cost basis of these securities. Preferred shares comprise investments in preferred equity investments that are redeemable at the option of IFC or mandatorily redeemable by the issuer. Unrealized losses associated with preferred shares are primarily driven by changes in discount rates associated with changes in credit spreads or interest rates, minor changes in exchange rates and comparable market valuations in the applicable sector. Based u pon IFC’s assessment of the expected credit losses, IFC expects to recover the cost basis of these securities. Debt securities with contractual maturities that are accounted for as available-for-sale have contractual maturities during the years ending June 30, 2019 through June 30, 2023 and thereafter, as follows (US$ millions): 2019 2020 2021 2022 2023 Thereafter Total Corporate debt securities $ 181 $ 394 $ 589 $ 488 $ 594 $ 1,747 $ 3,993 Asset-backed securities 8 59 73 69 118 435 762 Total disbursed portfolio of debt securities with contractual maturities $ 189 $ 453 $ 662 $ 557 $ 712 $ 2,182 $ 4,755 IFC FINANCIALS 2018 | 81 Page 79 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE F – DEBT SECURITIES (continued) The expected maturity of asset-backed securities may differ from the contractual maturity, as reported above, due to prepayment features. In addition, IFC has $144 million of redeemable preferred shares and other debt securities with undefined maturities ($220 million - June 30, 2017). The currency composition and average contractual rate of debt securities with contractual maturities that are accounted for as available-for-sale are summarized below: June 30, 2018 June 30, 2017 Average Average Amount contractual Amount contractual (US$ millions) rate (%) (US$ millions) rate (%) Indian rupee 1,587 8.5 1,170 8.9 US dollar 1,311 4.8 1,168 4.6 Euro 868 3.2 541 3.4 Turkish lira 387 13.0 202 11.1 Colombian peso 342 7.0 304 9.0 South African rand 54 11.8 93 8.7 Georgian lari 44 11.0 45 11.0 New Romanian lei 39 3.1 54 5.9 Swiss franc 38 2.0 - - Chilean peso 38 7.7 37 7.7 Other currencies 47 8.9 70 6.4 Total disbursed portfolio of debt securities with contractual maturities $ 4,755 6.8 $ 3,684 6.8 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 $23 million at June 30, 2018 ($101 million – June 30, 2017). The interest income on such debt securities for the year ended June 30, 2018, June 30, 2017 and June 30, 2016 is summarized as follows (US$ millions): 2018 2017 2016 Interest income not recognized on nonaccruing debt securities 1 11 4 Interest income recognized on debt securities in nonaccrual status related to current and prior years, on a cash basis * 2 2 * Less than $0.5 million. NOTE G – EQUITY INVESTMENTS AND ASSOCIATED DERIVATIVES Income from equity investments and associated derivatives for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 comprises the following (US$ millions): 2018 2017 2016 Gains on equity investments and associated derivatives, net $ 1,009 $ 1,040 $ 1,013 Dividends 282 244 241 Other-than-temporary impairments: Equity investments at cost less impairment (264) (365) (384) Equity investments available-for-sale (182) (216) (360) Total other-than-temporary impairments (446) (581) (744) Custody, fees and other 8 4 8 Total income from equity investments and associated derivatives $ 853 $ 707 $ 518 Gains on equity investments and associated derivatives includes net realized gains on equity investments and associated derivatives of $992 million for the year ended June 30, 2018 ($1,073 million – year ended June 30, 2017, $1,217 million – year ended June 30, 2016). Dividends include $13 million for the year ended June 30, 2018 ($11 million – years ended June 30, 2017 and June 30, 2016) 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 $3,960 million as of June 30, 2018 ($3,630 million – June 30, 2017). IFC FINANCIALS 2018 | 82 Page 80 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE H – INVESTMENT TRANSACTIONS COMMITTED BUT NOT DISBURSED OR UTILIZED Loan, equity and debt security commitments signed but not yet disbursed, and guarantee and client risk management facilities signed but not yet utilized are summarized below (US$ millions): June 30, 2018 June 30, 2017 Investment transactions committed but not disbursed: Loans, equity investments and debt securities $ 10,284 $ 10,099 Investment transactions committed but not utilized: Guarantees 713 1,071 Client risk management facilities 144 126 Total investment transactions committed but not disbursed or utilized $ 11,141 $ 11,296 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, 2018 June 30, 2017 Loan participations signed as commitments but not disbursed $ 1,779 $ 1,684 Loan participations disbursed and outstanding which are serviced by IFC $ 8,467 $ 9,021 NOTE J – RECEIVABLES AND OTHER ASSETS Receivables and other assets are summarized below (US$ millions): June 30, 2018 June 30, 2017 Receivables from unsettled security trades $ 868 $ 586 Accrued income on derivative instruments 641 517 Accrued interest income on loans 315 279 Accrued interest income on time deposits and securities 154 187 Fixed assets 1,033 967 Less: Accumulated depreciation (570) (519) Fixed assets, net 463 448 Deferred charges and other assets 1,455 1,268 Total receivables and other assets $ 3,896 $ 3,285 IFC FINANCIALS 2018 | 83 Page 81 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, 2018 Interest rate swaps Currency swaps payable notional principal payable Market borrowings (receivable) (receivable) Net currency obligation Weighted Weighted Notional Weighted Weighted Amount average Amount average amount average Amount average (US$ millions) rate (%) (US$ millions) rate (%) (US$ millions) rate (%) (US$ millions) rate (%) US dollar $ 29,601 2.1 $ 21,060 2.2 $ 30,344 2.3 $ 50,698 2.3 (30,307) (2.0) Australian dollar 7,369 3.5 (7,369) 3.5 - - - - Mexican peso 3,867 7.5 (3,867) 7.5 - - - - New Turkish lira 2,751 10.0 (2,696) 9.8 - - 55 19.8 Indian rupee 2,262 6.8 - - - - 2,262 6.8 Japanese yen 2,137 4.3 (2,137) 4.3 - - - - Brazilian real 1,629 5.3 (1,629) 5.3 - - - - New Zealand dollar 1,156 3.5 (1,156) 3.5 - - - - Russian ruble 994 7.4 (994) 7.3 - - - - South African rand 456 5.5 (456) 4.4 - - - - Euro 357 5.0 (357) 5.0 - - - - Chinese renminbi 357 3.3 (206) 3.5 - - 151 3.1 Pounds sterling 315 2.2 (315) 2.2 - - - - Swedish kronor 245 1.0 (245) 1.0 - - - - Hong Kong dollar 151 2.0 (151) 2.0 - - - - New Romanian lei 134 2.3 (116) 2.3 - - 18 2.6 Peso uruguayo 100 11.3 (100) 11.3 - - - - Peruvian soles nuevo 91 2.6 (91) 2.6 - - - - Philippine peso 90 6.3 - - - - 90 6.3 Colombian peso 78 5.1 (78) 5.1 - - - - Singapore dollar 73 1.0 (73) 1.0 - - - - Georgian lari 44 8.0 - - - - 44 8.0 Nigerian naira 38 12.7 (38) 12.7 - - - - Botswana pula 25 4.0 - - - - 25 4.0 Kazakhstan tenge 24 7.8 (20) 8.0 - - 4 7.0 Chilean peso 22 2.5 (22) 2.5 - - - - Uzbekistan sum 20 9.5 (20) 9.5 - - - - Rwanda franc 17 12.3 - - - - 17 12.3 Ukraine hrivnya 15 13.6 - - - - 15 13.6 Namibia dollar 13 9.8 - - - - 13 9.8 Costa Rican colon 12 6.4 (12) 6.4 - - - - New Ghanaian cedi 9 4.5 (9) 4.5 - - - - New Serbian dinar 5 3.8 - - - - 5 3.8 Dominican peso 4 8.7 - - - - 4 8.7 Principal at face value 54,461 $ (1,097) $ 37 $ 53,401 2.5 Short-term borrowings from 2,262 market and other sources 56,723 Unamortized discounts, net (3,065) Total market borrowings 53,658 Fair value adjustments (1,370) Carrying amount of market borrowings $ 52,288 IFC FINANCIALS 2018 | 84 Page 82 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K – BORROWINGS (continued) June 30, 2017 Interest rate swaps Currency swaps payable notional principal payable Market borrowings (receivable) (receivable) Net currency obligation Weighted Weighted Notional Weighted Weighted Amount average Amount average amount average Amount average (US$ millions) rate (%) (US$ millions) rate (%) (US$ millions) rate (%) (US$ millions) rate (%) US dollar $ 30,531 1.7 $ 18,925 1.3 $ 34,214 1.0 $ 49,443 1.1 (34,227) (1.6) Australian dollar 7,832 3.6 (7,448) 3.6 307 2.0 384 2.0 (307) (3.5) Brazilian real 2,183 5.4 (2,183) (5.4) - - - - New Zealand dollar 2,136 3.7 (2,136) 3.7 - - - - Turkish lira 1,885 9.5 (1,842) 9.0 - - 43 29.2 Indian rupee 1,792 7.1 - - - - 1,792 7.1 Japanese yen 1,638 3.8 (1,638) 3.8 - - - - Russian ruble 1,185 6.9 (1,170) 7.0 - - 15 5.3 Mexican peso 1,081 6.2 (1,081) 6.0 - - - - South African rand 447 5.0 (447) 3.8 - - - - Chinese renminbi 383 2.3 (236) 1.8 - - 147 3.1 Euro 302 5.4 (302) 5.4 - - - - Hong Kong dollar 177 2.8 (177) 2.8 - - - - Pounds sterling 117 5.4 (117) 5.4 - - - - Uruguayan peso 103 11.2 (103) 11.2 - - - - Nigerian naira 96 14.0 (83) 14.6 - - 13 10.2 Swedish kronor 95 1.3 (95) 1.3 - - - - Singapore dollar 73 1.0 (73) 1.0 - - - - Peruvian soles nuevo 45 1.0 (45) 1.0 - - - - Georgian lari 45 8.0 - - - - 45 8.0 Rwanda franc 22 11.6 (4) 9.0 - - 18 12.2 Ghanaian cedi 22 11.6 (22) 11.6 - - - - Colombian peso 20 5.3 (20) 5.3 - - - - New Romanian lei 18 0.8 - - - - 18 0.8 Zambian kwacha 16 15.0 - - - - 16 15.0 Costa Rican colon 15 6.7 (15) 6.6 - - - - Namibia dollar 14 9.8 - - - - 14 9.8 Dominican peso 12 9.9 - - - - 12 9.9 Kazakhstan tenge 11 8.0 (11) 8.0 - - - - Chilean peso 10 3.4 (10) 3.4 - - - - Principal at face value 52,306 $ (333) $ (13) $ 51,960 1.4 Short-term borrowings from 2,706 market and other sources 55,012 Unamortized discounts, net (1,765) Total market borrowings 53,247 Fair value adjustments (295) Carrying amount of market borrowings $ 52,952 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 7.4 years at June 30, 2018 (6.4 years - June 30, 2017). Charges on borrowings for the year ended June 30, 2018 include $6 million of interest expense on secured borrowings ($2 million – year ended June 30, 2017 and $2 million – year ended June 30, 2016) and is net of $2 million of gains on buybacks of market borrowings ($2 million – year ended June 30, 2017; $6 million - year ended June 30, 2016). The net nominal amount receivable from currency swaps of $1,097 million and the net notional amount payable from interest rate swaps of $37 million at June 30, 2018 (receivable of $333 million from currency swaps and receivable of $13 million from interest rate swaps - June 30, 2017), shown in the above table, are represented by currency and interest rate swap assets at fair value of $437 million and currency and interest rate swap liabilities at fair value of $3,659 million ($865 million and $2,351 million - June 30, 2017), included in derivative assets and derivative liabilities, respectively, on the consolidated balance sheet. IFC FINANCIALS 2018 | 85 Page 83 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, 2018 is $2,262 million ($2,670 million - June 30, 2017). Charges on borrowings for the year ended June 30, 2018, include $38 million in respect of this program ($15 million - June 30, 2017 and $7 million – June 30, 2016). Borrowings from IBRD Borrowings outstanding from IBRD and currency are summarized below: June 30, 2018 June 30, 2017 Weighted Weighted Principal amount average Principal amount average (US$ millions) cost (%) (US$ millions) cost (%) US dollar $ - - $ 196 0.9 Total borrowings outstanding from IBRD $ - $ 196 Borrowings from IDA Borrowings outstanding from IDA are summarized below: June 30, 2018 Interest rate swap notional principal IDA Borrowings payable (receivable) Net currency obligation Notional Principal Weighted Notional Weighted amount Weighted amount average amount average (US$ average (US$ millions) cost (%) (US$ millions) cost (%) millions) cost (%) US dollar $ 843 1.8 $ 843 1.9 $ 843 1.9 (843) (1.8) Total IDA borrowings outstanding 843 $ - $ 843 1.9 Fair value adjustments (36) Carrying amount of IDA borrowings $ 807 June 30, 2017 Interest rate swap notional principal IDA Borrowings payable (receivable) Net currency obligation Notional Principal Weighted Notional Weighted amount Weighted amount average amount average (US$ average (US$ millions) cost (%) (US$ millions) cost (%) millions) cost (%) US dollar $ 970 1.8 $ 970 0.9 $ 970 0.9 (970) (1.8) Total IDA borrowings outstanding 970 $ - $ 970 0.9 Fair value adjustments (15) Carrying amount of IDA borrowings $ 955 The weighted average remaining maturity of borrowings from IDA was 4.2 years at June 30, 2018 (4.7 years - June 30, 2017). Charges on borrowings for the year ended June 30, 2018, includes $17 million ($19 million - year ended June 30, 2017; $21 million - year ended June 30, 2016) in respect of borrowings from IDA. IFC FINANCIALS 2018 | 86 Page 84 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K – BORROWINGS (continued) Maturity of borrowings The principal amounts repayable on borrowings outstanding in all currencies during the years ending June 30, 2019, through June 30, 2023, and thereafter are summarized below (US$ millions): 2019 2020 2021 2022 2023 Thereafter Total Borrowings from market sources $ 10,118 $ 8,512 $ 9,970 $ 5,056 $ 5,607 $ 15,198 $ 54,461 Short-term borrowings from market and other sources 2,262 - - - - - 2,262 Borrowings from IBRD - - - - - - - Borrowings from IDA 121 125 125 114 96 262 843 Total borrowings, gross $ 12,501 $ 8,637 $ 10,095 $ 5,170 $ 5,703 $ 15,460 $ 57,566 Unamortized discounts, net (3,065) Fair value adjustments (1,406) Carrying amount of borrowings $ 53,095 After the effect of interest rate and currency swaps, IFC’s borrowings generally reprice within one year. NOTE L – PAYABLES AND OTHER LIABILITIES Payables and other liabilities are summarized below (US$ millions): June 30, 2018 June 30, 2017 Accounts payable, accrued expenses and other liabilities $ 1,520 $ 1,588 Payables for unsettled security trades 1,055 1,083 Accrued charges on borrowings 551 422 Liabilities under retirement benefit plans 531 589 Accrued charges on derivative instruments 435 329 Secured borrowings & short sold securities 185 216 Deferred income 111 89 Total payables and other liabilities $ 4,388 $ 4,316 NOTE M – CAPITAL TRANSACTIONS During the years ended June 30, 2018 and June 30, 2017, no shares were subscribed and paid by member countries. Under IFC’s Articles of Agreement, in the event a member withdraws from IFC, IFC and the member may negotiate on the repurchase of the member’s capital stock on such terms as may be appropriate under the circumstances. Such agreement may provide, among other t hings, for a final settlement of all obligations of the member to IFC. If such an agreement is not made within six months after the member withdraws or such other time as IFC and the member may agree, the repurchase price of the member’s capital stock shall be the value thereof sho wn by the books of IFC on the day when the member withdraws. The repurchase of capital stock is subject to certain conditions including payments in installments, at such times and in such available currency or currencies as IFC reasonably determines, taking into accou nt 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 the date of withdrawal. NOTE N – OTHER INCOME Other income for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 comprise the following (US$ millions): June 30, 2018 June 30, 2017 June 30, 2016 Income from AMC consolidated entities $ 80 $ 79 $ 66 Other reimbursable arrangements 26 16 19 Investment gain (loss) on PEBP assets 25 35 (4) Fees collected from clients 22 19 22 Others 18 20 15 Total Other Income $ 171 $ 169 $ 118  IFC FINANCIALS 2018 | 87 Page 85 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 Creating Infrastructure Total Markets SME Project designated Advisory Advisory Performance- Ventures for Development retained Grants to IDA services Window based grants IDA countries Fund earnings 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 Year ended June 30, 2017 Designations of retained earnings 101 60 - - - - 161 Expenditures against designated retained earnings (101) (59) - (4) (2) (3) (169) At June 30, 2017 $ - $ 99 $ - $ 8 $ 18 $ - $ 125 Year ended June 30, 2018 Designations of retained earnings 80 40 85 - - - 205 Reallocation of prior year designations - (49) 49 - - - - Expenditures against designated retained earnings (80) (44) (12) (3) (1) - (140) At June 30, 2018 $ - $ 46 $ 122 $ 5 $ 17 $ - $ 190 On August 3, 2017, the Board of Directors approved a designation of $85 million of IFC’s retained earnings for IFC’s Creating Markets Advisory Window (CMAW), $40 million of IFC’s retained earnings for advisory servi ces, a reallocation of $49 million of the unutilized balances of prior year designations related to Advisory Services to CMAW, and a designation of $80 million of IFC’s retained earnings for grants to IDA. The transfer of funds to IDA are subject to certain conditions, including IFC’s financial results. On October 13, 2017, the Board of Governors noted with approval the designations approved by the Board of Directors. IFC recognizes designation of retained earnings for advisory services and CMAW 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 June 20, 2018, IFC recognized grants to IDA of $80 million on the signing of a grant agreement between IDA and IFC concerning the transfer to IDA and use of funds corresponding to the designation of retained earnings for grants to IDA approved by IFC’s Board of Di rectors on August 3, 2017 and noted with approval by IFC’s Board of Governors on October 13, 2017. Accumulated other comprehensive income The components of accumulated other comprehensive income at June 30, 2018 and June 30, 2017 are summarized as follows (US$ millions): June 30, 2018 June 30, 2017 Net unrealized (losses) gains on available-for-sale debt securities $ (192) $ 54 Net unrealized gains on available-for-sale equity investments 1,402 1,468 Unrecognized net actuarial losses and unrecognized prior service costs on benefit plans (946) (1,064) Total accumulated other comprehensive income $ 264 $ 458 IFC FINANCIALS 2018 | 88 Page 86 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, 2018, June 30, 2017 and June 30, 2016 comprise (US$ millions): 2018 2017 2016 Unrealized gains and losses on loans, debt securities and associated derivatives: Unrealized gains (losses) on loans and associated derivatives $ 108 $ 281 $ (229) Unrealized gains (losses) on debt securities and associated derivatives 73 39 (37) Total net unrealized gains (losses) on loans, debt securities and associated derivatives 181 320 (266) Unrealized gains and losses on borrowings from market, IDA and associated derivatives: Unrealized gains and losses on market borrowings accounted for at fair value: Credit spread component (278) 89 239 Interest rate, foreign exchange and other components 1,353 902 (436) Total unrealized gains (losses) on market borrowings 1,075 991 (197) Unrealized (losses) gains on derivatives associated with market borrowings (1,189) (949) 295 Unrealized gains (losses) on borrowings from IDA accounted for at fair value 21 32 (36) Total net unrealized (losses) gains on borrowings from market, IDA and associated derivatives (93) 74 62 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value $ 88 $ 394 $ (204) 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 der ivative 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, 2018 and June 30, 2017 is summarized as follows (US$ millions): Consolidated balance sheet location June 30, 2018 June 30, 2017 Derivative assets Interest rate $ 318 $ 309 Foreign exchange 483 53 Interest rate and currency 1,773 2,051 Equity and other 235 234 Total derivative assets $ 2,809 $ 2,647 Derivative liabilities Interest rate $ 1,153 $ 662 Foreign exchange 88 262 Interest rate and currency 3,037 2,444 Equity and other 11 13 Total derivative liabilities $ 4,289 $ 3,381 IFC FINANCIALS 2018 | 89 Page 87 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, 2018, June 30, 2017 and June 30, 2016 is summarized as follows (US$ millions): Derivative risk category Income statement location 2018 2017 2016 Income from loans and guarantees, including realized gains and losses on Interest rate loans and associated derivatives $ (3) $ (7) $ (24) Income from debt securities, including realized gains and losses on debt securities and associated derivatives 4 - (1) Income from liquid asset trading activities (2) (33) (241) Charges on borrowings 101 152 313 Other income (6) (2) (1) Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (478) (581) 88 Foreign Income from equity investments and associated derivatives - - - exchange Income from liquid asset trading activities 158 156 (25) Foreign currency transaction gains and losses on non-trading activities (182) (153) 8 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 1 (5) 1 Interest rate and Income from loans and guarantees, including realized gains and losses on currency loans and associated derivatives (147) (153) (184) Income from debt securities, including realized gains and losses on debt securities and associated derivatives (31) (23) (16) Income from liquid asset trading activities 139 220 103 Charges on borrowings 731 701 653 Foreign currency transaction gains and losses on non-trading activities (1,071) (295) 200 Other income - 3 - Net unrealized gains and losses on non-trading financial instruments accounted for at fair value (507) (158) 87 Equity Income (loss) from equity investments and associated derivatives 4 (163) 95 Income from loans and guarantees, including realized gains and losses on loans and associated derivatives (10) - - Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 9 15 (4) Total $ (1,290) $ (326) $ 1,052 The income related to each derivative risk category includes realized and unrealized gains and losses. At June 30, 2018, the outstanding volume, measured by US$ equivalent notional, of interest rate contracts was $57,960 million ($57,477 million at June 30, 2017), foreign exchange contracts was $21,279 million ($16,550 million at June 30, 2017) and interest rate and currency contracts was $38,267 million ($37,253 million at June 30, 2017). At June 30, 2018, there were 352 equity contracts related to IFC’s loan and equity investment portfolio and 1 other derivative contract recognized as derivatives assets or liabilities under ASC Topic 815 (371 equity risk and other contracts at June 30, 2017). 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, 2018 and June 30, 2017 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. IFC FINANCIALS 2018 | 90 Page 88 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) All of IFC’s financial instruments in its liquid 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 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 Corporate and Portfolio Risk Management department maintains oversight for the pricing of liquid assets. IFC’s regional and industry departments are primarily responsible for fair valuing IFC’s investment portfolio (equity investments, debt securities, loan investments and related derivatives). IFC’s Portfolio Valuation Unit, in Risk & Financial Sustainability, and Portfolio Revie w Unit, in Finance and Accounting, provide oversight over the fair valuation process by monitoring and reviewing the fair values of IFC’s investment portfolio. A Portfolio Committee, a committee of IFC’s management team, was established effective FY18 Q1 with responsibilities that include oversight of portfolio valuations. IFC’s borrowings are fair valued by the Quantitative Analysis and Modeling Group in IFC’s Treasury department under the oversight of the Corporate Portfolio and Risk Management department. The methodologies used and key assumptions made to estimate fair values as of June 30, 2018, and June 30, 2017, are summarized below. Liquid assets – The primary pricing source for the liquid assets is valuations obtained from external pricing services (vendor prices). The most liquid securities in the liquid asset portfolio are exchange traded futures, options, and US Treasuries. For exchange traded futures and options, exchange quoted prices are obtained and these are classified as Level 1 in accordance with ASC 820. Liquid assets valued using quoted market prices are also classified as Level 1. Securities valued using vendor prices for which there is evidence of high market trade activity may also be classified as Level 1. US Treasuries are valued using index prices and also classified as Level 1. The remaining liquid assets valued using vendor prices are classified as Level 2 or Level 3 based on the results of IFC’s evaluation of the vendor’s pricing methodologies an d individual security facts and circumstances. Most vendor prices use some form of matrix pricing methodology to derive the 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 and these are classified as Level 2 or Level 3 depending on the degree that the inputs are observable in the market. The critical factors in valuing liquid assets in both Level 2 and Level 3 are the estimation 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, option adjusted spread curve, volatilities, 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 prepayment rate, constant default rate, vintage, and credit enhancements. Loans and debt securities – Loans and debt securities in IFC’s investment portfolio that do not have available market prices are primarily valued using discounted cash flow approaches. All loans measured at fair value are classified as Level 3. Certain loans contain embedded conversion and/or income participation features. If not bifurcated as standalone derivatives, these features are considered in determining the loans’ fair value based on the quoted market prices or other calculated values 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, 2018 and June 30, 2017 are presented below: June 30, 2018 Fair value Weighted (US$ average Valuation technique millions) Significant inputs Range (%) (%) Debt securities – preferred shares Discounted cash flows $ 112 Discount rate 10.2 – 30.0 15.2 Relative valuations 71 Valuation multiples* Listed price (adjusted) - Recent transactions 192 Other techniques 8 Total preferred shares 383 Loans and other debt securities Discounted cash flows 2,203 Credit default swap spreads 0.6 – 6.9 2.2 Recent transactions 1,715 Expected recovery rates 35.0 – 50.0 44.8 Other techniques 408 Total loans and other debt securities 4,326 Total $ 4,709 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/sales ratio, the range and weighted average are not provided. IFC FINANCIALS 2018 | 91 Page 89 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2017 Fair value Weighted (US$ average Valuation technique millions) Significant inputs Range (%) (%) Debt securities – preferred shares Discounted cash flows $ 175 Discount rate 8.7 – 30.0 13.6 Relative valuations 78 Valuation multiples* Listed price (adjusted) 2 Recent transactions 133 Other techniques 3 Total preferred shares 391 Loans and other debt securities Discounted cash flows 2,033 Credit default swap spreads 0.3 – 8.1 2.5 Recent transactions 1,586 Expected recovery rates 10.0 – 85.0 42.7 Other techniques 293 Total loans and other debt securities 3,912 Total $ 4,303 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/sales ratio, 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, 2018, IFC had bond issuances with a total fair value of $46 million classified as level 3 in Costa Rican colon, Kazakhstan tenge and Uzbekistan sum where the significant unobservable inputs were yield curve data. Derivative instruments – The various classes of derivative instruments include interest rate contracts, foreign exchange contracts, interest rate and currency contracts, equity contracts and other derivative contracts. Certain over the counter derivatives in the liquid asset portfolio priced in-house are classified as Level 2, while certain over the counter derivatives priced using external manager prices are classified as Level 3. Fair values for derivative instruments are derived by determining the present value of estimated future cash flows using appropriate discount rates and option specific models where appropriate. The significant inputs used in valuing the various classes of derivative instruments classified as Level 2 and significant unobservable inputs for derivative instruments classified as Level 3 as of June 30, 2018 and June 30, 2017 are presented below: Level 2 derivatives Significant Inputs Interest rate Inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. Foreign exchange Foreign exchange rate, inter-bank yield curves and foreign exchange basis curve. Interest rate and currency Foreign exchange rate, inter-bank yield curves, foreign exchange basis curve and yield curves specified to index floating rates. June 30, 2018 Weighted Fair value average Level 3 derivatives Type (US$ millions) Significant inputs Range (%) (%) Equity related derivatives Fixed strike price options $ 21 Volatilities 11.6 – 35.4 20.1 Variable strike price options 202 Contractual strike price* Other 1 Interest rate and currency swap Yield curve points, assets Vanilla swaps 8 exchange rates Interest rate and currency swap Yield curve points, liabilities Vanilla swaps (7) exchange rates Total $ 225 * In case of valuation techniques with multiple significant inputs, the range and weighted average are not provided. IFC FINANCIALS 2018 | 92 Page 90 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2017 Weighted Fair value average Level 3 derivatives Type (US$ millions) Significant inputs Range (%) (%) Equity related derivatives Fixed strike price options $ 40 Volatilities 11.8 – 42.6 21.5 Variable strike price options 180 Contractual strike price* Other 1 Interest rate and currency swap Yield curve points, assets Vanilla swaps 7 exchange rates Interest rate and currency swap Yield curve points, liabilities Vanilla swaps (3) exchange rates Total $ 225 * 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, 2018 and June 30, 2017 are presented below: June 30, 2018 Fair value (US$ Weighted Sector Valuation technique millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 473 Cost of equity (%) 10.1 – 25.0 14.7 Institutions Asset growth rate (%) (23.2) – 125.0 14.1 Return on assets (%) (1.3) – 5.2 2.6 Perpetual growth rate (%) 3.0 – 14.0 5.3 Relative valuations - Discount for lock-up (%) 0.0 – 50.0 7.2 Listed price (adjusted) 713 Recent transactions 67 Other techniques 73 Total banking and other financial institutions 1,326 Funds Recent transactions 83 Total funds 83 Weighted average Others Discounted cash flows 1,098 cost of capital (%) 8.0 – 21.9 12.1 Cost of equity (%) 12.1 – 18.5 15.6 Relative valuations 272 Valuation multiples* Listed price (adjusted) 3 Discount for lock-up (%) ** 4.5 Recent transactions 141 Other techniques 174 Total others 1,688 Total $ 3,097 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/earnings before interest, taxes, depreciation, and amortization ratio, the range and weighted average are not provided. ** No range is provided as all of the projects that use this valuation technique are with the same institution and have the same lock-up discount percentage. IFC FINANCIALS 2018 | 93 Page 91 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2017 Fair value Weighted Sector Valuation technique (US$ millions) Significant inputs Range average Banking and other financial Discounted cash flows $ 550 Cost of equity (%) 10.3 – 25.0 16.1 Institutions Asset growth rate (%) (62.5) – 51.4 9.4 Return on assets (%) (19.1) – 6.1 2.3 Perpetual growth rate (%) 2.5 – 12.0 5.0 Relative valuations - Discount for lock-up (%) 0.0 – 50.0 8.1 Listed price (adjusted) 263 Recent transactions 123 Other techniques 44 Total banking and other financial institutions 980 Funds Recent transactions 88 Total funds 88 Weighted average Others Discounted cash flows 894 cost of capital (%) 6.3 – 19.6 12.2 Cost of equity (%) 10.4 – 17.8 13.9 Relative valuations 290 Valuation multiples* Listed price (adjusted) 248 Discount for lock-up (%) 0.0 – 10.4 3.0 Recent transactions 588 Other techniques 22 Total others 2,042 Total $ 3,110 * In case of valuation techniques with multiple significant inputs, including price/earnings ratio and enterprise value/earnings before interest, taxes, depreciation, and amortization ratio, the range and weighted average are not provided. IFC FINANCIALS 2018 | 94 Page 92 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, 2018 and June 30, 2017 are summarized below (US$ millions): June 30, 2018 June 30, 2017 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 $ 45,303 $ 45,303 $ 45,803 $ 45,803 Investments: Loans at amortized cost, net of reserves against losses 22,682 23,975 21,550 23,059 Loans accounted for at fair value under the Fair Value Option 927 927 970 970 Total loans 23,609 24,902 22,520 24,029 Equity investments at cost less impairment 2,710 4,251 3,209 4,379 Equity investments accounted for at fair value as available-for-sale 3,528 3,528 3,590 3,590 Equity investments accounted for at fair value 6,794 6,794 6,689 6,689 Total equity investments 13,032 14,573 13,488 14,658 Debt securities accounted for at fair value as available-for-sale 4,900 4,900 3,984 3,984 Debt securities accounted for at fair value under the Fair Value 527 527 Option 723 723 Total debt securities 5,623 5,623 4,511 4,511 Total investments 42,264 45,098 40,519 43,198 Derivative assets: Borrowings-related 437 437 865 865 Liquid asset portfolio-related and other 693 693 239 239 Investment-related 1,437 1,437 1,324 1,324 Client risk management-related 242 242 219 219 Total derivative assets 2,809 2,809 2,647 2,647 Other investment-related financial assets - 83 - 87 Financial liabilities Securities sold under repurchase agreements and payable for cash collateral received $ 6,364 $ 6,364 $ 5,401 $ 5,401 Market, IBRD, IDA and other borrowings outstanding 53,095 53,078 54,103 54,103 Trading securities - short sold bonds - - - - Derivative liabilities: Borrowings-related 3,659 3,659 2,352 2,352 Liquid asset portfolio-related and other 232 232 613 613 Investment-related 169 169 205 205 Client risk management-related 229 229 211 211 Total derivative liabilities 4,289 4,289 3,381 3,381 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 $40 million at June 30, 2018 ($33 million - June 30, 2017). Fair values of loan commitments are based on present value of loan commitment fees. IFC FINANCIALS 2018 | 95 Page 93 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Fair value hierarchy The following tables provide information as of June 30, 2018 and June 30, 2017, about IFC’s financial assets and financial liabilities measured at fair value on a recurring basis. As required by ASC 820, financial assets and financial liabilities are classified in their entirety based on the lowest level input that is significant to the fair value measurement (US$ millions): June 30, 2018 Level 1 Level 2 Level 3 Total Trading securities: Asset-backed securities $ - $ 7,192 $ - $ 7,192 Corporate securities 1,566 6,672 - 8,238 Government and agency obligations 9,514 3,869 18 13,401 Money market funds 78 - - 78 Total trading securities 11,158* 17,733 18 28,909 Loans - 2 894 896 Loans measured at net asset value*** 31 Total Loans (outstanding principal balance $1,037) - 2 894 927 Equity investments: Banking and other financial institutions 1,596 254 1,326 3,176 Funds 30 15 83 128 Others 1,313 57 1,688 3,058 Equity investments measured at net asset value*** 3,960 Total equity investments 2,939 326 3,097 10,322 Debt securities: Corporate debt securities 621 672 2,590 3,883 Preferred shares - - 383 383 Asset-backed securities - - 840 840 Other debt securities - - 2 2 Debt securities measured at net asset value*** 515 Total debt securities 621 672 3,815 5,623 Derivative assets: Interest rate - 318 - 318 Foreign exchange - 483 - 483 Interest rate and currency - 1,765 8 1,773 Equity and other - - 235 235 Total derivative assets - 2,566 243 2,809 Total assets at fair value $ 14,718 $ 21,299 $ 8,067 $ 48,590 Borrowings: Structured bonds $ 36 $ 6,103 $ - $ 6,139 Unstructured bonds 36,042 7,994 46 44,082 Total borrowings (outstanding principal balance $54,692**) 36,078 14,097 46 50,221 Trading securities - short sold bonds - - - - Derivative liabilities: Interest rate - 1,153 - 1,153 Foreign exchange - 88 - 88 Interest rate and currency - 3,030 7 3,037 Equity and other - - 11 11 Total derivative liabilities - 4,271 18 4,289 Total liabilities at fair value $ 36,078 $ 18,368 $ 64 $ 54,510 * 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 $5,281 million, with a fair value of $1,940 million as of June 30, 2018. ***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, 2018: Trading securities with fair value of $2,950 million transferred from level 1 to level 2 and $0 from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $158 million transferred from level 1 to level 2 and $34 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $1,072 million transferred from level 1 to level 2, while bonds with a fair value of $300 million were transferred from level 2 to level 1 due to change in quality of market price information. IFC FINANCIALS 2018 | 96 Page 94 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) June 30, 2017 Level 1 Level 2 Level 3 Total Trading securities: Asset-backed securities $ - $ 8,407 $ - $ 8,407 Corporate securities 4,125 4,408 - 8,533 Government and agency obligations 11,724 1,378 19 13,121 Money market funds 127 - - 127 Total trading securities 15,976* 14,193 19 30,188 Loans - 9 928 937 Loans measured at net asset value*** 33 Total Loans (outstanding principal balance $1,026) - 9 928 970 Equity investments: Banking and other financial institutions 1,968 105 980 3,053 Funds - 13 88 101 Others 1,357 96 2,042 3,495 Equity investments measured at net asset value*** 3,630 Total equity investments 3,325 214 3,110 10,279 Debt securities: Corporate debt securities 429 367 2,458 3,254 Preferred shares - - 391 391 Asset-backed securities - - 524 524 Other debt securities - - 2 2 Debt securities measured at net asset value*** 340 Total debt securities 429 367 3,375 4,511 Derivative assets: Interest rate - 309 - 309 Foreign exchange - 53 - 53 Interest rate and currency - 2,044 7 2,051 Equity and other - - 234 234 Total derivative assets - 2,406 241 2,647 Total assets at fair value $ 19,730 $ 17,189 $ 7,673 $ 48,595 Borrowings: Structured bonds $ - $ 5,788 $ - $ 5,788 Unstructured bonds 39,257 5,811 26 45,094 Total borrowings (outstanding principal balance $52,957**) 39,257 11,599 26 50,882 Trading securities - short sold bonds - - - - Derivative liabilities: Interest rate - 662 - 662 Foreign exchange - 262 - 262 Interest rate and currency - 2,441 3 2,444 Equity and other - - 13 13 Total derivative liabilities - 3,365 16 3,381 Total liabilities at fair value $ 39,257 $ 14,964 $ 42 $ 54,263 * 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 $3,533 million, with a fair value of $1,797 million as of June 30, 2017. ***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, 2017: Trading securities with fair value of $288 million transferred from level 1 to level 2 and $593 million from level 2 to level 1 due to decrease/increase in market activities. Equity investments with fair value of $123 million transferred from level 1 to level 2 and $112 million from level 2 to level 1 due to decrease/increase in market activities. Bonds issued by IFC with a fair value $332 million transferred from level 1 to level 2, while bonds with a fair value of $660 million were transferred from level 2 to level 1 due to change in quality of market price information. IFC FINANCIALS 2018 | 97 Page 95 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) The following tables present the changes in the carrying value of IFC’s Level 3 financial assets and financial liabilities for the years ended June 30, 2018 and 2017 (US$ millions). IFC’s policy is to recognize transfers in and transfers out at the beginning of the reporting period. Year ended June 30, 2018 Net unrealized Net gains and losses (realized gains/losses and unrealized) included in Purchases, included in net issuances, income related Balance as Other sales, Transfers Transfers Balance as to assets / of Net comprehensive settlements into out of Level of June 30, liabilities held July 1, 2017 Income income and others Level 3 (*) 3 (**) 2018 at year end Trading securities: Asset-backed securities $ - $ - $ - $ 2 $ - $ (2) $ - $ - Corporate securities - - - - - - - - Government and agency obligations 19 (1) - - - - 18 (1) Total trading securities 19 (1) - 2 - (2) 18 (1) Loans 928 (58) - 24 - - 894 (50) Equity investments: Banking and other financial institutions 980 119 247 246 162 (428) 1,326 21 Funds 88 10 - (15) - - 83 19 Others 2,042 (79) 1 1 9 (286) 1,688 (122) Total equity investments 3,110 50 248 232 171 (714) 3,097 (82) Debt securities: Corporate debt securities 2,458 (29) (58) 684 861 (1,326) 2,590 (1) Preferred shares 391 16 18 (42) - - 383 29 Asset-backed securities 524 1 (94) 409 - - 840 7 Other debt securities 2 - - - - - 2 - Total debt securities 3,375 (12) (134) 1,051 861 (1,326) 3,815 35 Derivative assets: Interest rate and currency 7 (3) - 8 1 (5) 8 8 Equity and other 234 1 - - - - 235 11 Total derivative assets 241 (2) - 8 1 (5) 243 19 Total assets at fair value $ 7,673 $ (23) $ 114 $ 1,317 $ 1,033 $ (2,047) $ 8,067 $ (79) Borrowings: Structured bonds $ - $ - $ - $ - $ - $ - $ - $ - Unstructured bonds (26) 9 - (29) - - (46) 9 Total borrowings (26) 9 - (29) - - (46) 9 Derivative liabilities: Interest rate - - - - - - - - Interest rate and currency (3) (3) - 3 (5) 1 (7) (2) Equity and other (13) 2 - - - - (11) 2 Total derivative liabilities (16) (1) - 3 (5) 1 (18) - Total liabilities at fair value $ (42) $ 8 $ - $ (26) $ (5) $ 1 $ (64) $ 9 (*) 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, 2018. (**) 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, 2017 beginning balance as of June 30, 2018. IFC FINANCIALS 2018 | 98 Page 96 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Year ended June 30, 2017 Net unrealized Net gains and losses (realized gains/losses and unrealized) included in Purchases, included in net issuances, income related Balance as Other sales, Transfers Transfers Balance as to assets / of Net comprehensive settlements into out of of June 30, liabilities held July 1, 2016 Income income and others Level 3 (*) Level 3 (**) 2017 at year end Trading securities: Asset-backed securities $ - $ - $ - $ - $ - $ - $ - $ - Corporate securities 47 2 - (49) - - - - Government and agency obligations 21 (2) - - - - 19 (2) Total trading securities 68 - - (49) - - 19 (2) Loans 962 37 - (62) - (9) 928 16 Equity investments: Banking and other financial institutions 1,100 51 55 (4) 77 (299) 980 44 Funds 98 11 - (21) - - 88 11 Others 1,733 (88) 7 499 40 (149) 2,042 (73) Total equity investments 2,931 (26) 62 474 117 (448) 3,110 (18) Debt securities: Corporate debt securities 1,518 56 72 1,043 119 (350) 2,458 27 Preferred shares 549 82 (109) (131) - - 391 (31) Asset-backed securities 113 (4) (1) 416 - - 524 - Other debt securities 2 - - - - - 2 - Total debt securities 2,182 134 (38) 1,328 119 (350) 3,375 (4) Derivative assets: Interest rate and currency 34 (2) - - 5 (30) 7 - Equity and other 381 (142) - (5) - - 234 (142) Total derivative assets 415 (144) - (5) 5 (30) 241 (142) Total assets at fair value $ 6,558 $ 1 $ 24 $ 1,686 $ 241 $ (837) $ 7,673 $ (150) Borrowings: Structured bonds $ - $ - $ - $ - $ - $ - $ - $ - Unstructured bonds (155) 7 - (201) - 323 (26) 7 Total borrowings (155) 7 - (201) - 323 (26) 7 Derivative liabilities: Interest rate - - - - - - - - Interest rate and currency (31) (5) - - (1) 34 (3) (2) Equity and other (6) (7) - - - - (13) (7) Total derivative liabilities (37) (12) - - (1) 34 (16) (9) Total liabilities at fair value $ (192) $ (5) $ - $ (201) $ (1) $ 357 $ (42) $ (2) (*) 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, 2017. (**) 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, 2016 beginning balance as of June 30, 2017. IFC FINANCIALS 2018 | 99 Page 97 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, 2018 and 2017 (US$ millions). Year ended June 30, 2018 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ 2 $ - $ - $ - $ 2 Corporate securities - - - - - Total trading securities 2 - - - 2 Loans - - 142 (118) 24 Equity investments: Banking and other financial institutions 75 (171) - 342 246 Funds 162 (2) - (175) (15) Others 236 (202) - (33) 1 Total equity investments 473 (375) - 134 232 Debt securities: Corporate debt securities 1,490 (1) - (805) 684 Preferred shares 27 (18) - (51) (42) Asset-backed securities 328 - - 81 409 Total debt securities 1,845 (19) - (775) 1,051 Derivative assets: Interest rate and currency 4 - - 4 8 Equity and other - - - - - Total derivative assets 4 - - 4 8 Total assets at fair value $ 2,324 $ (394) $ 142 $ (755) $ 1,317 Borrowings: Structured Bonds $ - $ - $ - $ - $ - Unstructured Bonds - - (29) - (29) Total Borrowings - - (29) - (29) Derivative liabilities: Interest rate - - - - - Interest rate and currency (1) - - 4 3 Equity and other - - - - - Total derivative liabilities (1) - - 4 3 Total liabilities at fair value $ (1) $ - $ (29) $ 4 $ (26) IFC FINANCIALS 2018 | 100 Page 98 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE R – FAIR VALUE MEASUREMENTS (continued) Year ended June 30, 2017 Settlements Purchases Sales Issuances and others Net Trading securities: Asset-backed securities $ - $ - $ - $ - $ - Corporate securities - (49) - - (49) Total trading securities - (49) - - (49) Loans - - 149 (211) (62) Equity investments: Banking and other financial institutions 65 (67) - (2) (4) Funds 149 - - (170) (21) Others 495 (149) - 153 499 Total equity investments 709 (216) - (19) 474 Debt securities: Corporate debt securities 1,333 (13) - (277) 1,043 Preferred shares 44 (133) - (42) (131) Asset-backed securities 423 - - (7) 416 Total debt securities 1,800 (146) - (326) 1,328 Derivative assets: Interest rate and currency - - - - - Equity and other - - - (5) (5) Total derivative assets - - - (5) (5) Total assets at fair value $ 2,509 $ (411) $ 149 $ (561) $ 1,686 Borrowings: Structured Bonds $ - $ - $ - $ - $ - Unstructured Bonds - - (201) - (201) Total Borrowings - - (201) - (201) Derivative liabilities: Interest rate - - - - - Interest rate and currency - - - - - Equity and other - - - - - Total derivative liabilities - - - - - Total liabilities at fair value $ - $ - $ (201) $ - $ (201) 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 statements of operations 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, 2018, equity investments, accounted for at cost less impairment, with a carrying amount of $986 million were written down to their fair value of $722 million ($1,537 million and $1,172 million – June 30, 2017), resulting in a loss of $264 million, which was included in income from equity investments and associated derivatives in the consolidated statements of operations during the year ended June 30, 2018 (loss of $365 million – year ended June 30, 2017). The amount of the write-down was based on a Level 3 measure of fair value. IFC FINANCIALS 2018 | 101 Page 99 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 statements of operations 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. An analysis of IFC’s major components of income and expense by business segment for the years ended June 30, 2018, June 30, 2 017 and June 30, 2016, is provided below (US$ millions): Investment Treasury Advisory June 30, 2018 services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,377 $ - $ - $ 1,377 Provision for losses on loans, guarantees, accrued interest and other receivables (90) - - (90) Income from equity investments and associated derivatives 853 - - 853 Income from debt securities, including realized gains and losses on debt securities and associated derivatives 363 - - 363 Income from liquid asset trading activities - 771 - 771 Charges on borrowings (451) (590) - (1,041) Advisory services income - - 305 305 Service fees and other income 273 - - 273 Administrative expenses (938) (27) (64) (1,029) Advisory services expenses - - (354) (354) Expense from pension and other postretirement benefit plans (171) (11) (62) (244) Other expenses (35) - - (35) Foreign currency transaction gains and losses on non-trading activities 90 33 - 123 Income (loss) before net unrealized gains and losses on non- trading financial instruments accounted for at fair value and grants to IDA 1,271 176 (175) 1,272 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 181 (93) - 88 Income (loss) before grants to IDA 1,452 83 (175) 1,360 Grants to IDA (80) - - (80) Net income (loss) 1,372 83 (175) 1,280 Net (gains) losses attributable to non-controlling interests - - - - Net income (loss) attributable to IFC $ 1,372 $ 83 $ (175) $ 1,280 IFC FINANCIALS 2018 | 102 Page 100 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE S – SEGMENT REPORTING (continued) Investment Treasury Advisory June 30, 2017 services services services Total Income from loans and guarantees, including realized gains and losses on loans and associated derivatives $ 1,298 $ - $ - $ 1,298 Provision for losses on loans, guarantees, accrued interest and other receivables (86) - - (86) Income from equity investments and associated derivatives 707 - - 707 Income from debt securities, including realized gains and losses on debt securities and associated derivatives 282 - - 282 Income from liquid asset trading activities - 917 - 917 Charges on borrowings (261) (451) - (712) Advisory services income - - 277 277 Service fees and other income 251 - - 251 Administrative expenses (874) (25) (63) (962) Advisory services expenses - - (327) (327) Expense from pension and other postretirement benefit plans (211) (13) (69) (293) Other expenses (35) - - (35) Foreign currency transaction gains and losses on non-trading activities (155) (33) - (188) Income (loss) before net unrealized gains and losses on non- trading financial instruments accounted for at fair value and grants to IDA 916 395 (182) 1,129 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value 320 74 - 394 Income (loss) before grants to IDA 1,236 469 (182) 1,523 Grants to IDA (101) - - (101) Net income (loss) 1,135 469 (182) 1,422 Net (gains) attributable to non-controlling interests (4) - - (4) Net income (loss) attributable to IFC $ 1,131 $ 469 $ (182) $ 1,418 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, accrued interest and other receivables (359) - - (359) Income from equity investments and associated derivatives 518 - - 518 Income from debt securities, including realized gains and losses on debt securities and associated derivatives 129 - - 129 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) IFC FINANCIALS 2018 | 103 Page 101 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE T – VARIABLE INTEREST ENTITIES Significant variable interests IFC has identified investments in 215 VIEs which are not consolidated by IFC but in which it is deemed to hold significant variable interests at June 30, 2018 (224 investments - June 30, 2017). 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 have the power to direct the activities of the VIEs that most significantly impact their economic performance 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 $36,579 million at June 30, 2018 ($35,650 million - June 30, 2017). 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 $5,603 million at June 30, 2018 ($6,328 million - June 30, 2017). The industry sector and geographical regional analysis of IFC’s maximum exposures as a result of its investment in these VIEs at June 30 , 2018 and June 30, 2017 is as follows (US$ millions): June 30, 2018 Equity Debt Risk Loans investments securities Guarantees management Total Manufacturing, agribusiness and services Asia $ 183 $ 14 $ 65 $ - $ - $ 262 Europe, Middle East and North Africa 214 38 108 - - 360 Sub-Saharan Africa, Latin America and Caribbean 128 125 30 5 - 288 Other - 37 - - - 37 Total manufacturing, agribusiness and services 525 214 203 5 - 947 Financial markets Asia 135 7 2 - - 144 Europe, Middle East and North Africa 4 - 182 - - 186 Sub-Saharan Africa, Latin America and Caribbean 17 32 34 - - 83 Other 147 78 226 - 8 459 Total financial markets 303 117 444 - 8 872 Infrastructure and natural resources Asia 817 134 29 - 6 986 Europe, Middle East and North Africa 627 145 4 - 25 801 Sub-Saharan Africa, Latin America and Caribbean 904 147 13 - 46 1,110 Other 203 1 - - - 204 Total infrastructure and natural resources 2,551 427 46 - 77 3,101 Telecom, media & technology, and venture investing Asia 6 283 - - - 289 Europe, Middle East and North Africa - 111 12 - - 123 Sub-Saharan Africa, Latin America and Caribbean 37 203 11 - 6 257 Other - 14 - - - 14 Total telecom, media & technology, and venture investing 43 611 23 - 6 683 Maximum exposure to VIEs $ 3,422 $ 1,369 $ 716 $ 5 $ 91 $ 5,603 of which: Carrying value 2,761 1,025 648 - 54 4,488 Committed but not disbursed 661 344 68 5 37 1,115 IFC FINANCIALS 2018 | 104 Page 102 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE T – VARIABLE INTEREST ENTITIES (continued) June 30, 2017 Equity Debt Risk Loans investments securities management Total Manufacturing, agribusiness and services Asia $ 210 $ 22 $ 24 $ - $ 256 Europe, Middle East and North Africa 361 57 100 - 518 Sub-Saharan Africa, Latin America and Caribbean 150 188 22 - 360 Other - 30 - - 30 Total manufacturing, agribusiness and services 721 297 146 - 1,164 Financial markets Asia 178 8 - - 186 Europe, Middle East and North Africa 79 11 178 4 272 Sub-Saharan Africa, Latin America and Caribbean 43 37 228 - 308 Other 148 88 226 9 471 Total financial markets 448 144 632 13 1,237 Infrastructure and natural resources Asia 622 104 4 2 732 Europe, Middle East and North Africa 779 232 8 37 1,056 Sub-Saharan Africa, Latin America and Caribbean 1,015 197 13 53 1,278 Other 211 1 - - 212 Total infrastructure and natural resources 2,627 534 25 92 3,278 Telecom, media & technology, and venture investing Asia 7 242 - - 249 Europe, Middle East and North Africa - 128 5 - 133 Sub-Saharan Africa, Latin America and Caribbean 36 203 11 - 250 Other - 17 - - 17 Total telecom, media & technology, and venture investing 43 590 16 - 649 Maximum exposure to VIEs $ 3,839 $ 1,565 $ 819 $ 105 $ 6,328 of which: Carrying value 2,984 1,124 557 64 4,729 Committed but not disbursed 855 441 262 41 1,599 The carrying value of investments and maximum exposure to VIEs at June 30, 2018 and June 30, 2017 is as follows (US$ millions): June 30, 2018 Carrying value Committed but Maximum Investment category of investments not yet disbursed exposure Loans $ 2,761 $ 661 $ 3,422 Equity investments 1,025 344 1,369 Debt securities 648 68 716 Guarantees - 5 5 Risk management 54 37 91 Maximum exposure to VIEs $ 4,488 $ 1,115 $ 5,603 June 30, 2017 Carrying value Committed but Maximum Investment category of investments not yet disbursed exposure Loans $ 2,984 $ 855 $ 3,839 Equity investments 1,124 441 1,565 Debt securities 557 262 819 Risk management 64 41 105 Maximum exposure to VIEs $ 4,729 $ 1,599 $ 6,328 IFC FINANCIALS 2018 | 105 Page 103 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE U – ADVISORY SERVICES IFC provides advisory services to government and private sector clients. IFC’s advisory services to governments on investment climate and financial sector development are 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 recei ved 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, 2018, other assets include undisbursed donor funds of $511 million ($488 million - June 30, 2017) and IFC’s advisory services funding of $234 million ($199 million - June 30, 2017). Included in other liabilities as of June 30, 2018 is $511 million ($488 million - June 30, 2017) of refundable undisbursed donor funds. NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS IBRD, IFC and MIGA participate in a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan and Trust (RSBP) and a Post- Employment Benefits Plan (PEBP) that cover substantially all of their staff members. All costs, assets and liabilities associated with these plans are allocated between IBRD, IFC and MIGA based upon their emplo yees’ respective participation in the plans. Costs allocated to IBRD are then shared between IBRD and IDA based on an agreed cost-sharing ratio. The expenses for the SRP, RSBP, and PEBP are included in expense from pension and other postretirement benefit plans. The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP allocated to IFC for the years ended June 30, 2018, June 30, 2017 and June 30, 2016 (US$ millions): SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Benefit cost Service cost $ 162 $ 166 $ 138 $ 37 $ 41 $ 33 $ 31 $ 30 $ 24 Interest cost 145 131 136 24 23 23 20 17 15 Expected return on plan assets (186) (174) (188) (31) (28) (29) - - - Amortization of unrecognized prior service costs 1 1 1 3 3 3 2 2 2 Amortization of unrecognized net actuarial losses 17 56 15 - 5 - 19 20 12 Net periodic pension cost $ 139 $ 180 $ 102 $ 33 $ 44 $ 30 $ 72 $ 69 $ 53 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, 2018, June 30, 2017 and June 30, 2016, expenses for these plans of $244 million, $293 million and $185 million, respectively, were allocated to IFC. IFC FINANCIALS 2018 | 106 Page 104 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) The following table summarizes the Projected Benefit Obligations (PBO), fair value of plan assets, and funded status associated with the SRP, RSBP and PEBP for IFC for the years ended June 30, 2018 and June 30, 2017 (US$ 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 2018 2017 2018 2017 2018 2017 Projected benefit obligations Beginning of year $ 3,944 $ 3,898 $ 621 $ 636 $ 527 $ 484 Service cost 162 166 37 41 31 30 Interest cost 145 131 24 23 20 17 Net entity transfers 16 (3) 1 (1) - - Participant contributions 55 51 3 3 5 7 Federal subsidy received - - - - - - Plan amendments - - - - - - Benefits paid (151) (140) (10) (10) (8) (7) Actuarial loss (gain) 78 (159) (40) (71) 31 (4) End of year 4,249 3,944 636 621 606 527 Fair value of plan assets Beginning of year 3,412 3,065 564 484 - - Net entity transfers 16 (3) 1 (1) - - Participant contributions 55 51 3 3 - - Actual return on assets 310 364 52 61 - - Employer contributions 77 75 25 27 - - Benefits paid (151) (140) (10) (10) - - End of year 3,719 3,412 635 564 - - Funded status** (530) (532) (1) (57) (606) (527) Accumulated benefit obligations $ 3,726 $ 3,423 $ 636 $ 621 $ 477 $ 406 ** 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, 2018 and June 30, 2017, there were no amendments made to the retirement benefit plans. The following tables present the amounts included in Accumulated Other Comprehensive Income (Loss) relating to Pension and Other Postretirement Benefits (US$ millions): Amounts included in Accumulated other comprehensive income (loss) in the year ended June 30, 2018: SRP RSBP PEBP Total Net actuarial loss (gains) $ 672 $ (4) $ 243 $ 911 Prior service cost 7 17 11 35 Net amount recognized in accumulated other comprehensive loss $ 679 $ 13 $ 254 $ 946 Amounts included in Accumulated other comprehensive income (loss) in the year ended June 30, 2017: SRP RSBP PEBP Total Net actuarial loss $ 735 $ 56 $ 231 $ 1,022 Prior service cost 9 20 13 42 Net amount recognized in accumulated other comprehensive loss $ 744 $ 76 $ 244 $ 1,064 IFC FINANCIALS 2018 | 107 Page 105 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, 2019 are as follows (US$ millions): SRP RSBP PEBP Total Net actuarial loss $ 5 $ - $ 23 $ 28 Prior service cost 1 3 2 6 Net amount recognized in accumulated other comprehensive loss $ 6 $ 3 $ 25 $ 34 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, 2018, June 30, 2017, and June 30, 2016: Weighted average assumptions used to determine projected benefit obligation (%), except years SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Discount rate 4.10 3.70 3.40 4.10 3.90 3.60 4.10 3.80 3.50 Rate of compensation increase 5.50 5.20 5.30 5.50 5.20 5.30 Health care growth rates - at end of fiscal year 6.00 5.50 5.30 Ultimate health care growth rate 4.20 4.00 4.00 Year in which ultimate rate is reached 2030 2030 2030 Weighted average assumptions used to determine net periodic pension cost (%), except years SRP RSBP PEBP 2018 2017 2016 2018 2017 2016 2018 2017 2016 Discount rate 3.70 3.40 4.30 3.90 3.60 4.50 3.80 3.50 4.40 Expected return on plan assets 5.50 5.70 6.20 5.50 5.70 6.20 Rate of compensation increase 5.20 5.30 5.40 5.20 5.30 5.40 Health care growth rates - at end of fiscal year 5.50 5.30 4.90 Ultimate health care growth rate 4.00 4.00 4.10 Year in which ultimate rate is reached 2030 2030 2030 IFC FINANCIALS 2018 | 108 Page 106 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 $ 24 $ (16) Effect on postretirement benefit obligation $ 169 $ (127) 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 fixed income, public and private equity and real assets. 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 following table presents the policy asset allocation at June 30, 2018 and the actual asset allocation at June 30, 2018 and June 30, 2017 by asset category for the SRP and RSBP. SRP RSBP Policy % of Plan Assets Policy % of Plan Assets Allocation Allocation 2018 (%) 2018 2017 2018 (%) 2018 2017 Asset class Public equity 33 31 35 33 30 34 Fixed income & cash 26 19 19 26 20 21 Private equity 20 19 17 20 21 19 Hedge funds 8 11 11 8 10 10 Real assets* 13 14 14 13 13 12 Other** - 6 4 - 6 4 Total 100 100 100 100 100 100 * Includes public and private real estate, infrastructure and timber. ** Includes authorized investments that are outside the policy allocations primarily in long-term private credit funds. More recently, in April 2018, the revised SAAs for SRP and RSBP were approved with an effective date of July 1, 2018. The new SAAs introduce a five percent allocation to ‘credit strategies’ by proportionally reducing the allocation to fixed income and global equities. 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, 2018, the largest exposure to a single counterparty was 7% 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 2018 | 109 Page 107 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, 2018 and June 30, 2017 (US$ millions): June 30, 2018 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Time deposits $ 5 $ 2 $ - $ 7 $ 1 $ * $ - $ 1 Securities purchased under resale agreements 37 - - 37 7 - - 7 Government and agency securities 392 87 - 479 74 18 - 92 Corporate and convertible bonds - 87 - 87 - 15 - 15 Asset-backed securities - 37 - 37 - 6 - 6 Mortgage-backed securities - 54 - 54 10 - 10 Total debt securities 434 267 - 701 82 49 - 131 Equity securities US common stocks 109 - - 109 19 - - 19 Non-US common stocks 508 - - 508 72 - - 72 Mutual funds 33 - - 33 12 - - 12 Real estate investment trusts 63 - - 63 10 - - 10 Total equity securities 713 - - 713 113 - - 113 Other funds at NAV** Commingled funds - - - 531 - - - 87 Private equity - - - 877 - - - 163 Hedge funds - - - 455 - - - 69 Real estate (including infrastructure and timber) - - - 436 - - - 71 Total other funds - - - 2,299 - - - 390 Derivative assets/ liabilities 1 1 - 2 * * - * Other assets/ liabilities***, net - - - 4 - - - 1 Total Assets $ 1,148 $ 268 $ - $ 3,719 $ 195 $ 49 $ - $ 635 * 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. IFC FINANCIALS 2018 | 110 Page 108 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE V – PENSION AND OTHER POSTRETIREMENT BENEFITS (continued) June 30, 2017 SRP RSBP Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Debt securities Time deposits $ 2 $ - $ - $ 2 $ 2 $ - $ - $ 2 Securities purchased under resale agreements 30 - - 30 8 - - 8 Government and agency securities 387 94 - 481 73 22 - 95 Corporate and convertible bonds - 68 - 68 - 12 - 12 Asset-backed securities - 36 - 36 - 6 - 6 Mortgage-backed securities - 47 - 47 - 7 - 7 Total debt securities 419 245 - 664 83 47 - 130 Equity securities US common stocks 132 - - 132 17 - - 17 Non-US common stocks 616 - - 616 93 - - 93 Mutual funds 19 - - 19 3 - - 3 Real estate investment trusts 77 - - 77 11 - - 11 Total equity securities 844 - - 844 124 - - 124 Other funds at NAV** Commingled funds - - - 416 - - - 71 Private equity - - - 711 - - - 128 Hedge funds - - - 385 - - - 57 Real estate (including infrastructure and timber) - - - 388 - - - 58 Total other funds 1,900 314 Derivative assets/ liabilities * (1) - (1) * * - * Other assets/ liabilities***, net - - - 5 - - - (4) Total Assets $ 1,263 $ 244 $ - $ 3,412 $ 207 $ 47 $ - $ 564 * 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, sub-sovereigns 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) represent investments 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 collective investment vehicles, such as trusts that are reported at NAV as provided by the investment manager or sponsor of the fund based on valuation of underlying investments. IFC FINANCIALS 2018 | 111 Page 109 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, 2018 (US$ millions): SRP RSBP PEBP July 1, 2018 - June 30, 2019 $ 153 $ 8 $ 16 July 1, 2019 - June 30, 2020 160 9 17 July 1, 2020 - June 30, 2021 169 11 18 July 1, 2021 - June 30, 2022 179 12 20 July 1, 2022 - June 30, 2023 189 14 21 July 1, 2023 - June 30, 2028 1,156 95 145 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, 2018 is $76 million and $19 million, respectively. IFC FINANCIALS 2018 | 112 Page 110 INTERNATIONAL FINANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE W – OFFSETTING OF DERIVATIVES, RESALE, REPURCHASE AND SECURITIES LENDING AGREEMENTS AND COLLATERAL IFC does not present derivative assets and liabilities or amounts due or owed under resale, repurchase and securities lending transactions related to contracts entered into with the same counterparty under a legally enforceable netting agreement on a net basis on its consolidated balance sheet. The following table provides the gross and net positions of IFC’s derivative contracts, resale, repurchase and securities len ding agreements considering amounts and collateral held or pledged that are subject to enforceable counterparty credit support and netting agreements described below (US$ 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, 2018 Gross amount of Gross amounts not offset in the Assets assets presented in the consolidated balance sheet consolidated balance Financial Collateral Net amount sheet instruments received Derivative assets $ 3,450* $ 1,948 $ 432*** $ 1,070 Resale agreements - - - - Total assets $ 3,450 $ 1,948 $ 432 $ 1,070 June 30, 2018 Gross amounts not offset in the Liabilities Gross amount of consolidated balance sheet liabilities presented in Cash Net amount the consolidated Financial Collateral balance sheet instruments pledged Derivative liabilities $ 4,724** $ 1,948 $ 1,819 $ 957 Repurchase and securities lending agreements 6,129 6,129 - - Total liabilities $ 10,853 $ 8,077 $ 1,819 $ 957 June 30, 2017 Gross amount of Gross amounts not offset in the Assets assets presented in the consolidated balance sheet consolidated Financial Collateral Net amount balance sheet instruments received Derivative assets $ 3,164* $ 1,812 $ 459*** $ 893 Resale agreements - - - - Total assets $ 3,164 $ 1,812 $ 459 $ 893 June 30, 2017 Gross amount of Gross amounts not offset in the Liabilities liabilities presented in consolidated balance sheet the consolidated Financial Collateral Net amount balance sheet instruments pledged Derivative liabilities $ 3,709** $ 1,812 $ 981 $ 916 Repurchase and securities lending agreements 5,068 5,060 - 8 Total liabilities $ 8,777 $ 6,872 $ 981 $ 924 * Includes accrued income of $641 million and $517 million as of June 30, 2018 and June 30, 2017 respectively. ** Includes accrued charges of $435 million and $328 million as of June 30, 2018 and June 30, 2017 respectively. *** Includes cash collateral of $210 million and $312 million as of June 30, 2018 and June 30, 2017 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 upo n 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 2018 | 113 Page 111 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, 2018, $1,987 million of cash collateral was posted under CSAs ($932 June 30, 2017). 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, 2018, IFC had $236 million ($334 million at June 30, 2017) 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, 2018, all of which may be rehypothecated was $231 million ($197 million - June 30, 2017). As of June 30, 2018, $8 million of such collateral was rehypothecated under securities lending agreements ($200 million - June 30, 2017). Collateral posted by IFC in connection with repurchase agreements approximates the amounts classified as Securities sold under repurchase agreements. At June 30, 2018, trading securities with a carrying amount (fair value) of $202 million ($197 million - June 30, 2017) were pledged in connection with borrowings under a short-term discount note program, the carrying amount of which was $2,262 million ($2,670 million - June 30, 2017). 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 $61 million at June 30, 2018 ($321 million at June 30, 2017). At June 30, 2018, IFC had no collateral posted under these agreements. If IFC’s credit rating w ere to be downgraded from its current AAA/Aaa to AA+/Aa1 or below, then collateral in the amount of $0 would be required to be posted against net liability positions with counterparties at June 30, 2018 ($12 million at June 30, 2017). 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, 2018 was $0 ($0 - June 30, 2017). The following table presents an analysis of IFC’s repurchase and securities lending transactions by (1) class of collateral p ledged and (2) their remaining contractual maturity as of June 30, 2018 and June 30, 2017 (US$ millions): Remaining Contractual Maturity of the Agreements - June 30, 2018 Overnight and Up to 30 30-90 Greater than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ - $ 6,128 $ - $ - $ 6,128 Agency securities - - - - - Municipal securities and other - - - - - Total Repurchase agreements - 6,128 - - 6,128 Securities lending transactions - - - - - U.S. Treasury securities $ 8 $ - $ - $ - $ 8 Total Securities lending transactions 8 - - - 8 Total Repurchase agreements and Securities lending transactions $ 8 $ 6,128 $ - $ - $ 6,136* As of June 30, 2018, IFC has no repurchase-to-maturity transactions outstanding. * Includes accrued interest. IFC FINANCIALS 2018 | 114 Page 112 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, 2017 Overnight and Up to 30 30-90 Greater than Continuous days days 90 days Total Repurchase agreements U.S. Treasury securities $ - $ 4,871 $ - $ - $ 4,871 Agency securities - - - - - Municipal securities and other - - - - - Total Repurchase agreements - 4,871 - - 4,871 Securities lending transactions U.S. Treasury securities $ 199 $ - $ - $ - $ 199 Total Securities lending transactions 199 - - - 199 Total Repurchase agreements and Securities lending transactions $ 199 $ 4,871 $ - $ - $ 5,070* As of June 30, 2017, IFC has no repurchase-to-maturity transactions outstanding. * Includes accrued interest. 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, 2018, were $110 million ($109 million - year ended June 30, 2017; $113 million - year ended June 30, 2016). Other chargebacks include $22 million for the year ended June 30, 2018 ($20 million - year ended June 30, 2017; $18 million - year ended June 30, 2016). NOTE Y – RELATED PARTY TRANSACTIONS On December 22, 2017, IFC entered into a currency swap agreement with IDA for a period of 12 years. IFC will receive a fixed rate of 2.49% annually on a USD notional of 9 million and will pay 3.27% annually on a West African CFA franc (XOF) notional of 5.0 billion. As of June 30, 2018, the derivative had a fair value of $1 million. During the quarter ended September 30, 2014, 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 condit ion 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 as surances, 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 2018 | 115 KPMG LLP Suite 12000 1801 K Street, NW Washington, DC 20006 Independent Auditors’ Report President and Board of Directors International Finance Corporation: We have audited the accompanying consolidated financial statements of the International Finance Corporation and its subsidiaries (IFC), which comprise the consolidated balance sheets as of June 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in capital and cash flows for each of the years in the three-year period ended June 30, 2018, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of International Finance Corporation and its subsidiaries as of June 30, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2018 in accordance with U.S. generally accepted accounting principles. Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The consolidated statement of capital stock and voting power as of June 30, 2018 is presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. IFC FINANCIALS 2018 | 116 of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Report on Internal Control over Financial Reporting We also have audited, in accordance with auditing standards generally accepted in the United States of America, IFC’s internal control over financial reporting as of June 30, 2018, based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 9, 2018 expressed an unmodified opinion on the effectiveness of IFC’s internal control over financial reporting. Washington, D.C. August 9, 2018 IFC FINANCIALS 2018 | 117 STATEMENT OF CUMULATIVE GROSS COMMITMENTS (at June 30, 2018) Cumulative Commitments1 (US$ thousands) Investment Portfolio LOAN & NUMBER OF GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL Sub-Saharan Africa Angola 9 552,350.77 – 552,350.77 Benin 13 323,730.67 – 323,730.67 Botswana 7 60,451.60 – 60,451.60 Burkina Faso 26 571,273.33 – 571,273.33 Burundi 10 53,648.14 – 53,648.14 Cameroon 43 787,185.60 471,500.00 1,258,685.60 Cape Verde 7 22,065.16 – 22,065.16 Central African Republic 1 9,880.40 – 9,880.40 Chad 10 139,265.59 13,900.00 153,165.59 Congo, Democratic Republic of 29 521,888.34 94,000.00 615,888.34 Congo, Republic of 9 154,232.40 25,000.00 179,232.40 Cote D’Ivoire 64 1,060,426.87 139,956.30 1,200,383.17 Djibouti 1 4,000.00 – 4,000.00 Eritrea 1 949.22 – 949.22 Eswatini 10 57,779.49 – 57,779.49 Ethiopia 15 601,181.96 11,149.00 612,330.96 Gabon 6 252,620.01 110,000.00 362,620.01 Gambia, The 10 47,270.30 – 47,270.30 Ghana 84 3,071,830.23 913,750.00 3,985,580.23 Guinea 18 495,642.41 11,000.00 506,642.41 Guinea-Bissau 5 9,156.37 – 9,156.37 Kenya 126 2,748,489.52 125,662.05 2,874,151.58 Lesotho 2 454.00 – 454.00 Liberia 13 193,659.96 – 193,659.96 Madagascar 25 324,918.26 21,000.00 345,918.26 Malawi 22 226,225.68 9,500.00 235,725.68 Mali 30 319,290.15 40,000.00 359,290.15 Mauritania 16 320,030.04 9,502.61 329,532.64 Mauritius 23 268,188.39 96.00 268,284.39 Mozambique 33 506,814.01 60,413.42 567,227.42 Namibia 9 148,390.96 – 148,390.96 Niger 5 37,416.88 – 37,416.88 Nigeria 129 11,014,274.39 877,155.04 11,891,429.43 Rwanda 23 263,670.54 10,000.00 273,670.54 Sao Tome and Principe 2 2,050.98 – 2,050.98 Senegal 43 513,881.33 93,768.65 607,649.98 Seychelles 7 39,443.21 2,500.00 41,943.21 Sierra Leone 11 140,719.12 25,000.00 165,719.12 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. IFC FINANCIALS 2018 | 118 LOAN & NUMBER OF GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL Somalia 2 974.61 – 974.61 South Africa 99 3,311,840.26 15,000.00 3,326,840.26 South Sudan 1 5,000.00 – 5,000.00 Sudan 6 27,267.78 6,488.79 33,756.57 Tanzania 70 638,104.05 15,540.51 653,644.56 Togo 15 291,097.29 – 291,097.29 Uganda 54 617,833.45 76,788.37 694,621.82 Zambia 46 348,530.24 20,285.82 368,816.06 Zimbabwe 51 284,261.86 99,000.00 383,261.86 Regional Investments: Sub-Saharan Africa 110 3,202,998.76 1,905.97 3,204,904.73 East Asia and the Pacific Cambodia 17 524,959.56 414,227.27 939,186.83 China 308 10,429,618.31 2,111,109.29 12,540,727.60 Fiji 11 57,493.22 2,500.00 59,993.22 Indonesia 138 4,566,885.39 2,832,055.37 7,398,940.76 Kiribati 1 1,798.00 – 1,798.00 Korea, Republic of 51 868,449.18 195,700.00 1,064,149.18 Lao People’s Democratic Republic 15 96,101.86 – 96,101.86 Malaysia 12 154,868.40 5,389.13 160,257.52 Mongolia 20 1,018,604.54 887,125.00 1,905,729.54 Myanmar 24 727,733.65 20,000.00 747,733.65 Papua New Guinea 12 404,744.11 25,000.00 429,744.11 Philippines 110 3,335,027.40 695,879.60 4,030,907.00 Samoa 7 20,096.57 – 20,096.57 Solomon Islands 3 55,000.00 – 55,000.00 Thailand 89 2,329,328.08 1,748,419.34 4,077,747.42 Timor-Leste 2 1,500.00 – 1,500.00 Tonga 1 6,787.00 – 6,787.00 Vanuatu 4 18,104.05 – 18,104.05 Vietnam 63 7,517,497.30 490,635.00 8,008,132.30 Regional Investments: East Asia and the Pacific 52 1,694,150.18 – 1,694,150.18 South Asia Afghanistan 9 228,103.55 – 228,103.55 Bangladesh 63 4,776,280.56 154,620.40 4,930,900.96 Bhutan 6 54,516.61 – 54,516.61 India 481 15,572,556.19 1,743,639.77 17,316,195.95 Maldives 7 168,250.00 8,500.00 176,750.00 Nepal 28 248,906.37 39,000.00 287,906.37 Pakistan 143 7,349,348.18 665,807.01 8,015,155.19 Sri Lanka 50 1,219,319.97 128,615.60 1,347,935.57 Regional Investments: South Asia 11 225,988.18 – 225,988.18 Europe and Central Asia Albania 21 487,756.81 65,691.91 553,448.72 Armenia 17 519,195.41 – 519,195.41 Azerbaijan 27 596,529.40 197,930.00 794,459.40 Belarus 21 663,666.31 6,000.00 669,666.31 IFC FINANCIALS 2018 | 119 LOAN & NUMBER OF GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL Bosnia and Herzegovina 33 358,576.43 10,577.55 369,153.98 Bulgaria 29 988,138.96 183,646.71 1,171,785.68 Croatia 22 774,637.47 228,199.03 1,002,836.50 Czech Republic 18 455,175.92 245,587.93 700,763.84 Estonia 11 137,806.09 11,854.97 149,661.07 Georgia 31 1,087,521.59 49,825.25 1,137,346.84 Greece 16 835,930.36 40,131.25 876,061.61 Hungary 34 437,985.38 70,334.83 508,320.21 Kazakhstan 37 1,546,507.40 282,916.67 1,829,424.07 Kosovo 7 44,770.49 – 44,770.49 Kyrgyz Republic 15 123,526.17 – 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 17 304,463.16 25,000.00 329,463.16 Moldova 18 263,322.94 45,000.00 308,322.94 Montenegro 7 100,202.85 – 100,202.85 Poland 52 868,191.93 115,316.83 983,508.77 Romania 56 3,005,215.56 478,163.46 3,483,379.02 Russian Federation 193 8,759,961.07 2,523,371.96 11,283,333.03 Serbia 42 1,630,263.14 206,411.61 1,836,674.75 Slovak Republic 7 115,543.69 – 115,543.69 Slovenia 13 292,535.47 47,382.71 339,918.18 Tajikistan 20 149,295.04 – 149,295.04 Turkey 211 14,469,510.79 3,851,862.15 18,321,372.94 Turkmenistan 1 35,000.00 – 35,000.00 Ukraine 56 2,675,498.93 920,577.00 3,596,075.93 Uzbekistan 20 173,016.67 12,900.00 185,916.67 Regional Investments: Europe and Central Asia 62 3,386,559.65 200,880.02 3,587,439.67 Latin America and the Caribbean Antigua and Barbuda 1 30,000.00 – 30,000.00 Argentina 210 7,353,856.97 5,429,134.44 12,782,991.40 Barbados 6 128,625.08 – 128,625.08 Belize 4 33,066.33 11,000.00 44,066.33 Bolivia 33 571,868.85 140,500.00 712,368.85 Brazil 297 17,665,077.31 7,560,951.30 25,226,028.61 Chile 71 2,615,482.92 1,422,604.66 4,038,087.58 Colombia 141 4,115,225.77 1,338,631.03 5,453,856.79 Costa Rica 34 1,379,409.07 99,708.82 1,479,117.89 Dominica 1 700.00 – 700.00 Dominican Republic 39 892,166.95 241,850.00 1,134,016.95 Ecuador 28 826,748.05 99,240.06 925,988.11 El Salvador 21 901,629.23 113,500.00 1,015,129.23 Grenada 2 8,000.00 – 8,000.00 Guatemala 30 1,986,936.34 210,000.00 2,196,936.34 Guyana 8 76,416.96 – 76,416.96 Haiti 13 130,564.23 25,250.00 155,814.23 Honduras 28 1,664,976.92 142,900.75 1,807,877.67 IFC FINANCIALS 2018 | 120 LOAN & NUMBER OF GUARANTEE REGION COUNTRY ENTERPRISES IFC PARTICIPATIONS TOTAL Jamaica 24 517,845.60 194,244.48 712,090.09 Mexico 227 7,732,264.07 2,891,461.62 10,623,725.69 Nicaragua 28 1,043,523.16 12,428.57 1,055,951.74 Panama 36 2,332,808.84 153,300.00 2,486,108.84 Paraguay 18 1,430,570.29 10,000.00 1,440,570.29 Peru 82 2,487,883.72 977,099.31 3,464,983.03 St. Lucia 4 80,421.91 35,000.00 115,421.91 Suriname 1 4,065.88 – 4,065.88 Trinidad and Tobago 18 358,653.74 235,000.00 593,653.74 Uruguay 19 348,634.40 120,000.00 468,634.40 Venezuela, Republica Bolivariana de 39 897,229.54 703,791.42 1,601,020.96 Regional Investments: Latin America and the Caribbean 86 2,111,907.06 350,000.00 2,461,907.06 Middle East and North Africa Algeria 15 303,557.27 5,556.90 309,114.17 Bahrain 2 340,271.16 – 340,271.16 Egypt, Arab Republic of 124 4,110,803.93 987,357.26 5,098,161.19 Iran, Islamic Republic of 11 63,342.91 8,199.46 71,542.37 Iraq 13 838,951.18 175,000.00 1,013,951.18 Jordan 63 1,864,653.30 688,588.31 2,553,241.62 Lebanon 40 5,091,758.12 230,430.00 5,322,188.12 Morocco 45 1,078,480.97 515,014.09 1,593,495.06 Oman 7 319,853.40 57,000.00 376,853.40 Saudi Arabia 12 541,276.71 – 541,276.71 Syrian Arab Republic 4 24,731.60 – 24,731.60 Tunisia 34 528,316.42 427,227.80 955,544.22 United Arab Emirates 11 165,501.47 – 165,501.47 Yemen, Republic of 14 206,004.20 56,104.66 262,108.86 Regional Investments: Middle East and North Africa 41 1,448,710.25 33,000.00 1,481,710.25 Worldwide Australia 2 975.00 – 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 – 10,500.00 Italy 1 960.00 – 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 174 13,280,153.51 330,206.24 13,610,359.74 Other2 31 604,133.24 11,400.00 615,533.24 6,438 234,380,746 51,389,882 285,770,628 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 2018 | 121 2121 PENNSYLVANIA AVENUE, NW WASHINGTON, DC 20433 USA IFC.ORG